# 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, 2001

|[   ] | 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 Identification No.)
              
            
     incorporation or organization)   
             
      
              
              
              
              
            
            
   5355 Capital Court Suite 108, Reno, Nevada 89502
            
            
              
              
              
            
      (Address of principal executive offices) 
(Zip Code)
              
              
Issuers telephone number:  (775) 856-4500
              
              
Securities registered under Section 12(b) of the Exchange Act:  
None
              
              
Securities registered under Section 12(g) of the Exchange Act:

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. Yes [X]  
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: $56,094

As
of March 31, 2001 the issuer had 2,349,600 shares of its $0.001 par value common
stock issued and 2,324,341 shares of its common stock 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 non-affiliates.

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.

On
December 24, 2001, the Company announced, in a Form 8-K filing, the share
consolidation of one new common share for each fifteen pre-consolidated shares
was in effect. The post reverse total is 2,349,600 and the new CUSIP is 306907
30 4. All of the common authorized and issued shares were affected by the
consolidation. All share amounts in this report are stated post share
consolidation unless otherwise indicated. Certain amounts and earnings per share
have been restated to reflect this share consolidation.

## ITEM 1.
DESCRIPTION OF BUSINESS.

(a)   FLOPPY DISK
MANUFACTURING BUSINESS

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 1,283,333 shares of its restricted
common stock to the sellers. The equipment valuation was determined by a
discounted cash flow of projected operating income using a maximum cost of funds
of 20% per annum. This was further supported by an independent experts
valuation opinion of the replacement value of the equipment. 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 $3.00 per share issued. Also on January 8, 2000, Registrant sold
216,667 shares of restricted common stock to APG Associates, LLC for $650,000,
of which $600,000 was paid by the purchasers secured note. 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. The
sellers previously used none of the assets in such a business.

Flexible
were the primary storage medium for the original personal computers. An 8-inch
flexible disk came in soft vinyl jackets and was replaced by 5 1/4" disks in
scaled down soft jackets, which in 1980 evolved into the 3 1/2" disk encased in
a molded plastic shell. Capacities increased from single-sided, low-density
disks holding 100 KB of data, to the current industry standard 1.44 MB
double-sided high-density diskettes.

The
advent of Microsoft Windows made the hard drive the medium of choice for
operating systems and software, relegating the floppy disk to lesser, but still
valuable roles as removable data storage and backup, installation media for
software and emergency boot disks.

Applications for floppy
disks are:

| |  | 1. | Data Transfer:
| |  | -- | --------------

| |  |  | Floppy disks are still the most universal means of transferring files from one
PC to another.
| |  |  | ---------------------------------------------------------------------------------------------

| |  | 2. | Small File Storage and Backup:
| |  | -- | ------------------------------

| |  |  | For most routine office applications, such as word processing, spreadsheets and
presentations, the floppy capacity is adequate.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------

| |  | 3. | Software Installation and Driver Updates
| |  | -- | ----------------------------------------

---

| |  |  | New hardware uses floppies for installation of driver software.
| |  |  | ---------------------------------------------------------------

(b)  SALE OF
OIL & GAS BUSINESS

On
December 4, 2001, Registrant agreed to sell all of its assets related to the oil
and natural gas industry to an entity controlled by George H. Fancher Jr., a
director of the Registrant. The transaction was deemed effective December 1,
2001, and included all of Registrant's undivided interests in producing natural
gas wells and adjacent acreage in California and Registrant's undivided interest
in oil and gas leaseholds, geophysical exploratory data and other nominal
assets. Following the transaction, the Registrant had no interest in any oil or
natural gas assets of any nature. The buyer assumed all of the obligations of
the Registrant to pay approximately $13,500 in outstanding liabilities relating
to the oil and natural gas properties transferred and any future contingent
liabilities including well closure, remediation and clean-up, and surrendered
25,259 restricted shares of Registrant's common stock. The deemed value of the
shares received was $75,777 and the Company recorded a loss on the transaction
of $91,415. The disinterested members of the Board of Directors of the
Registrant following an independent evaluation of the properties approved the
transaction unanimously.

The
transaction concluded the Companys involvement in the oil and gas business
and has been treated as a disposal of a segment of its business. Furthermore,
the Company has no intention to become involved in the oil and gas business at
any future time.

(c)  Cancellation
of Acquisition

On
December 4, 2001, Peter J. Ashworth was unanimously elected as the President and
Chief Executive Officer, CEO, of Registrant by the Board of
Directors, Board of Registrant. Also on December 4, 2001, the Board
was expanded to eight persons and Peter J. Ashworth was elected by the Board, as
a director of the Registrant. The Board approved in principle an arrangement
pursuant to which Registrant would acquire from Mr. Ashworth and others a media
service business previously operated by Mr. Ashworth. On March 5, 2002 Mr.
Ashworth informed the Board that the media service business filed for Chapter 7
bankruptcy and then resigned as the CEO and as a director and the intended
acquisition was cancelled.

## Marketing

Floppy Disk Market

Current
market trends show increasing demand for US made 3.5" disk products due to NAFTA
requirements in Mexico.

Since
the events of September 11, 2001, the market has shown a strong increase in
demand due to increased awareness of the issues regarding data security and the
importance of timely and regular backup of sensitive data as well as offsite
backups. The 3.5 floppy disk is still the only universal data interchange
format.

Furthermore
it is our intention to intensively seek duplication orders as the price ranges
for duplicated floppy disks is substantially greater than for bulk disks while
having substantially similar costs to manufacture as do bulk disks.

## 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.

---

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. To the best of
managements knowledge, only Fan Energy and Imation (a subsidiary of the 3M
Corporation) have any domestic 3.5 floppy disk manufacturing capability.

## Employees

The
Company does not have any employees. All officers consult to the Company. We may
hire marketing employees based on the projected size of the market and expect to
base the compensation on what is necessary to hire and retain qualified sales
employees. We presently do not have personal benefits, pension, health, annuity,
insurance, profit sharing or any similar benefit plan; however, we may adopt
such plans in the future.

## ITEM  2.
DESCRIPTION OF PROPERTY.

Media Production 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 until March 31,2002 for office
and industrial space where the equipment is located. The lease is personally
guaranteed by two directors of the Company. 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.

Title to Properties

(a)  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
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.

Current Operations

The
Companys equipment has the capacity to produce six million floppy disks
per month. During December 2001, the Company processed 650,000 disks generating
$56,094 in revenue and $3,829 in gross profit.

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.

## 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.

---

## 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.

# PART II

## 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. The Company
has obtained a sponsoring broker dealer to seek obtaining a trading symbol for
trading on the OTC Bulletin Board.

(b)  APPROXIMATE
NUMBER OF HOLDERS OF COMMON STOCK

December
21, 2001, the Board of Directors of the Registrant at a meeting duly convened
and held effective as of the 21st day of December, 2001, in accordance with
N.R.S. #167; 78-207 of the State of Nevada Revised Statutes, adopted resolutions
to decrease the number of authorized shares of the corporations $0.001 par
value common stock from 95,000,000 shares to 6,333,334 shares and
correspondingly decreasing the number of issued and outstanding shares of such
class held by each common stockholder of record as of the close of business on
December 24, 2001 (the Effective Date). The following information relates to the
reduction in number of authorized shares and the reverse stock split effected:

The
number of authorized shares and the par value of each class and series of shares
before and after the change hereby effected:

`Before Change     After Change
                                           ===============   ==============
     Common Stock, $0.001 Par Value          95,000,000         6,333,334
     Preferred Stock, $0.001 Par Value        5,000,000         5,000,000`

The
number of shares of common stock to be issued after the change in



`Each Share                             Before Change       After Change
     ==========                            =============== ==========================
     Common Stock                                 1        one-fifteenth of one share
                                             35,243,992         2,349,600
     Preferred Stock, #0.001 Par Value            1                 1
                                                  0                 0`

On
December 31, 2001, the Company had 2,349,600 shares of its common stock issued
and 2,324,341 shares of its common stock outstanding and approximately 525
shareholders.

(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.

On
January 8, 2000 the Company issued 1,283,333 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 216,667 shares of
restricted common stock to one of the persons for $650,000, of which $600,000
was paid by the 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.

---

On
May 31, 2001 the Company issued 19,500 restricted shares to its officers and
directors for reimbursement of expenses and for services provided during the
year 2000. 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 200,000 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 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 29, 2000. and the Company sold
200,000 shares of common stock and 200,000 stock purchase warrants, each warrant
exercisable to purchase one share of common stock at an exercise price of $1.50
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 all
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, operating
expenses and our anticipated capital requirements and capital resources. The
actual results that we achieve in our operations could differ materially from
the matters discussed in the forward-looking statements.

During
January 2001, the Company formed a wholly owned subsidiary named Avatar
Semiconductor-Research, Inc. and capitalized it with $50,000. The purpose of the
subsidiary is to develop new technology in semiconductor and material sciences
for the computer industry. During the first quarter of 2001, it acquired two
servers in preparation for beginning work during the second quarter. The Company
is not currently pursuing any such opportunities, due to a lack of capital.
Should our disk manufacturing operations generate sufficient capital, the
Company may resume our pursuits in this area.

During
the month of January 2001, we disbursed $17,500 for the creation of a flash
marketing presentation template that can be easily modified by individual
customers. We also prepaid $32,000 for burnishing tape for floppy disk
production.

During
February 2001, we paid $52,000 for 650,000 3.5-inch floppy disks. These disks
were processed during our setup and initial testing of the 3.5 disk plant
and during the fourth quarter, were sold for $56,094. After this startup phase
was completed, the Company began looking for investment capital to bring the
plant to full production.

We
had general and administrative expenses of $514,490 during 2001, compared to
$90,701 during the prior year. The expenses were higher because of the start-up
expenses involved in establishing the disk media production business. We
incurred approximately $320,855 in consulting expenses, salaries, payroll taxes
and benefits. Our rent, utilities and insurance during 2001 were $92,598. Travel
expenses of $29,783 were incurred in meeting with prospective clients,
financiers and a board meeting. We also incurred $42,776 in legal and auditing
expenses during 2001. The remaining $28,478 was paid for office expenses,
transfer agent fees, bank fees, postage and other miscellaneous items.

---

During
the twelve months ended December 31, 2001, we paid $78,167 for capital equipment
and set up costs necessary for operating the disk media production business and
the semiconductor-research business. An additional $81,635 of equipment was
purchased by the subsidiary. We also paid approximately $8,600 for leasehold
improvements to prepare the facility for operations. The disk media production
equipment was set up for operations during the first quarter. We began
depreciating the equipment during January 2001 on a straight-line basis over 10
years and changed our method of depreciation to the unit of production method
during the second quarter in order to better match the depreciated cost of the
asset to the revenue produced by it.

At
December 31, 2001, the Company had no cash and $217,676 in current liabilities
of which $163,378 was owed to affiliates of the Company.

We
currently have three full time consultants for the media production and
corporate business. We anticipate hiring employees as we begin full-time
production of 3.5-inch floppy disks.

The
Company needs to raise additional financing over the next twelve months to
commence its floppy disk production operation and pay its general and
administrative expenses.

To
fund the anticipated near term capital shortfall, we may accept loans from
management or other affiliates. Assuming sufficient capital resources become
available, we will continue to develop our business in production of floppy
disks and wholesaling computer equipment.

During
the year 2002, the Company plans to begin operation of the 3.5
disk-manufacturing facility on an increasing production ramp beginning in the
second quarter with plans to produce approximately 5 million disks during the
quarter. In quarters three and four, the Company plans to produce 10 million
and 15 million disks, respectively.

If
the Company is able to raise sufficient capital and the Company is able to meet
projected sales, the 3.5" disk manufacturing operation should generate gross
revenues for the year 2002 of approximately $3,600,000 and gross profit of
approximately $900,000.

The
company expects total aggregated costs of goods including Materials, Labor and
Burden (MLB) to equal roughly $0.09 per disk or less and needs approximately
$650,000 to fill its pipeline, maintain inventories and allow for growth to 13.5
million disks by the end of quarter four of 2002. This level of capital is
sufficient to bring the Company to profitability. The capital required for
Materials, Labor and Burden is used to fill our pipeline with raw materials
sufficient for two months of operation, pay for labor directly related to
production as well as burden on those operations. The company expects to sell
its 3.5 disks for approximately $0.12 per disk, wholesale to OEM
customers.

The
capital required for GS&A, sufficient to carry the Company during the first
six months of operations while the Company awaits payment on receivables
generated by sales of product produced is estimated at $350,000.

`GS&A                    $   350,000
               MLB                     $   650,000
               ----------------  -----------------
               Total                   $ 1,000,000
               ================  =================`

The
Company has identified several large customers as well as the necessary
suppliers and other vendors. A sufficiently trained workforce is available to
the Company in the Reno, Nevada area.

Currently,
the Company plans to raise capital in order to implement a full production ramp
up during 2002. In order to accomplish this ramp the Company will need to raise
approximately $1,000,000 in working capital. The approximate use of the proceeds
is as follows:

During
December 2001, the Company entered into an Investment Banking Agreement with
West America Securities of Westlake Village, California (WUSA) to raise up to
$1,000,000 on a best efforts basis. The company issued an option to acquire
6,667 shares of common stock at $7.50 per share.

---

Also
during December 2001, the Company prepared a Form 15c211 to be filed by West
America Securities (WUSA) on behalf of the Company with the NASD. During the
first Quarter of 2002, West America has received two comment letters from NASD
Regulation and has responded to them and currently awaits approval of the
Companys common stock to trade on the Over the Counter Bulletin Board
(OTCBB).

The
table below sets forth the Companys current outstanding options and
warrants. Warrants to acquire 200,000 shares at $1.50 per share were registered
under the Companys SB-2 filing closed on December 29, 2000. Although the
Company is unable to determine when or if these or any other warrants or options
will be exercised, should the Companys common stock begin trading on the
OTCBB above the $1.50 strike price, the Company believes that the Registered
Warrants would most likely be exercised. We can make no assurances as to whether
any of the warrants or options will be exercised or whether we will be able to
successfully raise any other capital. It is unlikely that any options or
warrants would be exercised in the absence of a trading market in the
Companys common stock. Should a trading market for the Companys
common stock develop with prices in excess of the respective strike prices for
the Companys other existing warrants and options, the Company may seek to
register the other existing warrants and options in order to obtain additional
capital.

`Options/Warrants             Strike Price              Value
          ====================        ==================     ==============
                         2,000        $          3.00        $        6,000

                         6,667        $          3.30        $       22,000

                         6,667        $          5.25        $       35,000

                         4,667        $          5.25        $       24,500

                        16,667        $          5.25        $       87,500

                        10,000        $          5.25        $       52,500

                       200,000        $          1.50        $       300,000

                        78,667        $          3.00        $       236,001
          --------------------        -----------------      ---------------
                       325,334                               $       765,301
          ====================        -----------------      ===============
          Average Strike Price        $          2.35
          ====================        =================`

The
Company may also seek to register additional shares of common or preferred stock
in order to raise sufficient capital to implement our plan of operation. The
company may also seek to register Securities to be offered to employees pursuant
to employee benefit plans.

The
Company has a note receivable for $ 600,000 due on or before March 31, 2003 from
an affiliate for 200,000 restricted common shares.

Unless
we raise additional capital in an offering or outstanding warrants are
exercised, or we raise capital from other sources, we will not be able to fund
the anticipated near term capital shortfall during the first and second quarters
of 2002, The Company has been and may continue to accept loans from management
or other affiliates.

If
we are able to raise sufficient capital to begin full production, we will begin
hiring new employees and eventually may employ as many as thirty-five (35)
employees

## 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.

NONE

---

# 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 as of December 31, 2001, 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            70  Chairman and Director              January 8, 2001
   John Shebanow           34  President, Treasurer and Director  January 8, 2001
   Robert Hamblen          71  Vice President and Director        January 8, 2001
   George H. Fancher Jr.   62  Director                           October 30, 1997
   William E. Grafham      64  Director                           July 2, 1997
   Jeffrey J. Scott        41  Director                           October 30, 1997
   Albert A. Golusin       47  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.

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 that 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 Limited   OTC Bulletin Board         Research`

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 that 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 Commissions 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 31,1999, 2000 and 2001 of the chief executive officer at December
31, 2001 and all officers and directors, as a group.

Summary Compensation
Table

`Annual Compensation       Long Term Compensation
                                                                    Securities
Name and Principal                                                  Underlying   All Other
Positions at 12/31/01               Salary    Bonus   Compensation    Options   Compensation

William E. Grafham, President
    1999                              - 0 -      - 0 -  $22,542(1)      --        None
    2000                              - 0 -      - 0 -  $18,000(1)      --        None
John James Shebanow, President
    2001                            $ 90,000     - 0 -    - 0 -         --        None
Officers and directors, as a group
(4 persons) (2)
    1999                            $  7,500(3)  - 0 -  $44,953(3)      --        None
    2000                            $  6,405(2)  - 0 -  $49,875(2)      --        None
    2001                            $240,000     - 0 -  $50,000(4)      --        None`

---

| | (1) | Includes 6,653 shares of common stock issued at a deemed value of $3.30 per
share in satisfaction of $22,452 owed to an entity owned by Mr. Grafham for rent
and reimbursement expenses. An amount of $18,000 was accrued at December 31,
2000 and paid in 2001 for management services provided and out of pocket
expenses during the year 2000.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes 14,333 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 3,300 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes 13,319 shares issued at a deemed value of $3.30 per share to two
officers, one of whom is a director, in satisfaction of $44,953 in compensation
or reimbursements owed to them.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes 16,667 shares issued at a deemed value of $3.00 per share to four
directors, one of which was an officer, in satisfaction of $50,000 in
compensation or reimbursements owed to them.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Value of Options at
December 31, 2001

`Aggregate Fiscal Year End Option Values                                                     
                                       Value of Unexercised
                                       Underlying Options at      Unexercised In-the-money
                           Number of      Fiscal Year End         Options at Fiscal Year End
                           Securities Exercisable/Unexercisable  Exercisable/Unexercisable

William E. Grafham           20,000        $ -- / --                    $ -- / --
All officers and
   directors as a group      55,333        $ -- / --                    $ -- / --
=================================================================================================`

| | (1) | Because there is no trading market, the estimated value is based on $3.00 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 2001. The Company granted options to
purchase 6,667 shares at $7.50 per share to West America Securities, Inc. of
Westlake Village, CA in connection with an investment banking agreement.

## 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 66,667 shares of common stock. Options relating to 54,000 shares have been
issued and are outstanding and all are presently exercisable. No options were
granted in 1999. The options are exercisable at $3.00 per share for 2,000
shares, $3.40 per share for 6,667 shares, $5.25 per share for 45,333 shares. The
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. Four directors of the
Company were issued 16,667 shares of restricted common stock of the Company on
May 31, 2001 as compensation for services furnished to the Company as an officer
or director through December 31, 2000. Prior to 2000, the Company Granted
options to purchase shares of common stock at exercise prices of $5.25 per share
for four director as to 46,667 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 or
Name of Officer or Director       Shares Beneficially Owned(1)    Percent(1)
------------------------------    ---------------------------     ---------
William E. Grafham, Director (2)                82,241              3.48%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI
------------------------------------------   ---------            -------
George H. Fancher Jr., Director (3)             56,001              2.37%
1801 Broadway, Suite 720
Denver, Colorado 80202
------------------------------------------   ---------            -------
Jeffrey J. Scott, Director (4)                  25,835              1.09%
2500, 500 - 4'th Avenue S.W.
Calgary, Alberta T2P 2V6
------------------------------------------   ---------            -------
Albert A. Golusin, Director & Secretary (5)    352,669             13.14%
10641 N. 44'th Street
Phoenix, Arizona 85028
------------------------------------------   ---------            -------
John Shebanow, Director and Treasurer (6)      780,000             27.83%
5355 Capital Court, Suite 108
Reno, Nevada 89502
------------------------------------------   ---------            -------
Robert Hamblen, Director (6)                    66,667              2.84%
5355 Capital Court, Suite 108
Reno, Nevada 89502
------------------------------------------   ---------            -------
Alex Gassiot, Director (6)                     780,000             27.83%
3550 Barron Way, Suite 11B
Reno, Nevada 89511
------------------------------------------   ---------            -------
APG Associates, LLC (6)                        453,333             19.29%
3550 Barron Way, suite 11B
Reno, Nevada 89511
------------------------------------------   ---------            -------
X Family Partnership (6)                       326,667             13.90%
11811 N Tatum Blvd, Suite 3031
Phoenix, Arizona 85028
------------------------------------------   ---------            -------
First Holding Company (7)                      194,668              8.01%
Q &H Corporate Services
3'rd floor Harbour Centre
Grand Cayman, BWI
------------------------------------------   ---------            -------
Don Stewart (7)(8)                             281,871             10.89%
P.O. Box 245
Grand Cayman, BWI
------------------------------------------   ---------            -------
Carolyn Grafham (7)(9)                         232,668              9.01%
7475 E. Gainey Ranch Rd. #21
Scottsdale, Arizona 85258
------------------------------------------   ---------            -------
David Grafham (7)(10)                          276,003             10.69%
Suite 1101, 1001 14'th Ave. S.W.
Calgary, Alberta, Canada T2R 1L2
==========================================   =========            ========
All officers and directors
as a group (Seven (7) persons)               1,690,079             70.53%`

---

| | (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 31, 2002
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 20,000 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 16,667 shares underlying presently exercisable stock purchase warrants
and options.
| | --- | --------------------------------------------------------------------------------------------

| | (4) | Includes presently exercisable options to purchase up to 10,000
shares.
| | --- | -----------------------------------------------------------------------

| | (5) | Includes 8,667 shares of common stock underlying presently exercisable
options.
| | --- | -------------------------------------------------------------------------------

| | (6) | Mr. Golusin has a beneficial ownership in 50% of the shares. The Shares were
acquired from 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 82,000 shares.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | Includes 5,867 exercisable warrants. Also includes 91,000 shares and 120,000
exercisable warrants held by two trusts for which Mr. Stewart is co-trustee, of
which beneficial ownership is disclaimed.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (9) | Includes 91,000 shares and 82,000 warrants held by a trust of which she is
beneficiary. Also includes 47,500 exercisable warrants held by a trust of which
she is co-trustee, for which beneficial ownership is disclaimed.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (10) | Includes 38,000 exercisable warrants held by a trust of which he is beneficiary.
Also includes 91,000 shares and 82,000 exercisable warrants held by a trust of
which he is co-trustee, of which beneficial ownership is disclaimed.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (11) | John Shebanow and Alex Gassiot are both managing members of APG Associates with
dispositve authority over the shares.
| | ---- | ---------------------------------------------------------------------------------------------------------------------

## ITEM  12.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

On
May 31, 2001 the Company issued 19,500 restricted shares to its officers and
directors for reimbursement of expenses and for services provided during the
year 2000. The shares issued had a deemed value of $58,500. The issuance of the
stock was exempt from registration under Section 4(2) of the Securities Act.

On
December 4, 2001, Registrant agreed to sell all of its assets related to the oil
and natural gas industry to an entity controlled by George H. Fancher Jr., a
director of the Registrant. The transaction was deemed effective December 1,
2001, and included all of Registrants undivided interests in producing
natural gas wells and adjacent acreage in California and Registrants
undivided interest in oil and gas leaseholds, geophysical exploratory data and
other nominal assets. Following the transaction, the Registrant had no interest
in any oil or natural gas assets of any nature. The buyer assumed all of the
obligations of the Registrant to pay approximately $13,500 in outstanding
liabilities relating to the oil and natural gas properties transferred and any
future contingent liabilities including well closure, remediation and clean-up,
and surrendered 25,259 restricted shares of Registrants common stock owned
of record and beneficially by George H. Fancher Jr. to the Company. The deemed
value of the shares received was $75,777 and the Company recorded a loss on the
transaction of $91,415. The disinterested members of the Board of Directors of
Registrant following an independent evaluation of the properties approved the
transaction unanimously.

The
transaction concluded the Companys involvement in the oil and gas
business. Furthermore, the Company has no intention to become involved in the
oil and gas business at any future time.

---

## 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)
| | ------ | --------------------------------------------------------------------------------------------------------

| | (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, 2001.
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------

| | (10.13) | Sale of oil and gas properties on Exhibit 10.13.
| | ------- | ------------------------------------------------

| | (21.1) | Subsidiary of the Registrant
| | ------ | ----------------------------

__________________

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

---

| | (2) | Incorporated by reference to Exhibit 10.7 on Registrants Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

| | (b) | Reports on Form 8-K. The Registrant filed two reports on Form 8-K during the
fiscal quarter ending December 31, 2001.
| | --- | ---------------------------------------------------------------------------------------------------------------------

| |  | (b.1) | A Form 8-K filed December 13, reported in Item 5, the sale of its oil and gas
assets to Mr. Fancher and the election of a new president.
| |  | ----- | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | (b.2) | A Form 8-K filed December 24 reported under Item 5 the 15 into 1 reverse stock
split.
| |  | ----- | -------------------------------------------------------------------------------------

---

# [James C.
Marshall, CPA, P.C. Letterhead]

# INDEPENDENT
AUDITORS REPORT

To The Board of
Directors and Stockholders
FAN ENERGY INC.

We have audited the
accompanying consolidated balance sheet of Fan Energy, Inc. (a development stage
company) and its consolidated subsidiary as of December 31, 2001 and the related
consolidated statements of operations, stockholders equity and cash flows
for the two years then ended and the period from inception to December 31, 2001.
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 audits in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform 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 audits provide a reasonable basis for our opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Fan Energy, Inc. and its
consolidated subsidiary as of December 31, 2001 and the results of their
operations and their cash flows for the two years then ended and the period from
inception to December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company has
incurred losses from operations and has liquidity issues which 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 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ JAMES
C. MARSHALL, CPA, P.C.
Scottsdale, Arizona
March 29, 2002

---

# FAN ENERGY
INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
December 31, 2001

`ASSETS
                                     ------
CURRENT ASSETS:

   Cash ..................................................   $      --
   Due from affiliates ...................................        34,989
   Prepaid expenses ......................................        49,500
                                                             -----------
   Total current assets ..................................        84,489
                                                             -----------
OTHER ASSETS:
   Equipment and leasehold improvements-net
      of accumulated depreciation ........................     4,003,798
                                                             -----------
Total assets .............................................   $ 4,088,287
                                                             ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                                                             -----------

CURRENT LIABILITIES
   Accounts payable ......................................   $    54,298
   Due to affiliates .....................................       163,378
                                                             -----------
Total current liabilities ................................       217,676
                                                             -----------
Total liabilities ........................................       217,676
                                                             -----------

STOCKHOLDERS EQUITY

 Preferred stock, $.01 par value,
   5,000,000 shares authorized, none issued
Common stock, $.001 par value, 6,333,334 shares
   authorized, 2,349,600 issued and 2,324,341
   outstanding at December 31, 2001 ......................         2,350
Additional paid-in capital ...............................     6,570,655
Additional paid-in capital stock options .................       100,500
Treasury stock ...........................................       (75,777)
(Deficit) accumulated during the development stage .......    (2,727,117)
                                                             -----------
Total stockholders' equity ...............................     3,870,611
                                                             -----------
Total liabilities and stockholders' equity ...............   $ 4,088,287
                                                             ===========`

See accompanying notes to
these consolidated financial statements.

---

# FAN ENERGY
INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS

`Cummulative
                                                    For the 12          from January 1,
                                                   months ended         1997 (Inception)
                                                ----------------        to December 31,
                                                2001        2000            2001
                                                ----        ----        ---------------
REVENUES
--------
Floppy disk sales ......................       56,094          --          56,094
                                           ----------    ----------    ----------
Total Revenue ..........................       56,094          --          56,094

COST OF SALES
-------------
Cost of floppy disk sales ..............      (52,265)      (52,265)
                                           ----------    ----------    ----------
Total Cost of Sales ....................      (52,265)         --         (52,265)

Gross Profit ...........................        3,829          --           3,829

OPERATIING EXPENSES
-------------------
General and administrative .............      463,168        30,000       583,168
Depreciation ...........................       14,604          --          14,604
                                           ----------    ----------    ----------
Total Operating Expenses ...............      477,772        30,000       597,772

OTHER INCOME (EXPENSE)
---------------------
Interest expense .......................          332           262         8,978
Interest revenue .......................      (33,141)         --         (33,141)
                                           ----------    ----------    ----------
Total Non-Operating expenses ...........      (32,809)          262       (24,163)

(Loss) income from continuing ..........     (441,134)      (30,262)     (569,780)
   operations

DISCONTINUED OPERATION
----------------------
(Loss) income from discontinued ........      (34,870)      (38,104)     (508,220)
   operation, net

Loss from impairment of assets .........         --            --      (1,557,702)
   on discontinued operation

Loss on disposal of discontinued .......      (91,415)         --         (91,415)
   operation, net
                                           ----------    ----------    ----------
NET (LOSS) .............................      567,419)      (68,366)   (2,727,117)
                                           ==========    ==========    ==========
(LOSS) INCOME PER SHARE:
   (Loss) per share from continuing ....        (0.20)        (0.05)
                                           ==========    ==========
      operation

   (Loss) per share from discontinued ..        (0.05)        (0.06)
                                           ==========    ==========
      operation

   (Loss) per share ....................        (0.25)        (0.11)
                                           ==========    ==========

WEIGHTED AVERAGE SHARES OUTSTANDING:

  Basic ................................    2,312,765       631,195
                                           ==========    ==========`

See accompanying notes to
these consolidated financial statements.

---

# FAN ENERGY
INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years ended
December 31, 1997 through 2001

`Common Stock
                                                ---------------------     Additional
                                                                           Paid-In
                                                Shares         Amount       Capital
                                                ------         ------     ----------

Balance January 1, 1997 ................        51,447    $        51    $   504,597
Reclassification of deficit pursuant
  to quasi reorganization ..............          --             --         (504,648)
Sale of common stock and warrants
  pursuant to private placement at $.20
  per unit .............................       166,667            167        499,833
Issuance of common stock for services
  issued for $3.00 per share ...........        16,667             17         49,983
Sale of common stock and warrants
  pursuant to private placement at $7.50
  per unit .............................       133,333            133        999,867
Costs of private placement offering ....          --             --          (52,869)
Issuance of common stock for property ,
  valued at $2.00 per share ............       150,000            150        299,850
Issuance of common stock for warrants
  for offering costs ...................          --             --            4,545
Issuance of stock options ..............          --             --            2,332
Net (loss) for the year ended December
31, 1997 ...............................          --             --             --
                                           -----------    -----------    -----------
Balance December 31, 1997 ..............       518,114            518      1,803,490
Issuance of common stock for services
  issued for $3.00 per share ...........        14,333             14         42,986
Exercise of common stock warrants for
  cash at $3.00 per share ..............       137,667            138        412,862
Net (loss) for the year ended December
31, 1998 ...............................          --             --             --
                                           -----------    -----------    -----------
Balance December 31, 1998 ..............       670,114            670      2,259,338
Conversion of payables to common stock
  by officers, valued at $3.38 per share        13,320             13         44,940
Forgiveness of debt by officer/director           --             --           22,000
Return of common stock by
officers/directors .....................       (53,333)           (53)            53
Net (loss) for the year ended December
31, 1999 ...............................          --             --             --
                                           -----------    -----------    -----------
Balance December 31, 1999 ..............       630,100            630      2,326,331
Issuance of common stock in public
offering ...............................       200,000            200        299,800
Cost of public offering ................          --             --          (12,456)
Net (loss) for the year ended December
31, 2000 ...............................          --             --             --
                                           -----------    -----------    -----------
Balance December 31, 2000 ..............       830,100            830      2,613,675
Shares issued for media production
equipment ..............................     1,283,333          1,283      3,848,717
Shares purchased in private placement ..        16,667             17         49,983
Shares issued under Secured Note .......       200,000            200        599,800
Secured Note receivable ................          --             (200)      (599,800)
Shares issued for services .............        19,500             20         58,480
Acquisition of shares from sale of oil
properties .............................          --             --             --
Net (loss) for the year ended December
31, 2001 ...............................          --             --             --
                                           -----------    -----------    -----------
Balance December 31, 2001 ..............     2,349,600    $     2,150    $ 6,570,855
                                           ===========    ===========    ===========
                                              Deficit
                                            Accumulated
                                               During
                                            Development       Treasury        Stock
                                               Stage            Stock        Options       Total
                                            -----------       --------       -------       -----

Balance January 1, 1997 ................   $  (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 .............................          --             --             --         500,000
Issuance of common stock for services
  issued for $3.00 per share ...........          --             --             --          50,000
Sale of common stock and warrants
  pursuant to private placement at $7.50
  per unit .............................          --             --             --       1,000,000
Costs of private placement offering ....          --             --             --         (52,869)
Issuance of common stock for property ,
  valued at $2.00 per share ............          --             --             --         300,000
Issuance of common stock for warrants
  for offering costs ...................          --             --             --           4,545
Issuance of stock options ..............          --             --          100,500       102,832
Net (loss) for the year ended December
31, 1997 ...............................      (199,232)          --             --        (199,232)
                                           -----------    -----------    -----------   -----------
Balance December 31, 1997 ..............      (199,232)          --          100,500     1,705,276
Issuance of common stock for services
  issued for $3.00 per share ...........          --             --             --          43,000
Exercise of common stock warrants for
  cash at $3.00 per share ..............          --             --             --         413,000
Net (loss) for the year ended December
31, 1998 ...............................    (1,456,553)          --             --      (1,456,553)
                                           -----------    -----------    -----------   -----------
Balance December 31, 1998 ..............    (1,655,785)          --          100,500       704,723
Conversion of payables to common stock
  by officers, valued at $3.38 per share          --             --             --          44,953
Forgiveness of debt by officer/director           --             --             --          22,000
Return of common stock by
officers/directors .....................          --             --             --            --
Net (loss) for the year ended December
31, 1999 ...............................      (435,547)          --             --        (435,547)
                                           -----------    -----------    -----------   -----------
Balance December 31, 1999 ..............    (2,091,332)          --          100,500       336,129
Issuance of common stock in public
offering ...............................          --             --             --         300,000
Cost of public offering ................          --             --             --         (12,456)
Net (loss) for the year ended December
31, 2000 ...............................       (68,366)          --             --         (68,366)
                                           -----------    -----------    -----------   -----------
Balance December 31, 2000 ..............    (2,159,698)          --          100,500       555,307
Shares issued for media production
equipment ..............................          --             --             --       3,850,000
Shares purchased in private placement ..          --             --             --          50,000
Shares issued under Secured Note .......          --             --             --         600,000
Secured Note receivable ................          --             --             --        (600,000)
Shares issued for services .............          --             --             --          58,500
Acquisition of shares from sale of oil
properties .............................          --      $    75,777)          --         (75,777)
Net (loss) for the year ended December
31, 2001 ...............................      (567,419)          --             --        (567,419)
                                           -----------    -----------    -----------   -----------
Balance December 31, 2001 ..............   $(2,727,117)   $   (75,777)   $   100,500   $ 3,870,611
                                           ===========    ===========    ===========   ===========`

See accompanying notes to
these consolidated financial statements.

---

# FAN ENERGY
INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 and 2001

`Cumulative from
                                                                    For the years ended               January 1, 1997
                                                                        December 31,                  (Inception) to
                                                                     2001             2000            December 31, 2001
                                                                     ----             ----            -----------------
CASH FLOWS FROM OPERATING ACTIVITIES

  Net (loss) income for the period .........................  $  (567,419.00)  $   (68,366.00)  $(2,727,117.00)
   Adjustments to reconcile net
     cash used by operations:
       Loss from discontinued operation, net ...............       34,870.00        38,104.00       508,220.00
       Impairment of assets on discontinued operation ......                          --          1,557,702.00
       Loss on sale of discontinued operation ..............       91,415.00          --             91,415.00
        Depreciation .......................................       14,604.00          --             14,604.00
        Fair value of stock options issued .................         --               --            102,832.00
       Common stock issued for services ....................       58,500.00       196,453.00
        Forgiveness of payable by officer/director .........         --               --             22,000.00
Changes in assets and liabilities:
       (Increase)/decrease  in  receivable from affiliates .      (34,989.00)         --            (34,989.00)
       (Increase)/decrease  in  prepaid expenses ...........      (49,500.00)         --            (49,500.00)
       Increase/(decrease) in accounts payable .............       49,961.00        44,124.00        49,961.00
       Increase/(decrease) in payable to affiliates ........      143,018.00          --            143,018.00
                                                               -------------    -------------    -------------
Net cash (used) by operating activities ....................     (259,540.00)       13,862.00      (125,401.00)

CASH FLOWS FROM INVESTING ACTIVITIES

Cash paid for equipment & tenant improvements ..............     (168,402.00)         --           (168,402.00)
                                                               -------------    -------------    -------------
Net cash (used) in investing activities ....................     (168,402.00)         --           (168,402.00)
                                                               -------------    -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of common stock warrants ............         --               --            413,000.00
Proceeds from sale of common stock .........................         --            300,000.00     1,800,000.00
Cash paid for offering costs ...............................         --            (12,456.00)      (60,780.00)
Proceeds from sale of common stock under note ..............       50,000.00          --             50,000.00
                                                               -------------    -------------    -------------
Net cash (used) in financing activities ....................       50,000.00       287,544.00     2,202,220.00
                                                               -------------    -------------    -------------

Cash (used)  from discontinued operations ..................       10,886.00        54,360.00    (1,908,417.00)

Net Increase (decrease) in cash ............................     (367,056.00)      355,766.00          --
Cash at beginning of period ................................      367,056.00        11,290.00          --
                                                               -------------    -------------    -------------
Cash at end of period ......................................  $      --        $   367,056.00    $     --
                                                               =============    =============    =============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES

Issuance of common stock for equipment .....................     3,850,000
Acquisition of 25,259 treasury stock shares in sale
 of discontinued operation .................................        75,777`

See accompanying notes to
these consolidated financial statements.

---

# FAN ENERGY
INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended
December 31, 2000 and 2001

SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION

During the years ended
December 31, 1997, 1998, 1999, 2000 and 2001 the Company paid cash for interest
of $6,247, $0, $2,137, $262 and $332, respectively.

SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES

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

|° | issued 150,000 shares of common stock, valued at $300,000 ($2.00 per share), as
partial consideration for unproved oil and gas properties.
|- | ------------------------------------------------------------------------------------------------------------------------------------------

|° | issued 45,333 options to purchase common stock to officers, directors and
consultants, valued at $102,832.
|- | ----------------------------------------------------------------------------------------------------------

|° | issued 16,667 shares of common stock for services, valued at $50,000 ($3.00 per
share).
|- | ---------------------------------------------------------------------------------------

|° | issued 12,000 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 14,333 shares of common
stock for services, valued at $43,000 ($3.00 per share).

During
the year ended December 31, 1999, the Company issued an aggregate 13,319 shares
of common stock to officers for accounts payable, valued at $44,953 ($3.30 per
share); and an officer/director forgave $22,000 in accounts payable.

On
January 8, 2000 the Company issued 1,283,333 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 216,667 shares of
restricted common stock to one of the persons for $650,000, of which $600,000
was paid by the purchasers secured promissory one, due in March 31, 2003.
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.

On
May 31, 2001 the Company issued 19,500 restricted shares to its officers and
directors for services provided during the year 2000. The issuance of the stock
was exempt from registration under Section 4(2) of the Securities Act.

On
December 1, 2001 the Company received 25,259 of its own restricted common shares
at a deemed value of $75,777 from a director as part of the sale of all of its
oil and gas interests to the same director.

See accompanying notes to
these consolidated financial statements.

---

# FAN ENERGY
INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Years ended December 31, 2001 and 2000

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 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. On December 24, 2001, the Company effected
another reverse stock split of one new common share for each fifteen
pre-consolidated shares.

Effective
with the change in control and reactivation during 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 as
defined by Statement of Financial Accounting Standards (SFAS) No. 7 and was
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. During 1999 through 2001 revenue from oil and gas production
was received from two wells. On December 1, 2001 the Company agreed to sell all
of its assets related to the oil and natural gas industry to an entity
controlled by a director of the Company. The transaction was deemed effective
December 1, 2001, and included all of the Companys undivided interests in
producing natural gas wells and adjacent acreage in California and the
Companys undivided interest in oil and gas leaseholds, geophysical
exploratory data and other nominal assets. Following the transaction, the
Company had no interest in any oil or natural gas assets of any nature. The
buyer assumed all of the obligations of the Company to pay approximately $13,500
in outstanding liabilities relating to the oil and natural gas properties
transferred and any future contingent liabilities including well closure,
remediation and clean-up, and surrendered 25,259 restricted shares of the
Companys common stock owned of record and beneficially by the director to
the Company. The deemed value of the shares received was $75,777 and the Company
recorded a loss on the transaction of $91,415. The disinterested members of the
Board of Directors of Company following an independent evaluation of the
properties approved the transaction unanimously.

The
transaction concluded the Companys involvement in the oil and gas business
segment. Furthermore, the Company has no intention to become involved in the oil
and gas business at any future time.

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 from four independent sellers. In
consideration for the acquisition of the assets, the Company issued 1,283,333
shares of its restricted common stock to the sellers. The equipment valuation
was determined by a discounted cash flow of projected operating income using a
maximum cost of funds of 20% per annum. This was further supported by an
independent experts valuation opinion of the replacement value of the
equipment. In determining the amount of Companys consideration for the
assets, the parties estimated the present fair market value of all such assets
to be equivalent to approximately $3.00 per share issued. Also on January 8,
2000, the Company sold 216,667 shares of restricted common stock to one of the
sellers for $650,000, of which $600,000 was paid by the a secured note. 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 were previously used in such a business by the sellers.

On
December 24, 2001, the Company announced in a Form 8-K filing the share
consolidation of one new common share for each fifteen pre-consolidated shares
was in effect. The post reverse total is 2,349,600 issued shares of its $0.001
par value common stock and 2,324,341 outstanding shares of its common stock. All
of the common authorized and issued shares were affected by the consolidation.

OPERATIONS

The
accompanying consolidated 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.

---

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, 2001 has
incurred net operating losses since reactivation as a development stage company
of $2,727,117 and does not have sufficient working capital to fund its planned
operations during the next twelve months. Additional funding will be required to
purchase raw materials and inventory to put its manufacturing plant 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 consolidated 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.

NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

RESTATEMENT OF SHARE
AMOUNTS

On
December 24, 2001, the Company effected a share consolidation of one new common
share for each fifteen pre-consolidated shares. All of the common authorized and
issued shares were affected by the consolidation. All share amounts in this
entire report are stated post reverse unless otherwise indicated. The Company
has restated the prior periods to reflect this share consolidation to January 1,
1997.

PRINCIPLES OF CONSOLIDATION

The
consolidated financial statements include the accounts of the company and its
subsidiary. All intercompany accounts and transactions were eliminated.

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.

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. A
valuation allowance of $1,557,702 was made in the year ended 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.

The
Company recognizes 3.5 disk revenues from its disk manufacturing
operations only when it is (i) in receipt of a confirmed purchase order, an
invoice has been presented for payment, or some other contractual arrangement of
sale has been executed; (ii) delivery of the product has been made and accepted;
(iii) the pricing of the product has been established and; (iv) any credit
extended to customers is based on their credit worthiness having been previously
established.

EQUIPMENT AND LEASHEOLD
IMPROVEMENTS

Equipment
and Leasehold Improvements are stated at cost. A modified units of production
method, that is based upon units produced subject to a certain minimum level, is
used to depreciate substantially all disk manufacturing equipment. The straight
line method is used for all other equipment. The estimated depreciable lives
range from 3 to 10 years for machinery, equipment and fixtures.

---

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.

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 consolidated 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.

USE OF ESTIMATES

The
preparation of consolidated 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 consolidated
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 segment 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 anti-dilutive. Loss per share have been
restated from those previously reported as a result of the share consolidation.

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..

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.

NEW TECHNICAL PRONOUNCEMENTS

In
June 2001 the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets.
This statement establishes accounting and reporting standards for goodwill and
intangibles for years commencing after December 15, 2001. Whether already
acquired or subsequently acquired after the effective date, companies are
required to identify intangibles with finite lives and those with indefinite
lives. Those intangibles with finite lives are to be amortized over the
estimated useful lives of the assets while those with indefinite lives are not
to be amortized. Each intangible or goodwill asset should be analyzed at least
annually for impairment where the carrying value is in excess of the fair value
of the intangibles and in excess of the implied fair value in the case of
goodwill assets. The assets carrying value is to be reduced by a charge to
income if the fair value is lower than the carrying value. The Company has not
determined the effect if this new standard; however, the impact is not expected
to be material.

---

NOTE 3 - EQUIPMENT AND
LEASEHOLD IMPROVEMENTS

Equipment
and Leasehold Improvements consist of the following:

`3.5" Disk Manufacturing Equipment         $ 3,915,722
           Computers                                      94,074
           Leasehold Improvements                          8,606
                                                      ----------
                                                       4,018,402
           Less: accumulated depreciation                 14,604
                                                      ----------
                                                      $4,003,798
                                                      ==========`

Depreciation
Expense for the period ended December 31, 2001 was $14,604

NOTE 4 - INCOME TAXES

The Company owes does not
provide any current or deferred income tax provision or benefit for any period
presented because it has experienced operating losses since inception. The
Company has provided a full valuation allowance because of the uncertainty
regarding the utilization of the net operating loss carryforwards.

At December 31, 2001, the
Company had net operating losses of approximately $2,727,000. These net
operating loss carryforwards expire between 2017 and 2021 unless utilized by the
Company.

`For the year ended
                                                        December 31, December 31,
                                                            2001         2000
                                                        -----------  -----------

         Current Federal income tax benefit              $ 722,541    $  23,244
                                                         ---------    ---------

         Deferred Federal income tax benefit             $ 529,619    $    --
                                                         ---------    ---------

         Total current and deferred income tax benefit     192,922       23,244

         Valuation allowance                              (192,922)     (23,244)
                                                         ---------    ---------
         Benefit of income taxes                         $   --       $    --
                                                         =========    =========`

Income
tax expense does not differ from amounts computed by applying the U.S. Federal
income tax rate of 34% except for the valuation allowance.

Future
realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Tax effects are based on a 34% Federal
income tax rate. The realized net operating losses expire over the next twenty
years, as follows:

`Expiration                  Amount $
                        ----------                  --------

                           2017                   $   199,000
                           2018                   $   199,000
                           2019                   $   136,000
                           2020                   $    68,000
                           2021                   $ 2,125,000
                                                  -----------
                        Total net operating
                         loss available           $ 2,727,000
                                                  ===========`

NOTE 5 - COMMITMENTS AND
CONTINGENCIES

The Company leases
approximately 5,000 square feet of industrial space in Reno, Nevada for
approximately $3,300 a month. The lease is guaranteed by two directors and
expires on March 31, 2002; afterwhich, it will be on a month to month basis at
the same rate of about $3,300.

The Company has no other
commitments or contingent liabilities.

---

NOTE 6 - STOCKHOLDERS'
EQUITY

COMMON STOCK

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

|° | 166,667 units, at a price of $3.00 per unit, consisting of 166,667 shares of
common stock and warrants to purchase 166,667 shares of common stock at an
exercise price of $3.00 per share before June 2, 1998. Proceeds to the Company
were $500,000, before costs of the offering of $430.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|° | 133,333 units, at a price of $7.50 per unit, consisting of 133,333 shares of
common stock and warrants to purchase 78,667 shares of common stock at an
exercise price of $9.00 per share before October 31, 1998 (currently extended to
March 31, 2002 at a reduced exercise price of $3.00 per share). Proceeds to the
Company were $1,000,000 before costs of the offering of $52,439.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|° | 16,667 shares for services, of which 10,000 shares are to officers and
directors, valued at $50,000 ($3.00 per share).
|- | ----------------------------------------------------------------------------------------------------------------------

|° | 150,000 shares to an officer/director as partial compensation for the
acquisition of oil and gas prospects, valued at $300,000 ($2.00 per share).
|- | -------------------------------------------------------------------------------------------------------------------------------------------------

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

|° | 14,333 shares for services to officers and directors, valued at $43,000 ($3.00
per share which amount was reduced from $7.50 per share by the Board of
Directors).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|° | 137,667 shares for $413,000 cash ($3.00 per share) for exercise of common stock
warrants.
|- | -----------------------------------------------------------------------------------------

In
1999 the Company issued 13,319 shares of common stock to officers and directors,
for conversion of $44,952 in accounts payable ($3.38 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
53,333 shares of common stock to the Company for no consideration.

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

200,000
units, at a price of $1.50 per unit, consisting of 200,000 shares of common
stock and warrants to purchase 200,000 shares of common stock at an exercise
price of $1.50 per share before June 20, 2003. Proceeds to the Company were $
300,000, before costs of the offering of $ 12,456.

Also
during 2000, 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 from four independent sellers. In consideration for the
acquisition of the assets, the Company issued 1,283,333 shares of its restricted
common stock to the sellers. The equipment valuation was determined by a
discounted cash flow of projected operating income using a maximum cost of funds
of 20% per annum. This was further supported by an independent experts
valuation opinion of the replacement value of the equipment. In determining the
amount of Companys consideration for the assets, the parties estimated the
present fair market value of all such assets to be equivalent to approximately
$3.00 per share issued. Also on January 8, 2000, the Company sold 216,667 shares
of restricted common stock to one of the sellers for $650,000, of which $600,000
was paid by the a secured note.

WARRANTS

In
1997, the Company issued 78,667 warrants in conjunction with a private placement.

In
1998 the Company registered 200,000 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 deterioration in
the market for public companies in the oil and gas business segment, 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 29, 2000. and the Company
sold 200,000 shares of common stock and 200,000 stock purchase warrants, each
warrant exercisable to purchase one share of common stock at an exercise price
of $1.50 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.

---

At
December 31, 2001 the status of outstanding warrants is as follows:

`Shares     Exercise
            Issue Date     Exercisable   Price     Expiration Date
            ----------     -----------  --------   ---------------
        October 31, 1997      78,667     $ 3.00      March 31, 2003
        December 29, 2001    200,000     $ 1.50      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 more
shareholder which may not exceed five years.

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

`Weighted
                                 Average              Weighted
                                Number of  Exercise  Average Fair   Exercise
                                 Shares      Price      Value         Price
                                ---------  --------  ------------   ---------
Options Outstanding -
 December 31, 1999
(60,667 exercisable)              60,667     $ 5.25      $2.70      $3.00-$7.50

Cancelled                        -14,000     $ 6.30    $5.25-$7.50
                                --------     ------    -----------
Options Outstanding -
 December 31, 2000 & 2001
(46,667 exercisable)              46,667     $ 4.80    $3.00-$5.25  $3.00-$7.50
                                ========     ======    ===========  ===========`

The
weighted average remaining contractual life of options outstanding at December
31, 2001 was 5.5 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 2000 and 2001 would have
changed as follows:

`2001          2000
                                              ----          ----
  Net(loss) applicable to common
     stockholders-as reported             $ (567,419)   $  (68,366)
                                          ==========    ==========
  Net(loss) applicable to common
     stockholders-pro forma               $ (567,419)   $  (68,366)
                                          ==========    ==========

  (Loss) per share - as reported          $    (0.25)   $    (0.11)
                                          ==========    ===========
  (Loss) per share - pro forma            $    (0.25)   $    (0.11)
                                          ==========    ===========`

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, 2000 and December 31, 2001 the number of options exercisable was
46,667 and the weighted average exercise price of these options was $4.80.

---

NOTE 7 - RELATED PARTY
TRANSACTIONS

At
December 31, 2001, the Company owes individual directors and officers an
aggregate $163,378 for unreimbursed expenses and accrued
compensation.

On
May 31, 2001 the Company issued 19,500 restricted common shares to its officers
and directors for services provided during the year 2000. The deemed value of
the shares issued was $50,000.

On
December 1, 2001 the Company agreed to sell all of its assets related to the oil
and natural gas industry to an entity controlled by a director of the Company.
The transaction was deemed effective December 1, 2001, and included all of the
Companys undivided interests in producing natural gas wells and adjacent
acreage in California and the Companys undivided interest in oil and gas
leaseholds, geophysical exploratory data and other nominal assets. Following the
transaction, the Company had no interest in any oil or natural gas assets of any
nature. The buyer assumed all of the obligations of the Company to pay
approximately $13,500 in outstanding liabilities relating to the oil and natural
gas properties transferred and any future contingent liabilities including well
closure, remediation and clean-up, and surrendered 25,259 restricted shares of
the Companys common stock owned of record and beneficially by the director
to the Company. The deemed value of the shares received was $75,777 and the
Company recorded a loss on the transaction of $91,415. The transaction was
approved unanimously by the disinterested members of the Board of Directors of
Company following an independent evaluation of the properties.

NOTE 8 - SEGMENT REPORTING
AND DISCONTINUED OPERATION

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.

Until
2001, the Company had one reportable segment, oil and gas producing activities.
The Company had concentrated its oil and gas exploration and development
activities in the western United States, primarily in California and Wyoming.
All activities in this segment were with industry partners.

The
Company earned revenue from its oil and gas activities of $155,660 and $207,918
for the years ended December 31, 2000 and 2001, respectively. Operating expenses
were $179,153 and $247,941 for the years ended December 31, 2000 and 2001,
respectively are attributable to this segment. The Companys total assets
were $261,272 at December 31, 2000. None of the Companys assets at
December 31, 2001 were attributable to the oil and gas activities as they were
sold on December 1, 2001.

During
2001, the Company had two reportable segments, the oil and gas producing
activities until December 1, 2001, and floppy disk manufacturing activity at
December 31, 2001. The Companys total assets of 4,088,287 were
attributable to the floppy disk manufacturing activity. Revenues during 2001
attributable to the manufacturing operation were $56,094 and operating expenses
and cost of sales were $530,037.

On December 1, 2001, the
Company sold all of its producing and non-producing oil and gas properties to a
director of the Company. The oil and gas business segment was sold for $89,277
which resulted in a loss on the sale of $91,415. The results of the oil and gas
business segment has been reflected as discontinued operation in the
accompanying consolidated financial statement.

The operating results of
the discontinued operation are as follows:

`Cummulative from
                                                                   January 1, 1997
                                                                    (Inception) to
                                         2001            2000      December 31, 2001
                                         ----            ----      -----------------

Net revenue                          $   91,656      $  141,049    $    400,148
(Loss) from discontinued operation,
  Net of income taxes                $ (156,285)     $  (38,104)   $ (2,157,337)`

The disposition of the oil
and gas operation represents the disposal of a business segment under Accounting
Principles Board (APB) Opinion Number 30. Accordingly, results of
this operation have been classified as discontinued, and prior periods have been
restated, including the reallocation of fixed overhead charges.

---

At December 31, 2001, the
Company did not have any assets related to the oil and gas business segment;
however, it had liabilities for consulting expenses totaling $4,337.

NOTE 9 - 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.

---

## SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

FAN ENERGY INC.
Date:  April 1, 2002    
 
            
            
            
            
            
        By:
/s/John Shebanow                
                
                
                
        
                
                
        
       John Shebanow, President
Date:  April 1, 2002    
 
            
            
            
            
            
        By:
/s/Albert A. 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 1, 2002    
 
            
            
            
            
            
        By:
/s/George H. Fancher Jr.                
                
                
                
        
                
                
        
       George H. Fancher Jr., Director
Date:  April 1, 2002   
            
            
            
            
                
        By:
/s/John Shebanow                
                
                
                
        
                
                
        
       John Shebanow, Director
Date:  April 1, 2002   
            
            
            
            
                
        By:
/s/William E. Grafham                
                
                
                
        
                
                
        
       William E. Grafham, Director
Date:  April 1, 2002   
            
            
            
            
                
        By:
/s/Jeffrey J. Scott                
                
                
                
        
                
                
        
       Jeffrey J. Scott, Director
Date:  April 1, 2002   
            
            
            
            
                
        By:
/s/Albert Golusin                
                
                
                
        
                
                
        
       Albert Golusin, Director
Date:  April 1, 2002   
            
            
            
            
                
        By:
/s/Alex Gassiot                
                
                
                
        
                
                
        
       Alex Gassiot, Director
Date:  April 1, 2002   
            
            
            
            
                
        By:
/s/Robert Hamblen                
                
                
                
        
                
                
        
       Robert Hamblen, Director

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