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, 1998

[ ]  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:   (602) 483-8848

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. $ - 0 -

     As of December 31, 1998 the issuer had  10,051,705  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. (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

     (b) NARRATIVE DESCRIPTION OF THE BUSINESS

     The Company  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.  The Company's present activities are focused in the Green
River Basin in Wyoming and the Sacramento Basin in central  California where its
exploration prospects are located.

     The Company holds an  approximately  undivided 20% interest in a 5,760 acre
prospect located in Sweetwater  County,  Wyoming.  One exploratory well has been
drilled on the prospect which has been  completed as an apparent  commercial oil
and gas  well.  As of the date of this  report  the well  was  shut-in  awaiting
completion of a natural gas pipeline before  production  will be commenced.  The
operator of the well, Fancher Oil, LLC, owned by the Company's Chairman, plan to
drill  two or three  development  exploratory  wells on this  prospect  in 1999.


                                        2

<PAGE>


Depending upon the success of the initial drilling,  the market for natural gas,
the  availability of capital and other factors,  as many as 8 to 18 wells may be
drilled to fully test and exploit this  prospect in the next one to three years.
In addition,  the Company has the right to participate  with up to a 20% working
interest in three additional  prospects which Fancher Resources,  LLC intends to
explore in the vicinity of this  prospect  which could result in the drilling of
up to three additional exploratory wells in 1999.

     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  1998.  The
prospects  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,  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  is seeking to sell its  interest  in these two  exploratory
prospects in the Sacramento Basin.

     The Company intends to use its present cash assets,  the proceeds from sale
of the  Sacramento  Basin  prospects  and from a  securities  offering,  and the
anticipated 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 or natural  gas,
limited  production  and no cash flow and it is  anticipated  that only  limited
revenue will  develop when the two wells in which the Company  holds an interest
are placed in  production  during the first half of 1999.  Unless the  Company's
exploratory drilling program is successful,  and the Company participates in the
development of reserves and production from this property, cash flow will not be
significant.  The  Company  does not serve as the  Operator  in its two  present
prospects.  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."

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.


                                        3

<PAGE>



     o Utilize State-of-the-Art Technologies. Certain of the Company's 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 drilling 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.  The
Company  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.

Acquisitions of Other Properties

     The Company 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
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


                                        4

<PAGE>


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 1999, the price paid
by natural gas  purchasers in the  Sacramento  Basin of central  California  was
approximately $1.80 per mcf and in the Green River Basin of southeastern Wyoming
was  approximately  $1.50 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.


                                        6

<PAGE>


     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.

                                        7

<PAGE>


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

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

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

Employees

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

                                        8

<PAGE>


ITEM 2.   DESCRIPTION OF PROPERTY.

Principal Properties

     The Company holds interests in two 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
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
Resources,  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 the 2D and 2E 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 is expected
to begin in the  summer of 1999.  A reserve  study  prepared  by an  independent
petroleum  engineer,  projected  this well to produce 1.2 BCF of natural gas and
60,000 bbls of oil over its lifetime.

     Presently,  there are two proposed development locations to the west of the
discovery well which are expected to find similar sands in a structurally higher
position as encountered in the initial well, based on subsurface geology and the
3-D Seismic  survey.  These locations were classified as "probable" in the above
reserve  study.  Drilling is scheduled to commence in May or June 1999.  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  these  development  wells  will  range  from  10% to 20%,
depending  on the location of the well.  The Company 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.

                                        9

<PAGE>


     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
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 has obtained
oil and gas leases or lease options totaling  approximately  30,000 net acres on
the two prospects. The Operator may 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,
1998 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.


                                       10

<PAGE>


     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
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).

Title to Properties

     The Company 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.  The
Company's  properties  will be subject to  customary  royalty  interests,  liens
incident to  operating  agreements,  liens for current  taxes and other  burdens
which the Company believes do not materially interfere with the use of or affect
the value of such 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  participate  in the  development  of the
Horsethief  Canyon  Prospect  located  in  Sweetwater   County,   Wyoming.   Two
development  wells will be drilled in May or June of 1999 to confirm the results
from the  discovery  well that was drilled and completed in December  1998.  The
well is currently  shut-in pending  connection to a natural gas pipeline that is
located  approximately  four  (4)  miles  to  the  west  of the  well  location.
Connection to the pipeline  probably will not occur until after the drilling and
completion of the two development wells.

     In addition,  the Company has the right to participate in three  additional
prospects  that  Fancher  Resources,  LLC has  developed  in the vicinity of the
Horsethief Canyon Prospect that could result in the drilling of three additional
exploratory  wells this year.  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 Resources, 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.

                                       11

<PAGE>


     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
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, 1998, the gross and net
acres of oil and natural gas leases which the Company  beneficially holds or has
the right to acquire.
<TABLE>
<CAPTION>
Prospect Area                                                   Developed                        Undeveloped
-------------                                           ------------------------          ------------------------
                                                        Gross              Net             Gross              Net
                                                        -----              ---             -----              ---
<S>                                                     <C>                 <C>            <C>              <C>  
Green River Basin:
   Horsethief Prospect ..........................        --                 --              3,525             705
Sacramento Basin:
   Bali Prospect ................................       160                 40             11,389           2,847
   Fiji Prospect ................................       - 0 -              - 0 -            6,748           1,687
                                                     --------           --------          -------           -----
         Total ..................................       160                 40             18,137           4,534
</TABLE>

Reserves

     As of December 31, 1998, the Company had interests in two productive  wells
(.45  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, 1998,  as
estimated by an independent petroleum engineer.

<TABLE>
<CAPTION>
                                                                                                     Discounted
                                                               Net Gas            Net Oil           Present Value
                                                               -------            -------           -------------
Prospect                                                       (MMCF)              (MBO)               ($M)(1)
--------                
<S>                                                           <C>                  <C>                  <C>  
Sacramento Basin .....................................        380  (2)               -                  467.9
Green River Basin ....................................        187.3(3)              9.5                 211.5
                                                              -----                 ---                 -----
         Total .......................................        567.3                 9.5                $679.4
----------------
</TABLE>

(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,  1998  without  escalation,  net of  heat  content
     adjustments,  gathering costs and compression  charges, or $2.07 per mcf in
     the  Sacramento  Basin,  $1.65 per mcf in the Green River Basin and $12 per
     barrel for oil in Wyoming.  All prices were assumed to remain flat over the
     productive  lives of the wells.  Operating  costs  utilized were the actual
     costs for the wells without escalation.

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

                                       12

<PAGE>


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

Drilling Activity

     The  following  table   summarizes  the  Company's  oil  and  gas  drilling
activities for 1998.
<TABLE>
<CAPTION>
                                                        Productive                       Nonproductive
                                                  -------------------------         --------------------------
Exploratory Wells Drilled                         Gross Wells      Net Well         Gross Wells       Net Well
-------------------------                         -----------      --------         ----------       --------
<S>                                                    <C>           <C>               <C>             <C>  
   Sacramento Basin, California..................      1             .25                4              .8125
   Green River Basin, Wyoming....................      1             .20                -                --
</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.

     (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

     As of December 31, 1998, the Company had 10,051,705  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.


                                       13

<PAGE>


     (d) RECENT SALES OF UNREGISTERED SECURITIES

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

     (i) On December 15, 1996 the  Registrant  issued  636,700  shares of Common
Stock,  valued  at  $6,367 to an  officer  and  director  of the  Registrant  in
satisfaction of an obligation owed by the Registrant to the officer for expenses
of $6,367  advanced on behalf of the Registrant by such person.  The issuance of
the shares was exempt from  registration  under  Section 4(2) of the  Securities
Act, as the person to whom the shares were issued,  the President and a director
of the  Registrant,  had full  knowledge  of the  business  and  affairs  of the
Registrant,  certificates representing the shares were marked with a restrictive
legend and the shares were taken for investment.

     (ii) On June 2, 1997 the Registrant  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 Registrant at an exercise
price of $0.20 per share on or before June 2, 1998. 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 Registrant.

     (iii) On August 29,  1997 the  Registrant  issued  2,250,000  shares of its
Common Stock to George H. Fancher Jr. in connection  with the acquisition by the
Registrant 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  Registrant  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
Registrant  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 Registrant. 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
Registrant's stock transfer agent.

     (iv) On September  15, 1997 the  Registrant  issued  250,000  shares of its
Common Stock to six persons for services valued by the Registrant at $50,000. Of
the six  persons,  one is a Canadian  attorney who  received  25,000  shares for
service as a director of the Registrant and for preparation of documentation for
the Registrant 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  Registrant  and  received  50,000  shares.  He
provided financial and accounting  services to the Registrant and maintained its

                                       14

<PAGE>



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 Registrant 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  Registrant  at the time
that the  acquisition of the oil and gas  properties was completed,  he assisted
the Registrant 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 Registrant.  The
sixth person,  who received 25,000 shares, is an employee of a business owned by
the  President  of  the  Registrant  and  an  administrative  assistant  to  the
President. This person provided office, administrative and stenographic services
to the  Registrant.  Each of the persons to whom the shares were issued had full
knowledge of the business and affairs of the  Registrant,  each signed a written
investment letter which  acknowledged the receipt of information  concerning the
Registrant  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 Registrant'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.

     (v) On October  31,  1997 the  Registrant  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, 1998.  The  Registrant  issued cash finder's fees
totaling  $45,000 and issued  warrants  entitling  the holders to purchase up to
180,000  shares  of  Common  Stock at $0.50  per  share to three  nonaffiliated,
non-U.S.  citizen finders in connection with the  transaction.  The Registrant's
President,  William  E.  Grafham,  participated  in the  private  placement  and
purchased 200,000 shares and 100,000 warrants for $100,000.  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.

     (vi) In September  1998,  the  Registrant  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 1998. 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
Registrant's stock transfer agent.

                                       15

<PAGE>


     (vii)  Effective July 1, 1998, the Registrant  issued 215,000 shares of its
Common Stock to four officers and directors of the  Registrant in  consideration
for services,  valued at $43,000,  provided to the  Registrant  through June 30,
1998. No underwriter was involved in the transaction. The issuance of securities
to the  individuals  were 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 Registrant's stock transfer agent.

     (e) PROCEEDS FROM SALE OF REGISTERED SECURITIES

     In 1998 the  Company  registered  3,000,000  shares of  common  stock for a
contemplated  public offering.  None of the registered  shares were sold and the
Company received no proceeds from such offering.

     (f) THE SECURITIES ENFORCEMENT AND PENNY STOCK REFORM ACT OF 1990

     The  Securities  Enforcement  and Penny Stock  Reform Act of 1990  requires
additional  disclosure and  documentation  related to the market for penny stock
and for trades in any stock  defined as a penny  stock.  Unless the  Company can
acquire  substantial  assets and trade at over $5.00 per share on the bid, it is
more likely  than not that the  Company's  securities,  for some period of time,
would be defined under that Act as a "penny stock." As a result, those who trade
in the Company's  securities may be required to provide  additional  information
related  to their  fitness to trade the  Company's  shares.  Also,  there is the
requirement  of a  broker-dealer,  prior to a transaction  in a penny stock,  to
deliver a standardized risk disclosure document that provides  information about
penny stocks and the risks in the penny stock market.  Further,  a broker-dealer
must provide the customer  with current bid and offer  quotations  for the penny
stock,  the  compensation  of  the  broker-dealer  and  its  salesperson  in the
transaction,  and monthly  account  statements  showing the market value of each
penny  stock  held in the  customer's  account.  These  requirements  present  a
substantial  burden  on any  person  or  brokerage  firm who  plans to trade the
Company's  securities and would thereby make it unlikely that any liquid trading
market would ever result in the  Company's  securities  while the  provisions of
this Act might be applicable to those securities.

     (g) BLUE SKY COMPLIANCE

     The trading of penny stock  companies may be  restricted by the  securities
laws ("Blue Sky" laws) of the several states.  Management is aware that a number
of states currently  prohibit the unrestricted  trading of penny stock companies
absent  the  availability  of  exemptions,  which are in the  discretion  of the
states' securities administrators.  The effect of these states' laws would be to
limit the  trading  market,  if any,  for the shares of the  Company and to make
resale of shares acquired by investors more difficult.

                                       16

<PAGE>



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 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-look statements.

     We have not generated  revenue in either of the last two fiscal  years.  We
plan to generate revenue, commencing in the first quarter of 1999, when we begin
to sell natural gas produced from the first of two successful  exploratory wells
which we drilled in 1998. The producing natural gas well in the Bali prospect in
the Sacramental Basin of central  California 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  production  from this  well.  The
successful  well in the  Horsethief  Canyon  prospect  is not  expected to begin
producing  natural gas and oil until the summer of 1999,  assuming  that the two
additional wells to be drilled on the prospect have been completed by that time.

     In  1998  we  did  additional   geological  and  geophysical   testing  and
participated  in  drilling  three  unsuccessful  exploratory  wells  on our Fiji
prospect for a net cost of approximately $244,000. Based on the results of these
three unsuccessful  wells, at the end of 1998 we elected to discontinue  further
drilling.

     Also in 1998 we participated in drilling an unsuccessful  exploratory  well
on the Bali prospect, in which we had a 6.25% working interest, resulting in dry
hole costs of approximately  $12,000. A second exploratory well in which we hold
a 25% working  interest was drilled and  completed  as a successful  natural gas
well. As stated above,  production  from this well began in the first quarter of
1999. We expended approximately $89,000 in drilling and completion costs for the
well.  Because of the limited drilling success on the Bali prospect,  we decided
not to participate  in drilling any additional  wells and to attempt to sell our
interests in this prospect and in the nearby Fiji prospect.

     On October 1, 1998, we entered into a participation  agreement with Fancher
Resources,  LLC under which we acquired a 20% working interest in the Horsethief
Canyon prospect. We paid approximately $131,000 representing our agreed share of
acquisition  and 3-D Seismic  evaluation  expenses  incurred in  assembling  the
prospect.  We  participated  in drilling the initial  well on this  prospect and
incurred  approximately  $86,000 in drilling  and  completion  costs.  As stated
above,  we  anticipate  at least two and as many as 17  additional  wells may be
drilled on the  prospect,  of which at least two will be  drilled  in 1999.  Our
anticipated   drilling  and  completion  expenses  on  the  next  two  wells  is

                                       17

<PAGE>



anticipated to be approximately  $160,000.  We also have the option to acquire a
20%  working  interest in three  additional  exploratory  natural  gas  drilling
prospects  generated  by  Fancher  Resources,  LLC  near the  Horsethief  Canyon
prospect.  Our  participation  in drilling those prospects will be determined by
availability of capital resources.

     Because we decided to discontinue  further exploration of our Bali and Fiji
prospects  due to the  nondiscovery  of  proven  reserves,  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 natural gas properties was
reduced to the  approximate  amount of the present  value of the oil and natural
gas reserves on these properties.

     We estimate that general and administrative  expense will be about $150,000
in 1999.  Other  capital  costs  associated  with  participation  in  acquiring,
exploring and drilling of the Horsethief  Canyon and nearby prospects will be at
least  $250,000 and could be as much as  $700,000,  depending on such factors as
the success of initial  drilling  efforts,  decisions by the Operator to conduct
additional exploratory drilling and related factors. In 1998 we incurred general
and  administrative  expenses of approximately  $199,000 which included non-cash
equity  compensation  to officers  and  directors  of $43,000 and  approximately
$57,000 for deferred  offering  costs  related to the offering  described  below
which we  charged to  expense  at the end of 1998.  We also  expended a total of
approximately $673,000 in acquisition,  exploration and drilling expenses on the
Fiji, Bali and Horsethief Canyon prospects as described above.

     At December  31,  1998 we had  approximately  $15,000 in cash,  compared to
$425,000  at December  31,  1997.  In  September  1998 we  received  $413,000 in
proceeds  from the  exercise of 2,065,000  warrants to purchase  common stock at
$0.20  per  share  held by  eight  warrant  holders.  Warrants  to  purchase  an
additional  435,000  shares of common stock were not exercised  and expired.  We
anticipate that our revenue from the production of the one producing natural gas
well on the Bali prospect will be approximately  $7,500 to $9,000 monthly during
1999,  depending upon the production rates and applicable natural gas prices. We
have not raised any additional cash from any source. We will require  additional
capital  resources in order for us to complete the 1999 drilling and exploration
activities described above and to pay our ongoing operating expenses.

     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.  In January  1999,  we decided to revise the  offering  and reduce the
offering  price to $0.30 per share,  which  offering is  expected to  recommence
during  the  second  quarter  of 1999.  We also  extended  to July 31,  1999 the
expiration date for outstanding warrants entitling the holders to purchase up to
1,180,000 shares of common stock. We plan to reduce the exercise price for these
warrants  to $0.30 per  share.  We are  anticipating  that at least a portion of
these outstanding  warrants will be exercised by the warrant holders. If all the
warrants  are  exercised,  of which  there  is no  assurance,  we would  receive
approximately  $354,000 by July 31, 1999, the date when the warrants will expire
unless they are again  extended.  If all the warrants  should be exercised,  the
proceeds  to the  Company  would  enable  the  Company  to pay  its  anticipated
operating  expenses  and  to  participate  in  the  drilling  of  at  least  two
exploratory  wells  in 1999.  If the  Company  amends  the  terms of its  public
offering and  completes  the sale of at least 400,000  shares,  the  anticipated

                                       18

<PAGE>


minimum  amount of the offering,  the Company  would  receive gross  proceeds of
approximately  $120,000.  We can make no  assurances  as to  whether  any of the
warrants will be exercised or whether we will be able to  successfully  complete
any portion of our anticipated offering.

     Unless a substantial  portion of the outstanding  warrants are exercised or
at least the minimum  offering in the  anticipated  offering is  completed or we
sell our  interests in the Bali and Fiji  prospects,  we do not believe that our
available  cash will be  sufficient  to pay all of our  anticipated  general and
administrative  expenses,  capital lease costs and anticipated drilling expenses
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.  If we are able to raise additional  capital
we  will  use  the  proceeds  to  pay  our  ongoing  operating  expenses  and to
participate in additional  drilling.  To fund the anticipated  near term capital
shortfall,  we may accept loans from  management or other  affiliates.  Assuming
sufficient  capital  resources  become  available,  we will  continue to seek to
acquire interests in other oil or natural gas properties.

     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.

     Year 2000 Considerations. We have considered the impact of Year 2000 issues
on our  computer  system and  applications  and  developed a  remediation  plan.
Because we are a small company and use computer systems and  applications  owned
by our  consultants,  we do not anticipate that we will incur any material costs
in remediating  potential Year 2000 problems.  We did not incur any expenses for
such purposes in 1998. The Company's  consultants  have confirmed to the Company
that Year 2000 issues will be detected and  remediated by the middle of 1999. We
are unable to assess  whether Year 2000 issues may affect  others in the oil and
gas industry with whom we may have operating  agreements or other  arrangements,
such  as  oil or  gas  purchasers,  pipeline  operators,  drilling  contractors,
governmental  agencies or others.  Problems  experienced  by such other entities
could adversely affect our business.

ITEM 7.   FINANCIAL STATEMENTS.

     The complete financial statements are included at Item 13 herein.

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.

                                       19

<PAGE>

                                    PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

     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.

<TABLE>
<CAPTION>

Names of Executive
Officers and Directors                        Age      Position
----------------------                        ---      --------
<S>                                           <C>      <C>
George H. Fancher Jr. ..................       59      Chairman of the Board, Chief Operating
                                                       Officer and Director
William E. Grafham......................       61      President, Chief Executive Officer and Director
Jeffrey J. Scott........................       36      Vice President and Director
Rex L. Utsler ..........................       53      Vice President and Director
George A. Cloudy .......................       64      Director
Albert A. Golusin.......................       44      Secretary and Treasurer
</TABLE>

     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).


                                       20

<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.    Alberta Stock Exchange      Oil and gas
Walking Bear Resources Inc.         Alberta Stock Exchange      Oil and gas
Tellis Gold Mining Company Inc.     Vancouver Stock 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.


                                       21

<PAGE>


     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.

     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, 1997 and 1998 (there was no
compensation in prior years) of the chief executive officer at December 31, 1998
and all officers and directors, as a group.

                                       22

<PAGE>

<TABLE>
<CAPTION>

                              Summary Compensation Table
                                                                               Long Term  
                                                                              Compensation  
                                                Annual 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
         1997 ......................    - 0 -       - 0 -           - 0 -       200,000        None
         1998 ......................    - 0 -       - 0 -         10,000(1)       --           None

All officers and directors,
as a group (five persons)
         1997 ......................  $ 10,027(2)   - 0 -       $ 30,000(3)     800,000        - 0 -
         1998 ......................  $ 30,000(2)   - 0 -       $ 43,000(4)     100,000        - 0 -
</TABLE>
------------------

     (1) Includes 50,000 shares of common stock,  valued at $10,000,  issued for
services as an officer and director.
     (2) Paid to Albert A. Golusin, Secretary, for services as a consultant.
     (3) Includes 150,000 shares of common stock,  valued at $30,000,  issued to
three  persons for services as officers,  directors and  representatives  of the
Company.
     (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.

     The Company has an agreement to pay Albert A. Golusin a monthly retainer of
$2,500,  as a  consultant,  for part time  accounting,  financial  reporting and
corporate secretarial services. In addition,  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, 1998

<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 the
last price paid for common stock of the Company of $0.20 of the Company's common
stock, less the exercise price of the options.

                                       23

<PAGE>


Option Grants in the Last Two Fiscal Years

     The Company granted options during 1997 and 1998 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>   <C>
1997:
William E. Grafham..............       100,000(1)              12.3%                 $0.22                07/02/02
President                              100,000(2)              12.3%                 $0.35                10/30/07
George H. Fancher Jr. ..........       250,000(2)              30.1%                 $0.35                10/30/07
Rex L. Utsler ..................       100,000                 12.3%                 $0.35                10/30/07
Jeffrey J. Scott ...............       150,000                 18.5%                 $0.35                10/30/07
Albert A. Golusin ..............        30,000(1)               3.7%                 $0.20                07/02/07
                                        70,000                  8.6%                 $0.35                10/30/07
1998:
George A. Cloudy ...............       100,000(1)               100%                 $0.50                04/30/08
----------------------
</TABLE>

     (1) These  options  become  exercisable  as to  one-half  of the shares six
months from the date of grant (July 1, 1997 for Messrs. Grafham and Golusin, and
April 9, 1998 for Mr. Cloudy) and as to the balance, six months thereafter.  All
other options are presently exercisable.

     (2) The  options  are  nonstatutory  ("nonqualified")  options.  All  other
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.  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

                                       24

<PAGE>


may be no longer  than five years.  The  aggregate  fair market  value of Common
stock,  determined at the time the option is granted,  for which incentive stock
options become exercisable by an employee during any calendar year is limited to
$100,000.

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

Compensation of Directors

     The  Company  does  not pay cash  compensation  to  directors.  Four 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, 1998. The Company has granted
each of the four directors  options to purchase  shares of Common stock at $0.35
per share, as shown in the table above.  The options were granted under the Plan
and must be exercised  within 10 years from the date of grant.  George A. Cloudy
received an option to purchase up to 100,000  shares at $0.50 per share in April
1998.  The option became  exercisable  as to half of the shares six months after
the date of grant and the balance will become exercisable one year from the date
of grant.

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

     The following  table sets forth, as of March 1, 1999,  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.

<TABLE>
<CAPTION>
                                                                        Shares beneficially   
                                                                    owned prior to offering(1) 
Name of Beneficial Owner                                           ---------------------------
or Name of Officer or Director                                         Number        Percent
------------------------------                                         ------        -------
<S>                                                                  <C>               <C>  
William E. Grafham, Director................................         943,568(2)        10.5%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI

George H. Fancher Jr., Director...............................     3,050,000(3)        35.2%
1801 Broadway, Suite 720
Denver, Colorado 80202

                                       25

<PAGE>

<CAPTION>
                                                                        Shares beneficially   
                                                                    owned prior to offering(1) 
Name of Beneficial Owner                                           ---------------------------
or Name of Officer or Director                                         Number        Percent
------------------------------                                         ------        -------
<S>                                                                  <C>               <C>  
Rex L. Utsler, Director ......................................       300,000(4)        4.4%

Jeffrey J. Scott, Director ...................................       250,000(5)         2.5%

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

Albert A. Golusin, Secretary and Treasurer ...................       215,000(7)         2.4%

David Grafham ................................................       650,000            8.0%
1307 West 8th Avenue
Vancouver, B.C.
Canada V5H 3W4

Roger Duffield................................................       400,000            5.0%
c/o  Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)

Euro Securities Ltd. .........................................       650,000            8.0%
c/o  Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)

Linda Kemble .................................................       650,000            8.0%
#59 Temple Hill Dr. N.E.
Calgary, Alberta
Canada T1Y 404

Don Stewart ..................................................       738,000(9)         9.0%
P. O. Box 245
Grand Cayman, BWI(8)

Susan Scott ..................................................       415,000(11)        5.2%
#2 2109 4th Avenue, N.W.
Calgary, Alberta, Canada T2N 0N6

Alex Whiteside................................................       405,000(10)        5.1%
1530--1001 13 Avenue, S.W.
Calgary, Alberta, Canada T2R 0L5

All officers and directors as a group (6 persons) ............     4,663,568(12)       49.1%
----------------------
</TABLE>

     (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

                                       26
<PAGE>


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.  In  addition,  the Company will be required to issue and
deliver  to Mr.  Fancher an  additional  500,000  shares of Common  stock if the
Company  receives gross revenue from its interest in the Bali and Fiji prospects
at least equal to all direct costs  incurred in  acquiring  the  prospects,  and
drilling the wells,  including  cash amounts paid to Mr.  Fancher at the time of
acquisition. See "Certain Transactions."
     (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

                                       27

<PAGE>


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
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.

     The Company  paid  $8,000 in 1997 and $24,000 in 1998 to Arizona  Corporate
Management,  Inc., a corporation  owned by William E. Grafham,  as reimbursement
for office and related  expenses and for rent. The Company has 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 has an  arrangement  with George H. Fancher Jr.,  pursuant to which Fancher
Oil  Company was paid $2,000 in 1997 and $24,000 in 1998 and will be paid $2,000
per month in the future for office  facilities,  use of certain office equipment
and limited administrative and technical support.

     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  Resources,
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  Resources,  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  Resources,  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.

     On June 2, 1997 the Company sold 2,500,000  shares and warrants to purchase
an  additional  2,500,000  shares  at $0.20  per  share  for  $500,000  to eight
purchasers in private  transactions with nonUnited States  residents.  In August
1998,  holders of 2,065,000 of the warrants  exercised the warrants for $413,000
in proceeds, and 435,000 warrants expired unexercised.


                                       28

<PAGE>


     On  December  1, 1996 Jean  Boyd,  then a  director  and an  officer of the
Company,  was issued  636,700 shares of Common stock at a deemed value of $0.001
per share in  satisfaction  of an  obligation  of $6,367 owed to her for Company
expenses advanced by her in previous years.

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

     (a) The following financial information is filed as part of this report:

     (1) Financial Statements:
         Independent Auditor's Report ...................................... F-2
         Balance Sheet December 31, 1998 ................................... F-3
         Statements of Operations Years Ended December 31, 1997
             and 1998 ..............................F-4
         Statement of Stockholders' Equity Years Ended December 31,
            1997 and 1998 .................................................. F-5
         Statements of Cash Flows Years Ended December 31, 1997
            and 1998 ................................................... F-6-F-7
         Notes to Financial Statements ............................... F-8--F-19
     (2) Schedules
         Supplemental Disclosure of Cash Flow Information .................. F-7
         Supplemental Schedule of Non-Cash Investing and
         Financing Activities .............................................. F-7
     (3) 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.*

         (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.*

         (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.*

         (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.*

         (3.5) Bylaws of Registrant adopted December 31, 1997.*

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


                                       29

<PAGE>
         Exhibit No.       Description and Method of Filing
         ----------        --------------------------------

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

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

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

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

          (10.6)  Agreement with Albert Golusin.*

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

          (24)    Power of Attorney.

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

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

     (b) Reports on Form 8-K.  The  Company  filed no reports on Form 8-K during
the fiscal quarter ending December 31, 1998.

                                       30

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)


                          INDEX TO FINANCIAL STATEMENTS


                                                                            PAGE
                                                                            ----

         Independent Auditor's Report ...................................... F-2

         Balance Sheet 
               December 31, 1998 ........................................... F-3

         Statements of Operations
               Years Ended December 31, 1997 and 1998 .......................F-4

         Statement of Stockholders' Equity
               Years Ended December 31, 1997 and 1998 ...................... F-5

         Statements of Cash Flows 
               Years Ended December 31, 1997 and 1998 ................ F-6 - F-7

         Notes to Financial Statements .............................. F-8 - F-19









                                       F-1

<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, 1998 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, 1998.  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, 1998 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, 1998 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 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 10, 1999




                                       F-2

<PAGE>

<TABLE>
<CAPTION>
                                 FAN ENERGY INC.
                          (A Development Stage Company)
                                  BALANCE SHEET
                                December 31, 1998


                                     ASSETS

<S>                                                                            <C>        
CURRENT ASSET
  Cash .....................................................................   $    15,875
                                                                                ----------

    Total Current Asset ....................................................        15,875

OIL AND GAS PROPERTIES (Note 3) ............................................       690,584
                                                                                ----------

                                                                               $   706,459
                                                                                ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable .........................................................   $     1,736
                                                                                ----------

    Total Current Liabilities ..............................................         1,736
                                                                                ----------
COMMITMENTS AND CONTINGENCIES (Note 3)

STOCKHOLDERS' EQUITY (Note 4)
  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 - 10,051,704 shares .........................        10,052
  Additional paid-in capital ...............................................     2,249,956
  Deficit accumulated during the development stage .........................    (1,655,785)
  Additional paid-in capital stock options .................................       100,500
                                                                                ----------

                                                                                   704,723
                                                                                ----------
                                                                               $   706,459
                                                                                ==========
</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 OPERATIONS
                     Years ended December 31, 1997 and 1998

                                                                                   Cumulative
                                                                                  Amounts from
                                                                                 Jan. 1, 1997 to
                                                          1997           1998     Dec. 31, 1998
                                                          ----           ----    ---------------

<S>                                                   <C>            <C>            <C>      
REVENUES ..........................................   $      --      $      --      $      --
                                                      -----------    -----------    -----------


OPERATING EXPENSES
  General and administrative ......................       192,985        198,851        391,836
  Impairment of oil and gas properties ............          --        1,257,702      1,257,702

  Interest (Note 3) ...............................         6,247           --            6,247
                                                      -----------    -----------    -----------

                                                          199,232      1,456,553      1,655,785
                                                      -----------    -----------    -----------


NET (LOSS) ........................................   $  (199,232)   $(1,456,553)   $(1,655,785)
                                                      ===========    ===========    ===========

NET (LOSS) PER COMMON SHARE - Basic
   and Diluted ....................................   $      (.07)   $      (.17)   $      (.29)
                                                      ===========    ===========    ===========

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING - Basic and Diluted .........     3,011,287      8,567,537      5,789,412
                                                      ===========    ===========    ===========
</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 STOCKHOLDERS' EQUITY
                                          Years ended December 31, 1997 and 1998
                                                                                                              Deficit     Additional
                                                                                                            Accumulated    Paid-In
                                                                         Common Stock        Additional      During the    Capital
                                                                   ----------------------      Paid-In      Development     Stock
                                                                   Shares          Amount      Capital         Stage       Options
                                                                   ------          ------    ----------     -----------   ---------
<S>                                                                <C>        <C>           <C>            <C>            <C>  

Balance, January 1, 1997 ...................................       771,704   $       772   $   503,876    $  (504,648)   $   --
Reclassification of deficit pursuant to quasi
    reorganization .........................................          --            --        (504,648)       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
Issuance of stock options ..................................          --            --           4,545           --          --
Net (Loss) .................................................          --            --           2,332           --       100,500
                                                                      --            --            --         (199,232)       --
                                                               -----------   -----------   -----------    -----------    ----------
Balance, December 31, 1997 .................................     7,771,704         7,772     1,796,236       (199,232)    100,500
Issuance of common stock for services, valued at
    $.20 per share .........................................       215,000           215        42,785           --          --
Exercise of common stock warrants for cash, at $.20
    per sare ...............................................     2,065,000         2,065       410,935           --          --
Net (Loss) .................................................          --            --            --       (1,456,553)       --
                                                               -----------   -----------   -----------    -----------    ----------
Balance, December 31, 1998 .................................    10,051,704   $    10,052   $ 2,249,956    $(1,655,785)   $ 100,500
                                                               ===========   ===========   ===========    ===========    ==========
</TABLE>





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

                                       F-5

<PAGE>

<TABLE>
<CAPTION>
                                 FAN ENERGY INC.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1997 and 1998

                                                                                                                        Cumulative
                                                                                                                       Amounts from
                                                                                                                     Jan. 1, 1997 to
                                                                                  1997                 1998           Dec. 31, 1998
                                                                                  ----                 ----          ---------------
<S>                                                                           <C>                  <C>                  <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (Loss) ........................................................         $  (199,232)         $(1,456,553)         $(1,655,785)
  Adjustments to reconcile net (loss) to net
      cash provided by operating activities
    Impairment of oil and gas properties ............................                --              1,257,702            1,257,702
    Stock options ...................................................             102,832                 --                102,832
    Stock for services ..............................................              50,000               43,000               93,000
    Changes in assets and liabilities
      Increase (decrease) in accounts payable .......................               5,315               (3,579)               1,736
      Other .........................................................             (10,383)              10,383                 --
                                                                              -----------          -----------          -----------

  Net cash (used) by operating activities ...........................             (51,468)            (149,047)            (200,515)
                                                                              -----------          -----------          -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Cash paid for oil and gas properties ..............................            (975,491)            (672,795)          (1,648,286)
                                                                              -----------          -----------          -----------

  Net cash (used) in investing activities ...........................            (975,491)            (672,795)          (1,648,286)
                                                                              -----------          -----------          -----------

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                 --              1,500,000
  Cash paid for offering costs ......................................             (48,324)                --                (48,324)
                                                                              -----------          -----------          -----------

  Net cash provided by financing activities .........................           1,451,676              413,000            1,864,676
                                                                              -----------          -----------          -----------

NET INCREASE (DECREASE) IN CASH .....................................             424,717             (408,842)              15,875

CASH, BEGINNING OF PERIODS ..........................................                --                424,717                 --
                                                                              -----------          -----------          -----------

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



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

                                       F-6

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                     Years ended December 31, 1997 and 1998



SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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



















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

                                       F-7

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998



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  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. The name
     of the corporation was changed to Fan Energy Inc. in December 1997.

     Effective  with  the  change  in  control  and  reactivation,  the  Company
     undertook development stage activities as defined by Statement of Financial
     Accounting  Standards  (SFAS) No. 7 and is considered a  development  stage
     company  effective  January 1, 1997.  Its  principal  activities  have been
     raising  capital through the sale of its  securities,  acquiring  undivided
     minority  interests  in two oil and natural gas  exploratory  prospects  in
     California  for cash and common  stock and one  prospect  in  Wyoming,  and
     commencing  the  drilling of  exploratory  and  development  wells on these
     properties.  As of  December  31,  1998  the  Company  has not  earned  any
     production revenue from its oil and gas activities.

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


                                      F - 8

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     lower  of cost or  estimated  fair  value  of the  cost  center's  unproved
     properties less (3) applicable income tax effects.  The valuation allowance
     was $1,257,702 at December 31, 1998.

     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 at December 31, 1997 consisted of costs incurred in
     connection with a proposed  public offering of the Company's  common stock.
     As the offering was not successful,  costs incurred of $57,029 were charged
     to operations in 1998.

     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, 1998, the Company had a net operating loss  carryforward of
     approximately  $850,000 that may be offset  against  future  taxable income
     through 2018.

     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  $113,000  is
     attributable to 1998.

     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 - 9

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principle  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 (Note
     4).



                                     F - 10

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998



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.

     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.

     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 revenues from its planned operations. As such, the Company, as
     of December 31, 1998 has incurred net operating  losses since  reactivation
     as a development  stage company of $1,655,785 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.




                                     F - 11

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     NEW TECHNICAL PRONOUNCEMENTS

     In June 1997 SFAS No.  130,  "Reporting  Comprehensive  Income"  was issued
     effective for fiscal years  beginning after December 31, 1997, with earlier
     application permitted.  The Company has adopted SFAS No. 130 effective with
     the fiscal year ended  December 31, 1998.  Adoption of SFAS No. 130 has not
     had an impact on the Company's financial statements.

     In June 1997 SFAS No. 131,  "Disclosure about Segments of an Enterprise and
     Related  Information" was issued effective for fiscal years beginning after
     December 31,  1997,  with earlier  application  permitted.  The Company has
     adopted  SFAS No. 131  effective  with the fiscal year ended  December  31,
     1998.

     In February 1998 SFAS No. 132,  "Employers'  Disclosure  about Pensions and
     Other  Postretirement  Benefits",  was issued  effective  for fiscal  years
     beginning after December 15, 1997, with earlier application encouraged. The
     Company  has  adopted  SFAS No. 132  effective  with the fiscal year ending
     December 31,  1998.  Adoption of SFAS No. 132 has not had any impact on the
     Company's financial statements.

     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. SFAS No. 134 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.



                                     F - 12

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998



NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

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

     Capitalized  costs  associated with oil and gas producing  activities as of
     December 31, 1998 are as follows:

     Proved properties                                              $ 1,012,485
     Unproved properties                                                935,801
                                                                    -----------
     
                                                                      1,948,286

     Less valuation allowance                                        (1,257,702)
                                                                    -----------

     Net capitalized costs                                          $   690,584
                                                                    ===========

     Information  relating to the  Company's  costs  incurred in its oil and gas
     operations  during the years ended December 31, 1997 and 1998 is summarized
     as follows:
                                                          1997           1998


     Property acquisition - Unproved properties        $1,214,866     $  172,919
     Exploration costs                                     60,625        368,699
     Development costs                                       --          131,177
                                                        ----------    ----------

                                                       $1,275,491     $  672,795
                                                       ==========     ==========

     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,  to drill and equip
     development wells.

     As of December  31,  1998,  the Company had not earned any revenue from its
     oil and gas activities and none of its properties had produced oil or gas.




                                     F - 13

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998



NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

     OIL AND GAS RESERVES (UNAUDITED)

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

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

     At December 31, 1998 proved reserves were as follows:

                                                       GAS               OIL
                                                      (MMCF)           (MBBL)

     Beginning of year                                  --                --
     Proved developed producing                       190.0               --
     Proved developed non-producing                   187.3              9.5
     Proved undeveloped                               190.0               --
                                                      -----             ----

     End of year                                      567.3              9.5
                                                      =====             ====

     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 - 14

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998


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:

                                                                  (in 000's)


     Future cash inflows                                           $1,210
     Future production costs                                         (224)
     Future development costs                                        (101)
     Future income tax expense                                       (221)
                                                                 --------


     Future net cash flows                                            664
     10% annual discount for estimated timing of
        cash flows                                                   (206)
     Net operating loss carryforward                                  221
                                                                 --------
     Standardized measure of discounted future
        net cash flows                                            $   679
                                                                 ========

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

                                                                    (in 000's)
     Standardized measure of discounted future net cash flows,
        beginning of year                                            $  --

     Discoveries                                                       679
                                                                    ------
     Standardized measure of discounted future net cash flows, end
     of year                                                         $ 679
                                                                     =====

     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.

NOTE 4 - STOCKHOLDERS' EQUITY

     COMMON STOCK

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

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

                                     F - 15

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998


NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)

     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 July  31,  1999).  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.

     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
     (extended to July 31, 1999) as partial  consideration  for a finders fee in
     conjunction with the private  placement sale of $.50 units described above.
     The warrants are valued at $4,545,  using the Black-Scholes  option pricing
     model.

     At December 31, 1998 the status of outstanding warrants is as follows:

           Issue               Shares             Exercise        Expiration
           Date              Exercisable           Price             Date

     October 31, 1997         1,000,000            $.60          July 31, 1999
     October 31, 1997           180,000            $.50          July 31, 1999


                                     F - 16

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998


NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)

     At December 31, 1998 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 $.58, 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 term of all stock options granted
     under the Plan may not  exceed ten  years,  and no later than three  months
     after termination of employment, except the term of incentive stock options
     granted to a 10% or more shareholder which may not exceed five years.

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

<TABLE>
<CAPTION>
                                                                          Weighted         Weighted
                                                                           Average          Average
                                                          Number          Exercise           Fair          Exercise
                                                        of Shares           Price            Value           Price
<S>                                                     <C>                <C>              <C>           <C>
Options Outstanding - January 1, 1997                       --               --               --              --
Granted                                                  810,000            $.33             $.20         $.20 - .35
                                                         -------
Options Outstanding - December 31, 1997
(680,000 exercisable)                                    810,000            $.33             $.20
Granted                                                  100,000            $.50             $ --            $.50
                                                         -------
Options Outstanding - December 31, 1998
(860,000 exercisable)                                    910,000            $.35             $.18
                                                         =======
</TABLE>


     The weighted average  contractual  life of options  outstanding at December
     31, 1998 was 9.5 years.


                                     F - 17

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998


NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)

     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 1997 would have been
     increased to the pro forma amounts indicated below:

     Net (loss) applicable to common stockholders - as reported     $(1,456,553)
                                                                    ===========
     Net (loss) applicable to common stockholders - pro forma        (1,461,206)
                                                                    ===========
     (Loss) per share - as reported                                        (.17)
                                                                           ====
     (Loss) per share - pro forma                                          (.17)
                                                                           ====

     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:  dividend yield of 0%; expected  volatility of
     0%; discount rate of 5.25%; and expected life of 10 years.

     At December 31, 1998 the number of options  exercisable was 860,000 and the
     weighted average exercise price of these options was $.34.

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

     STOCK SPLIT

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

NOTE 5 - RELATED PARTY TRANSACTIONS

     In 1997  and  1998 the  Company  paid an  aggregate  $10,000  and  $48,000,
     respectively,  to entities controlled by  Officers/Directors of the Company
     for office space and administrative services in Scottsdale, Arizona ($8,000
     - 1997,  and  $24,000  - 1998) and  Denver,  Colorado  ($2,000 - 1997,  and
     $24,000 - 1998), 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 1997 the Company paid the  Secretary/Treasurer
     $10,027 for services  provided and issued  50,000  shares of common  stock,
     valued at $10,000 ($.20 per share). During 1998 the Secretary/Treasurer was
     paid $30,000 under the  agreement,  which was converted to a month to month
     basis.

                                     F - 18

<PAGE>

                                 FAN ENERGY INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                     Years ended December 31, 1997 and 1998


NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)

     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)

NOTE 6 - SEGMENT REPORTING

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

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

     The  Company has not earned any  revenue  from its oil and gas  activities.
     However the Company has discovered  proved  reserves from its 1998 drilling
     program.  The  Company's  total assets of $706,459 at December 31, 1998 and
     operating  expenses of $199,232 and $1,456,553 for the years ended December
     31, 1997 and 1998, respectively, are attributable to this segment.

NOTE 7 - PROPOSED STOCK OFFERING

     The  Company's  Board of Directors  approved  the filing of a  Registration
     Statement on Form SB-2 with the Securities and Exchange Commission relating
     to an initial  public  offering of a minimum  400,000  shares and a maximum
     3,000,000  shares  of the  Company's  common  stock  at a price of $.30 per
     share,  on a "best  efforts"  basis by the  officers  and  directors of the
     Company.





                                     F - 19

<PAGE>

                                   SIGNATURES

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

                                     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  registrant 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

                                       31

<PAGE>


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


                                   FORM 10-KSB

                                   EXHIBITS TO

                                 FAN ENERGY INC.




                                INDEX TO EXHIBITS

         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.*

          (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.*

          (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.*

          (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.*

          (3.5)  Bylaws of Registrant adopted December 31, 1997.*

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

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

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

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

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

          (10.6) Agreement with Albert Golusin.*

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

          (24)   Power of Attorney.

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

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

                                       32