`U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934 For the fiscal year ended December 31, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
    For the transition period from              to
            ---------------  --------------------

Commission File No. 333-47699

                                 FAN ENERGY INC.
                  --------------------------------------------
                 (Name of small business issuer in its charter)

               Nevada                                 77-0140428
   ------------------------------                ---------------------
   (State or other jurisdiction of                  (I.R.S. Employer
   incorporation or organization)                Identification Number)

          5355 Capital Court suite 108, Reno, Nevada                89502
           -----------------------------------------               --------
          (Address of principal executive offices)   (Zip Code)

Issuer's telephone number: (775) 856-4500

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

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

                    (Common Stock (Par Value $.01 Per Share)
                     --------------------------------------
                                 Title of Class

     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.[X] Yes [ ]No.

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is 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. [X]

     State issuer's revenues for its most recent fiscal year: $152,832

     As of March 31, 2000 the issuer had 34,951,492 shares of its $0.01 par
value common stock issued and outstanding. As there is no public trading market
for Registrant's securities, Registrant is unable to determine the aggregate
market value of the common stock, the Registrant's only class of voting stock,
held by nonaffiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

       Transitional Small Business Issuer Disclosure Format Yes [ ] No [X]





PART I


This Report on Form 10-KSB and documents incorporated herein by reference
contain certain "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995 which involve substantial risks and
uncertainties. When used in this report and in other reports filed by the
Company, the forward-looking statements are often identified by the use of such
terms and phrases as "anticipates," "believes," "intends," "estimates," "plans,"
"expects," "seeks," "scheduled," "foreseeable future" and similar expressions.
Although the Company believes the understandings and assumptions on which the
forward-looking statements in this report are based are reasonable, the
Company's actual results, performances and achievements could differ materially
from the results in, or implied by, these forward-looking statements. Certain
factors that could cause or contribute to such differences include those
discussed in "Management's Plan of Operations" and elsewhere herein.

ITEM 1.  DESCRIPTION OF BUSINESS.

   (a) GENERAL DEVELOPMENT OF BUSINESS

During the year 2000, Fan Energy Inc. ("Fan" or the "Company") operated as an
independent energy company engaged in the exploration and acquisition of crude
oil and natural gas reserves. Originally formed as an Idaho corporation in the
early 1900s, the Company's predecessor was not successful in the exploration of
mining properties. In 1988 the predecessor was merged into a newly-formed Nevada
corporation as Eastern Star Mining, Inc. and it was inactive thereafter, with no
assets or liabilities through the end of 1996. In early 1997 the corporation was
reactivated when the holder of a majority of the outstanding common stock
transferred control of the inactive corporation. The transferee elected new
directors and officers and caused the Company to effect a 10-into-1 reverse
stock split. Thereafter, the Company raised capital through the sale of its
securities and acquired an interest in its oil and gas properties for cash and
common stock. For a description of the transaction in which the Company acquired
the properties, see Item 2. "Description of Properties." The name of the
corporation was changed to Fan Energy Inc. in December 1997. The Company
conducted no business activities until 1998 when it participated in drilling
wells. In 1999 the Company received its first revenue from the production from
the wells in which it owns an interest, as described below.

On December 29, 2000, Registrant completed and closed a public offering in which
it offered and sold 3.0 million shares of common stock and 3.0 million stock
purchase warrants, each warrant exercisable to purchase one share of common
stock at an exercise price of $0.10 per share. Registrant received $300,000 in
gross proceeds in the offering.

On January 8, 2001, Registrant acquired plant, equipment and other assets,
including specialized manufacturing equipment, manufacturing set-ups, real
estate lease, fixtures and related equipment and other property with an
estimated fair value of at least $3.8 million from John Shebanow, Robert
Hamblen, Alex Gassiot and APG Associates, LLC. In consideration for the
acquisition of the assets, Registrant issued 19,250,000 shares of its restricted
common stock to the sellers. In determining the amount of Registrant' s
consideration for the assets, the parties estimated the present fair market
value of all such assets to be equivalent to approximately $0.20 per share
issued. The parties agreed that if an independent evaluation of the assets
acquired by the Registrant is less than $1.9 million, the sellers will pay to
the Registrant the difference in cash. Also on January 8, 2000, Registrant sold
3,250,000 shares of restricted common stock to APG Associates, LLC for $650,000,
of which $600,000 was paid by the purchaser's secured note which is due May __,
2000.

                                       2



The assets acquired by Registrant constituted plant, equipment and other
physical property intended to be used in the manufacture of 3.5 inch micro
floppy disks. None of the assets have previously been used in such a business by
the sellers. The Registrant intends to use the assets acquired to engage in the
development, marketing, manufacture and sale of 3.5 inch micro floppy disks in
the world replacement market for such products.

   (b) NARRATIVE DESCRIPTION OF THE OIL AND GAS BUSINESS

Fan holds an undivided net working interest equal to approximately 20% in a
5,760 acre prospect located in Sweetwater County, Wyoming. The Company has a net
profits interest of 16% in two exploratory wells have been drilled on the
prospect. The first well was completed as an apparent oil producer and the
second as a marginally productive natural gas well which has not proven to be
economically viable . The oil producing well was shut-in during the first
quarter of 2000 because of the weather. During the second and third quarter of
2000, the oil producing well produced 1,317 barrels of oil. The well was shut-in
during the fourth quarter of 2000 for the winter. As of the date of this report,
the well is still shut-in. The Company received a reserve report on March 2,
2001 indicating that the reserves previously carried in Sweetwater County,
Wyoming are uneconomic to produce because of high operating costs and the
absence of a gas pipeline. The Company is seeking to sell its interest in the
Wyoming properties and does not intend to pursue any further oil and gas
opportunities in the area.

During 1999, the Company held an undivided 25% working interest in two
exploratory prospects located in Yolo and Solano Counties in the Sacramento
Basin near Sacramento, California which has been held for sale since late 1999.
During 2000, the Company abandoned maintaining most of its leases except those
supporting a producing well or leases that have farm-out potential. Currently,
the Company's principal revenue is derived from its share of production from the
producing Molluca 1-35 well and one other producing well in which the Company
has a small interest.

The Company anticipates generating revenue from its media production business
during the second quarter of 2001 and is seeking to sell its interest in the
producing well in the Sacramento Basin.

On March 2, 2001, the Company received a report of its net oil and gas reserves
with their associated economic benefit based on rates, prices and information
available at December 31, 2000. The reserves evaluated were associated with the
Molucca prospect in Solano County, California. Reserves previously carried in
Wyoming were evaluated as uneconomic.

The report indicated that Molluca's producing well was economic based upon a
price of $ $13.06/MMBTU at December 31, 2000 as opposed to the historical twelve
month average wellhead price of $ 3.79/MMBTU. Offsetting the beneficial increase
in pricing, was the appearance of water production beginning in May 2000. The
very high water handling and disposal costs in this area of California increased
operating expenses significantly. The Molluca well, while showing significant
value under SEC pricing guidelines, has no remaining reserves at more
conventional evaluation pricing scenarios. The appraisal assumed Molluca' s
producing well would decline until it reached its economic limit after the first
quarter of 2001 and then would be re-completed into another formation with a
production comparable to that of late 2000. It also assumed that a new location
in the Molluca prospect would be drilled where there are proven undeveloped
reserves and would produce at a rate similar to the existing Molluca well when
first drilled.


                                       3


Business Strategy

Oil and Gas Properties

The Company received a reserve report from an independent petroleum engineer
which concluded the drilling of a new well in the Molluca area where there are
proven undeveloped reserves because production on the exisiting Molluca well
would decline during the year 2001 until it reached its economic limit. It also
conservatively assumed that natural gas prices would reflect the historic
average of 2000 as opposed to the last quarter of 2000.

Management reasonably expects that natural gas prices for production in
California could average $8.00 per MMBTU which is more than twice the historic
average during 2000. We base our opinion upon the pricing in the futures during
the first quarter of 2001 for the Southern California Hub which ranged between
$9.00 and $13.00 MMBTU and the expectations of price increases due to the
upcoming demands this summer.

The Company is currently evaluating the cost of water disposal in the Molluca
area and the cost-benefit of drilling the development well to recover proven
undeveloped reserves. In the event the Company determines it is economically
viable, it may drill a new well to obtain more natural gas production and seek
to sell the future production.

Marketing

Floppy Disk Market

Our marketing strategy is to sell primarily into the worldwide commodity-like
market for bulk formatted and unformatted 3.5 inch floppy disks. Current
wholesale prices range from approximately $0.11 to $0.22 per disk (qty
dependent). We believe our advanced equipment allows us to sell profitably into
this market at these price points.

Furthermore it is our intention to intensively seek duplication orders as the
price ranges for duplicated floppy disk ranges from approximately $0.20 to $0.40
while having substantially similar costs to manufacture as do bulk disks.

To further our goals we have hired a full time marketing director who is
currently pursuing contracts and orders throughout the U.S., Canada and Western
Europe.

Computer Equipment

We are currently receiving purchase orders for large numbers of computer
equipment and we expect to begin generating revenue during April the first
quarter of 2001 in this area of business. It is expected that this line of
business will generate continued revenue with relatively small cash outlays. In
order to further increase sales we have hired a full time salesperson who is
actively pursuing buyers of computer equipment.

Competition

The 3.5 inch floppy disk is a product at the end of its life cycle. For most
users the need for floppy disks is temporary at best. Driver disks, temporary
storage for transportation to other locations and some archival storage are the
only uses for most consumers in the U.S. Despite shrinking unit sales, billions
of units are still produced annually and most computers still ship with a floppy
disk drive. The floppy disk is the only universal interchange standard in
existence and will most likely remain so. As demand continues to decrease, and
profit margins continue to shrink, more and more manufacturers will cease
operations, especially in high labor markets like the U.S. We believe our
advanced equipment allows us to manufacture finished product with many fewer
employees than other manufacturers. As supply diminishes prices should rise and
profit margins increase. However, the price rise should not be sufficient to
entice other manufacturers to reenter the market.

                                       4


The competition in the floppy disk business is intense, mostly from Asian
manufacturers. These manufacturers supply a large percentage of the world market
in floppy disks. However, their time to market is far greater than that of Fan
Energy. Our advanced systems allow us to produce finished product at lower costs
than most Asian manufacturers here in the United States. Most other U.S.
manufacturers have ceased operations leaving only a handful left. Among these
are Imitation and TDK, however, it is our understanding that the majority of
their products are sold into the consumer as opposed to the bulk disk market.

Regulation

Regulation of Oil and Natural Gas Production. The Company's oil and natural gas
exploration, production and related operations are subject to extensive rules
and regulations promulgated by federal, state and local authorities and
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, the Company is unable to predict the future
cost or impact of complying with such laws.

The states of California and Wyoming and many other states require permits for
drilling operations, drilling bonds and reports concerning operations and impose
other requirements relating to the exploration and production of oil and natural
gas. Such states also have statues or regulations addressing conservation
matters, including provisions for the unitization or pooling of oil and natural
gas properties, the establishment of maximum rates of production from wells, and
the regulation of spacing, plugging and abandonment of such wells.

Federal Regulation of Natural Gas. The Federal Energy Regulatory Commission
("FERC") regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by the Company,
as well as the revenues received by the Company for sales of such production.
Since the mid-1980's, FERC has issued a series of orders that have significantly
altered the marketing and transportation of natural gas. These orders mandate a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sale,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders was to increase competition within all phases of the natural gas
industry. Certain aspects of these orders may be modified as a result of various
appeals and related proceedings and it is difficult to predict the ultimate
impact of the orders on the Company and others. Generally, the orders eliminate
or substantially reduce the interstate pipelines' traditional role as
wholesalers of natural gas in favor of providing only storage and transportation
service, and has substantially increased competition and volatility in natural
gas markets.

The price which the Company may receive for the sale of oil and natural gas
liquids would be affected by the cost of transporting products to markets. FERC
has implemented regulations establishing an indexing system for transportation
rates for oil pipelines, which, generally, would index such rates to inflation,
subject to certain conditions and limitations. The Company is not able to
predict with certainty the effect, if any, of these regulations on any future
operations. However, the regulations may increase transportation costs or reduce
well head prices for oil and natural gas liquids.

Environmental Matters. The Company's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may(i) require the acquisition of a permit or other
authorization before construction or drilling commences and for certain other
activities; (ii)limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness and other protected areas; and (iii)
impose substantial liabilities for pollution resulting from the Company's
operations. The permits required for various of the Company's operations are
subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce their regulations, and
violations are subject to fines or injunctions, or both. In the opinion of
management, the Company is in substantial compliance with current applicable
environmental laws and regulations, and the Company has no material commitments
for capital expenditures to comply with existing environmental requirements.
Nevertheless, changes in existing environmental laws and regulations or in
interpretations thereof could have a significant impact on the Company, as well
as the oil and natural gas industry in general.

                                       5



The Company may agree to indemnify sellers of properties purchased by the
Company against certain liabilities for environmental claims associated with
such properties. No assurance can be given that existing environmental laws or
regulations, as currently interpreted or reinterpreted in the future, or future
laws or regulations will not materially adversely affect the Company's results
of operations and financial condition or that material indemnity claims will not
arise against the Company with respect to properties acquired by the Company.

The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sites. It is
not uncommon for the neighboring land owners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize the imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting the
Company's operations impose clean-up liability relating to petroleum and
petroleum related products. In addition, although RCRA classifies certain oil
field wastes as "non-hazardous," such exploration and production wastes could be
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.

The Company has acquired leasehold interests in numerous properties that for
many years have produced oil and natural gas. Although the previous owners of
these interests may have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties. In addition, some of the
Company's properties may be operated in the future by third parties over whom
the Company has no control. Notwithstanding the Company's lack of control over
properties operated by others, the failure of the operator to comply with
applicable environmental regulations may, in certain circumstances, adversely
impact the Company.

NEPA. The National Environmental Policy Act ("NEPA") is applicable to many of
the Company's planned activities and operations. NEPA is a broad procedural
statute intended to ensure that federal agencies consider the environmental
impact of their actions by requiring such agencies to prepare environmental
impact statements ("EIS") in connection with all federal activities that
significantly affect the environment. NEPA is a procedural statute only
applicable to the federal government, and none of the Company's Sacramento Basin
acreage is located on federal land. The Bureau of Land Management's issuance of
drilling permits and the Secretary of the Interior's approval of plans of
operation and lease agreements all constitute federal action within the scope of
NEPA. Consequently, unless the responsible agency determines that the Company's
drilling activities will not materially impact the environment, the responsible
agency will be required to prepare an EIS in conjunction with the issuance of
any permit or approval.

ESA. The Endangered Species Act ("ESA") seeks to ensure that activities do not
jeopardize endangered or threatened animal, fish and plant species, nor destroy
or modify the critical habitat of such species. Under ESA, exploration and
production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA provide for
criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to the
Company's operations include, but are not necessarily limited to, the Fish and
Wildlife Coordination Act, the Fishery Conservation and Management Act, the
Migratory Bird Treaty Act and the National Historic Preservation Act. Although
the Company believes that its operations are in substantial compliance with such
statutes, any change in these statutes or any reclassification of a species as
endangered could subject the Company to significant expense to modify its
operations or could force the Company to discontinue certain operations
altogether.

                                       6



Employees

As of the date of this report, the Company had four full-time employees, all
involved in our technology business.

ITEM 2.  DESCRIPTION OF PROPERTY.

Media Producing Equipment

In January 2001, the Company purchased media production and factory equipment
with the capacity to produce six million 3.5 inch floppy disks per month. Also
acquired were leasehold improvements and a lease for three years for office and
industrial space where the equipment will be. The lease is personally guaranteed
by the Company's chairman, Alex Gassiot. The Company's plant and corporate
address is located at 5355 Capital Court # 108, Reno, Nevada 89502.

The equipment has state of the art burnishers that enable the polishing of a
disk while still intact with the disk housing or cookie shell. This technology
enables the equipment to format and certify disks with an error rate less than
two percent. Standard burnishers and disk certifiers experience error rates of
approximately fifteen per cent.

Oil and Gas Properties

The Company holds interests in three wells and exploratory prospects in two
geographical areas.

Green River Basin. The Horsethief Canyon Prospect is a Frontier sandstone
natural gas exploration prospect on the eastern flank of the Rock Springs Uplift
of the Green River Basin in southwestern Wyoming. There are a number of gas
fields that produce from the Frontier formation in the vicinity of this
prospect.

The primary formations of interest in the Horsethief Canyon Prospect are the
Second and Third Frontier sands at a depth of approximately 5500 feet. The
Second Frontier in the prospect area has two zones which are present over a
significant portion of the leasehold which are referred to as the "2D" and "2E"
zones. These sands are present in four non-producing wells drilled on the
leasehold acreage in the 1970s and early 1980s. Based on log calculations of
these wells and production tests on one of these wells, the Company believes
this formation will yield commercial quantities of gas, using modern completion
and production techniques. The Third Frontier formation is also considered to be
potentially productive in the prospect area based on log and formation tests of
these wells.

In October 1998, the Company entered into an agreement with Fancher Oil LLC, in
which the Company acquired a twenty percent (20%) working interest in
approximately 3,525 acres including seismic options, farm-in' s and trades,
hereinafter referred to as the Horsethief Canyon Prospect. Subsequently, a 5,760
acre Federal Exploratory Unit was formed and a 3D Seismic exploration program
was completed. The Company then participated in the drilling of the H.C. Federal
#30-12, centrally located in the prospect acreage. The well was completed as an
apparent oil and natural gas producer in two zones of the Second Frontier
formation and is awaiting the installation of surface facilities and pipeline
connection. The drilling confirmed the results of the 3-D Seismic and analysis
of the older wells in the area. Production in this initial well commenced in the
summer of 1999 and continued for six months. The well was shut-in for the winter
in late 1999 and began producing again during the second and third quarter of
2000 until it was shut-in for the winter. The second well, which has been
determined to be uneconomic, was drilled and completed in late summer 1999. This
well may be abandoned in 2001.


                                       7


Sacramento Basin. The Sacramento Basin is an asymmetrical trough roughly 160
miles long, 50 miles wide and up to 30,000 feet deep. Sacramento, California is
located in the southern portion of the basin. The majority of the reserves in
the basin are natural gas which occurs in sandstone reservoirs of late
Cretaceous, Paleocene and Eocene geologic ages. The productive sands are very
porous and permeable, ranging in depth from 2000 to 8000 feet. It is generally
assumed that the gas was generated from deeply buried Cretaceous shales during
the early to mid Tertiary period when such shales reached depths of 12,000 feet
or greater. Over time the gas migrated upward along geologic structures through
faults and continuous sands where porosity and permeability allowed such
migration. Most reservoirs appear to be water driven and are capable of
producing at relatively high rates until the water production becomes excessive,
resulting in the termination of economically producing natural gas.

In August 1997, the Company entered into an agreement with George H. Fancher Jr.
pursuant to which the Company agreed to acquire Mr. Fancher's undivided 25%
working interest in two exploratory gas prospects in the Sacramento Basin of
central California. The Company completed this transaction in early November
1997 at which time Mr. Fancher assigned to the Company his interest in two
Participation Agreements with Slawson Exploration Company, Inc. (the
"Operator"), an unaffiliated independent oil and gas producing company. See
"Certain Relationships and Related Party Transactions." Mr. Fancher reserved a
0.625% net overriding royalty interest in the properties conveyed to the
Company. The Operator has a 11.5% working interest in both prospects and also
holds a 3.5% overriding royalty interest in any properties acquired in the AMI
(as described below). Four nonaffiliated independent oil and natural gas
producing entities hold the balance of the working interest in the two
prospects.

Under the Participation Agreements, the Company was entitled to receive a 25%
net working interest (approximately a 18.75% net revenue interest) in oil and
natural gas leases and other property interests obtained by the Operator in two
prospects, designated the "Fiji" prospect and the "Bali" prospect, included in
an area of mutual interest defined in each Participation Agreement ("AMI").
During 2000, the Company declined paying its share of costs to maintain most
leases throughout the prospects. The Company has continued to pay for the leases
supporting the proven reserves and the producing wells in the Molluca area and
in certain areas that are being farmed out to be drilled by others. It also may
retain a small interest in future wells but will not be responsible for any
costs. The Company is obligated to pay 33.75% of leasehold acquisition costs,
oil and gas lease rentals and renewals, and costs incurred in connection with
acquisition of 3-D Seismic data within the two AMI's surrounding the two
prospects, for the Company's 25% working interest in the prospects. Each of the
other four working interest owners (other than the Operator) also is required to
pay a portion of expenses larger than its working interest.

The Operator holds title to all leasehold agreements, including oil and gas
leases, farm-in agreements or other leasehold acquisitions, beneficially for the
Company and other participants in the prospects until such time as production is
established. Therefore the Company does not anticipate that it will be a record
holder of most of the acreage in which it holds an undivided beneficial
interest. The Operator is also entitled to an additional fee from the Company of
$2,500 per well commenced in either prospect. The Company is entitled, at its
sole election, to decline to participate in any particular well proposed to be
drilled by the Operator. If the Company should elect not to participate in a
proposed well, it shall forfeit all of its interest in the leasehold and any
agreements relating to the lands within in the revenue sharing unit for the
proposed well. Once the land acquisition and 3-D Seismic acquisition is
completed, the Operator will operate the exploration, development and
exploitation activities under the terms of a standard Operating Agreement. The
Company will generally be obligated to pay its portion of the expenditures
incurred by the Operator in operating activities, including drilling expenses
and similar expenditures and will be entitled to receive approximately 18.75%
(the net revenue interest) of any production which might be obtained from the
prospects (after provisions for land owner and overriding royalties).


                                       8


The one successful well in which Fan holds an interest in this project commenced
production in early 1999. Fan continues to pay for its share of the leasehold
expense costs for areas surrounding Molluca with proven undeveloped reserves.

Fan does not presently expect to participate in any additional exploratory
drilling activities on these prospects and is holding its interest for sale to
others, although no potential purchaser has indicated a willingness to purchase
these properties on terms which Fan would consider reasonable.

Title to Properties

Media Production Equipment

The media production equipment and assets acquired by the Company during January
2001 constitute all of the real, personal, intangible and intellectual property
necessary for Fan to engage in the 3.5 inch Micro Floppy Disk finish
manufacturing business . The Company holds all of its equipment free and clear
of restrictions on, or conditions to, transfer or assignment, and are free and
clear of rights of way, covenants, conditions or restrictions. They are also
clear of any adverse claims, liens, charges or encumbrances whatsoever.

Oil and Gas Producing Properties

Fan has the right to acquire from the Operator satisfactory title to all
interest in the two prospects where it holds an interest in accordance with
standards generally accepted in the oil and natural gas industry. Our properties
are subject to customary royalty interests, liens incident to operating
agreements, liens for current taxes and other burdens which we believe do not
materially interfere with the use of or affect the value of our properties. The
remaining acreage is held by lease rentals and similar provisions and requires
production in paying quantities prior to expiration of various time periods to
avoid lease termination.

Current Operations

During the year 2000 the Company held interests in two revenue producing wells
in California and Wyoming. During the year 2001, the Company plans to generate
revenues from the production of 3.5 inch floppy disks and to sell its ownership
interest in all of its oil properties.

The Company' s equipment has the capacity to produce six million floppy disks
per month. It is currently seeking contracts to produce such disks and
anticipates generating revenues during the second quarter of 2001. The Company
also is seeking contracts to duplicate disks for end users that distribute
information or programs on floppy disks to their customers. Such contracts are
preferable because of the higher profit margins. Discussions are currently being
held with one such user that could demand up to 500,000 disks per month.

The Company also is seeking opportunities to generate revenue from the
purchasing and sale of used specialized computer equipment. Significant profit
margins can be achieved with minimal overhead cost in such transactions.

Acreage

The following table sets forth, as of December 31, 2000, the gross and net acres
of oil and natural gas leases which the Company beneficially holds or has the
right to acquire.

Prospect Area                              Developed       Undeveloped
-------------                           ---------------  ---------------
                                        Gross    Net      Gross     Net
                                        -----   -----    ------   ------
Green River Basin
  Horsethief Prospect ......             --      --       3,525    705
Sacramento Basin:
  Bali Prospect ............            160      40       11,389    2,847
                                        ---      --       ------   ------
   Total ...................            160      40       14,914   3,552


                                       9



Reserves


As of December 31, 2000, the Company had an 18.5% profits interest in one
productive well in the Sacramento Basin. The well is operated by an outside
party under arrangements standard in the industry. The following is information
about the reserves attributable to the Company's property at December 31, 2000,
as estimated by an independent petroleum engineer.

                                  Discounted  Discounted
                                   Net Gas     Net Oil     Present Value     Present Value
                                                                (1)                (2)
                                   -------   -------       ------------ ----------------
Prospect                             (MMCF)  (MBO)             ($M)            ($M)
-----------

Sacramento Basin .................  131.5(3)   --              232.2              1,060.0
Green River Basin (4)................  --      --                --                --
                                     -------  ------      -------------    -----------------
   Total ........................     131.5    --              232.2              1,060.0


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

(1)  Present value of future net revenue, discounted at 10% before any related
     income taxes. Assumed product prices of a historical 12 month average at
     $3.79/MMBTU was used instead of the prices in effect in the areas at
     December 31, 2000 of $13.06/MMBTU without escalation, net of heat content
     adjustments, gathering costs and compression charges. All prices were
     assumed to remain flat over the productive lives of the wells. Operating
     costs utilized were estimated costs for the well at a flat rate ($26,000
     per month in California) without escalation.
(2)  Present value of future net revenue, discounted at 10% before any related
     income taxes. Assumed prices in effect in the areas at December 31, 2000 of
     $13.06/MMBTU without escalation, net of heat content adjustments, gathering
     costs and compression charges. All prices were assumed to remain flat over
     the productive lives of the wells. Operating costs utilized were estimated
     costs for the well at a flat rate ($26,000 per month in California) without
     escalation.
(3) Includes one well which commenced production in January 1999 and one proved
undeveloped (undrilled) well.

(4)Includes two proved nonproducing wells. The reserves previously carried were
   determined to be uneconomic due to high operating costs and the absence of a
   gas pipeline.


Drilling Activity

   The Company did not incur any drilling activity during the year 2000.


ITEM 3.  LEGAL PROCEEDINGS.

   No legal proceedings to which the Company is a party were pending during the
reporting period, and the Company knows of no legal proceedings pending or
threatened or judgments entered against any director or officer of the Company
in his capacity as such.

                                       10


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

   The Company did not submit any matter to a vote of security holders through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

   (a) PRINCIPAL MARKET OR MARKETS

   The Company's common stock is not listed on any exchange and there is no
public trading market for the common stock, and there has been no market.

   (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

   As of March 30, 2001, the Company had 12,451,492 shares of common stock
outstanding, held by approximately 513 stockholders.

   (c) DIVIDENDS

   The Company has never declared or paid cash dividends on its common stock and
anticipates that future earnings, if any, will be retained for development of
its business.

   (d) RECENT SALES OF UNREGISTERED SECURITIES

   The following is information with respect to all unregistered securities sold
by the Company within the past three years:

   (i) In September 1998, the Company issued 2,065,000 shares of its common
stock to eight persons upon exercise of outstanding warrants originally issued
June 2, 1997 (see Item 26(b) above). The warrants were exercised at $0.20 per
share for total proceeds of $413,000. 435,000 unexercised warrants expired at
the end of August 1999. No underwriter was involved in the transaction and there
were not underwriting discounts or commissions. The issuance of the securities
was exempt from registration under Section 4(2) of the Securities Act. Each of
the persons exercising warrants acquired the securities for investment,
certificates representing the securities were marked with a restrictive legend
and stop transfer instructions were placed with the Company's stock transfer
agent.

(ii) Effective July 1, 1998, the Company issued 215,000 shares of its common
stock to four officers and directors of the Company in consideration for
services valued at $43,000 which were provided to the Company through June 30,
1998. At the end of 1999 one director surrendered 50,000 of the shares to the
Company for cancellation. No underwriter was involved in the transaction. The
issuance of securities to the individuals were exempt under Section 4(2) of the
Securities Act. Each of the persons to whom the shares were issued acquired the
securities for investment, certificates representing the securities were marked
with a restrictive legend and stop transfer instructions were placed with the
Company's stock transfer agent.

On January 8, 2000 the Company issued 19,250,000 restricted shares of its common
stock to four persons for plant, equipment and other assets, including
specialized manufacturing equipment, manufacturing set ups, real estate leases,
fixtures and related equipment and other property with an estimated fair market
value of $3.8 million. Also on that date the Company issued 3,250,000 shares of
restricted common stock to one of the persons for $650,000, of which $600,000
was paid by th purchaser's secured promissory one, due in May 2001. Three of the
purchasers became directors of the Company. The purchasers represented that they
had complete information about the Company and its business and properties and
agreed to take the securities for investment. Certificates representing the
shares bear restrictive legends and stop transfer instructions have been placed
with the transfer agent. The issuance of the stock was exempt from registration
under Section 4(2) of the Securities Act.

(e) PROCEEDS FROM SALE OF REGISTERED SECURITIES

In 1998 the Company registered 3,000,000 shares of common stock for a
contemplated public offering in Registration No. 333-64448 which was declared
effective May 14, 1998. The offering was discontinued in late 1998 because the
Company was unable to complete the sale of the minimum number of shares offered.
None of the registered shares were sold. In 1999, the Company re-registered the
shares with a view towards recommencement of the public offering. Due to a
deterioration in the market for public companies in the oil and gas business,
the offering was again deferred before the post-effective amendment to the
registration statement was made effective. During the second quarter of 2000,
the Company filed a post-effective registration statement (no. 333-47699) and
recommenced the offering, which included shares of common stock and common stock
purchase warrants. the offering was completed December 298, 2000. and the
Company sold 3.0 million shares of common stock and 3.0 million stock purchase
warrants, each warrant exercisable to purchase one share of common stock at an
exercise price of $0.10 per share. Registrant received $300,000 in gross
proceeds and a net of $287,000 of offering costs. As of the date of this report,
the Company has utilized most of the proceeds from the offering in connection
with start up of our floppy disk business.

ITEM 6.  MANAGEMENT'S PLAN OF OPERATION

   In the following discussion we are providing an analysis of our financial
condition and the Plan of Operation during the next quarter and the balance of
the fiscal year. This discussion should be read in conjunction with our
financial statements and the notes thereto. Certain matters discussed below are
based on potential future circumstances and developments, which we anticipate or
expect, but which cannot be assured. Such forward-looking statements include,
but are not limited to, our plans to produce 3.5 inch floppy disks for sale,
trends in the results of our operations, anticipated rates of production, the
sale of our natural gas and oil properties, operating expenses and our
anticipated capital requirements and capital resources. The actual results which
we achieve in our operations could differ materially from the matters discussed
in the forward-looking statements.

   During the year 2000, the Molluca natural gas well in the Bali prospect in
the Sacramento Basin of central California generated $146,474 at an average
price of $3.08 per MCF during 2000 net to our interest. During the three months
ended December 31, 2000, the production from this well was sold at an average
price of $5.39 per MCF. We anticipate gas prices on the well during 2001 to be
somewhat comparable to the first quarter of 2001 and averaging about $8.00 per
MMBTU. We anticipate that the well will incur higher operating costs due to
water disposal and will decline in production until it becomes uneconomic, which
we estimate to be after the first quarter in 2001. The producing well and our
interest in the surrounding unexplored acreage is being held for sale. Pending
any sale of those properties, we will continue to receive revenue from the
producing well.

   During summer and fall of 2000 the oil producing well in Wyoming produced
1,317 barrels of oil, net to the Company's interest, which was sold at an
average price of $30 per barrel. We realized $5,820 after taxes and fees from
our 16% revenue interest in the well during the 2000. The well was shut-in
during the fourth quarter of 2000 for the winter. We do not anticipate producing
from the well during 2001 because of high operating costs.

                                       11


We depleted our California natural gas well by $112,001 and our Wyoming
properties $2,754 totaling $114,755 during 2000. These charges, although
significant, did not affect the results of our operations for 2000.

We did not take any non-cash impairment charges against our oil and gas
prospects during 2000. Our reserve report for the year 2000 on our prospects
indicated that based upon historical average natural gas prices during 2000, the
present value of our properties discounted 10% would be approximately $ 232,200.
The report also stated that based upon the pricing at December 31, 2000, the
present value of our properties discounted 10% would be approximately $
1,060,000. We believe that the carrying value of our prospects of approximately
241,000 at December 31, 2000 is reasonable because the natural gas pricing
during the first quarter of 2001 has been about one-third higher than the
historical average natural gas price during 2000.

We had general and administrative expenses totaling $90,701 during 1999,
compared to $129,700 in the prior year. The decrease was due primarily to our
lower lever of operations in 2000. We had reimbursements of $ 10,955 and fees
for services provided to four directors for accounting and administrative
functions approximating $50,005 in 2000. We paid $ 29,881 in legal and
accounting fees in regard to required filings with the Securities and Exchange
Commission and for consultations pertaining to potential acquisitions.

In 2000 we had cash expenditures of approximately $28,000 for geophysical, lease
extension costs and intangible drilling costs which were capitalized. Our share
of those expenses during 2001 are have not been estimated by management at this
time as they are subject to such factors as the success of initial drilling
efforts, decisions by the operator to conduct other exploratory activities,
weather and related factors.

On December 29, 2000, we completed and closed a public offering in which we
offered and sold 3.0 million shares of common stock and 3.0 million stock
purchase warrants, each warrant exercisable to purchase one share of common
stock at an exercise price of $0.10 per share. The public offering generated
$300,000 in gross proceeds and $287,544 net to us after expenses we incurred in
connection with the registration.

   At December 31, 2000 we had approximately $ 367,000 in cash and our working
capital was approximately $ 314,000.

During the first quarter of the year 2001, we received net cash flow from the
gas producing property of approximately $ 16,000.

On January 8, 2001, the Company acquired approximately $ 3.8 million in media
production equipment for 19,250,000 common shares which caused a change in
control and management. In conjunction with the transaction, the Company issued
3,250,000 shares of common stock in a private placement at $.20 per share in a
secured note to APG Associates, LLC. Of the shares subscribed for, APG
Associates, LLC paid $ 50,000 on January 8, 2001. The balance of the note was
subsequently extended by the board of directors to May 16, 2001.

Also during the month of January 2001, we disbursed $ 17, 500 for the creation
of a customized program to be presented to a company that we believe will use
that program on 3.5 inch floppy disks for marketing purposes and contract with
us for approximately 500,000 duplicated disks per month. This anticipated
contract will generate a higher profit margin than the certification of floppy
disks.

                                       12


During February 2001, we purchased 650,000 3.5" floppy disks for $ 52,000 and
anticipate receiving delivery during April 2001.

During the quarter ended March 31, 2001, we paid approximately $ 16,750 for the
set-up and maintenance of the media production equipment and approximately $
32,000 for consumables used in the production of floppy disks and $ 5,700 for
capital equipment, approximately $ 31,000 in rent, utilities, insurance,
leasehold improvements, and office expenses, approximately $ 14,000 for legal
and accounting costs for filings with the Securities and Exchange Commission
regarding the change in control and change in public accountants, approximately
$ 15,000 in prepaid items, approximately $ 90,000 in salaries and benefits for
four full-time employees and one part-time employee, approximately $ 30,000 in
travel expenses for corporate meetings, pursuing sales contracts and financings
for the Company.

At March 30, 2001, the Company had approximately $ 78,000 in cash and $ 66,800
in accounts payable. During April 2001, the board settled $ 46,300 in payables
by authorizing the issuance of restricted common shares. The remaining $ 20,500
is payable to a director of the Company.

We will require additional capital resources to take on significant
manufacturing contracts for the start up of those projects and if we decide to
participate in the drilling of exploratory well in the Molluca area where there
are proven reserves. Although we anticipate generating revenue from the sales of
used computers and 3.5 inch certified floppy disks, we have not determined the
cash requirements of the Company during the next nine months.

The Company has a note receivable for $ 600,000 payable during May 2001 from APG
Associates, LLC, "APG" for 3,000,000 restricted common shares.

Outstanding warrants to purchase up to 1,180,000 shares of common stock, due to
expire, were extended through October 31, 2000 and again to April 30, 2001.The
exercise price for those warrants was reduced to $0.15 per share. If all the
warrants are exercised, of which there is no assurance, we would receive
approximately $177,000 by the end of April 2001, unless the warrants are again
extended. The proceeds which we would receive, if most of the warrants are
exercised, would be used for working capital. In addition there are 3,000,000
warrants outstanding until June 20, 2003 at an exercise price of $.10 per share
from the registered offering completed during December 29, 2000. We can make no
assurances as to whether any of the warrants will be exercised or whether we
will be able to successfully raise any other capital.

The Company currently has 130,000 options outstanding at an average price of
$.215 expiring on July 2, 2002 and 570,000 options outstanding at an average
price of $.35 expiring on October 30, 2007. If all the options are exercised, of
which there is no assurance, we would receive $227,500. It is unlikely that such
options would be exercised in the absence of a trading market in the Company's
common stock.

                                       13



   Unless we raise additional capital in an offering or outstanding warrants are
exercised, or we raise capital from other sources, we do not believe that our
limited cash flow will be sufficient to permit us to participate in drilling
additional wells over the next 12 months. As a result we may be unable to
participate in drilling any additional exploratory or development wells on the
Horsethief Canyon prospect or other nearby prospects, unless we are able to
successfully farm-out a portion of our interests to others. If we are able to
raise additional capital we may use the proceeds to participate in additional
development drilling. To fund the anticipated near term capital shortfall during
the second quarter of 2001, we may accept loans from management or other
affiliates.

   We currently have four full-time employees and two part-time employee for the
media production and corporate business. We use consultants for matters
pertaining to drilling, property evaluations and administration. We anticipate
hiring more employees as we begin generating revenues from the production of 3.5
inch floppy disks.

ITEM 7.  FINANCIAL STATEMENTS.

We are filing the following reports, financial statements and notes to financial
statements with this annual report. These reports may be found following Part IV
of this report.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE.

In connection with the relocation of its executive offices from Denver, Colorado
to Phoenix, Arizona, the Registrant determined to dismiss its principal
independent accountant, Wheeler Wasoff, P.C., of Denver, Colorado, effective
January 31, 2001. The Independent Auditors' Reports on the financial statements
of the Registrant for each of the past two fiscal years ending December 31, 1998
and 1999, did not contain an adverse opinion or a disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope or accounting
principles. Each opinion included an explanatory paragraph which raised
substantial doubt about the ability of Registrant to continue as a going concern
and each opinion indicated that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

During the Registrants two most recent fiscal years and the subsequent interim
period preceding the date of dismissal, the Registrant had no disagreements with
the former accoun tants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the former accountants' satisfaction, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.

Effective February 1, 2001, Registrant engaged the firm of Marshall &Weber,
CPA's, PLC as the principal accountant to audit the Registrant's financial
statements at and for the fiscal year ending December 31, 2000.

  PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS.

   The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. Each serves until the next annual meeting of
stockholders.

Names of Executive
Officers and Directors     Age  Position                       Date of Appointment
----------------------     -----  ----------                   ---------------------------

Alex Gassiot               69   Chairman and Director         January 8, 2001
John Shebanow              33   President and Director        January 8, 2001
Robert Hamblen             70   Vice President and Director   January 8, 2001
George H. Fancher Jr.      61   Director                      October 30, 1997

William E. Grafham         63   Director                      July 2, 1997
Jeffrey J. Scott           40   Director                      October 30, 1997
Albert A. Golusin          46   Secretary, Treasurer          July 2, 1997
                                     Director                 December 30, 2000

Alex Gassiot is a licensed Real Estate Broker in California and Nevada and has
been in business for over 35 years. He is president of PA Associates, Inc., a
Nevada Corporation, and Owner/Broker of Far West Ranch and Cattle
Sales/Management Company. Mr. Gassiot has extensive experience in all phases of
real estate sales and commercial and residential development. He also has
extensive experience in the cattle, ski and restaurant industries. During the
last five years Mr. Gassiot has worked as a real estate broker and managed his
personal investments.

                                       14


John Shebanow has extensive experience in the data storage industry. He has been
a principal in several computer companies since 1991, including having founded
Terra Systems Corporation, a full line software fulfillment company in 1995 and
a family of software fulfillment and web marketing companies. Prior to 1995, Mr.
Shebanow operated a private computer systems design and software development
company in the San Francisco Bay Area. His company installed hundreds of
intranets, Internet wide area networks to real estate, banking and securities
firms as well as developed software to control machinery. During the last five
years he has consulted to various companies in software fulfillment, web
marketing and data storage.

Robert Hamblen has worked during the last five years as a general manager and
manufacturing manager for companies in the software fulfillment industry. Prior
to his work as a general manager, he worked for 25 years as a general contractor
in the real estate industry.

 George H. Fancher Jr. has been a self employed independent oil producer,
operator and consultant in the Rocky Mountain Area since 1969, doing business as
Fancher Oil Company since 1980. He was employed by Chevron as a Petroleum
Engineer, in Casper, Wyoming, and Denver, Colorado from 1962 until 1966. In
1966, he joined Ball Brothers Research Corporation in Boulder, Colorado,
followed by two years with an independent oil company before forming
Smith-Fancher, independent producers in the Rocky Mountain and Mid-Continent
regions. In 1980, he formed Fancher Oil Company and has operated as a sole
proprietor since that time. Mr. Fancher has been a director of the Independent
Petroleum Association of America (IPAA), the Independent Petroleum Association
of Mountain States (IPAMS) and the Rocky Mountain Oil and Gas Association
(RMOGA). He is a registered Petroleum Engineer and a member of the Society of
Petroleum Engineers. He has served on the Crude Oil Policy Committee, Improved
Oil Recovery Task Force Committee, and Public Lands Committee of the IPAA. He is
also a member of the Liaison Committee of Cooperating Oil and Gas Associations,
and currently is the past Chairman of the Rocky Mountain Producers Advisory
Group and was on the Board of Directors of the Petroleum Technology Transfer
Council (PTTC).

William E. Grafham has an investment banking background having worked for two
major national Canadian Brokerage houses from 1963 until 1977. In 1977 he
established operating companies representing West German partnerships investing
in natural resources. Offices were set up in Calgary, Alberta; Denver, Colorado;
and Vancouver, BC. The Calgary and Vancouver operating companies were eventually
merged into larger entities; while the main assets of the Denver operation were
sold in 1988. Since 1988 Mr. Grafham, a private investor, has participated in
the formation of a number of businesses investing in technology, oil and gas,
precious metals and mining, and real estate. Most of these investments have
resulted in the companies going public, with involvements in a number of
countries. Mr. Grafham has been active as a director in various companies during
the last five years. He is currently a director or officer of the following
publicly-traded companies which publicly trade.

  Company                              Public Exchange                 Type of Business
  -------------                        ---------------------           ----------------

  Jerez Energy International, Inc.      Canadian Venture Exchange      Oil and gas
  Walking Bear Resources Inc.           Canadian Venture Exchange      Oil and gas
  Tellis Gold Mining Company Inc.       Canadian Venture Exchange      Technology
  Klinair Environmental Technologies   OTC Bulletin Board              Research
  Limited

Jeffrey J. Scott. Mr. Scott is currently President and Chief Operating Officer
of Calgary-based Jerez Energy International Inc. Jerez is a Canadian
international oil and gas exploration and development company focused in West
Africa. He has held this position since May 1995. Mr. Scott is also Vice
President of Operations of Postell Energy Co. Ltd., a privately held Canadian
oil and gas company. He has held this position since 1986. Mr. Scott is a
graduate of the University of Calgary and has been active in the oil and gas
industry since 1979 and has experience in the areas of production, operations
and management. He is also a director of Cenalta Oil Field Services and Klinair
Environmental Technologies Limited which are in different aspects of the oil and
gas industry.

 Albert A. Golusin has been a Certified Public Accountant since 1981. He worked
with the public accounting firms of Grant Thornton & Company and Kenneth
Leventhal & Company from 1979 through 1994. From 1985 to 1992, Mr. Golusin was
the Controller of a public company called N-W Group, Inc. that later became
Glenayre Electronics. He was responsible for managing a $ 40 million cash
portfolio, managing the accounting department and preparing the financial
statements for reporting to the Securities Commisions in the U.S.A. and Canada.
From 1993 to the present, Mr. Golusin has consulted to publicly traded companies
or companies preparing to become publicly traded. He is currently a director of
Rhombic Corporation which is a materials research and development company that
is publicly traded on the OTC Bulletin Board of NASDAQ.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.

   Not applicable.

ITEM 10. EXECUTIVE COMPENSATION.

   The following table sets forth certain information concerning the
compensation paid by the Company for services rendered in all capacities to the
Company for the three fiscal years ended December 31,1998, 1999 and 2000 (there
was no compensation in prior years) of the chief executive officer at December
31, 2000 and all officers and directors, as a group.



   Summary Compensation Table
                                                                                          Long Term
                                                Annual Compensation                      Compensation
                                            -------------------------------              ------------
                                                                            Securities
Name and Principal                                                          Underlying       All Other
Positions at 12/31/98                Salary    Bonus       Compensation       Options        Compensation
---------------------                -------   -------    ----------------- -----------      ------------

William E. Grafham, President
   1998 ...........................   - 0 -    - 0 -       $10,000(1)            --             None
None
   1999 ...........................   - 0 -    - 0 -        $22,452(2)          --               None
   2000 ..........................     -0-     - 0 -        $18,000(2)          --               None

All officers and directors,
as a group (four persons)
   1998 ...........................  $30,000(3)  - 0 -     $43,000(4)          100,000          None
   1999 ...........................  $ 7,500(3)  - 0 -     $44,953(5)            -0-            None
   2000 ..........................   $ 6,405(3)  -0-        $49,875(4)           -0-            None

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




                                       15



(1)     Includes 50,000 shares of common stock, valued at $10,000, issued for
        services as an officer and director.
(2)     Includes 99,788 shares of common stock issued at a deemed value of
        $0.225 per share in satisfaction of $22,452 owed to en entity owned by
        Mr. Grafham for rent and reimbursement expenses. An amount of $ 18,000
        was accrued at December 31, 2000 for management services provided and
        out of pocket expenses during the year 2000.
(3)      Paid to Albert A. Golusin, Secretary, for services as a consultant.
(4)     Includes 215,000 shares of common stock, valued at $43,000, issued to
        five persons for services as officers, directors and representatives of
        the Company. Subsequently, one person surrendered 50,000 of the shares
        for cancellation. The Company accrued a total of $49,875 for
        compensation to all directors and officers for their services and office
        costs during the year 2000.
(5)     Includes 199,788 shares issued at a deemed value of $0.225 per shares to
        two officers, one of whom is a director, in satisfaction of $44,952 in
        compensation or reimbursements owed to them.


Value of Options at December 31, 1999


   Aggregate Fiscal Year End Option Values
  ------------------------------------------------------------
  Number of Securities  Value of Unexercised
   Underlying Unexercised  In-the-Money Options
  Options at Fiscal Year End  at Fiscal Year End
   Exercisable/Unexercisable  Exercisable/Unexercisable(1)
  --------------------------  ---------------------------

William E. Grafham.............  200,000/ --   $ -- / --
All officers and directors
 as a group....................  700,000/--    $ -- / --

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

   (1) Because there is no trading market, the estimated value is based on $0.20
per share, the last price paid for common stock of the Company, less the
exercise price of the options.

Option Grants in the Last Two Fiscal Years

   The Company did not grant options during 1999 and 2000.

Stock Option Plan

   The Company has adopted its 1997 Statutory and Non-Statutory Incentive Stock
Option Plan ("Plan") which authorizes the Company to grant incentive stock
options within the meaning of Section 422A of the Internal Revenue Code of 1986,
as amended, and to grant nonstatutory stock options. The Plan relates to a total
of 1,000,000 shares of common stock. Options relating to 910,000 shares have
been issued and are outstanding and all are presently exercisable. No options
were granted in 1999. The options are exercisable at $0.20 per share for 30,000
shares, $0.22 per share for 100,000 shares, $0.35 per share for 680,000 shares
and $0.50 per share for options to purchase 100,000 shares granted to George A.
Cloudy in April 1998 at the time he joined the Board of Directors. The


                                       16


outstanding options must be exercised within 10 years from the date of grant and
no later than three months after termination of employment or service as a
director, except that any optionee who is unable to continue employment or
service as a director due to total and permanent disability may exercise such
options within one year of termination and the options of an optionee who is
employed or disabled and who dies must be exercised within one year after the
date of death.

   The Plan requires that the exercise prices of options granted must be at
least equal to the fair market value of a share of common stock on the date of
grant, provided that for incentive options if an employee owns more than 10% of
the Company's outstanding common stock then the exercise price of an incentive
option must be at least 110% of the fair market value of a share of the
Company's common stock on the date of grant, and the maximum term of such option
may be no longer than five years. The aggregate fair market value of common
stock, determined at the time the option is granted, for which incentive stock
options become exercisable by an employee during any calendar year is limited to
$100,000.

   The Plan is to be administered by the Company's Board of Directors or a
committee thereof which determines the terms of options granted, including the
exercise price, the number of shares of common stock subject to the option, and
the terms and conditions of exercise. No option granted under the Plan is
transferrable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable during the lifetime of the optionee
only by such optionee.

Compensation of Directors

   The Company does not pay cash compensation to directors. Three of the
directors of the Company were issued 50,000 shares of restricted common stock of
the Company on July 1, 1998 as compensation for services furnished to the
Company as an officer or director through June 30, 1999. Prior to 2000, the
Company Granted options to purchase shares of common stock at exercise prices of
$0.35 per share for four director as to 700,000 shares and at $0.50 per share to
one director as to 100,000 shares. The options were granted under the Plan and
must be exercised within 10 years from the date of grant. No compensation was
paid to directors for services as directors during 1999 and 2000.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
   MANAGEMENT.

   The following table sets forth, as of March 30, 2001, certain information
with respect to the beneficial ownership of the Company's common stock by (i)
each director and officer of the Company, (ii) each person known to the Company
to be the beneficial owner of 5% or more of the outstanding shares of common
stock, with such person's address, and (iii) all of the directors and executive
officers as a group. Unless otherwise indicated, the person or entity listed in
the table is the beneficial owner of the shares and has sole voting and
investment power with respect to the shares indicated.




Name of Beneficial Owner                      Shares beneficially
or Name of Officer or Director                    Owned (1)                    Percent
------------------------------                -----------------------          -------

William E. Grafham, Director                    1,593,356 (2)                    4.5
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI

George H. Fancher Jr., Director                 2,450,000(3)                     7.0
1801 Broadway, Suite 720
Denver, Colorado 80202

Jeffrey J. Scott, Director                         250,000(4)                    0.7
2500, 500 - 4'th Avenue S.W.
Calgary, Alberta T2P 2V6

Albert A. Golusin, Secretary and Treasurer         315,000(5)                    0.9
10641 N. 44'th Street
Phoenix, Arizona 85028

John Shebanow                                  16,600,000 (6)                   14.3
5355 Capital Court, suite 108
Reno, Nevada 89502

Robert Hamblen                                  1,000,000 (6)                    2.9
3550 Barron Way, suite 11B
Reno, Nevada 89511

Alex Gassiot                                   16,600,000 (6)                   47.5
3550 Barron Way, suite 11B
Reno, Nevada 89511

APG Associates, LLC                            11,700,000 (6)                   33.5
3550 Barron Way, suite 11B
Reno, Nevada 89511

First Holding Company                           2,595,000 (7)                    7.2
Q & H Corporate Services
3'rd floor Harbour Centre
Grand Cayman, BWI

Don Stewart                                     3,903,000(7)(8)                 10.8
P.O. Box 245
Grand Cayman, BWI

Carolyn Grafham                                 3,165,000(7)(9)                  8.6
7475 E. Gainey Ranch Rd. # 21
Scottsdale, Arizona 85258

David Grafham                                   3,815,000(7)(10)                10.4
Suite 1101, 1001 14'th Ave. S.W.
Calgary, Alberta, Canada T2R 1L2


All officers and directors as a
 group (7 persons)                              27,108,356                      75.8


                                       17


(1)  All securities are owned directly and beneficially unless otherwise noted.
     Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission and generally includes voting or
     investment power with respect to securities. Shares of common stock subject
     to options and warrants currently exercisable or exercisable within 60 days
     of March 30, 2001 are deemed outstanding for computing the percentage of
     the person or entity holding such securities but are not outstanding for
     computing the percentage of any other person or entity.
(2)  Includes 300,000 shares of common stock underlying presently exercisable
     options and warrants. Also includes the shares owned by companies in which
     Mr. Grafham has the voting or investment power.
(3)  Includes 250,000 shares underlying presently exercisable stock purchase
     warrants and options.
(4)  Includes presently exercisable options to purchase up to 150,000 shares.
(5)  Includes 100,000 shares of common stock underlying presently exercisable
     options.
(6)  Shares were acquired in a transaction resulting in a change of control on
     January 8, 2001,Mr. Shebanow and Mr. Gossiott are co-managers of APG
     Associates, LLC.
(7)  First Holding Company is a trust of which Carolyn Grafham is the
     beneficiary. Don Stewart and David Grafham are co-trustees of the trust.
     Includes exercisable warrants to purchase up to 1,230,000 shares.
(8)  Includes 88,000 exercisable warrants. Also includes 1,365,000 shares and
     1,800,000 exercisable warrants held by two trusts for which Mr. Stewart is
     co-trustee, of which beneficial ownership is disclaimed.
(9)  Includes 1,365,000 shares and 1,230,000 warrants held by a trust of which
     she is beneficiary. Also includes 570,000 exercisable warrants held by a
     trust of which she is co-trustee, fo which beneficial ownership is
     disclaimed.
(10) Includes 570,000 exercisable warrants held by a trust of which he is
     beneficiary. Also includes 1,365,000 shares and 1,230,000 exercisable
     warrants held by a trust of which he is co-trustee, of which beneficial
     ownership is disclaimed.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

The Company paid $8,000 in 1997, $24,000 in 1998 and $22,452 in 1999 to Arizona
Corporate Management, Inc., a corporation owned by William E. Grafham, as
reimbursement for office and related expenses and for rent. The 1999 amount was
paid by issuing 99,788 shares for our common stock at an agreed value of $0.225
per share. During 1999 and in previous years the Company had a month-to-month
agreement to pay $2,000 per month to the corporation for office space, use of
certain office equipment and for limited administrative services. The Company
also had an arrangement with George H. Fancher Jr., pursuant to which Fancher
Oil LLC was paid $2,000 in 1997, and $24,000 in 1998 for office facilities, use
of certain office equipment and limited administrative and technical support in
1999. Mr. Fancher canceled an obligation of Fan to reimburse $22,000 to Fancher
Oil LLC for 1999 expenses.


                                       18


On an agreement dated October 1, 1998, the Board of Directors, with Mr. Fancher
abstaining, approved a transaction in which the Company acquired an undivided
20% working interest (16% net revenue interest) in Fancher Oil LLC's
approximately 3,525 acre Horsethief exploration prospect located in Sweetwater
County, in the Green River Basin of southwestern Wyoming. The Company agreed to
pay 24% of all costs incurred in acquiring the initial well and in acquiring,
processing and interpreting the 3-D Seismic data and drilling of the initial
well through the casing point for a 20% working interest, which was equivalent
to the rate paid by the nonaffiliated participate in the project. Under the
agreement the Company reimbursed Fancher Oil LLC $131,000 as acreage acquisition
and seismic survey expenses and approximately $104,000 as the Company's share of
drilling and completion costs in the initial exploratory well. Fancher Oil LLC
holds a 55% working interest in the prospect and earns operating fees, standard
in the area, from the other working interest owners. The Company also has the
right to participate on an equivalent basis in four other exploratory oil and
natural gas prospects being assembled by the operator in the area near the
Horsethief prospect.

At December 31, 2000 the Company had accrued approximately $ 50,000 to be paid
to the directors of the Company for expenses and overhead incurred in 2000 in
operating the Company.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

   (a) Exhibits. The following exhibits required by Item 601 to be filed
  herewith are incorporated by reference to previously filed documents:

   Exhibit No.   Description and Method of Filing
   -----------   --------------------------------

   (3.1)  Restated Articles of Incorporation of Eastern Star Mining,
   Inc., as filed with the Nevada Secretary of State February
   7, 1997.(1)

   (3.2)  Certificate of Amendment of Articles of Incorporation of
   Eastern Star Mining, Inc., as filed with the Nevada
   Secretary of State May 19, 1997.(1)

   (3.3)  Certificate of Amendment of Articles of Incorporation of
   Eastern Star Mining, Inc., as filed with the Nevada
   Secretary of State May 28, 1997.(1)

   (3.4)  Certificate of Amendment of Articles of Incorporation of
   Eastern Star Holdings, Inc., as filed with the Nevada
   Secretary of State December 10, 1997.(1)

   (3.5)  Bylaws of Company adopted December 31, 1997.(1)

   (10.1)   Letter Agreement dated August 27, 1997 between Company and
   George H. Fancher Jr. d/b/a Fancher Oil Company.(1)

   (10.2)   Agreement With Arizona Corporate Management, Inc. dated
   November 1, 1998.(1)

   (10.3)   1997 Incentive and Nonstatutory Stock Option Plan. (1)

   (10.4)   Letter regarding conflicts of interest dated March __, 1998
   between Company and George H. Fancher Jr.(1)

                                       19


   (10.5)   Form of Subscription Agreement for certain officers and
   consultants.(1)

   (10.6)   Agreement with Albert Golusin.(1)

   (10.7)   Participation Agreement dated October 1, 1998 with Fancher
   Oil LLC.(2)

   (10.8)   Indemnification Agreement with George H. Fancher Jr. Incorporated
   by reference to Exhibit 10.7 on Registrant's Annual Report
  on Form 10-KSB for the fiscal year ended December 31, 1998.

   (10.9)   Agreement dated May 6, 1999 with George H. Fancher Jr.
   Incorporated by reference to Exhibit 10.9 to Registration 333-47699.

   (10.10)   Warrant Agency Agreement.  Incorporated by reference to Exhibit
   10.9 to Registration 333-47699.

   (10.11)  Subscription Agreement and attached promissory note, incorporated by
   reference to Exhibit 10.1 to Form 8-K dated January 8, 2001.

   (10.12)  Letter Agreement to purchase assets, dated January 5, 2001,
   incorporated by reference to Exhibit 10.2 to Form 8-K dated January 8, 201.
------------------

   (1)  Incorporated by reference to Registration Statement No. 33-64448 on
  Form SB-2, which became effective May 14, 1998.
   (2)

   (b) Reports on Form 8-K. The Registrant filed no reports on Form 8-K during
the fiscal quarter ending December 31, 1999.`

## INDEX TO
FINANCIAL STATEMENTS

`(1)  Financial Statements:
     Independent Auditor's Report .......................................... F-1
     Independent Auditor's Report .......................................... F-2
     Balance Sheet December 31, 2000 ....................................... F-3
     Statements of  Operations  Years ended  December  31, 1999 and 2000
         and Cumulative Amounts from Inception to December 31, 2000 ........ F-4
     Statement of Stockholders' Equity Years Ended December 31,
          1997, 1998, 1999 and 2000 ........................................ F-5
     Statements of Cash Flows Years ended December 31, 1999 and 2000
          and Cumulative Amounts from Inception to December 31, 1999 ....... F-6-F-7
     Notes to Financial Statements ......................................... F-8-F-22
(2)  Schedules
     None`

---

## INDEPENDENT
AUDITOR'S REPORT

To The Board of Directors
and Stockholders FAN ENERGY INC.

We have audited the
accompanying balance sheet of Fan Energy Inc. (a development stage company) as
of December 31, 2000 and the related statements of operations,
stockholders equity and cash flows for the year then ended. These
financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the
financial statements referred to above present fairly, in all material respects,
the financial position of Fan Energy Inc. as of December 31, 2000 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.

The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the financial statements, the Company has
incurred losses from its initial operations and has not earned significant
revenues from its principal operations that raise substantial doubt about its
ability to continue as a going concern. Managements plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

/s/ MARSHALL &
WEBER, CPA's, P.L.C.

Scottsdale, Arizona
April 12, 2001

---

## INDEPENDENT
AUDITOR'S REPORT

To The Board of Directors
and Stockholders FAN ENERGY INC.

We have audited the
accompanying balance sheet of Fan Energy Inc. (a development stage company) as
of December 31, 1999 and the related statements of operations,
stockholders equity and cash flows for the year then ended and cumulative
amounts from January 1, 1997 to December 31, 1999. These financial statements
are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audit.

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

In our opinion, the
financial statements referred to above present fairly, in all material respects,
the  financial  position  of Fan Energy  Inc.  as of  December  31, 1999 and the
results  of its  operations  and its  cash  flows  for the year then  ended and
cumulative  amounts from January 1, 1997 to December 31, 1999 in conformity with
generally accepted accounting principles.

The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the financial statements, the Company has
incurred losses from its initial operations and has not earned significant
revenues from its principal operations that raise substantial doubt about its
ability to continue as a going concern. Managements plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

/s/ Wheeler Wasoff, P.C.    
             
             
             
             
             
             
             
             
             
             
             
             
WHEELER WASOFF, P.C.
Denver, Colorado
March 17, 2000

---

## FAN
ENERGY INC.
(A Development Stage Company)
BALANCE SHEET
December 31, 2000

`ASSETS


CURRENT ASSET
 Cash ..........................................................    $   367,056
 Accounts receivable ...........................................         20,320
                                                                    -----------
  Total Current Asset ..........................................        387,376

OIL AND GAS PROPERTIES (Note 3) ................................        240,952
                                                                    -----------
                                                                    $   628,328
                                                                    ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Accounts payable - trade ......................................    $     2,646
           related party .......................................         70,375
                                                                    -----------
  Total Current Liabilities ....................................         73,021
                                                                    -----------
COMMITMENTS AND CONTINGENCIES (Note 3)

STOCKHOLDERS' EQUITY (Note 5)
 Preferred stock, $.01 par value
    Authorized - 5,000,000 shares
    Issued - none ..............................................           --
 Common stock, $.001 par value
    Authorized - 95,000,000 shares
    Issued and outstanding - 12,451,492 shares .................         12,452
 Additional paid-in capital ....................................      2,602,053
 Deficit accumulated during the development stage ..............     (2,159,698)
 Additional paid-in capital stock options ......................        100,500
                                                                    -----------
                                                                        555,307
                                                                    -----------
                                                                    $   628,328
                                                                    ===========`

The  accompanying notes are
an integral part of the financial statements

---

## FAN
ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Years ended December 31, 2000 and 1999

`Cumulative
                                                                          Amounts from
                                                                          Jan. 1,1997 to
                                               2000            1999       Dec. 31, 2000
                                               ----            ----       -------------
REVENUES
 Oil and gas sales ..................   $    155,660    $    152,832    $    308,492
                                        ------------    ------------    ------------

OPERATING EXPENSES
 Lease operating expenses ...........         18,308          31,631          49,939
 General and administrative .........         90,701         129,673         612,210
 Depletion ..........................        114,755         124,938         239,693
 Impairment of oil and gas properties           --           300,000       1,557,702
 Interest (Note 3) ..................            262           2,137           8,646
                                        ------------    ------------    ------------
                                             224,026         588,379       2,468,190
                                        ------------    ------------    ------------

NET (LOSS) ..........................   $    (68,366)   $   (435,547)   $ (2,159,698)
                                        ============    ============    ============

NET (LOSS) PER COMMON SHARE - Basic
  and Diluted .......................   $       (.01)   $       (.04)   $       (.28)
                                        ============    ============    ============

WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING
  - Basic and Diluted ...............      9,467,930      10,051,567       7,774,581
                                        ============    ============    ============`

The  accompanying notes are
an integral part of the financial statements

---

## FAN
ENERGY INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997 through 2000

`Deficit       Additional
                                                                                           Accumulated       Paid-In
                                                   Common Stock            Additional       During the       Capital
                                              -----------------------        Paid-In       Development        Stock
                                              Shares           Amount        Capital          Stage          Options
                                              ------           ------      ----------      ------------     ----------
Balance, January 1, 1997 .............        771,704    $        772    $    503,876   $   (504,648)     $     --
Reclassification of deficit pursuant
 to quasi reorganization .............                                                       504,648
Sale of common stock and warrants
 pursuant to private placement, at

 $.20 per unit .......................      2,500,000           2,500         497,500
Cost of private placement offering ...
Issuance of common stock for services,
 valued at $.20 per share ............        250,000             250          49,750
Sale of common stock and warrants
 pursuant to private placement,
 at $.50 per unit ....................      2,000,000           2,000         998,000
Costs of private placement offering ..
Issuance of common stock for property,
 valued at $.133 per share ...........      2,250,000           2,250         297,750
Issuance of common stock warrants for
 offering costs ......................                                          4,545
Issuance of stock options ............                                          2,332                        100,500
Net (Loss) ...........................                                                      (199,232)
                                         ------------    ------------    ------------   ------------    ------------
Balance, December 31, 1997 ...........      7,771,704           7,772       1,796,236       (199,232)        100,500
Issuance of common stock for
 services, valued at $.20 per share ..        215,000             215          42,785
Exercise of common stock warrants for
 cash, at $.20 per share .............      2,065,000           2,065         410,935
Net (Loss) ...........................                                                    (1,456,553)
                                         ------------    ------------    ------------   ------------    ------------
Balance, December 31, 1998 ...........     10,051,704          10,052       2,249,956     (1,655,785)        100,500
Conversion of payables to common
 stock by officers, valued at
 $.225 per share .....................        199,788             200          44,753
Forgiveness of debt by officer/
 director ............................                                         22,000
Return of common stock by officers/
 directors ...........................       (800,000)           (800)            800
Net (Loss) ...........................                                                      (435,547)
                                         ------------    ------------    ------------   ------------    ------------
Balance, December 31, 1999 ...........      9,451,492           9,452       2,317,509     (2,091,332)        100,500
Issuance of common stock in public
 offering ............................      3,000,000           3,000         297,000
Cost of public offering ..............                                        (12,456)
Net (Loss) ...........................                                                       (68,366)
                                         ------------    ------------    ------------   ------------    ------------
Balance, December 31, 2000 ...........     12,451,492    $     12,452    $  2,602,053     (2,159,698)   $    100,500
                                         ============    ============    ============   ============    ============`

The  accompanying notes are
an integral part of the financial statements

---

## FAN
ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 and 1999

`Cumulative
                                                                                 Amounts from
                                                                                Jan.1, 1997 to
                                                          2000          1999     Dec. 31, 2000
                                                          ----          ----    ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss) ....................................   $    68,366)   $  (435,547)   $(2,159,698)
  Adjustments to reconcile net (loss) to net
   cash provided by operating activities
  Depletion .....................................       114,755        124,938        239,693
  Impairment of oil and gas properties ..........          --          300,000      1,557,702
  Stock options .................................       102,832
  Stock for services and payables ...............          --           44,953        137,953
  Forgiveness of payables by officer/director ...          --           22,000         22,000
  Changes in assets and liabilities
   (Increase) in accounts receivable ............        25,827        (46,147)       (20,320)
   (Decrease) increase in accounts payable ......        44,124         27,161         73,021
                                                    -----------    -----------    -----------
 Net cash (used) provided by operating activities       116,340         37,358        (46,817)
                                                    -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Cash paid for oil and gas properties ..........       (28,118)       (61,943)    (1,738,347)
                                                    -----------    -----------    -----------
  Net cash (used) in investing activities .......        28,118)       (61,943)    (1,738,347)
                                                    -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from exercise of common stock warrants          --             --          413,000
  Proceeds from sale of common stock ............       300,000           --        1,800,000
  Cash paid for offering costs ..................       (12,456)       (60,780)
  Proceeds from short-term borrowings ...........          --           90,000         90,000
  Repayments of short-term borrowings ...........       (20,000)       (70,000)       (90,000)
                                                    -----------    -----------    -----------
  Net cash provided by financing activities .....       267,544         20,000      2,152,220
                                                    -----------    -----------    -----------

NET (DECREASE) INCREASE IN CASH .................       355,766         (4,585)       367,056

CASH, BEGINNING OF PERIODS ......................        11,290         15,875           --
                                                    -----------    -----------    -----------
CASH, END OF PERIODS ............................   $   367,056    $    11,290    $   367,056
                                                    ===========    ===========    ===========`

The  accompanying notes are
an integral part of the financial statements

---

## FAN
ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2000 and 1999

SUPPLEMENTAL  DISCLOSURE OF
CASH FLOW INFORMATION

During  the years ended
December  31,  1997,1998,1999  and 2000 the  Company  paid cash for  interest of
$6,247, $0, $2,137 and 262, respectively.

SUPPLEMENTAL  SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES

During  the year ended
December 31, 1997, the Company:

|o | issued 2,250,000 shares of common stock, valued at $300,000 ($.133 per share),
as partial consideration for unproved oil and gas properties.
|- | --------------------------------------------------------------------------------------------------------------------------------------------

|o | issued 680,000 options to purchase common stock to officers, directors and
consultants, valued at $102,832.
|- | -----------------------------------------------------------------------------------------------------------

|o | issued 250,000 shares of common stock for services,  valued at $50,000 ($.20 per
share).
|- | ----------------------------------------------------------------------------------------

|o | issued 180,000 warrants to purchase shares of common stock as partial
consideration for finders fees in conjunction with the private placement
sale of common stock, valued at $4,545.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During  the year ended
December  31,  1998,  the  Company  issued  215,000  shares of common  stock for
services, valued at $43,000 ($.20 per share).

During  the year ended
December 31, 1999,  the Company  issued an  aggregate  199,788  shares of common
stock to officers for accounts payable, valued at $44,953 ($.225 per share); and
an officer/director forgave $22,000 in accounts payable.

The  accompanying notes are
an integral part of the financial statements

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 1 - ORGANIZATION

During
the year 2000 Fan Energy Inc. (the Company) was an independent
energy company engaged in the development, exploration and acquisition of oil
and natural gas reserves in the western United States. Originally formed as an
Idaho corporation in the early 1900s, the crude Companys predecessor was
not successful in the exploration of mining properties. In 1988 the predecessor
was merged into a newly-formed Nevada Corporation named Eastern Star, Inc. and
it was inactive thereafter, with no assets or liabilities through the end of
1996. In early 1997, the corporation was reactivated when the holder of a
majority of the outstanding common stock transferred control of the inactive
corporation. The transferee elected new directors and officers and caused the
Company to effect a 10-into-1 reverse stock split. The name of the corporation
was changed to Fan Energy Inc. in December 1997.

Effective
with the change in control and reactivation, the Company undertook development
stage activities as defined by Statement of Financial Accounting Standards
(SFAS) No. 7 and is considered a development stage company effective January 1,
1997. Its principal activities have been raising capital through the sale of its
securities, acquiring undivided minority interests in two oil and natural gas
exploratory prospects in California for cash and common stock and one prospect
in Wyoming, and commencing the drilling of exploratory and development wells on
these properties. In 1999 and 2000 revenue from oil and gas production was
received from two wells.

On
January 8, 2001, the Company acquired plant, equipment and other assets,
including specialized manufacturing equipment, manufacturing set-ups, real
estate lease, fixtures and related equipment and other property to be used in
the production of magnetic media. In consideration for the acquisition of the
assets, the Company issued 19,250,000 restricted common shares. The transaction
resulted in a change in control of the Company (Note 9).

NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

OIL
AND GAS PROPERTIES

The
Company follows the full cost method to account for its oil and gas exploration
and development activities. Under the full cost method, all costs incurred which
are directly related to oil and gas exploration and development are capitalized
and subjected to depreciation and depletion. Depletable costs also include
estimates of future development costs of proved reserves. Costs related to
undeveloped oil and gas properties may be excluded from depletable costs until
such properties are evaluated as either proved or unproved. The net capitalized
costs are subject to a ceiling limitation. Gains or losses upon disposition of
oil and gas properties are treated as adjustments to capitalized costs, unless
the disposition represents a significant portion of the Companys proved
reserves. A separate cost center is maintained for expenditures applicable to
each country in which the Company conducts exploration and/or production
activities.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

OIL
AND GAS PROPERTIES (continued)

Depletion
and amortization of the full-cost pool is computed using the units-of-production
method based on proved reserves as determined annually by the Company and
independent engineers. An additional depletion provision in the form of a
valuation allowance is made if the costs incurred on oil and gas properties, or
visions in reserve estimates, cause the total capitalized costs of oil and gas
properties in the cost center to exceed the capitalization ceiling. The
capitalization ceiling is the sum of (1) the present value of future net
revenues from estimated production of proved oil and gas reserves applicable to
the cost center plus (2) the lower of cost or estimated fair value of the cost
centers unproved properties less (3) applicable income tax effects. The
valuation allowance was $1,557,702 at December 31, 2000.

REVENUE
RECOGNITION

The
Company recognizes oil and gas revenues from its interests in producing wells as
oil and gas is produced and sold from these wells. The Company has no gas
balancing arrangements in place. Oil and gas sold is not significantly different
from the Companys product entitlement.

IMPAIRMENT

The
Company has adopted SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of which
requires that long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Oil and gas properties accounted for using the
full cost method of accounting, a method utilized by the Company, are excluded
from this requirement, but will continue to be subject to the ceiling test
limitations.

INCOME
TAXES

The
Company has adopted the provisions of SFAS No. 109, Accounting for Income
Taxes. SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.

At
December 31, 2000, the Company had a net operating loss carryforward of
approximately $939,000 that may be offset against future taxable income through
2020.

The
Company has fully reserved the tax benefits of these operating losses because
the likelihood of realization of the tax benefits cannot be determined.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

INCOME
TAXES (continued)

The
tax benefit of the loss carryforward has been offset by a valuation allowance of
the same amount. Of the total tax benefit $30,000 is attributable to 2000.

Temporary
differences between the time of reporting certain items for financial and tax
reporting purposes consist primarily of compensation expense related to the
issuance of stock options and exploration and development costs on oil and gas
properties.

USE
OF ESTIMATES

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

The
oil and gas industry is subject, by its nature, to environmental hazards and
cleanup costs. At this time, management knows of no substantial costs from
environmental accidents or events for which it may be currently liable. In
addition, the Companys oil and gas business makes it vulnerable to changes
in wellhead prices of crude oil and natural gas. Such prices have been volatile
in the past and can be expected to be volatile in the future. By definition,
proved reserves are based on current oil and gas prices and estimated reserves.
Price declines reduce the estimated quantity of proved reserves and increase
annual amortization expense (which is based on proved reserves).

(LOSS)
PER COMMON SHARE

(Loss)
per common share is computed based on the weighted average number of common
shares outstanding during each period. Convertible equity instruments such as
stock warrants and options are not considered in the calculation of net loss per
share, as their inclusion would be antidilutive.

In
February  1997 SFAS No.  128,  "Earnings  Per Share" was  issued  effective  for
periods  ending after  December 15,  1997.  There is no impact on the  Company's
financial statements from adoption of SFAS No. 128.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

SHARE
BASED COMPENSATION

In
October 1995 SFAS No. 123 Accounting for Stock-Based Compensation
was issued. This standard defines a fair value based method of accounting for an
employee stock option or similar equity instrument. This statement gives
entities a choice of recognizing related compensation expense by adopting the
new fair value method or to continue to measure compensation using the intrinsic
value approach under Accounting Principles Board (APB) Opinion No. 25. The
Company has elected to utilize APB No. 25 for measurement; and will, pursuant to
SFAS No. 123, disclose supplementally the pro forma effects on net income and
earnings per share of using the new measurement criteria. No warrants or options
were issued in 1999 (Note 5).

CASH
EQUIVALENTS

For
purposes of reporting cash flows, the Company considers as cash equivalents all
highly liquid investments with a maturity of three months or less at the time of
purchase. On occasion, the Company has cash in banks in excess of federally
insured amounts.

BASIS
OF ACCOUNTING

The
accompanying financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which contemplates the realization of
assets and extinguishment of liabilities in the normal course of business.

As
previously discussed, the Company is in the development stage and has not
realized significant revenues from its planned operations. As such, the Company,
as of December 31, 2000 has incurred net operating losses since reactivation as
a development stage company of $2,159,698 and does not have sufficient working
capital to fund its planned operations during the next twelve months. Additional
funding will be required to complete the Companys planned drilling
program, put successful wells into production and finance general and
administrative expenses. These circumstances raise substantial doubt about the
Companys ability to continue as a going concern. In order to meet the
Companys continuing financing needs, management of the Company intends to
raise working capital through the sale of common stock or other securities, or
through other financing.

The
Companys financial statements do not include any adjustments related to
the realization of the carrying value of assets or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

The
ability of the Company to continue operations as a going concern is dependent
upon its success in obtaining capital through sale of common stock or other
securities and ultimately achieving profitable operations.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

NEW
TECHNICAL PRONOUNCEMENTS (continued)

In
June 1998 SFAS No. 133,  Accounting for Derivative Instruments and Hedging
Activities,  was issued for fiscal  years  beginning  after June 15, 1999.
Adoption  of SFAS No.  133 is not  expected  to have a  material  impact  on the
Company's financial statements.

In
October   1998   SFAS   No.   134,    Accounting   for   Mortgage   Broker
Securities, was issued for fiscal years beginning after December 15, 1998.
Adoption  of SFAS No.  134 does not have an  impact on the  Company's  financial
statements.

In
February  1999  SFAS No.  135,  Rescission  of FASB  Statement  No. 75 and
Technical  Corrections  was issued for the fiscal  years  beginning  after
February 15, 1999. Adoption of SFAS No. 135 is not expected to have an impact on
the Company's financial statements.

In
June 1999 SFAS No. 136, Transfers of Assets to a not-For-Profit
Organization or Charitable Trust that Raises or Holds Contributions for
Others was issued for fiscal years beginning after December 15, 1999.
Adoption of SFAS No. 136 does not have an impact on the Companys financial
statements.

In
June 1999 SFAS No. 137,  Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statements No. 133 was
issued.  Adoption  of SFAS No.  137 is not  expected  to have an  impact  on the
Company's financial statements.

NOTE 3 - OIL AND
GAS PROPERTIES

In
1997, the Company acquired a 25% undivided working interest in two natural gas
exploration and development prospects located in the southern part of the
Sacramento Basin in California. The Company paid $907,951 in cash and issued
2,250,000 shares of common stock, valued at $300,000 ($.133 per share), for the
properties. The total value of cash paid and stock issued approximates the
transferors historical basis in the property of $1,207,951. As additional
consideration, the Company agreed to issue 500,000 additional restricted shares
to the transferor if the gross revenue received by the Company from the
prospects is at least equal to all direct costs of the Company associated with
acquiring the interest in the prospects and drilling and other related expenses
by December 31, 1999. The Company paid to the transferor interest in the amount
of $6,247 (8% per annum) for funds advanced by the transferor on the property
from the date of the acquisition agreement (August 27, 1997) to the closing of
the agreement (November 11, 1997). Concurrently with the closing, the transferor
became a director and officer of the Company.

In
1998 the Company acquired a 20% working interest in certain Wyoming oil and gas
leases held by an entity controlled by the chief operating officer/director of
the Company, for $131,000 which includes seismic costs incurred to the date of
purchase.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 3 - OIL AND GAS
PROPERTIES (continued)

The
Company may be subject to various possible contingencies, which derive primarily
from interpretations of federal and state laws and regulations affecting the oil
and gas industry. Although management believes it has complied with the various
laws and regulations, new rulings and interpretations may require the Company to
make adjustments.

Capitalized
costs associated with oil and gas producing activities as of December 31, 2000
are as follows:

`Proved properties            $ 1,089,349
    Unproved properties              948,999
                                  ----------

                                   2,038,348

    Less: valuation allowance     (1,557,702)
      accumulated depletion         (239,693)
                                  ----------
    Net capitalized costs          $ 240,952
                                  ==========`

Information
relating to the Companys costs incurred in its oil and gas operations
during the years ended December 31, 1999 and 2000 is summarized as follows:

`2000        1999
                                                  ----        ----

   Property acquisition - Unproved properties  $   --       $   --
   Exploration costs                             28,118       61,943
   Development costs                               --           --
                                                -------     --------
                                               $ 28,118     $ 61,943
                                                =======     ========`

Property
acquisition costs include costs incurred to purchase, lease, or otherwise
acquire a property. Exploration costs include the costs of geological and
geophysical activity, dry holes, and drilling and equipping exploratory wells.
Development costs include costs incurred to gain access to prepare development
well locations for drilling and to drill and equip development wells.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 3 - OIL AND GAS
PROPERTIES (continued)

OIL
AND GAS RESERVES (UNAUDITED)

The
following unaudited reserve estimates presented as of December 31, 1999 and 2000
were prepared by an independent petroleum engineer. All of the Companys
reserves are located in the United States. There are many uncertainties inherent
in estimating proved reserve quantities and in projecting future production
rates and the timing of development expenditures. In addition, reserve estimates
of new discoveries that have little production history are  more imprecise than
those of properties with more production history. Accordingly, these estimates
are expected to change, as future information becomes available.

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

At
December 31, 1999 and 2000 proved reserves were as follows:

`2000    2000     1999    1999
                                                     GAS      OIL      GAS     OIL
                                                    (MMCF)   (MBBL)   (MMCF)  (MBBL)

                 Beginning of year                  325.9       .3    567.3    9.5
                 Revision of previous estimates     (68.7)     (.2)  (497.9)  (8.9)
                 Proved developed producing           2.5             182.3
                 Production                        (257.2)     (.1)   (69.4)   (.6)
                 Proved developed non-producing               14.6       .3
                 Proved undeveloped                 129.0             129.0
                                                    -----    -----    -----    ---

                 End of year                        131.5             325.9     .3
                                                    =====    =====    =====    ===`

STANDARD MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)

The
standardized measure of discounted future net cash flows is based on estimated
quantities of proved reserves and the future periods in which they are expected
to be produced and on year-end economic conditions; however, due to the large
disparity between year-end and historical pricing, a value was used representing
the historical average during the year 2000 which closely approximates the
currently available five year forward pricing. Estimated future gross revenues
are reduced by estimated future development and production costs, as well as
certain abandonment costs and by estimated future income tax expense. Future
income tax expenses have been computed considering the tax basis of the oil and
gas properties plus available carryforwards and credits.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 3 - OIL AND GAS
PROPERTIES (CONTINUED)

OIL
AND GAS RESERVES (UNAUDITED)

The
standardized measure of discounted future net cash flows should not be construed
to be an estimate of the fair market value of the Companys proved
reserves. Estimates of fair value would also take into account anticipated
changes in future prices and costs, the reserve recovery variances from
estimated proved reserves and a discount factor more representative of the time
value of money and the inherent risks in producing oil and gas. Significant
changes in estimated reserve volumes or product prices could have a material
effect on the Companys financial statements.

The
following table presents the standardized measure of the discounted future net
cash flows attributable to the Companys proved oil and gas reserves as of
December 31, 1999 and 2000:

`2000      1999
                                                                ----      ----
                                                                (in thousands)

    Future cash inflows                                        $ 666    $ 650
    Future production costs                                     (129)     (72)
    Future development costs                                     (85)     (85)
    Future income tax expense, net                              --
                                                               -----    -----
    Future net cash flows                                        452      493
    10% annual discount for estimated timing of cash flows       (47)     (91)
                                                               -----    -----
    Standardized measure of discounted future net cash flows   $ 405    $ 402
                                                               =====    =====`

The
following table presents the principal sources of the changes in the
standardized measure of discounted future net cash flows for the years ended
December 31, 1999 and 2000:

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 3 - OIL AND
GAS PROPERTIES (continued)

OIL
AND GAS RESERVES (UNAUDITED)

`2000     1999
                                                                ----     ----
                                                               (in thousands)
  Net change in sales price and production costs               $ 102    $ 108
  Changes in estimated future development costs                  (25)
  Sales and transfers of oil and gas produced, net of
   production costs                                             (138)    (121)
  Net change due to extensions and discoveries
  Net change due to purchases and sales of minerals in place
  Net change due to revisions in quantities                      209     (180)
  Net change in income taxes
  Accretion of discount                                          (68)
  Other, principally revisions in estimates of timing of
   production                                                   (170)       9
                                                               -----    -----
  Net changes                                                      3     (277)
  Balance, beginning of year                                     402      679
                                                               -----    -----
  Balance, end of year                                         $ 405    $ 402
                                                               =====    =====`

Proved
reserves were discovered in the fourth quarter of 1998; price variations were
nominal, therefore there is no change in standardized measure due to price
change for 1998.

The
December 31, 1999 weighted average prices utilized for purposes of estimating
the Companys proved reserves and future net revenues were $24.75 per
barrel of oil and $2.14 per MMBTU of natural gas. These prices were
significantly above the average annual prices during the previous several years.

The
December 31, 2000 weighted average prices utilized for purposes of estimating
the Companys proved reserves and future net revenues for proven reserves
in the Sacramento Basin of California were $ 3.79 per MMBTU of natural gas. The
value represents the twelve month historical average price for the property and
is very close to the currently available five year forward gas price in
California of $ 3.78 per MMBTU. Pricing estimates were not used for a barrel of
oil as the Horsethief Canyon prospect in Wyoming has been written off due to
uneconomic production.

NOTE 4 - NOTE PAYABLE
- BANK

In
1999 the Company entered into a $150,000 revolving line of credit with a
commercial bank in Denver, Colorado. The loan, guaranteed by an officer/director
of the Company, provides for interest at the banks Reference
Rate (8.5% at December 31, 1999) and matures on May 31, 2000. At December
31, 1999 the Company had available $130,000 in unused line of credit. Maximum
borrowings under the line of credit for 1999 were $90,000, at an average
interest rate of 8.5%.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 4 - NOTE PAYABLE -
BANK (continued)

The
Company did not renew the line of credit and did not have an outstanding Balance
at December 31, 2000.

NOTE 5 - STOCKHOLDERS'
EQUITY

COMMON
STOCK

In
1997, the Company completed the sale of common stock and warrants pursuant to a
private placement as follows:

|o | 2,500,000 units, at a price of $.20 per unit, consisting of 2,500,000 shares of
common stock and warrants to purchase 2,500,000 shares of common stock at an
exercise price of $.20 per share before June 2, 1998. Proceeds to the Company
were $500,000, before costs of the offering of $430.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | 2,000,000 units, at a price of $.50 per unit, consisting of 2,000,000 shares of
common stock and warrants to purchase 1,000,000 shares of common stock at an
exercise price of $.60 per share before October 31, 1998 (extended to October
31, 2000 at a reduced exercise price of $.15 per share). Proceeds to the Company
were $1,000,000 before costs of the offering of $52,439.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | 
|- | 

In
1997 the Company issued shares of common stock for non-cash consideration, as
follows:

|o | 250,000  shares  for  services,  of which  150,000  shares are to  officers  and
directors, valued at $50,000 ($.20 per share).
|- | -------------------------------------------------------------------------------------------------------------------------------

|o | 2,250,000  shares  to  an  officer/director  as  partial  compensation  for  the
acquisition   of  oil  and  gas  prospects,   valued  at  $300,000   ($.133  per
share).
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
1998 the Company issued shares of common stock, as follows:

|o | 215,000 shares for services to officers and directors, valued at $43,000 ($.20
per share which amount was reduced from $.50 per share by the Board of
Directors).
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | 2,065,000 shares for $413,000 cash ($.20 per share) for exercise of common stock
warrants.
|- | ------------------------------------------------------------------------------------------

In
1999 the Company issued 199,788 shares of common stock to officers and
directors, for conversion of $44,952 in accounts payable ($.225 per share); and
an officer/director forgave the repayment of $22,000 in accounts payable due to
an entity controlled by him; and two directors/officers returned an aggregate
800,000 shares of common stock to the Company for no consideration.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 5 - STOCKHOLDERS'
EQUITY (continued)

In
2000, the Company completed the sale of common stock and warrants pursuant to a
Prospectus as follows:

3,000,000
units, at a price of $.10 per unit, consisting of 3,000,000 shares of common
stock and warrants to purchase 3,000,000 shares of common stock at an exercise
price of $.10 per share before June 20, 2003. Proceeds to the Company were $
300,000, before costs of the offering of $ 12,456.

QUASI
REORGANIZATION

Effective
January 1, 1997, the stockholders of the Company approved a plan of informal
quasi reorganization. Pursuant to the plan, the Companys accumulated
deficit of $504,648 as of the date of reorganization was eliminated and charged
to additional paid-in capital.

WARRANTS

In
1997, the Company issued warrants to purchase 180,000 shares of common stock at
an exercise price of $.50 per share through October 31, 1998 as partial
consideration for a finders fee in conjunction with the private placement sale
of $.50 units described above. The warrants were valued at $4,545, using the
Black-Scholes option pricing model. In 1999, the exercise price of the warrants
was reduced to $.15 per share and the expiration date was extended to October
31, 2000. There was no financial impact from the extension of the warrants.

At
December 31, 1999 the status of outstanding warrants is as follows:

`Issue                  Shares           Exercise   Expiration
    Date                   Exercisable      Price      Date
    -----                  -----------      --------   ----------

   October 31, 1997         1,000,000       $.15       October 31, 2000
   October 31, 1997           180,000       $.15       October 31, 2000`

At
December 31, 1999 the per share weighted-average grant date fair value and per
share weighted average exercise price of outstanding warrants granted during
1997 are $.01 and $.15, respectively.

During
2000, the Company extended 1,180,000 warrants at an exercise price of $.15 per
share through April 30, 2001. The Company also issued 3,000,000 warrants in
conjunction with a completed Prospectus described above.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 5 -
STOCKHOLDERS' EQUITY (continued)

At
December 31, 2000 the status of outstanding warrants is as follows:

`Issue                  Shares           Exercise    Expiration
    Date                   Exercisable      Price       Date
    -----                  -----------      --------    ----------

   October 31, 1997        1,000,000        $.15        April 30, 2001
   October 31, 1997          180,000        $.15        April 30, 2001
   December 29,2000        3,000,000        $.10        June 20, 2003`

STOCK
OPTION PLAN

In
July 1997 the Company adopted its 1997 Statutory and Nonstatutory Incentive
Stock Option Plan (the Plan) allowing for the issuance of incentive stock
options and nonstatutory stock options to purchase an aggregate 1,000,000 shares
of common stock to directors, officers, employees and consultants of the
Company. The Plan is administered by the Board of Directors.

The
Plan provides that incentive stock options be granted at an exercise price equal
to the fair market value of the common shares of the Company on the date of the
grant and must be at least 110% of fair market value when granted to a 10% or
more shareholder. The exercise term of all stock options granted under the Plan
may not exceed ten years, and no later than three months after termination of
employment, except the term of incentive stock options granted to a 10% or
moreshareholder which may not exceed five years.

The
status of outstanding options granted pursuant to the 1997 Plan was as follows:

`Weighted             Weighted
                                                Average              Average
                                                Number of  Exercise  Fair       Exercise
                                                Shares     Price     Value      Price
                                                ---------  --------  --------   --------
   Options Outstanding - January 1, 1998
   (680,000 exercisable)                         810,000   $ .33    $ .20
   Granted                                       100,000   $ .50       --      $ .50
                                                 -------
   Options Outstanding - December 31, 1998
   (860,000 exercisable)                         910,000   $ .35    $ .18
   Granted                                         --         --       --
                                                 -------
   Options Outstanding - December 31, 1999
   (910,000 exercisable)                         910,000   $ .35    $ .18      $.20-$.50

   Cancelled                                    (210,000)  $ .42               $.35-$.50
                                                 =======
 Options Outstanding - December 31, 2000
   (700,000 exercisable)                         700,000   $ .32               $.20-$.35`

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 5 -
STOCKHOLDERS' EQUITY (continued)

The weighted
average remaining contractual life of options outstanding at December 31, 2000
was 6.7 years.

The
Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for the Companys stock option plan been determined based
on the fair value at the grant date consistent with the provisions of SFAS No.
123, the Companys net loss and loss per share for 1999 and 2000 would have
changed as follows:

`2000          1999
                                                               ----          ----
  Net(loss) applicable to common stockholders-as reported   $(68,366)   $  (435,547)
                                                            ========    ===========
  Net(loss) applicable to common stockholders-pro forma     $(68,366)   $  (435,547)
                                                            ========    ===========

  (Loss) per share - as reported                            $   (.01)   $      (.04)
                                                            ========    ===========
  (Loss) per share - pro forma                              $   (.01)   $      (.04)
                                                            ========    ===========`

The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1997 and 1998: dividend yield of 0%;
expected volatility of 0%; discount rate of 5.25%; and expected life of 10
years.

At
December 31, 1999 the number of options exercisable was 910,000 and the weighted
average exercise price of these options was $.35.

At
December 31, 2000 the number of options exercisable was 700,000 and the weighted
average exercise price of these options was $.32.

In
1997,the Company recognized as compensation expense $100,500 for 670,000 options
issued October 30, 1997 to Officers/Directors, pursuant to APB No. 25, and
$2,332 for 10,000 options issued to non-employees, pursuant to SFAS No. 123.
Those options were issued at an exercise price of $.15 per share less than the
then private placement cost of common stock.

STOCK
SPLIT

Effective
January 1, 1997 the Company effected a 10-into-1 reverse stock split. The
Company did not change the authorized number of common shares or par value of
the common stock. All information in these notes and the accompanying financial
statements gives retroactive effect to the 10-into-1 reverse stock split.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 6 -
RELATED PARTY TRANSACTIONS

During
1999 the Company incurred expenses of an aggregate $48,000 for entities
controlled by Officers/Directors of the Company for office space and
administrative services in Scottsdale, Arizona amounting to $24,000 and Denver,
Colorado amounting to $24,000 at the rate of $2,000 per month.

During
1999, the Company paid the Secretary/Treasurer $7,500 for services and issued
100,000 shares of common stock valued at $22,500 ($.225 per share).

In
1998, the Company acquired a 20% working interest in certain undeveloped oil and
gas  properties  for $131,000 from an entity  controlled by the chief  operating
officer/director of the Company. (See Note 3)

Effective
December 31, 1999, an officer/director forgave $22,000 owed by the Company to an
entity controlled by him, which amount was charged to additional paid in
capital. Additionally in 1999, the Company issued 99,788 shares of common stock
(valued at $.225 per share) in settlement of $22,452 owed to an entity
controlled by an officer/director. Accounts payable at December 31, 1999
includes $20,500 due to an officer/director for non-interest bearing cash
advances made to the Company.

During
1999 an officer/director of the Company personally guaranteed a line of credit
with a commercial bank which expired during 2000 (see Note 4).

During
2000, the Company agreed to reimburse the officers and directors as a group of
approximately $ 43,000 for office space, administrative services and expense
reimbursements.

NOTE 7 -
SEGMENT REPORTING

In
June 1997, SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information was issued, which amends the requirements for a public
enterprise to report financial and descriptive information about its reportable
operating segments. Operating segments, as defined in the pronouncement, are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The financial information is required to
be reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company has
adopted SFAS No. 131 for the year ended December 31, 1998.

The
Company has one reportable segment, oil and gas producing activities. The
Company has concentrated its oil and gas exploration and development activities
in the western United States, primarily in California and Wyoming. All
activities in this segment have been with industry partners.

The
Company earned revenue from its oil and gas activities of $152,832 and $155,773
for the years ended December 31, 1999 and 2000, respectively. The Companys
total assets of $261,272 at December 31, 2000 and operating expenses of $588,379
and $224,139 for the years ended December 31, 1999 and 2000, respectively, are
attributable to this segment.

---

## FAN
ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 2000 and 1999

NOTE 8 -
FINANCIAL INSTRUMENTS

FAIR
VALUE

The
fair values of cash, accounts receivable, accounts payable and short-term debt
approximate their carrying values due to the short-term nature of these
financial instruments.

CONCENTRATION
OF CREDIT RISK

Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash. The Company maintains cash accounts at two financial
institutions. The Company periodically evaluates the credit worthiness of
financial institutions, and maintains cash accounts only in large high quality
financial institutions, thereby minimizing exposure for deposits in excess of
federally insured amounts.

NOTE 9
SUBSEQUENT EVENTS

On
January 8, 2001, the Company acquired plant, equipment and other assets,
including specialized manufacturing equipment, manufacturing set-ups, real
estate lease, fixtures and related equipment and other property with an
estimated fair value of at least $3.8 million. In consideration for the
acquisition of the assets, the Company issued 19,250,000 shares of its
restricted common stock to the sellers. In determining the amount of the
Companys consideration for the assets, the parties estimated the present
fair market value of all such assets to be equivalent to approximately $0.20 per
share issued. The parties agreed that if an independent evaluation of the assets
acquired by the Company is less than $1.9 million, the sellers will pay to the
Registrant the difference in cash.

The
assets acquired by the Company constituted plant, equipment and other physical
property intended to be used in the manufacture of 3.5 inch micro floppy disks.
None of the assets have previously been used in such a business by the sellers.
The Company intends to use the assets acquired to engage in the development,
marketing, manufacture and sale of 3.5 inch micro floppy disks in the world
replacement market for such products.

---

`SIGNATURES

   In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                         FAN ENERGY INC.


Date: April 16, 2001                     By /s/ John Shebanow
     ---------------                        ------------------------
                                            John Shebanow, President


Date: April 16, 2001                    By /s/ Albert Golusin
      --------------                       -------------------------
                                           Albert A. Golusin,
                                           Principal Accounting
                                           Officer

   In accordance with the Exchange Act, the report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.


Date: April 16, 2001                  By /s/ George H. Fancher Jr.   Director
                                         ----------------------------------


Date: April 16, 2001                By /s/ John Shebanow   Director
                                         ----------------------------------


Date: April 16, 2001                By /s/William E. Grafham   Director
                                         ----------------------------------


Date: April 16, 2001               By /s/ Jeffrey J. Scott  Director
                                         ----------------------------------


Date: April 16, 2001                By /s/ Albert Golusin  Director
                                         ----------------------------------

Date: April 16, 2001                By/s/ Alex Gassiot              Director
                                         ----------------------------------

Date: April 16, 2001               By/s/ Robert Hamblen               Director
                                         ----------------------------------`