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, 1999

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

                          Commission File No. 333-47699

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


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

1801 Broadway Suite 720, Denver, Colorado                   80202
-----------------------------------------                  --------

(Address of principal executive offices)                  (Zip Code)

Issuer's telephone number:  (303) 296-6600

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

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

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

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.[X] Yes [ ]No.

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

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

     As of December  31, 1999 the issuer had  9,451,492 shares of its $0.01 par
value common stock issued and outstanding.  As there is no public trading market
for  Registrant's  securities,  Registrant  is unable to determine the aggregate
market value of the common stock, the  Registrant's  only class of voting stock,
held by nonaffiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


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


<PAGE>

                                     PART I

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

ITEM 1.   DESCRIPTION OF BUSINESS.

     (a) GENERAL DEVELOPMENT OF BUSINESS

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

     (b) NARRATIVE DESCRIPTION OF THE BUSINESS

     Fan' business  is  presently  to acquire  and  develop oil and natural gas
properties.  Fan intends to develop oil and  natural gas  properties  in regions
with known producing  horizons,  significant  available  undeveloped acreage and
considerable  opportunities  to  increase  reserves,   production  and  ultimate
recoveries  through  exploratory  and  development  drilling and  acquisition of
producing  properties.  Our  present  activities  are focused in the Green River
Basin in  Wyoming  and the  Sacramento  Basin in  central  California  where our
exploration and development prospects are located.

     Fan holds an undivided  net working equal to  approximately  20% in a 5,760
acre prospect located in Sweetwater County,  Wyoming. Two exploratory wells have
been drilled on the prospect,  with the first well  completed as an apparent oil
producer and the second as a marginally  productive natural gas well. Both wells
were  shut-in  for the  winter  months of 1999 and  early  2000  because  of the
weather.  As of the date of this  report,  both wells were  still  shut-in.  The
operator of the well, Fancher Oil LLC ("Operator") expects additional wells to


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<PAGE>


be drilling on this  prospect in 2000 and  thereafter.  Because of the Company's
limited financial resources, it is likely that the Company would farm-out all or
a portion of its interest in these  properties for  development by others,  with
the  expectation  that the Company  would  receive a reduced  interest in future
wells,  with most of the Company's  share of drilling and  development  expenses
being  paid  for by  other  participants.  The  Company  also  has the  right to
participate  with a  minority  working  interest  in other  prospects  which the
Operator  intends to explore in the  vicinity of this  prospect  and which could
result in the drilling of other exploratory wells in 2000 or thereafter.  Again,
the Company would expect to determine whether or not to participate in any given
well based on its  financial  condition  and other  factors at the time that the
well is  commenced.  The  Company  may choose to forfeit  any  interest in these
nearby prospects due to its limited financial resources.

     The Company also holds an undivided 25% working interest in two exploratory
prospects  located  in Yolo and Solano  Counties  in the  Sacramento  Basin near
Sacramento,  California  which  has been  held for sale  since  late  1999.  The
prospects  now total  approximately  25,520  gross acres.  In 1998,  the Company
participated in drilling five  exploratory  wells on the property,  one of which
was  completed  as a  producer.  In  1998  the  operator  of  the  prospects,  a
nonaffiliated  independent  oil  and  gas  company,  and  the  Company  together
completed a three  dimensional  seismic ("3-D  Seismic")  survey and  identified
several potential  drilling sites. The initial three exploratory wells on one of
the prospects and the first exploratory well on the other prospect, in which the
Company had a 6.25% working interest, were plugged and abandoned as dry holes in
1998. The fifth well, on the second prospect,  was placed on production early in
1999.  The Company's  principal  revenue is derived from its share of production
from this  well.  The  Company  is  seeking  to sell its  interest  in these two
exploratory prospects and the producing well in the Sacramento Basin.

     We intend to use our present cash assets,  any proceeds  received from sale
of the  Sacramento  Basin  prospects  and from a  securities  offering,  and any
proceeds from the exercise of outstanding  stock  purchase  warrants to meet the
capital  requirements for exploration and development of its current  properties
and to  acquire  similar  types  of  interests  in  other  oil and  natural  gas
properties in the United States and Canada.

     The Company  presently  has only  limited  reserves of oil and natural gas,
limited  production and relatively limited cash flow. When the two shut-in wells
in  Sweetwater  County,  Wyoming  are again  placed on  production,  the Company
anticipates  relatively little  additional cash flow from those operations.  The
Company does not serve as the Operator in its two present  projects.  Because it
is not  the  Operator,  the  Company  is not  generally  in a  position  to make
determinations with respect to where and when exploratory or other wells will be
drilled,  the timing of the drilling,  the conduct of day-to-day  activities and
related  management  of the  exploitation  of the  properties.  However,  in the
Sacramento  Basin  prospects  the  Company,  or any other owner of an  undivided
working interest, is authorized to propose certain exploration activities and to
become the operator for that activity if the Operator declines to act. See "Item
2. Description of Properties."


                                        3

<PAGE>



Business Strategy

     Our  intended  strategy  is to develop  and  increase  oil and  natural gas
reserves,  production and revenue for the Company and includes the following key
elements.

     o Utilize State-of-the-Art Technologies. Certain of our officers, directors
and  consultants  have  experience  in  utilizing  3-D Seismic  data and related
"state-of-the-art"  technologies  for analyzing oil and natural gas drilling and
development opportunities. The Company intends to continue to analyze and review
oil and  natural gas  prospects  which the  Company  holds or acquires  based on
analysis of 3-D  Seismic  data and related  technologies,  including  "amplitude
versus offset" or "AVO" seismic analysis.  The Company's efforts will be focused
on improving  drilng success rates and accelerating the development of oil and
natural gas reserves.

     o Develop Drillsite Inventory.  Our interests in the California and Wyoming
prospects  include an inventory of up to approximately 18 potential  exploratory
and  development  oil and natural gas wells,  based on an initial  review of the
completed 3-D Seismic and the two successful wells drilled on the prospects. The
Company also may participate in the drilling of three or more exploratory  wells
on nearby  prospects  which it has the right to acquire a 20% working  interest.
The  Company  believes  that  the  present  cash  resources,  proceeds  from  an
anticipated  securities  offering and anticipated  proceeds from the exercise of
outstanding  warrants  will enable the Company to pay its  anticipated  share of
drilling and completion  costs for two to three  exploratory  wells on the these
prospects. The Company also intends to continue to seek and acquire interests in
other drilling prospects in the United States and Canada.

     o Acquire  Interests in Producing Oil and Natural Gas Properties.  Fan will
continue to evaluate  potential  acquisitions  of  interests  in  producing  and
nonproducing  oil and natural  gas  properties  in the United  States and Canada
which  may  become  available  on  terms  which  the  Company  believes  will be
attractive  and which have the  potential to add to our reserves and  production
through the application of lower risk  exploitation and exploration  techniques.
These  acquisitions  would be subject to the  availability of properties  deemed
suitable  by the  Board  of  Directors,  availability  of  financial  resources,
location and other factors.

     Fan will also consider other business opportunities which become available,
including opportunities outside the oil and gas business.

Acquisitions of Other Properties

     Fan does not  presently  intend  to  operate  oil and gas  properties,  but
instead will focus upon acquiring and holding properties which management of the
Company believes, utilizing 3-D Seismic and other state-of-the-art technologies,
have a good potential to develop  significant  oil or natural gas production and
reserves.  The Company  presently has not  identified  any such  properties  for
acquisition  and it is not likely that  additional  properties  will be acquired
until the  Company  has  attained  additional  capitalization,  either  with the
proceeds of this Offering,  the exercise of  outstanding  warrants or from other
sources.

     The Company may evaluate and pursue acquisitions of interests in producing,
exploratory  or  development  oil and gas  properties  that  meet the  Company's
selection  criteria,  including  persons or  entities  with whom  members of our
management  may  have an  affiliation  or  other  relationship.  The  successful

                                        4

<PAGE>


acquisition of such properties would require an assessment of potential reserves
of oil or natural  gas,  future oil and  natural gas  prices,  operating  costs,
potential  environmental  and other  liabilities  and other  factors  beyond the
Company's  control.  Such an assessment is necessarily  inexact and its accuracy
would  be  inherently  uncertain.   The  Company  intends  that  upon  any  such
acquisition,  management  will  perform  a  review  of  the  subject  properties
generally consistent with industry practices.  Such a review, however, would not
reveal all existing or potential problems, nor would it permit a buyer to become
sufficiently  familiar with the properties to assess fully their deficiencies or
potential value. Inspections of the properties may not be performed and problems
with  existing  properties  may not be  observable  even in those cases where an
inspection is undertaken. The Company may assume existing liabilities, including
environmental  liabilities,  upon any such  acquisition and would likely acquire
interests in such properties on an "as is" basis.

     The  Company's  Chairman,  George  H.  Fancher  Jr.,  who  has  substantial
experience  as an  operator  of  exploration  and  development  of oil  and  gas
properties  for  his own  account,  is the  operator  of the  Company's  Wyoming
prospect and may be the operator of properties in which the Company  acquires an
interest.  In such  event,  charges to the Company  for such  services  will not
exceed usual and customary charges to unaffiliated persons and will be at a rate
no  higher  than  operating  charges  made to any other  participant  in a given
project.

Marketing of Production

     The  price  to be  received  by the  Company  for any oil and  natural  gas
production  which may be  established  on Company  properties  will  depend upon
numerous  factors  beyond the  Company's  control,  including  seasonality,  the
condition of the national  and  international  economies,  the  availability  of
foreign  imports,  political  conditions  in other oil and natural gas producing
countries,   domestic  governmental   regulations,   legislation  and  policies,
decreases  in the prices of oil or natural  gas could have an adverse  affect on
the value of any reserves established by the Company and the Company's cash flow
from any production  which may be established.  In February 2000, the price paid
by natural gas  purchasers in the  Sacramento  Basin of central  California  was
approximately $2.10 per mcf and in the Green River Basin of southeastern Wyoming
the price paid for oil  produced in that area was  approximately  $25 per barrel
and for natural gas approximately  $2.00 per mcf. Such prices could be higher or
lower at the time that any production from the Company's exploratory  activities
is available  for sale,  depending  upon the above  factors and other  unforseen
circumstances.

Competition

     The Company operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies, many
of which have substantially larger financial resources,  operations,  staffs and
facilities.  In seeking to acquire desirable producing properties or production,
the Company faces intense  competition  from both major and  independent oil and
natural  gas  companies.  The Company  expects  that the  inventory  of unproved
drilling  locations  in the two  prospects  in which the Company has an interest
will be the primary source of new reserves,  production and cash flow during the
next  year.  There  can be no  assurance  that  the  two  prospects  will  yield
substantial economic returns.  Failure of the two prospects to yield significant
quantities  of  economically  attractive  reserves  in  production  could have a
material adverse impact on the Company's  future  financial  condition and could
result in a writeoff of a significant  portion of its  investment in the oil and
gas properties.

                                        5

<PAGE>



     The  Company's  competitors  include major  integrated  oil and natural gas
companies and numerous  independent  oil and natural gas companies,  individuals
and  drilling  and income  programs.  Many of its  competitors  are large,  well
established  companies with  substantially  larger  operating staffs and greater
capital  resources than the Company's and which,  in many  instances,  have been
engaged in the energy  business  for a much longer time than the  Company.  Such
companies may be able to pay more for  productive oil and natural gas properties
and  exploratory  prospects  and to  define,  evaluate,  bid for and  purchase a
greater number of properties and prospects than the Company's financial or human
resources permit. The Company's ability to acquire additional  properties and to
discover  reserves in the future will be dependent  upon its ability to evaluate
and  select  suitable  properties  and to  consummate  transactions  in a highly
competitive environment.

Regulation

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

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

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


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

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

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

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

     The Company has acquired  leasehold  interests in numerous  properties that
for many years have produced oil and natural gas.  Although the previous  owners
of these  interests  may have used  operating and disposal  practices  that were
standard in the industry at the time, hydrocarbons or other wastes may have been


                                        7

<PAGE>


disposed of or released on or under the  properties.  In  addition,  some of the
Company's  properties  may be operated in the future by third  parties over whom
the Company has no control.  Notwithstanding  the Company's lack of control over
properties  operated  by others,  the  failure of the  operator  to comply  with
applicable  environmental  regulations may, in certain circumstances,  adversely
impact the Company.

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

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

Employees

     As of the date of this report, the Company had no employees.  The Company's
five  directors  and four part time  consultants  provide  management  and other
services.

ITEM 2.   DESCRIPTION OF PROPERTY.

Principal Properties

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

     Green River Basin. The Horsethief  Canyon Prospect is a Frontier  sandstone
natural gas exploration prospect on the eastern flank of the Rock Springs Uplift
of the Green  River  Basin in  southwestern  Wyoming.  There are a number of gas
fields  that  produce  from  the  Frontier  formation  in the  vicinity  of this
prospect. The Marianne Field, located 4 miles to the south, provided the analogy

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<PAGE>


for the Horsethief  Canyon Prospect.  The average well in the Marianne Field had
an  initial  production  rate of 1640 MCFD  with an  ultimate  recovery  of 2.47
billion cubic feet of gas.

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

     In October  1998,  the Company  entered into an agreement  with Fancher Oil
LLC, in which the Company  acquired a twenty  percent (20%) working  interest in
approximately  3,525  acres  including  seismic  options,  farmins  and  trades,
hereinafter referred to as the Horsethief Canyon Prospect. Subsequently, a 5,760
acre Federal  Exploratory Unit was formed and a 3D Seismic  exploration  program
was completed. The Company then participated in the drilling of the H.C. Federal
#30-12,  centrally located in the prospect acreage. The well was completed as an
apparent  oil and  natural  gas  producer  in two zones of the  Second  Frontier
formation and is awaiting the  installation  of surface  facilities and pipeline
connection.  The drilling  confirmed the results of the 3-D Seismic and analysis
of the older wells in the area. Production in this initial well commenced in the
summer of 1999 and the well produced  approximately  613 barrels of oil, net the
Company's  interest,  until the well was shut-in for the winter in late 1999.  A
second well,  which is expected be a marginal  natural gas well, was drilled and
completed  in late summer  1999 and has not yet been  commercially  produced.  A
reserve study prepared by an independent petroleum engineer projected that these
wells will produce  approximately  14.6 MMCF of natural gas and 3,000 barrels of
oil over their lifetime net to Fan's interests.

     [Presently,  there is one proposed  development location near the discovery
well which is expected to find similar sands in a structurally  higher  position
as  encountered in the initial  wells,  based on subsurface  geology and the 3-D
Seismic survey.  This location was classified as "probable" in the reserve study
and no reserves  were  included  in the  Company's  estimates.  Drilling of this
additional development location may be commenced in 2000 or thereafter.  Fancher
Oil LLC  ("Fancher") is the designated  Operator of this project and has between
27.5% and 55% working  interest in the Federal  Exploratory  Unit. The Company's
working  interest in future  wells will range from 7% to 20%,  depending  on the
location of the well, and what portion of its interest the Company  transfers to
others in advance of drilling.  Fan also has the right,  but not the obligation,
to  participate  for up to 20% of Fancher's  working  interest in any additional
acreage  or  farmins  that may be  acquired  by  Fancher  in the area of  mutual
interest (AMI) established for this prospect.]

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


                                        9

<PAGE>


migration.  Most  reservoirs  appear  to be  water  driven  and are  capable  of
producing at relatively high rates until the water production becomes excessive,
resulting in termination of production of natural gas.

     The primary  formations of interest in the Fiji and Bali Prospects  include
the Winters  formation,  the deepest and least  explored,  which ranges in depth
from 6,000 to 8,000 feet. The Starkey formation is immediately above the Winters
formation at depths ranging from 4,000 to 6,000 feet. The Mokelumme formation at
a depth of 3,000 to 4,000 feet and the Domengine  formation  from 2,000 to 3,000
feet are the other areas of interest.

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

     Under the  Participation  Agreements,  the Company is entitled to receive a
25% net working interest  (approximately  a 18.75% net revenue  interest) in oil
and natural gas leases and other property  interests obtained by the Operator in
two prospects,  designated the "Fiji" prospect and the "Bali" prospect, included
in an area of mutual interest defined in each  Participation  Agreement ("AMI").
The two AMIs total  approximately 70 square miles and the Operator  obtained oil
and gas leases or lease options totaling  approximately  30,000 net acres on the
two prospects.  Subsequently,  leases and options covering all but approximately
14,900 acres were surrendered. The Operator is authorized to continue to acquire
additional  lease  acreage in the AMI. The Company is obligated to pay 33.75% of
leasehold  acquisition costs, oil and gas lease rentals and renewals,  and costs
incurred in connection with acquisition of 3-D Seismic data within the two AMI's
surrounding  the two  prospects,  for the Company's 25% working  interest in the
prospects.  Each of the other  four  working  interest  owners  (other  than the
Operator) also is required to pay a portion of expenses  larger than its working
interest. Through December 31, 1999 the Operator had incurred approximately $3.7
million for land acquisition and 3-D Seismic data expenses, of which the Company
and its predecessor had paid approximately $1.25 million.

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


                                       10

<PAGE>


incurred by the Operator in operating  activities,  including  drilling expenses
and similar  expenditures and will be entitled to receive  approximately  18.75%
(the net revenue  interest) of any  production  which might be obtained from the
prospects (after provisions for land owner and overriding royalties).

     The one  successful  well in which Fan holds an  interest  in this  project
commenced  production  in early 1999.  In the  reserve  study,  the  independent
petroleum engineer estimated that the existing well would produce  approximately
182.3  MMCF  and  one  proved   development   well  would   ultimately   product
approximately 129.0 MMCF, net to Fan's interest, through approximately 2005.

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

Title to Properties

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

Current Operations

     The  Company  plans to continue to monitor  development  activities  in the
vicinity  of the  Horsethief  Canyon  Prospect  located  in  Sweetwater  County,
Wyoming.  The Company  participated  in two exploratory  wells,  one of which is
primarily  an oil well  producer  and one is  expected to produce low volumes of
natural  gas.  Both wells were  shut-in  over the winter of  1999-2000.  Until a
natural gas pipeline is extended into the area of these wells, it is likely that
additional drilling activity will be curtailed. Fan will consider transferring a
portion  or all of its  interest  in this  prospect  to others  in return  for a
carried interest in the wells.

     In addition,  the Company has the right to participate in three  additional
prospects  that Fancher Oil LLC has developed in the vicinity of the  Horsethief
Canyon  Prospect  that could  result in the drilling of  additional  exploratory
wells in 2000 or  thereafter.  These  prospects are referred to as the Northeast
Marianne, Southwest Marianne and Masterson Prospects. The Company has the right,
but not the  obligation,  to  participate  for up to 20% of  Fancher  Oil  LLC's
interest in these prospects,  including acreage,  farmins or trades. The primary
objective of these  prospects are the Second and Third  Frontier  sands with the
Muddy,  Dakota and Lakota formations as secondary  objectives.  Participation by
the Company  will depend upon the  Company's  available  capital  resources  and
drilling success in the initial wells.

     The Company  intends to  concentrate  its  activities  to the  drilling and
acquisition of gas reserves  primarily in the Green River Basin of  southwestern
Wyoming.  The Company will  actively  seek  opportunities  that can provide long


                                       11

<PAGE>


term, good quality  reserves using  technology to lower the risk and improve the
recovery.  There are no plans to participate in drilling any additional wells in
the California prospects.

Acreage

     The following  table sets forth, as of December 31, 1999, the gross and net
acres of oil and natural gas leases which the Company  beneficially holds or has
the right to acquire.

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

Reserves

     As of December 31,  1999,  the Company had  interests  in three  productive
wells (.41 net  wells) in two  areas.  The wells are  operated  by others  under
arrangements  standard in the industry.  The following is information  about the
reserves  attributable  to the  Company's  properties  at December 31, 1999,  as
estimated by an independent petroleum engineer.

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

Sacramento Basin ......................    311.3(2)        -          402.1
Green River Basin .....................    14.6(3)         .3          6.1
                                          -----           ---          ---
         Total ........................     325.9          .3         408.2

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

(1)  Present  value of future net revenue,  discounted at 10% before any related
     income  taxes.  Assumed  product  prices  used were prices in effect in the
     areas  at  December  31,  1999  without  escalation,  net of  heat  content
     adjustments,  gathering costs and compression  charges, or $2.06 per mcf in
     the Sacramento Basin, $1.00 per mcf in the Green River Basin and $24.75 per
     barrel for oil in Wyoming.  All prices were assumed to remain flat over the
     productive  lives of the wells.  Operating  costs  utilized were  estimated
     costs for the wells at a flat rate ($1,525 per well per month in California
     and  $5,200  per  well  per  month  in  the  Wyoming   properties)  without
     escalation.

(2)  Includes one well which commenced production in January 1999 and one proved
     undeveloped (undrilled) well.

(3)  Includes two proved nonproducing wells. Does not include one potential well
     assumed to be "probable" of future successful development.


                                       12

<PAGE>


Drilling Activity

     The  following  table   summarizes  the  Company's  oil  and  gas  drilling
activities for 1999.

<TABLE>
<CAPTION>
                                                            Productive                         Nonproductive
                                                      ------------------------         ---------------------------
Exploratory Wells Drilled                             Gross Wells     Net Well         Gross Wells        Net Well
-------------------------                             -----------     --------         -----------        --------
<S>                                                    <C>            <C>                 <C>             <C>
   Sacramento Basin, California..................         --             --                 --               --
   Green River Basin, Wyoming....................        1.0           .0775                --               --
</TABLE>

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.

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

     (a)  PRINCIPAL MARKET OR MARKETS

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

     (b)  APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

     As of March 1, 2000,  the  Company  had  9,451,492  shares of common  stock
outstanding, held by approximately 522 stockholders.

     (c)  DIVIDENDS

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

     (d)  RECENT SALES OF UNREGISTERED SECURITIES

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



                                       13

<PAGE>



     (i) On June 2, 1997 the Company issued 2,500,000 shares of its common stock
and 2,500,000 stock purchase warrants to eight non-U.S. citizens for $500,000 in
a private transaction.  Each of the warrants entitles the holder to purchase one
additional  share of common  stock of the Company at an exercise  price of $0.20
per  share on or  before  June 2,  1999.  No  underwriter  was  involved  in the
transaction  and  there  were no  underwriting  discounts  or  commissions.  The
issuance of the securities was exempt from  registration  under Rule 504 adopted
under Regulation D of the Securities Act. Form D was filed by the Company.

     (ii) On August 29, 1997 the Company issued  2,250,000  shares of its common
stock to George H. Fancher Jr. in connection with the acquisition by the Company
of  oil  and  gas  properties.   Upon  issuance  of  the  shares,   certificates
representing the shares were delivered to an escrow agent pending  completion of
the acquisition  transaction.  The  acquisition  transaction was completed on or
about November 11, 1997 at which time the shares were delivered to Mr.  Fancher.
In the  transaction,  the  Company  received  an  assignment  of  Mr.  Fancher's
undivided  interest in two natural gas  exploration  and  development  prospects
located in the southern part of the Sacramento Basin in California.  The Company
paid $907,951 in cash and issued the 2,250,000 shares of common stock, valued at
$300,000, for the properties. The total of the cash and the stock is intended to
be equal to Mr. Fancher's cost in acquiring and developing the property prior to
transfer to the Company.  No underwriter  was involved in the  transaction.  The
issuance of the  securities to Mr.  Fancher was exempt under Section 4(2) of the
Securities Act. Mr. Fancher acquired the securities for investment, certificates
representing  the  securities  were  marked with a  restrictive  legend and stop
transfer  instructions  were placed with the Company's  stock transfer agent. In
accordance  with the terms of the  acquisition,  because fewer than 10 wells had
been successfully  completed on the prospects,  effective  December 31, 1999 Mr.
Fancher surrendered 750,000 of the shares to the Company for cancellation.

     (iii) On September 15, 1997 the Company issued 250,000 shares of its common
stock to six persons for services  valued by the Company at $50,000.  Of the six
persons,  one is a Canadian attorney who received 25,000 shares for service as a
director of the Company and for preparation of documentation  for the Company in
connection  with the  acquisition  of oil and gas  properties  and advise to the
officers concerning certain aspects of the acquisition.  A second person, also a
director  at the time of  issuance of the  shares,  was also the  Secretary  and
Treasurer of the Company and received 50,000 shares.  He provided  financial and
accounting services to the Company and maintained its books and records.  Two of
the persons, each of whom received 50,000 shares, have substantial experience in
the oil and natural gas  business  and served as  consultants  to the Company in
connection with the acquisition of the natural gas exploration properties.  They
reviewed  in detail the  geologic  and related  data  available  concerning  the
properties  and  advised  the  officers   concerning  the  advisability  of  the
acquisition.  A third  consultant  also received  50,000  shares,  and agreed in
August 1997 to become a director of the Company at the time that the acquisition


                                       14

<PAGE>


of the oil and gas properties was completed,  he assisted the Company to prepare
and document its financing and  exploration  plan and to evaluate and budget the
plan of  development  of the natural gas  exploration  properties.  Of the three
consultants,  two became  directors  in  November  1997 and the third  agreed to
provide  ongoing  consulting  services to the  Company.  The sixth  person,  who
received  25,000 shares,  is an employee of a business owned by the President of
the  Company  and an  administrative  assistant  to the  President.  This person
provided office,  administrative and stenographic  services to the Company. Each
of the persons to whom the shares were issued had full knowledge of the business
and  affairs of the  Company,  each  signed a written  investment  letter  which
acknowledged  the receipt of information  concerning the Company and each agreed
to hold the shares issued for investment purposes, the certificates representing
the shares each bear a restrictive  legend and stop transfer  instructions  were
entered with the Company's  stock transfer agent. No underwriter was involved in
the  transactions.  Based on the foregoing facts, the issuance of the securities
was exempt from  registration  pursuant to Section  4(2) of the  Securities  Act
and/or Rule 506 adopted thereunder.

     (iv) On October 31, 1997 the Company issued  2,000,000 shares of its common
stock and warrants to purchase  1,000,000  shares of common stock to 10 non-U.S.
citizens for  $1,000,000.  Each of the warrants  entitles the holder to purchase
one additional  share of common stock at an exercise price of $0.60 per share on
or before  October 31, 1999.  The Company  issued cash  finder's  fees  totaling
$45,000  and issued  warrants  entitling  the  holders to purchase up to 180,000
shares of common  stock to three  nonaffiliated,  non-U.S.  citizen  finders  in
connection with the transaction.  The Company's  President,  William E. Grafham,
participated in the private  placement and purchased  200,000 shares and 100,000
warrants for $100,000. In 1999 we extended the expiration date of all  1,180,000
warrants to October 31, 2000, and reduced the exercise price to $0.15 per share.
The  issuance  of the  securities  was  exempt  from  registration  pursuant  to
Regulation S adopted under the  Securities  Act. Each of the  purchasers  agreed
that no sale of any of the  securities  would  be made to any  U.S.  Person,  as
defined in Regulation S, except in compliance with the Securities Act.

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

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

                                       15

<PAGE>


     (e) PROCEEDS FROM SALE OF REGISTERED SECURITIES

     In 1998 the  Company  registered  3,000,000  shares of  common  stock for a
contemplated  public offering in Registration  No.  333-64448 which was declared
effective May 14, 1998. The offering was  discontinued  in late 1998 because the
Company was unable to complete the sale of the minimum number of shares offered.
None of the registered shares were sold. In 1999, the Company  re-registered the
shares  with a view  towards  recommencement  of the public  offering.  Due to a
deterioration  in the market for public  companies in the oil and gas  business,
the  offering  was again  deferred  before the  post-effective  amendment to the
registration   statement   was  made   effective.   The  Company  will  consider
recommencement of its offering at an appropriate time in the future.

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 conduct drilling operations,  trends in the
results of our operations,  anticipated rates of production, natural gas and oil
prices,  operating expenses and our anticipated capital requirements and capital
resources.  The actual results which we achieve in our  operations  could differ
materially from the matters discussed in the forward-looking statements.

     We  generated  our first  revenue  during the first  quarter of 1999 from a
successful  exploratory  natural gas well in the Bali prospect in the Sacramento
Basin of central California. The well has generated $142,267 at an average price
of $2.08 per MCF during 1999 net to our interest.  During the three months ended
December 31, 1999, the production from this well was sold at an average price of
$2.34.  We  anticipate  production  and gas prices on the well during 2000 to be
somewhat  comparable  to the  production  and  prices  received  for  1999.  The
producing well and our interest in the surrounding  unexplored  acreage is being
held for sale. Pending any sale of those properties, we will continue to receive
revenue from the producing well.

     In late 1998 we  participated  in  drilling  a  successful  oil well in the
Horsethief Canyon prospect,  in which we hold a 20% working  interest.  The well
was not produced during the first quarter of 1999.  During all of the balance of
1999, the well produced 613 barrels of oil, net to the Company's interest, which
was sold at an average price of $18 per barrel.  We realized  $9,552 after taxes
and  fees  from our 16%  revenue  interest  in the  well  during  the  1999.  We
anticipate that this well, which was shut-in over the winter of 1999-2000,  will
produce a comparable  quantity of oil during 2000 and we expect that the selling
price for oil produced will reflect the general worldwide  increase in the price
of this commodity.

     We decided to farm out as much of our interest as was required to carry our
remaining  interest  to the  casing  point  in the  next  wells  drilled  in our
Hoursethief  Canyon  Prospect.  We therefore sold a 10% working  interest in the
spacing  unit in the next well for an amount  which was  sufficient  to fund the
remaining  7.8125% working interest which we hold in the well. After the well as


                                       16

<PAGE>


drilled we paid our proportionate  share of completion costs. After testing,  it
appears  that this well will be a marginally  productive  natural gas well which
will not be produced  until natural gas gathering  facilities  are extended into
the area of this well and the surrounding prospects.  We intend to sell gas from
this well to a nearby  facility which will generate  electricity  for sale to an
electric  transmission  utility in the area. We also agreed to be subject to the
balance of the farm-out  agreement relating to the portion of our interest which
we sold to other participants in the prospect.

     Because we decided to discontinue  further  exploration of our prospects in
the  Sacramento   Basin,   we  took  a  non-cash   impairment   charge  totaling
approximately  $1.25 million at the end of 1998. As a result of this charge, the
book value of our oil and gas properties at December 31, 1998 was reduced to the
approximate  amount of the present  value of the oil and natural gas reserves on
these properties at year end 1998. Based primarily on the fact the present value
of the proved oil and natural gas reserves  decreased  more than are produced in
1999, we again recorded an impairment charge, totaling $300,000. We depleted our
California natural gas well by approximately $119,000 and our Wyoming properties
$6,100 totaling $125,100 during 1999. These charges,  although significant,  did
not affect the results of our operations for 1999.

     We had general and  administrative  expenses totaling $129,700 during 1999,
compared to $198,900 in the prior year.  The decrease  was due  primarily to our
lower lever of operations in 1999. We had  reimbursements  and fees for services
provided by our three officers totaling approximately $69,000 in 1999 consisting
primarily   of   reimbursement   for  rent  and   administrative   services  and
approximately  $22,000 in services provided by our secretary.  Mr. Fancher,  our
chairman,  agreed to write-off $22,000 in reimbursements  owed to his affiliate.
The other amounts were satisfied by Fan issuing a total of 199,788 shares of our
common stock, at a deemed value of $0.225 per share.

     In 1999 we had cash  expenditures of  approximately  $5,400 for geophysical
and lease extension costs which were capitalized. Other capital costs associated
with  participating  and  acquiring,  exploring  and drilling of the  Horsethief
Canyon and nearby  prospects  were  approximately  $82,000 in 1999. Our share of
those  expenses  during  2000 are  expected  to be in the  range of  $40,000  to
$80,000,  depending on such factors as the success of initial drilling  efforts,
decisions by the operator to conduct other exploratory  activities,  weather and
related  factors.  In 1999 we obtained a $150,000 one year line of credit from a
bank.  Our  obligation  was guaranteed by Mr. Fancher and we agreed to indemnify
him if he was required to pay our  obligations  to the bank. We made  borrowings
under the line of credit to help pay our  portion of costs  incurred in drilling
the two wells in our Housethief  Canyon prospect.  As of the date of this report
all  obligations  to the bank have been  repaid and we do not expect to take any
additional advances on our line of credit.

     At December 31, 1999 we had  approximately  $57,000 in cash and receivables
and at March 23, 2000, we had  approximately  $37,000 in cash compared to around
$16,000 in cash at December 31, 1998.  We  anticipate  that our revenue from the
production of the one producing natural gas well on our California property will
be  approximately  $12,000  monthly  during  2000,  depending  upon the rates of
production and applicable  natural gas prices.  We also anticipate that we would
net around $1,000 each full month during which the Horsethief  Canyon properties
are operated,  again  depending  upon rates of production and applicable oil and
natural gas prices.

     During the second  quarter  of 1999 we  obtained a $150,000  line of credit
which was secured by the personal  guarantee of our chairman.  All draws against
this line had been  repaid  in full by  February  29,  2000.  In March  1999 our
president  loaned us $20,500,  which was used to repay  amounts owed Fancher Oil
LLC and to satisfy  other  obligations.  This loan,  which is unsecured  and for
which  we are not  charged  interest,  is  still  outstanding.  We will  require


                                       17

<PAGE>


additional  capital  resources  if we decide to  participate  in any  additional
drilling of  exploratory  wells or to acquire  interest in other  properties  in
2000. We presently  believe that the relatively  small amount of monthly revenue
which we receive from  production  will satisfy our ongoing  operating  expenses
given our relatively low level of planned activities during 2000.

     In May 1998 we  commenced  a public  offering  in which we  offered up to a
maximum of 3,000,000  common shares at $ 1.00 per share. No shares were sold and
expenses  incurred in connection  with the offering during 1998 were expensed at
year-end.  We attempted to  recommence  the offering  during 1999 but we did not
proceed  after it became  apparent  there was little  interest  for small public
companies  engaged in the oil and gas  business.  Expenses  we  incurred in this
connection in 1999 were written off at year end. We have decided to again revise
the offering and  recommence  it at a reduced  offering  price during the second
quarter of 2000.  The revised  terms of the offering  have not been  determined.
During 1999 warrants to purchase up to 1,180,000  shares of common stock, due to
expire, were extended through October 31, 2000, and the exercise price for those
warrants was reduced to $0.15 per share.  If all the warrants are exercised,  of
which there is no assurance,  we would receive approximately $177,000 by the end
of October 2000,  unless the warrants are again extended.  The proceeds which we
would receive, if most of the warrants are exercised, would enable us to pay our
share  of  drilling  expenses  in  development  wells in our  Horsethief  Canyon
prospect.  We can make no  assurances  as to whether any of the warrants will be
exercised or whether we will be able to successfully raise any other capital.

     Unless we raise additional  capital in an offering or outstanding  warrants
are exercised,  or we raise capital from other  sources,  we do not believe that
our limited cash flow will be sufficient to pay anticipated  operating  expenses
and  permit us to  participate  in  drilling  additional  wells over the next 12
months.  As a result we may be unable to  participate in drilling any additional
exploratory or  development  wells on the  Horsethief  Canyon  prospect or other
nearby prospects,  unless we are able to successfully  farm-out a portion of our
interests to others.. If we are able to raise additional capital we will use the
proceeds to pay  participate  in additional  development  drilling.  To fund the
anticipated near term capital shortfall,  we may accept loans from management or
other affiliates,  in addition to the line of credit guaranteed by the chairman.
Assuming sufficient capital resources become available, we will continue to seek
to  acquire  interest  in other oil or  natural  gas  properties.  Also,  we may
consider  other business  opportunities  which are offered to us outside the oil
and gas business under  circumstances which we believe afford us the opportunity
to increase the value of our Company for our shareholders.

     We do not have any  employees  and instead we use  consultants  for matters
pertaining  to drilling,  property  evaluations  and  administration.  We do not
presently contemplate hiring employees during the next 12 months.

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.

                                       18

<PAGE>



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

     The Company had no  disagreements  on accounting and financial  disclosures
with its independent auditors during the reporting period.

                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS.

     The following table sets forth the names and ages of the current  directors
and executive officers of the Company,  the principal offices and positions with
the Company  held by each  person and the date such person  became a director or
executive officer of the Company. Each director has served since 1997 except Mr.
Cloudy,  who became a director April 9, 1998.  Each serves until the next annual
meeting of stockholders.

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

George H. Fancher Jr. ..........    60    Chairman of the Board, Chief Operating
                                          Officer and Director
William E. Grafham..............    62    President, Chief Executive Officer and
                                          Director
Jeffrey J. Scott................    37    Vice President and Director
Rex L. Utsler ..................    54    Vice President and Director
George A. Cloudy ...............    65    Director
Albert A. Golusin...............    45    Secretary and Treasurer

     George H. Fancher Jr. Mr. Fancher 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.

     George 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).


                                       19

<PAGE>


     William E. Grafham. Mr. Grafham has an investment banking background having
worked for two major national Canadian Brokerage houses from 1963 until 1977. In
1977 he established  operating  companies  representing West German partnerships
investing in natural resources. Offices were set up in Calgary, Alberta; Denver,
Colorado; and Vancouver,  BC. The Calgary and Vancouver operating companies were
eventually  merged  into  larger  entities;  while the main assets of the Denver
operation were sold in 1988.

     Since  1988 Mr.  Grafham,  a  private  investor,  has  participated  in the
formation  of a number  of  businesses  investing  in  technology,  oil and gas,
precious  metals and mining,  and real estate.  Most of these  investments  have
resulted  in the  companies  going  public,  with  involvements  in a number  of
countries. Mr. Grafham has been active as a director in various companies during
the last five years.  He is  currently  a director  or officer of the  following
publicly-traded companies which trade on Canadian exchanges:

   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

     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 Petro Well Energy  Services,  Inc., a
public company which owns oil service rigs.

     Rex L. Utsler.  Mr.  Utsler has over twenty  years of executive  management
experience in the energy and retail services industries.  From 1971 to 1980, Mr.
Utsler was  employed by Western  Crude Oil Inc., a large  independent  crude oil
transportation  and marketing company in various senior management and executive
positions. In 1980, he founded Bountiful Corporation, a company that specialized
in the  purchasing,  transportation  and  marketing  of crude oil and  served as
president  and chief  executive  officer from 1980 to 1988.  Mr. Utsler has been
President of Grease Monkey Holding Corporation, a public company specializing in
automotive  services,  since September 1998. Mr. Utsler also served as President
and Chief Executive  Officer of Grease Monkey Holding  Corporation  from 1991 to
1997.

     George A.  Cloudy.  Mr.  Cloudy  has been  engaged  in the oil  exploration
business  since 1956.  After  graduating  from  Montana  School of Mines with an
engineering  geology degree,  petroleum option, he worked for G.S.I., a division
of Texas Instruments as a geophysicist from 1956 until 1965.

     In 1965 he was a co-founder of Digicon Inc.,  now Veritas DGC. From 1965 to
1994 he served in various capacities as Vice President, North and South America;
Executive Vice President,  Europe, Africa and the Far East;  President,  Digicon
Geophysical  Corp.,  and Vice  President  of  Research.  He was a director  from
1965-1991.  He served as chief  geophysicist and exploration  coordinator of Oil
Quest Inc. from 1995 to 1997. He is now an individual investor.


                                       20

<PAGE>


     Mr.  Cloudy is a member of the  Society  of  Exploration  Geophysicists,  a
registered geologist  (California) and a registered  professional  geophysicist,
Alberta, Canada (APEGGA).

     Albert A. Golusin. Mr. Golusin has been a Certified Public Accountant since
1981.  From 1985 to 1992,  Mr.  Golusin was the  Controller of a public  company
called  N-W  Group,  Inc.  which  later  became  Glenayre  Electronics.  He  was
responsible for assisting in the public reporting to regulatory  agencies in the
United States and Canada for the company.  From 1993 to the present, Mr. Golusin
has consulted to companies in the process of becoming publicly traded. He shares
an office with Arizona Corporate Management, Inc. in Scottsdale, Arizona.

Consultant

     Adrian  H.  Goodisman.  Mr.  Goodisman  has 13  years  of  exploration  and
production  experience  primarily  in the U.S.  and Western  Canada,  as well as
international  experience  in  the  UK,  Egypt,  Australia  and  Japan.  He is a
petroleum  engineer and has gained technical  excellence in field  exploitation,
acquisition/divestment's,  reserve  determinations and economic evaluations.  He
has a Bachelor of Science  (honors) degree in mathematics from the University of
Salford,  UK and a Master of Science  degree in petroleum  engineering  from the
University of Texas at Austin.  Mr. Goodisman is also actively involved with the
Society  of  Petroleum  Engineers  (SPE) and is  presently  on the SPE  National
Membership  Committee,  and a director of the Gulf Coast (Houston) Section.  For
the 1995/96  year,  he served as Chairman of the Board of Directors  for the SPE
Canadian Section.

     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 two fiscal years ended  December 31, 1998 and 1999 (there was no
compensation in prior years) of the chief executive officer at December 31, 1999
and all officers and directors, as a group.
<TABLE>
<CAPTION>

                             Summary Compensation Table
                                                                          Long Term
                                          Annual Compensation           Compensation
                                      -------------------------------   ------------
                                                                          Securities
Name and Principal                                       Other Annual    Underlying     All Other
Positions at 12/31/98                 Salary    Bonus    Compensation      Options    Compensation
---------------------                 ------    -----    ------------    -----------  ------------
<S>                                  <C>        <C>     <C>               <C>           <C>
William E. Grafham, President
     1998 ........................... - 0 -      - 0 -     $10,000(1)         --          None
     1999 ........................... - 0 -      - 0 -     $22,452(2)                     None

All officers and directors,
as a group (five persons)
     1998 ........................... $30,000(3) - 0 -     $43,000(4)       100,000       None
     1999 ........................... $ 7,500(3) - 0 -     $44,953(5)         -0-         None
</TABLE>

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


                                       21

<PAGE>


     (1) Includes 50,000 shares of common stock,  valued at $10,000,  issued for
services as an officer and director.
     (2)  Includes  99,788  shares of common  stock  issued at a deemed value of
$0.225  per share in  satisfaction  of  $22,452  owed to en entity  owned by Mr.
Grafham for rent and reimbursement expenses.
     (3) Paid to Albert A. Golusin, Secretary, for services as a consultant.
     (4) Includes 215,000 shares of common stock,  valued at $43,000,  issued to
five persons for  services as officers,  directors  and  representatives  of the
Company.   Subsequently,  one  person  surrendered  50,000  of  the  shares  for
cancellation.
     (5) Includes  199,788  shares issued at a deemed value of $0.225 per shares
to two  officers,  one of whom is a  director,  in  satisfaction  of  $44,952 in
compensation or reimbursements owed to them.

     The Company had an agreement to pay Albert A. Golusin a monthly retainer of
approximately  $2,500,  as a  consultant,  for part time  accounting,  financial
reporting  and  corporate  secretarial  services.  $7,500 in cash and $22,500 in
stock (100,000  shares) was paid to Mr.  Golusin in 1999.  Mr. Golusin  received
15,000  shares of common  stock on July 1, 1998 for  services he provided to the
Company through June 30, 1998.

Value of Options at December 31, 1999
<TABLE>
<CAPTION>
                                         Aggregate Fiscal Year End Option Values
                                ------------------------------------------------------------
                                    Number of Securities            Value of Unexercised
                                  Underlying Unexercised            In-the-Money Options
                                Options at Fiscal Year End           at Fiscal Year End
                                 Exercisable/Unexercisable        Exercisable/Unexercisable(1)
                                --------------------------        ---------------------------
<S>                                <C>                                 <C>
William E. Grafham.............       200,000/ --                         $ -- / --
All officers and directors
 as a group....................       850,000/50,000                      $ -- / --
</TABLE>
----------------------

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

Option Grants in the Last Two Fiscal Years

     The Company granted options during 1998 and 1999 to the following  officers
and directors:
<TABLE>
<CAPTION>
                                                          Percent of Total
                                    Number of Shares      Options Granted        Exercise Price         Expiration
Name                               Underlying Options       During Year              ($/sh)                 Date
----                               ------------------     -----------------      --------------         -----------
<S>                                    <C>                    <C>                  <C>                  <C>
1998:
George A. Cloudy ...............       100,000(1)               100%                 $0.50                04/30/08
1999:                                     None                  None                  None                  None
</TABLE>
----------------------

     (1) These options became exercisable in full April 9, 1999. All outstanding
options are presently exercisable.

     (2) The  options  are  nonstatutory  ("nonqualified")  options.  All  other
outstanding  options are intended to be incentive  stock  options  under Section
422A of the Internal Revenue Code of 1986.

Stock Option Plan

     The  Company has adopted its 1997  Statutory  and  Non-Statutory  Incentive
Stock Option Plan ("Plan") which authorizes the Company to grant incentive stock
options within the meaning of Section 422A of the Internal Revenue Code of 1986,
as amended, and to grant nonstatutory stock options. The Plan relates to a total
of 1,000,000  shares of common stock.  Options  relating to 910,000  shares have
been issued and are  outstanding and all are presently  exercisable.  No options


                                       22

<PAGE>


were granted in 1999. The options are  exercisable at $0.20 per share for 30,000
shares,  $0.22 per share for 100,000 shares,  $0.35 per share for 680,000 shares
and $0.50 per share for options to purchase  100,000 shares granted to George A.
Cloudy  in  April  1998 at the  time he  joined  the  Board  of  Directors.  The
outstanding options must be exercised within 10 years from the date of grant and
no later than three  months  after  termination  of  employment  or service as a
director,  except  that any  optionee  who is unable to continue  employment  or
service as a director due to total and  permanent  disability  may exercise such
options  within one year of  termination  and the options of an optionee  who is
employed or disabled  and who dies must be  exercised  within one year after the
date of death.

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

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

Compensation of Directors

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

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

     The following  table sets forth, as of March 1, 2000,  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.



                                       23

<PAGE>
<TABLE>
<CAPTION>

                                                                                 Shares beneficially
Name of Beneficial Owner                                                      owned prior to offering(1)
or Name of Officer or Director                                                 Number          Percent
------------------------------                                                 ------          -------
<S>                                                                       <C>                  <C>
William E. Grafham, Director .............................................  1,043,356(2)         11.0%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI

George H. Fancher Jr., Director ..........................................  2,300,000(3)         24.3
1801 Broadway, Suite 720
Denver, Colorado 80202

Rex L. Utsler, Director ..................................................    250,000(4)          2.7%

Jeffrey J. Scott, Director ...............................................    250,000(5)          2.7%

George A. Cloudy, Director ...............................................    100,000(6)           --

Albert A. Golusin, Secretary and Treasurer ...............................    315,000(7)          3.3%

David Grafham ............................................................    650,000             6.9%
1307 West 8th Avenue
Vancouver, B.C.
Canada V5H 3W4

Roger Duffield ...........................................................    400,000             4.2%
c/o  Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)

Euro Securities Ltd. .....................................................    650,000             6.9%
c/o  Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)

Linda Kemble .............................................................    650,000             6.9%
#59 Temple Hill Dr. N.E.
Calgary, Alberta
Canada T1Y 404

Don Stewart ..............................................................    738,000(9)          7.8%
P. O. Box 245
Grand Cayman, BWI(8)

Susan Scott ..............................................................    415,000(11)         4.4%
#2 2109 4th Avenue, N.W.
Calgary, Alberta, Canada T2N 0N6

Alex Whiteside ...........................................................    405,000(10)         4.3%
1530--1001 13 Avenue, S.W.
Calgary, Alberta, Canada T2R 0L5

All officers and directors as a group (6 persons) ........................  4,258,356(12)        45.1%
</TABLE>
----------------------


                                       24

<PAGE>


     (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 1, 1999
are deemed  outstanding  for  computing  the  percentage of the person or entity
holding such  securities but are not outstanding for computing the percentage of
any other person or entity.
     (2)  Includes   300,000  shares  of  common  stock   underlying   presently
exercisable options and warrants.
     (3) Includes 250,000 shares underlying presently exercisable stock purchase
warrants  and options.
     (4)  Includes   200,000  shares  of  common  stock   underlying   presently
exercisable stock purchase options and warrants.
     (5)  Includes  presently  exercisable  options  to  purchase  up to 150,000
shares.
     (6) Includes 100,000 shares underlying presently exercisable stock purchase
warrants.
     (7)  Includes   100,000  shares  of  common  stock   underlying   presently
exercisable options and stock purchase warrants.
     (8) Euro  Securities Ltd. is controlled by Euro Bank, a bank in Georgetown,
Grand Cayman  Island,  British West Indies,  of which Don Stewart is a director.
Mr. Stewart has no other  relationship  with, or control over,  Euro  Securities
Ltd.
     (9) Includes 88,000 shares of common stock underlying presently exercisable
stock purchase warrants.
     (10)  Includes  135,000  shares  of  common  stock   underlying   presently
exercisable stock purchase warrants.
     (11)  Includes  100,000  shares  of  common  stock   underlying   presently
exercisable stock purchase warrants.
     (12)  Includes  172,000  shares  of  common  stock   underlying   presently
exercisable stock purchase warrants.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

     On October 31, 1997 the Company sold  2,000,000  shares for  $1,000,000 and
paid finder's fees and related  offering costs of $47,894 and issued warrants to
purchase  an  additional  1,180,000  shares on or before  October 31, 1997 to 11
non-United States persons or entities pursuant to Regulation S adopted under the
Securities Act. William E. Grafham, the Company's President, a citizen of Canada
and a resident  of Grand  Cayman,  BWI,  purchased  200,000  shares and  100,000
warrants  for  $100,000.  The  shares are  restricted  from  transfer  except in
accordance with applicable United States' laws and the purchasers each agreed to
resell the  securities  to a "U.S.  Person" as defined in  Regulation S, only in
accordance  with  applicable  laws.  All of the  common  stock  and  the  shares
underlying the warrants, other than the shares and warrants held by Mr. Grafham,
have been registered for resale by the holders. The Company reduced the exercise
price for the  warrants  to $0.30  per  share  ($354,000  upon  exercise  of all
warrants) and extended the expiration to July 31, 1999.

     On November 11, 1997 the Company completed the acquisition of a 25% working
interest in the Fiji and Bali natural gas exploration and development  prospects
in  California  from George H.  Fancher Jr.,  subject to a net .625%  overriding
royalty interest  retained by Mr. Fancher.  The prospects  together totaled over
30,000 acres and are located in the southern part of the Sacramento  Basin.  See
"Business--Principal  Properties."  The Company paid $907,951 in cash and issued
2,250,000  shares at a deemed value of $300,000 for the  property.  Mr.  Fancher
acquired  the   interests  in  the   properties   early  in  1997  and  incurred
approximately  $1,208,000 for  acquisition of his interest in the properties and
payment of his portion of exploration  and leasehold  costs and expenses  before
transfer  to  the  Company.   The  Company  also  paid  $6,247  to  Mr.  Fancher
representing  interest on a portion of Mr.  Fancher's cost between the time that
the agreement to acquire the  properties  was made and the date of completion of
the transaction As additional consideration, the Company agreed to issue 500,000
additional restricted shares to Mr. Fancher if the gross revenue received by the
Company from the  prospects is at least equal to all direct costs of the Company
associated  with  acquiring  the  interest  in the  prospects  and  exploration,
drilling and other  related  expenses by December 31, 1999. At December 31, 1997
the Company had incurred direct costs of approximately $1,275,000, including the
payments to Mr. Fancher.  Prior to the acquisition,  Mr. Grafham and consultants


                                       25

<PAGE>



retained by the Company  reviewed the available  geologic data on the properties
and negotiated the purchase price based on the perceived value of the properties
as assembled by the Operator,  the acquisition  and exploration  expenditures on
the  properties  and the lack of a public market for the Company's  shares.  Mr.
Fancher agreed to become a director of the Company  following  completion of the
transaction. At the end of 1999 Mr. Fancher surrendered 750,000 shares of common
stock  to Fan for  cancellation.  Surrender  was  required  under  terms  of the
acquisition  because Fan did not  participate in drilling at least 10 successful
natural gas wells on the two prospects.

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

     On July 1,  1998,  the  Company  issued  215,000  shares to five  officers,
directors and consultants for services rendered through June 30, 1998.

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

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)



                                       26

<PAGE>


     (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.

     (27)            Financial Data Schedule.
------------------

     (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 no reports on Form 8-K during
the fiscal quarter ending December 31, 1999.


                                       27

<PAGE>


                                   SIGNATURES

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

                                      FAN ENERGY INC.


Date: March 31, 1999                  By /s/ George H. Fancher Jr.
                                         ---------------------------------------
                                         George H. Fancher, Jr., Chairman and
                                         Chief Operating Officer

Date: March 31, 1999                  By /s/ Rex Utsler
                                         ---------------------------------------
                                         Rex Utsler, Chief Financial Officer
                                         and Treasurer

Date: March 31, 1999                  By /s/ Albert Golusin
                                         ---------------------------------------
                                         Albert A. Golusin, Principal Accounting
                                         Officer

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


Date: March 31, 1999         By /s/ George H. Fancher Jr.              Director
                                ----------------------------------


Date: March 31, 1999         By /s/ Rex Utsler                         Director
                                ----------------------------------


Date: March 31, 1999         By /s/William E. Grafham                  Director
                                ----------------------------------


Date: March 31, 1999         By /s/ Jeffrey J. Scott                   Director
                                ----------------------------------


Date: March 31, 1999         By /s/ George A. Cloudy                   Director
                                ----------------------------------


                                       28

<PAGE>


                          INDEX TO FINANCIAL STATEMENTS


     (1)  Financial Statements:
          Independent Auditor's Report ..................................... F-1
          Balance Sheet December 31, 1999 .................................. F-2
          Statements of  Operations  Years ended  December  31, 1998 and
               1999 and Cumulative Amounts from Inception to
               December 31, 1999 ........................................... F-3
          Statement of Stockholders' Equity Years Ended December 31,
               1997, 1998 and 1999 ......................................... F-4
          Statements of Cash Flows Years ended December 31, 1998
               and 1999 and Cumulative Amounts from Inception to
               December 31, 1999 ..................................... F-5 - F-8

          Notes to Financial Statements .............................. F-9--F-19
     (2)  Schedules
          None






















                                        29

<PAGE>





                          INDEPENDENT AUDITOR'S REPORT


To The Board of Directors and Stockholders FAN ENERGY INC.

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

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

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

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


                                            /s/ Wheeler Wasoff, P.C.
                                            WHEELER WASOFF, P.C.


Denver, Colorado
March 17, 2000


                                       F-1

<PAGE>

<TABLE>
<CAPTION>
                                        FAN ENERGY INC.
                                 (A Development Stage Company)
                                         BALANCE SHEET
                                       December 31, 1999


                                            ASSETS

<S>                                                                            <C>
CURRENT ASSET
  Cash .....................................................................   $    11,290
  Accounts receivable ......................................................        46,147
                                                                               -----------
    Total Current Asset ....................................................        57,437

OIL AND GAS PROPERTIES (Note 3) ............................................       327,589
                                                                               -----------
                                                                               $   385,026
                                                                               ===========
                                LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable - trade .................................................   $     8,397
                     related party .........................................        20,500
  Note payable - bank ......................................................        20,000
                                                                               -----------
    Total Current Liabilities ..............................................        48,897
                                                                               -----------
COMMITMENTS AND CONTINGENCIES (Note 3)

STOCKHOLDERS' EQUITY (Note 5)
  Preferred stock, $.01 par value
        Authorized - 5,000,000 shares
        Issued - none ......................................................          --
  Common stock, $.001 par value
        Authorized - 95,000,000 shares
        Issued and outstanding - 9,451,492 shares ..........................         9,452
  Additional paid-in capital ...............................................     2,317,509
  Deficit accumulated during the development stage .........................    (2,091,332)
  Additional paid-in capital stock options .................................       100,500
                                                                               -----------
                                                                                   336,129
                                                                               -----------
                                                                               $   385,026
                                                                               ===========
</TABLE>

    The accompanying notes are an integral part of the financial statements


                                       F-2

<PAGE>

<TABLE>
<CAPTION>
                                                  FAN ENERGY INC.
                                           (A Development Stage Company)
                                             STATEMENTS OF OPERATIONS
                                      Years ended December 31, 1998 and 1999

                                                                                   Cumulative
                                                                                  Amounts from
                                                                                Jan. 1, 1997 to
                                                       1998           1999       Dec. 31, 1999
                                                       ----           ----      ---------------
REVENUES
<S>                                              <C>             <C>             <C>
  Oil and gas sales ..........................   $       --      $    152,832    $   152,832
                                                 ------------    ------------    -----------

OPERATING EXPENSES
  Lease operating expenses ...................           --            31,631          31,631
  General and administrative .................        198,851         129,673         521,509
  Depletion ..................................           --           124,938         124,938
  Impairment of oil and gas properties .......      1,257,702         300,000       1,557,702
  Interest (Note 3) ..........................           --             2,137           8,384
                                                 ------------    ------------     -----------
                                                    1,456,553         588,379       2,244,164
                                                 ------------    ------------     -----------

NET (LOSS) ...................................   $ (1,456,553)   $   (435,547)   $ (2,091,332)
                                                 ============    ============     ===========

NET (LOSS) PER COMMON SHARE - Basic
   and Diluted ...............................   $       (.17)   $       (.04)   $       (.29)
                                                 ============    ============     ===========

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING - Basic and Diluted ....      8,567,537      10,051,567       7,210,131
                                                 ============    ============     ===========
</TABLE>






The accompanying notes are an integral part of the financial statements.


                                       F-3

<PAGE>
<TABLE>
<CAPTION>
                                                  FAN ENERGY INC.
                                           (A Development Stage Company)
                                        STATEMENTS OF STOCKHOLDERS' EQUITY
                                   Years ended December 31, 1997, 1998 and 1999

                                                                                             Common Stock           Additional
                                                                                         --------------------         Paid-In
                                                                                         Shares          Amount       Capital
                                                                                         ------          ------       -------
<S>                                                                                <C>            <C>            <C>
Balance, January 1, 1997 ..........................................................     771,704    $       772    $   503,876
Reclassification of deficit pursuant to quasi reorganization ......................        --             --         (504,648)
Sale of common stock and warrants pursuant to private placement, at $.20 per unit..   2,500,000          2,500        497,500
Cost of private placement offering ................................................        --             --             (430)
Issuance of common stock for services, valued at $.20 per share ...................     250,000            250         49,750
Sale of common stock and warrants pursuant to private placement, at $.50 per unit..   2,000,000          2,000        998,000
Costs of private placement offering ...............................................        --             --          (52,439)
Issuance of common stock for property, valued at $.133 per share ..................   2,250,000          2,250        297,750
    Issuance of common stock warrants for offering costs ..........................        --             --            4,545
Issuance of stock options .........................................................        --             --            2,332
Net (Loss) ........................................................................        --             --             --
                                                                                    -----------    -----------    -----------
Balance, December 31, 1997 ........................................................   7,771,704          7,772      1,796,236
    Issuance of common stock for services, valued at $.20 per share ...............     215,000            215         42,785
    Exercise of common stock warrants for cash, at $.20 per share .................   2,065,000          2,065        410,935
Net (Loss) ........................................................................        --             --             --
                                                                                    -----------    -----------    -----------
Balance, December 31, 1998 ........................................................  10,051,704         10,052      2,249,956
Conversion of payables to common stock by officers, valued at $.225 per share .....     199,788            200         44,753
Forgiveness of debt by officer/director ...........................................        --             --           22,000
Return of common stock by officers/directors ......................................    (800,000)          (800)           800
Net (Loss) ........................................................................        --             --             --
                                                                                    -----------    -----------    -----------
Balance, December 31, 1999 ........................................................   9,451,492    $     9,452    $ 2,317,509
                                                                                    ===========    ===========
<CAPTION>
                                                                                        Deficit      Additional
                                                                                      Accumulated      Paid-In
                                                                                       During the      Capital
                                                                                      Development       Stock
                                                                                         Stage         Options
                                                                                      -----------    ----------
<S>                                                                                 <C>            <C>
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..        --             --
Cost of private placement offering ................................................        --             --
Issuance of common stock for services, valued at $.20 per share ...................        --             --
Sale of common stock and warrants pursuant to private placement, at $.50 per unit..        --             --
Costs of private placement offering ...............................................        --             --
Issuance of common stock for property, valued at $.133 per share ..................        --             --
    Issuance of common stock warrants for offering costs ..........................        --             --
Issuance of stock options .........................................................        --          100,500
Net (Loss) ........................................................................    (199,232)          --
                                                                                    -----------    -----------
Balance, December 31, 1997 ........................................................    (199,232)       100,500
    Issuance of common stock for services, valued at $.20 per share ...............        --             --
    Exercise of common stock warrants for cash, at $.20 per share .................        --             --
Net (Loss) ........................................................................  (1,456,553)          --

                                                                                    -----------   ------------
Balance, December 31, 1998 ........................................................  (1,655,785)       100,500
Conversion of payables to common stock by officers, valued at $.225 per share .....        --             --
Forgiveness of debt by officer/director ................................
Return of common stock by officers/directors ......................................        --             --
Net (Loss) ........................................................................    (435,547)          --
                                                                                    -----------    -----------
Balance, December 31, 1999 ........................................................ $(2,091,332)   $   100,500
                                                                                    ===========    ===========
</TABLE>


    The accompanying notes are an integral part of the financial statements.

                                       F-4

<PAGE>

<TABLE>
<CAPTION>

                                           FAN ENERGY INC.
                                    (A Development Stage Company)
                                      STATEMENTS OF CASH FLOWS
                               Years ended December 31, 1998 and 1999
                                                                                                              Cumulative
                                                                                                               Amounts from
                                                                                                              Jan. 1, 1997 to
                                                                           1998               1999             Dec. 31, 1999
                                                                           ----               ----            ---------------
<S>                                                                    <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (loss) ..................................................       $(1,456,553)        $ (435,547)         $(2,091,332)
   Adjustments to reconcile net (loss) to net
      cash provided by operating activities
   Depletion ...................................................              --              124,938              124,938
   Impairment of oil and gas properties ........................         1,257,702            300,000            1,557,702
   Stock options ...............................................              --                 --                102,832
   Stock for services and payables .............................            43,000             44,953              137,953
   Forgiveness of payables by officer/director .................              --               22,000               22,000
   Changes in assets and liabilities
      (Increase) in accounts receivable ........................              --              (46,147)             (46,147)
      (Decrease) increase in accounts payable ..................            (3,579)            27,161               28,897
      Other ....................................................            10,383               --                   --
                                                                       -----------        -----------          -----------
   Net cash (used) provided by operating activities ............          (149,047)            37,358             (163,157)
                                                                       -----------        -----------          -----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Cash paid for oil and gas properties ........................          (672,795)           (61,943)          (1,710,229)
                                                                       -----------        -----------          -----------
   Net cash (used) in investing activities .....................          (672,795)           (61,943)          (1,710,229)
                                                                       -----------        -----------          -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from exercise of common stock warrants .............           413,000               --                413,000
   Proceeds from sale of common stock ..........................              --                 --              1,500,000
   Cash paid for offering costs ................................              --                 --                (48,324)
   Proceeds from short-term borrowings .........................              --               90,000               90,000
   Repayments of short-term borrowings .........................              --              (70,000)             (70,000)
                                                                       -----------        -----------          -----------
   Net cash provided by financing activities ...................           413,000             20,000            1,884,676
                                                                       -----------        -----------          -----------

NET (DECREASE) INCREASE IN CASH ................................          (408,842)            (4,585)              11,290

CASH, BEGINNING OF PERIODS .....................................           424,717             15,875                 --
                                                                       -----------        -----------          -----------
CASH, END OF PERIODS ...........................................       $    15,875       $     11,290          $    11,290
                                                                       ===========        ===========          ===========
</TABLE>


    The accompanying notes are an integral part of the financial statements.



                                       F-5

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                     Years ended December 31, 1998 and 1999


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

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

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

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

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

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

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

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









    The accompanying notes are an integral part of the financial statements.





                                       F-6

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 1 - ORGANIZATION

     Fan Energy Inc. (the "Company") is an independent energy company engaged in
     the  development,  exploration and acquisition of crude 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  N
     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.

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     OIL AND GAS PROPERTIES

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

     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  revisions in reserve  estimates,  cause the total
     capitalized  costs of oil and gas  properties  in the cost center to exceed
     the capitalization  ceiling.  The capitalization  ceiling is the sum of (1)
     the present  value of future net  revenues  from  estimated  production  of
     proved oil and gas  reserves  applicable  to the cost  center  plus (2) the
     lower  of cost or  estimated  fair  value  of the  cost  center's  unproved
     properties less (3) applicable income tax effects.  The valuation allowance
     was $1,557,702 at December 31, 1999.


                                       F-7

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     REVENUE RECOGNITION

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

     IMPAIRMENT

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

     DEFERRED OFFERING COSTS

     Deferred  offering  costs consist of costs  incurred in  connection  with a
     proposed  public  offering of the Company's  common stock.  During 1998 and
     1999 the Company charged to operations  $57,029 and $15,356,  respectively,
     for costs incurred for uncompleted offerings of the Company's common stock.

     INCOME TAXES

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

     At December 31, 1999, the Company had a net operating loss  carryforward of
     approximately  $909,000 that may be offset  against  future  taxable income
     through 2019.

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

     The tax  benefit of the loss  carryforward  has been  offset by a valuation
     allowance  of the  same  amount.  Of  the  total  tax  benefit  $10,000  is
     attributable to 1999.

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

                                       F-8

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     USE OF ESTIMATES

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

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

     (LOSS) PER COMMON SHARE

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

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

     SHARED 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.  During the years ended  December 31, 1997 and 1998,  the Company
     issued  warrants  and/or options to purchase shares of its common stock. No
     warrants or options were issued in 1999 (Note 5).


                                      F-9

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     CASH EQUIVALENTS

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

     BASIS OF ACCOUNTING

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

     As previously  discussed,  the Company is in the development  stage and has
     not realized significant revenues from its planned operations. As such, the
     Company,  as of December 31, 1999 has incurred net  operating  losses since
     reactivation as a development stage company of $2,091,332 and does not have
     sufficient  working capital to fund its planned  operations during the next
     twelve  months.  Additional  funding  will  be  required  to  complete  the
     Company's  planned drilling  program,  put successful wells into production
     and finance general and administrative  expenses. These circumstances raise
     substantial  doubt  about the  Company's  ability  to  continue  as a going
     concern.  In  order  to meet  the  Company's  continuing  financing  needs,
     management of the Company intends to raise working capital through the sale
     of common stock or other securities, or through other financing.

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

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

     NEW TECHNICAL PRONOUNCEMENTS

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

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



                                      F-10

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

NOTE 3 - OIL AND GAS PROPERTIES

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

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

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



                                      F-11

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)

                     Years ended December 31, 1998 and 1999


NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

     Capitalized  costs  associated with oil and gas producing  activities as of
     December 31, 1999 are as follows:


               Proved properties                         $ 1,080,455
               Unproved properties                           929,774
                                                         -----------

                                                           2,010,229

               Less:  valuation allowance                 (1,557,702)
                      accumulated depletion                 (124,938)
                                                         -----------
               Net capitalized costs                     $   327,589
                                                         ===========

     Information  relating to the  Company's  costs  incurred in its oil and gas
     operations  during the years ended December 31, 1998 and 1999 is summariz
     as follows:


                                                            1998         1999

          Property acquisition - Unproved properties   $  172,919    $    --
          Exploration costs                               368,699       61,943
          Development costs                               131,177         --
                                                       ----------    ---------

                                                       $  672,795    $  61,943
                                                       ==========    =========

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

     OIL AND GAS RESERVES (UNAUDITED)

     The following unaudited reserve estimates presented as of December 31, 1998
     and 1999 were prepared by an  independent  petroleum  engineer.  All of the
     Company's  reserves  are  located  in the  United  States.  There  are many
     uncertainties  inherent in  estimating  proved  reserve  quantities  and in
     projecting   future   production   rates  and  the  timing  of  development
     expenditures.  In addition,  reserve estimates of new discoveries that have
     little production  history are more imprecise than those of properties with
     more  production  history.  Accordingly,  these  estimates  are expected to
     change, as future information becomes available.

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



                                      F-12

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

     At December 31, 1998 and 1999 proved reserves were as follows:

                                            1998     1998     1999     1999
                                            GAS      OIL      GAS       OIL
                                           (MMCF)   (MBBL)   (MMCF)    (MBBL)

     Beginning of year                       --       --     567.3      9.5
     Revision of previous estimates          --       --    (497.9)    (8.9)
     Proved developed producing            190.0      --     182.3       --
     Production                              --       --     (69.4)     (.6)
     Proved developed non-producing        187.3      9.5     14.6       .3
     Proved undeveloped                    190.0      --     129.0       --
                                           -----     ----    -----     ----

     End of year                           567.3      9.5    325.9       .3
                                           =====     ====    =====     ====

     STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)

     The  standardized  measure of discounted  future net cash flows is based on
     estimated  quantities  of proved  reserves and the future  periods in which
     they are  expected to be  produced  and on  year-end  economic  conditions.
     Estimated future gross revenues are priced on the basis of year-end prices.
     Estimated future gross revenues are reduced by estimated future development
     and production costs, as well as certain abandonment costs and by estimated
     future  income tax expense.  Future  income tax expenses have been computed
     considering  the tax  basis of the oil and gas  properties  plus  available
     carryforwards and credits.

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




                                      F-13

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

     The following  table  presents the  standardized  measure of the discounted
     future  net cash flows  attributable  to the  Company's  proved oil and gas
     reserves as of December 31, 1998 and 1999:

<TABLE>
<CAPTION>
                                                                        1998        1999
                                                                        ----        ----
                                                                         (in thousands)
<S>                                                                   <C>         <C>
        Future cash inflows                                           $1,210      $  650
        Future production costs                                         (224)        (72)
        Future development costs                                        (101)        (85)
        Future income tax expense, net                                   --          --
                                                                     -------      ------

        Future net cash flows                                            885         493

        10% annual discount for estimated timing of cash flows          (206)        (91)
                                                                     -------      ------

        Standardized measure of discounted future net cash flows     $   679      $  402
                                                                     ========     ======
</TABLE>

     The following  table  presents the principal  sources of the changes in the
     standardized  measure  of  discounted  future  net cash flows for the years
     ended December 31, 1998 and 1999:

<TABLE>
<CAPTION>
                                                                        1998        1999
                                                                        ----        ----
                                                                         (in thousands)
<S>                                                                  <C>          <C>
        Net change in sales price and production costs               $   --       $  108
        Changes in estimated future development costs                    --          (25)
        Sales and transfers of oil and gas produced, net of
           production costs                                              --         (121)
        Net change due to extensions and discoveries                    679           --
        Net change due to purchases and sales of minerals in place       --           --
        Net change due to revisions in quantities                        --         (180)
        Net change in income taxes                                       --           --
        Accretion of discount                                            --          (68)
        Other, principally revisions in estimates of timing of
           production                                                    --            9
                                                                     -------      ------
        Net changes                                                      679        (277)
        Balance, beginning of year                                       --          679
                                                                     -------      ------

        Balance, end of year                                         $   679      $  402
                                                                     =======      ======
</TABLE>

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




                                      F-14

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

     The  December 31, 1999  weighted  average  prices  utilized for purposes of
     estimating  the  Company's  proved  reserves and future net  revenues  were
     $24.75 per barrel of oil and $2.06 per Mcf of natural gas. These prices are
     significantly  above the  average  annual  prices  during the past  several
     years.

NOTE 4 - NOTE PAYABLE - BANK

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

NOTE 5 - STOCKHOLDERS' EQUITY

     COMMON STOCK

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

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

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

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

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

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

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

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

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



                                      F-15

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)

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

     QUASI REORGANIZATION

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

     WARRANTS

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

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

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

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

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

     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.


                                      F-16

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)


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

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

     The weighted average remaining  contractual life of options  outstanding at
     December 31, 1999 was 7.7 years.

     The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
     compensation cost for the Company's stock option plan been determined based
     on the fair value at the grant date  consistent with the provisions of SFAS
     No. 123, the  Company's net loss and loss per share for 1998 and 1999 would
     have changed as follows:
<TABLE>
<CAPTION>
                                                                      1998            1999
<S>                                                              <C>              <C>
     Net (loss) applicable to common stockholders - as reported  $(1,456,553)     $(435,547)
                                                                   =========        =======
     Net (loss) applicable to common stockholders - pro forma      1,461,206)      (435,547)
                                                                   =========        =======

     (Loss) per share - as reported                                     (.17)          (.04)
                                                                         ===            ===
     (Loss) per share - pro forma                                       (.17)          (.04)
                                                                         ===            ===
</TABLE>
     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes  option-pricing model with the following weighted-average
     assumptions  used for grants made in 1997 and 1998:  dividend  yield of 0%;
     expected  volatility of 0%; discount rate of 5.25%; and expected life of 10
     years.

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

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




                                      F-17

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)

     STOCK SPLIT

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

NOTE 6 - RELATED PARTY TRANSACTIONS

     In 1998 and 1999 the Company incurred  expenses of an aggregate $48,000 for
     each year to entities controlled by  Officers/Directors  of the Company for
     office space and administrative services in Scottsdale,  Arizona ($24,000 -
     1998 and $24,000 - 1999) and Denver, Colorado ($24,000 - 1998 and $24,000 -
     1999), at the rate of $2,000 per month.

     In November 1997, the Company  entered into a one-year  agreement  with its
     Secretary/Treasurer  to provide financial and other services to the Company
     for $2,500 per month. During 1998, the Secretary/Treasurer was paid $30,000
     under the agreement,  which was converted to a month to month basis. During
     1999,  the Company  paid the  Secretary/Treasurer  $7,500 for  services and
     issued 100,000 shares of common stock valued at $22,500 ($.225 per share).

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

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

     An officer/director  of the Company personally  guaranteed a line of credit
     with a commercial bank (see Note 4).

NOTE 7 - SEGMENT REPORTING

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



                                      F-18

<PAGE>


                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1998 and 1999


NOTE 7 - SEGMENT REPORTING

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

     The  Company  earned  revenue  from  its oil and gas  activities  of $0 and
     $152,832 for the years ended December 31, 1998 and 1999, respectively.  The
     Company's  total  assets of  $385,026 at  December  31, 1999 and  operating
     expenses of $1,456,553  and $588,379 for the years ended  December 31, 1998
     and 1999, respectively, are attributable to this segment.

NOTE 8 - FINANCIAL INSTRUMENTS

     FAIR VALUE

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

     CONCENTRATION OF CREDIT RISK

     Financial   instruments,   which   potentially   subject   the  Company  to
     concentrations of credit risk,  consist of cash. The Company maintains cash
     accounts at one financial  institution.  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.



                                      F-19

<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                   FORM 10-KSB

                                   EXHIBITS TO
                                 FAN ENERGY INC.

                                INDEX TO EXHIBITS
                                                                     Page or
Exhibit No.  Description                                         Cross Reference
-----------  ------------                                        ---------------

(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  Subscriion 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.

(27)         Financial Data Schedule.
-----------------

(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.