FAN ENERGY INC, SB-2/A, 1998-05-14

FAN ENERGY INC
SB-2/A, 1998-05-14
CRUDE PETROLEUM & NATURAL GAS

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As Filed with the Securities and Exchange Commission on May 13, 1998
Registration No. 333-47699

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------

AMENDMENT NO. 2
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
-------------------------

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

Nevada 1311 77-0140428
--------------------- ------------------------- -------------------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)

George H. Fancher Jr.
1801 Broadway, Suite 720 1801 Broadway, Suite 720
Denver, Colorado 80202 Denver, Colorado 80202
(303) 296-6600 (303) 296-6600
---------------------------- ---------------------------
(Address and telephone number (Name, address and telephone
of principal executive offices number of agent for service)
and address of principal place
of business)

With Copies to:

Alan W. Peryam, LLC
1120 Lincoln Street, Suite 1000
Denver, Colorado 80203
(303) 866-0900

Approximate date of proposed sale to the public: As soon as practicable
following the date on which the Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]

<PAGE>

<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE

Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities To Be Registered(1) Registered Per Share Offering Price Fee
- ------------------------------ ------------ ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value........... 3,000,000 shares(1) $1.00 $ 3,000,000 $ 885.00

Common Stock, $0.001 par value........... 2,700,000 shares(2) $1.00 $ 2,700,000 $ 796.50
--------- ---- ---------- --------

Total 5,700,000 XXX $ 5,700,000 $1,681.50
- ----------------------------
</TABLE>

(1) To be offered by the Registrant.

(2) To be offered by Selling Securityholders. Includes 1,800,000 shares of
Common Stock purchased in a private placement and 900,000 shares of Common
Stock issuable upon exercise of outstanding warrants acquired in a private
placement.

(3) The Registration Fee was paid previously.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

(ii)

<PAGE>

Fan Energy Inc.
Cross Reference Sheet

PART I
INFORMATION REQUIRED IN THE PROSPECTUS

Item
Number Form SB-2 Item Number Caption or Location in Prospectus
- ------ --------------------- ---------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front of Registration Statement and Outside
Front Cover of Prospectus Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of
of Prospectus Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factors
6. Dilution Comparative Data
7. Selling Security Holders Principal and Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
12. Description of Securities Description of Securities
13. Interests of Named Experts and Counsel Experts, Legal Matters
14. Disclosure of Commission Position on Plan of Distribution
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis or Plan
Plan of Operation of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Dividend Policy and Related Stockholder
Stockholder Matters Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Experts
Accountants on Accounting and Financial
Disclosure
</TABLE>

(iii)
<PAGE>

[RED HERRING LANGUAGE ON PROSPECTUS COVER PAGE]

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION
OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO
THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

<PAGE>

SUBJECT TO COMPLETION DATED MAY 13, 1998

PROSPECTUS
- --------------------------------------------------------------------------------
3,000,000 Shares

FAN ENERGY INC.
Common Stock
- --------------------------------------------------------------------------------

Fan Energy Inc., a Nevada corporation (the "Company"), is offering a
minimum of 300,000 shares ("Minimum Offering") of the Common Stock, $0.001 par
value (the "Common Stock") and up to 3,000,000 shares of Common Stock ("Maximum
Offering"), by this Prospectus (the "Offering"). The Prospectus also relates to
the resale of up to 2,700,000 shares of Common Stock by the Selling
Securityholders identified under the caption "Principal and Selling
Securityholders."

Prior to this Offering, there has been no public market for the Common
Stock of the Company, and there is no assurance that any such market will
develop. See "Risk Factors--Offering Price Determination" for a discussion of
the factors considered in determining the initial public offering price. While
not presently planned, the directors and officers of the Company may purchase up
to 100,000 shares (one-third of the Minimum Offering) in order to complete the
Offering. See "Risk Factors--Direct Offering by Officers and Directors."

The Common Stock will not be listed in the NASDAQ stock market. The Company
will seek to have the Common Stock included in the OTC Bulletin Board maintained
by the National Association of Securities Dealers, Inc. ("NASD") following
completion of the Offering.

SEE "RISK FACTORS" ON PAGES 7 TO 13 FOR A DISCUSSION OF MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)(3)
-------- ------------- ------------
Per Share ................. $ 1.00 $ 0.10 $ 0.90
Total Minimum ............. $ 300,000 $ 30,000 $ 270,000
Total Maximum.............. $ 3,000,000 $ 300,000 $ 2,700,000
- --------------------------------------------------------------------------------

(1) The shares of Common Stock are being offered by the Company on a
direct participation basis by the officers and directors of the
Company who will offer and sell the securities for no commission
or other compensation. The Company also may engage the services
of brokers and dealers which are members of the National
Association of Securities Dealers, Inc. ("NASD") and which are
registered as such with the United States Securities and Exchange
Commission to act as nonexclusive agents to sell the securities.
Any such participating brokers and dealers may be paid a
commission of 10% of the purchase price of securities sold by
them. To the extent the securities are not sold through
participating brokers and dealers, the proceeds to the Company
would be higher. No broker-dealers have been engaged as of the
date of this Prospectus. Persons who sell the securities may be
deemed to be underwriters as the term is defined under the
Securities Act of 1933.
(2) The first 300,000 shares are being offered by the Company on a
"best-efforts, all or none" basis ("Minimum Offering"). All
proceeds from subscriptions to purchase the shares offered by the
Company will be transmitted to an escrow account at The Bank of
Denver, Denver, Colorado ("Escrow Agent") by noon of the first
business day following receipt. If at least $300,000 for
subscriptions for the Minimum Offering is not deposited with the
Escrow Agent within 120 days from the date of this Prospectus
(which period may be extended for an additional 60 days without
notice by the Company), all monies received will be refunded
promptly to subscribers, without deduction for commissions or
expenses and without interest thereon. The minimum investment in
the Offering is $20,000. Subscribers have no right to return of
subscriptions during the term of the escrow. After proceeds from
the Minimum Offering have been deposited with the Escrow Agent,
the Offering may be continued on a "best-efforts" basis, but
without any refund provisions, until all shares offered by the
Company are sold or until the Company determines to terminate the
Offering, whichever first occurs. See "Plan of Distribution."
(3) The proceeds to the Company are before deduction of the expenses
of this Offering, which are estimated to be approximately
$40,000. Proceeds to the Company assume commissions are paid on
all proceeds received. See "Use of Proceeds."

May __, 1998
<PAGE>

INSIDE FRONT COVER

The Registration Statement of which this Prospectus is a part has
registered for resale up to 2,700,000 shares of Common Stock of the Company
which may be offered from time to time by nine persons who are the holders of
such securities. See "Principal and Selling Securityholders." One million eight
hundred thousand of such shares are issued and outstanding and the balance of
such securities are issuable upon exercise of outstanding stock purchase
warrants. See "Description of Securities." Shares of Common Stock could be sold
by the holders directly, through agents, dealers or underwriters, in the
over-the-counter market, or otherwise, including privately negotiated
transactions by the holders, on terms and conditions determined at the time of
any such sale by the selling holder. No broker, dealer or other person has
undertaken to purchase or sell any of the securities to be offered by the
holders. Expenses of any such sales of Common Stock will be borne by the parties
as they may agree. See "Plan of Distribution."

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, PERSONS ACTING AS UNDERWRITERS MAY BID FOR, AND PURCHASE, SHARES
OF COMMON STOCK IN THE OPEN MARKET, SHOULD A MARKET DEVELOP. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."

Prior to the date of this Prospectus, the Company has not been a reporting
company under the Securities Exchange Act of 1934, as amended. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements.

<PAGE>

PROSPECTUS SUMMARY

This Prospectus and documents incorporated herein by reference contain
certain "forward-looking statements" which involve substantial risks and
uncertainties. When used in this Prospectus 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 as they relate to the Company or
its business or the management of the Company. The "safe harbor" for
forward-looking statements provided by the Private Securities Litigation Reform
Act of 1995 specifically does not apply to statements made in connection with an
initial public offering. Although the Company believes the understandings and
assumptions on which the forward-looking statements in this Prospectus 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. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."

The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Unless otherwise indicated, information in this Summary and
elsewhere in this Prospectus reflects the 10-into-1 reverse stock split effected
by the Company in March 1997, and assumes that outstanding exercisable warrants
or options have not been exercised. Certain terms relating to the oil and
natural gas industry are defined in "Glossary of Oil and Natural Gas Terms."

The Company

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

The Company holds an undivided 25% working interest in two exploratory
prospects located in Yolo and Solano Counties in the Sacramento Basin near
Sacramento, California. The prospects total approximately 30,000 acres. The
operator of the prospects, a nonaffiliated independent oil and gas company, has
completed most aspects of a three dimensional seismic data survey ("3-D
Seismic") and has identified several potential drilling sites where natural gas
presence is anticipated. The initial exploratory well on the prospects was
plugged and abandoned as a dry hole in January 1998. See "Business--Properties."

The Company anticipates that as many as 40 natural gas wells may be drilled
to depths from 2,000 to 8,000 feet on the two prospects over the next one to
three years, depending upon whether initial drilling is successful and confirms
the Company's 3-D Seismic data interpretations, future natural gas prices,
availability of capital and other factors. Until and unless such wells are
drilled and completed as successful natural gas producers (of which there can be
no assurance) or the Company acquires or develops other oil or natural gas
production or reserves, the Company will have no production, no cash flow, and
no oil or natural gas reserves.

The Company intends to acquire interests in producing oil or natural gas
properties and exploratory prospects from others in the oil and gas business,
including persons or entities with whom members of management of the Company may
have an affiliation or other relationship.

<PAGE>

Business Strategy

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

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 in which it holds or may acquire an interest based on
acquisition and analysis of 3-D Seismic data and related technologies,
including "amplitude versus offset" or "AVO" analysis, in an effort to
improve drilling success rates and accelerate the development of oil
and natural gas reserves.

o Develop Drillsite Inventory. The Company's initial interests in the
Bali and Fiji prospects include an inventory of up to approximately 40
potential exploratory and development natural gas wells, based on an
initial review of the 3-D Seismic which has been completed. The
Company believes that the present cash resources, proceeds from this
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 at least 12 exploratory wells on the
these prospects. The Company intends to continue to seek and acquire
interests in other prospects in the United States and Canada.

o Acquire Interests in Oil and Natural Gas Properties. The Company will
continue to evaluate potential acquisitions of interests in 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 the Company's
reserves and production through the application of lower risk
exploitation and exploration techniques. The Company will evaluate and
may acquire interests in producing oil and natural gas properties
which may become available on terms acceptable to the Company. Such
acquisitions will be subject to the availability of properties deemed
suitable by the Board of Directors, availability of financial
resources, location and other factors.

The Company's executive offices are located at 1801 Broadway, Suite 720,
Denver, Colorado 80202, where it shares offices with George H. Fancher Jr., the
Company's Chairman. The telephone number is (303) 296-6600. The Company also
shares an office at 14555 North Scottsdale Road, Suite 200, Scottsdale, Arizona
85254 with Arizona Corporate Management, Inc., a business owned by William E.
Grafham, President. The phone number is (602) 483-8848.

<PAGE>

The Offering

<S> <C>
Common Stock Offered:

By the Company.................................. 3,000,000 shares.

By the Selling Securityholders.................. Up to 2,700,000 shares, including up to 900,000 shares
issuable upon exercise of outstanding warrants held by
nine persons. Selling Securityholders have agreed not
to sell or otherwise transfer Company securities held
by them for at least 120 days from the date of this
Prospectus and until 30 days after the Company
completes its offering; thus, the Offering by the
Company will not be concurrent with sales by Selling
Securityholders. See "Risk Factors-Potential Sales by
Selling Securityholders" and "Plan of Distribution."

Shares outstanding prior to Offering..................... 7,771,704 shares of Common Stock.

After Minimum Offering.......................... 8,071,704 shares of Common Stock (assuming no
outstanding warrants are exercised).

After Maximum Offering ......................... 10,771,704 shares of Common Stock (assuming no
outstanding warrants are exercised).

Use of proceeds.......................................... The Company would receive net proceeds of approxi-
mately $230,000 if only the Minimum Offering is sold,
or $2,660,000 if the Maximum Offering is sold, which
would be utilized to fund the Company's anticipated
drilling obligations and acquisition and exploration of
additional oil and natural gas properties. Officers and
directors of the Company do not presently plan to
purchase shares in the offering; however, such persons
or associates of such persons may purchase up to a
total of 100,000 of shares to help the Company complete
the sale of the Minimum Offering. See "Risk Factors"
and "Plan of Distribution." The Company will not
receive any proceeds from the sale of shares of Common
Stock by the Selling Securityholders. If all
outstanding warrants are all exercised by holders, the
Company would receive $1,190,000.

Risk factors............................................. The audit reports of the independent accountants
contain a "going concern" qualification. An investment
in the shares of Common Stock offered by this
Prospectus involves a high degree of risk and should be
considered only by persons who can afford the loss of
their entire investment. Prospective investors should
review carefully the entire Prospectus and should
consider, among other things, the matters described in
"Risk Factors."

Trading................................................ The Company will request one or more broker-dealers
which are members of the NASD to apply to have the
Common Stock of the Company listed on the OTC Bulletin
Board Market maintained by the NASD at the conclusion
of the Company's Offering. No present arrangements have
been made for the Company's Common Stock to be listed
on the OTC Bulletin Board.

</TABLE>

<PAGE>

Summary Financial Information
(Dollars in thousands, except per share data)

The following summary financial data for the periods set forth below have
been derived from the Company's financial statements included elsewhere in this
Prospectus. The summary financial data should be read in conjunction with
Management's Plan of Operations and the Financial Statements and the related
Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
Fiscal Year Ended
December 31,
----------------------------
1996 1997
---- ----
<S> <C> <C>
Statement of Operations Data:
Revenue...................................................................... $ - 0 - $ - 0 -
Costs and expenses........................................................... - 0 - 199,232
Net(loss).................................................................... - 0 - (199,232)
Net loss per share........................................................... - 0 - (0.03)
Net cash provided by (used in) operating activities.......................... - 0 - (51,468)

<CAPTION>
December 31,
----------------------------
1996 1997
---- ----
<S> <C> <C>
Balance Sheet Data:
Working capital ............................................................. $ - 0 - $ 419,402
Total assets................................................................. - 0 - 1,710,591
Total liabilities............................................................ - 0 - 5,315
Shareholders' equity......................................................... - 0 - 1,705,276

</TABLE>

<PAGE>

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risks, in addition to the other information contained in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.

New Business. Although the Company has existed since 1988, the Company was
substantially reorganized and entered a new line of business in 1997. Through
December 31, 1997 the only business conducted by the Company was to acquire an
undivided minority interest in two natural gas exploratory prospects, on one of
which one unsuccessful exploratory well was drilled and abandoned as a dry hole
in January 1998. The Company plans initially to conduct limited operations,
primarily by continuing to participate as a minority owner in the exploration of
the two natural gas prospects. The Company also intends to acquire similar
interests in other oil or natural gas exploratory prospects in the United
States. The Company's business operations are subject to all the risks inherent
in the establishment of a new business enterprise, including the absence of an
operating history, shortage of cash, lack of cash flow, undercapitalization and
similar problems. The Company does not anticipate that it will receive
substantial cash flow from its initial exploratory activities until and unless
at least several successful wells have been drilled, completed and placed on
production. The Company presently anticipates that its available cash will be
devoted toward acquisition of interests in other oil and gas properties and
participating in drilling activities. See "Business." Various problems,
expenses, complications and delays may be encountered in connection with the
development of the intended business. The Company also faces substantial
competitive and regulatory obstacles and other risks, some of which are
described below.

Qualified Audit Report; Operating Losses and Need for Additional Financing.
For the year ended December 31, 1997, the Company incurred operating losses of
approximately $199,000 and at such date had available working capital of
approximately $419,000. The auditors' reports for the Company's financial
statements for the periods ending, and at, December 31, 1996 and 1997 both were
qualified as to whether the Company has sufficient operating capital to enable
the Company to continue as a going concern. The Company intends to use its
available cash resources and proceeds of this Offering and the proceeds, if any,
from the exercise of outstanding stock purchase warrants to continue to
participate in the exploratory drilling of its two existing natural gas
prospects and to acquire similar interests in other oil and natural gas
properties. No other properties have been identified as of the date of this
Prospectus. The Company initially intends to participate in the drilling of at
least 10 additional wells on its existing natural gas prospects. The Company's
anticipated share in the expenses of drilling 10 wells and completing any
successful wells exceeds the Company's present cash resources and therefore
there can be no assurance the Company will have sufficient funds available to
complete its intended exploration drilling. If the Company completes the sale of
the Minimum Offering, and if outstanding stock purchase warrants which expire
during 1998 are exercised (see "Description of Securities--Warrants"), the
Company would have sufficient funds available to complete the initial portion of
its exploratory drilling plan and participate in drilling approximately 12
wells. There can be no assurance that required additional financing will be
obtained or that any other financing would be available to the Company from
other sources. See "Management's Discussion and Analysis and Plan of Operation."

Direct Offering by Officers and Directors. The Company is making the
Offering on a direct participation basis by its directors and officers. None of
such persons has recent experience in the sale of securities in an Offering of
the type described in this Prospectus. While there are escrow arrangements
pursuant to which proceeds from sales of shares will be held until at least the
Minimum Offering has been sold and to return the purchase price to investors if
at least the Minimum Offering has not been sold within 120 days (or within 180
days, should the Offering be extended), there can be no assurance that the
Offering will be successfully completed and it may be unlikely that all shares
offered are sold. In addition, the lack of a named underwriter or direct
participation in the Offering by named broker-dealers may make it more difficult
to complete the Offering and to establish a liquid public trading market
following the Offering. The directors and officers do not expect to purchase
shares in the Offering; however, such persons or associates of such persons may,
but are not obligated to, purchase up to 100,000 shares to help the Company
complete the Minimum Offering. See "Plan of Distribution."

<PAGE>

Potential Sales by Selling Securityholders. The Company has also registered
1,800,000 outstanding shares of Common Stock and 900,000 shares of Common Stock
underlying exercisable stock purchase warrants for resale by the holders. A
potential conflict of interest exists between the Company's Offering, described
in this Prospectus, and the offering of shares by the Selling Securityholders.
The nine persons who hold these securities have each agreed not to sell or
otherwise transfer (i.e., to "lockup") their Company securities until the later
of 120 days following the date of this Prospectus or until 30 days after the
Company has completed or discontinued its Offering, whichever is later (the
"Lockup Period"). No concurrent offering by the Selling Securityholders and the
Company is expected. However, the "overhang" of these shares may adversely
affect the willingness of brokers or dealers to seek to have the Company's stock
listed in the OTC Bulletin Board Market for public trading or to make a market
in the Company's Common Stock following the Offering. Also, the availability of
such shares for sale may adversely affect any public trading market which may
develop following the market. Selling Securityholders may sell their shares
following expiration of the Lockup Period whether or not the Company completes
the Minimum Offering.

Early Stages of Development Activities. The Company's initial strategy
includes (i) the use of 3-D Seismic and other state-of-the-art technologies to
maximize the potential of its properties, (ii) the drilling of exploratory wells
in the Sacramento Basin, and (iii) subject to the evaluation of the results of
seismic data and drilling, drilling of additional exploratory and development
wells in the area. The success of the project will be materially dependent on
whether the Company's initial few exploratory wells are commercially productive
wells and whether the Company can successfully acquire interests in additional
exploratory prospects. Although the Company believes the geologic
characteristics and results of its 3-D data survey of its two present prospects
reduce the risk of drilling nonproductive wells, there can be no assurance that
the Company will drill enough productive wells to establish natural gas reserves
and positive cash flow. If the Company drills a significant number of
nonproductive wells, the Company's business, financial condition and results of
operations would be materially adversely affected. Accordingly, due to the early
stage of development, the Company is unable to predict whether its exploration
activities in the Sacramento Basin will meet its expectations. In the event the
Company's exploration activities do not effectively establish reserves and
production, the Company's business, financial condition and results of operation
will be materially adversely affected.

Limited Management Participation. The Company's officers and directors are
presently compensated primarily with Common Stock of the Company and are not
employed on a full time basis by the Company. Each of such persons are expected
to devote only a portion of their time to the business and affairs of the
Company and all of the Company's officers and directors presently have other
business affairs to which they each devote most of their time. The success of
the Company in developing reserves of oil and natural gas and cash flow from the
production therefrom is dependent primarily upon the active participation of
George H. Fancher Jr., the Company's Chairman and William E. Grafham, the
President of the Company. Both of Messrs. Fancher and Grafham have substantial
experience in the oil and gas business but both also have significant and
demanding outside personal business interests, the effect of which will be to
minimize the amount of time that either has to devote to the business or affairs
of the Company. Mr. Fancher, the Chairman and Chief Operating Officer, plans to
devote 10% to 20% of his available business time to Company business. Mr.
Grafham, the President, does not expect to devote more than 10% of his time to
Company business. This limited time availability of management may adversely
affect the Company's ability to identify and acquire interests in other oil and
gas properties or to efficiently oversee the day-to-day development of the
existing exploratory endeavors. See "Conflicts of Interest" below
and"Management." The Company does not have key may life insurance on the lives
of, nor any employment agreement with, any of its officers or directors.

Conflicts of Interests. The directors and officers of the Company are
involved in other businesses, and have other interests in the oil and gas
business which may present conflicts of interest with respect to the activities
of the Company. Chairman George H. Fancher Jr. is involved on a full time basis
for his own account as an independent oil and gas producer. Mr. Fancher often
permits others to participate (i.e., acquire a working interest) in his oil and

8
<PAGE>

gas projects. Mr. Fancher has represented to the Company that oil or natural gas
prospects which he offers to third parties for participation, and which Mr.
Fancher, in his sole discretion, believes to be appropriate for the Company,
will be offered to the Company on terms no less favorable to the Company than
are available to any third party. Also, oil and gas business opportunities
generated by others and made available to Mr. Fancher for his participation,
which Mr. Fancher, in his sole discretion, believes to be appropriate for the
Company, will be made available to the Company on the same terms as are offered
to Mr. Fancher. Mr. Fancher may or may not participate in such ventures for his
own account. The Company will participate in an oil or natural gas prospect made
available by Mr. Fancher only if a majority of the Company's directors, other
than Mr. Fancher, approve the investment. Each of the other directors has
existing personal interests in various aspects of the oil and gas business and
each intends to continue such activities on his own behalf. However, each of the
directors has represented that any business opportunity in the oil or natural
gas business involving property located within 50 miles of any existing property
in which the Company holds an interest will be first offered to the Company
before the director pursues the opportunity for his own benefit.

Limited Operating History. The Company has a limited operating history upon
which investors may base their evaluation of the Company's prospects. As a
result of its brief history and recently commenced drilling program, the
financial results from the Company's historical periods are not indicative of
future results. There can be no assurance that the Company will experience
growth of revenue, oil and natural gas reserves or production. Any future growth
of the Company's oil and natural gas reserves, production and operations would
place significant demands on the Company's financial, operational and
administrative resources. See "Management's Discussion and Analysis and Plan of
Operation."

Volatility of Oil and Natural Gas Prices. The Company's future revenue,
operating results, profitability and growth and the carrying value of any oil
and natural gas properties it acquires or develops are substantially dependent
upon the prices available for oil and natural gas. Historically, the markets for
oil and natural gas have been volatile and such volatility may continue or recur
in the future. Various factors beyond the control of the Company will affect
prices of oil and natural gas, including the worldwide and domestic supplies of
oil and natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production controls,
political instability or armed conflict in oil or natural gas producing regions,
the price and level of foreign imports, the level of consumer demand, the price,
availability and acceptance of alternative fuels, the availability of pipeline
capacity, weather conditions, domestic and foreign governmental regulations and
taxes and the overall economic environment.

Any significant decline in the price of oil or natural gas would adversely
affect the Company and could require an impairment in the carrying value of any
reserves which the Company develops. See "Business and Properties--Competition"
and "Business and Properties--Regulation."

Lack of Control Over Oil and Gas Operations. The Company does not initially
expect to be the Operator of any of its oil or natural gas interests. All of the
Company's oil and natural gas properties presently consist of minority undivided
interests in properties operated by an unaffiliated entity. For the most part,
the Company will not have the right to determine the means, timing or
expenditures made in connection with operations, although the Company's
agreement with the Operator entitles the Company, or any other owner of an
undivided interest, to propose certain exploration activities and to become the
Operator for that activity if the Operator declines to act. Thus, the Company
will be unable to control material aspects of commercialization of its principal
assets and will be dependent upon the expertise, experience, ability, diligence
and financial condition of those who operate the various properties. An
independent operator's failure to properly perform could adversely affect the
Company.

Substantial Capital Requirements. The Company's current exploration plans
in the Sacramento Basin will require it to make substantial capital expenditures
in connection with the exploration and exploitation of those oil and natural gas
properties. The Company anticipates that the net proceeds from the Minimum
Offering and present working capital will be sufficient to meet its estimated
capital expenditure requirements for approximately 12 months following the
Offering. Exercise of outstanding warrants which expire in 1998 would generate
up to $1,190,000 of additional capital. The Company believes that it will
require a combination of additional financing and cash flow from operations to

9
<PAGE>

continue to implement its future plans. The Company currently does not have any
other arrangements with respect to, or sources of, additional financing, and
there can be no assurance that any additional financing will be available to the
Company on acceptable terms or at all. Future cash flows and the availability of
financing will be subject to a number of variables, such as the level of
production from any existing wells, prices of oil and natural gas and the
Company's success in locating and producing new reserves. To the extent that
future financing requirements are satisfied through the issuance of equity
securities, the Company's existing stockholders may experience dilution that
could be substantial. The incurrence of debt financing could result in a
substantial portion of the Company's operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the Company
more vulnerable to competitive pressures and economic downturns and could impose
restrictions on the Company's operations. If revenue, once established, were to
decrease as a result of lower oil or natural gas prices, decreased production or
otherwise, and the Company has no other capital sources available, the Company
could have a reduced ability to execute its exploration or development plans,
replace reserves, if any, or to maintain production levels, which could result
in decreased production and revenue over time. See "Management's Discussion and
Analysis and Plan of Operation."

Drilling and Operating Risks. Oil and natural gas drilling activities are
subject to many risks, including the risk that no commercially productive
reservoirs will be encountered. There can be no assurance that wells drilled by
the Company or in which the Company participates will be productive or that the
Company will recover all or any portion of its drilling costs. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells, but
from wells that are productive but do not produce sufficient net revenues to
return a profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including economic
conditions, title problems, water shortages, weather conditions, compliance with
governmental and tribal requirements and shortages or delays in the delivery of
equipment and services. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure may have a material adverse effect
on the Company's future results of operations and financial conditions.

The Company's operations are subject to hazards and risk inherent in
drilling for and producing and transporting oil and natural gas, such as fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of the Company and others. As protection against
operating hazards, the Company intends to maintain insurance coverage against
some, but not all, potential losses. The Company may elect to self-insure in
circumstances in which management believes that the cost of insurance, although
available, is excessive relative to the risks presented. The occurrence of an
event that is not covered, or not fully covered, by third party insurance could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Compliance With Governmental Regulations. Oil and natural gas operations
are subject to extensive federal, state and local laws and regulations relating
to the exploration for, and the development, production and transportation of,
oil and natural gas, as well as safety matters, which may be changed from time
to time in response to economic or political conditions. Matters subject to
regulation by federal, state and local authorities include permits for drilling
operations, road and pipeline construction, reports concerning operations, the
spacing of wells, unitization and pooling of properties, taxation and
environmental protection. There can be no assurance that delays will not be
encountered in the preparation or approval of such assessments, or that the
results of such regulations will not require the Company to alter its
development plans. Any delays in obtaining approvals or material alternations to
the Company's development plans could have a material adverse effect on the
Company's operations. From time to time, regulatory agencies have imposed price
controls and limitations on production by restricting the rate of flow of oil
and natural gas wells below actual production capacity in order to conserve
supplies of oil and natural gas. Although the Company believes it is in and will
continue to be in substantial compliance with all applicable laws and
regulations, the requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and the Company is unable to
predict the ultimate cost of compliance with these requirements or their effect
on its operations. Significant expenditures may be required to comply with
governmental and tribal laws and regulations and may have a material adverse
effect on the Company's financial condition and results of operations. See
"Business and Properties--Regulation."

<PAGE>

Compliance With Environmental Regulations. Operation of exploratory and
other wells are subject to complex and changing environmental laws and
regulations adopted by federal, state and local governmental authorities. The
implementation of new, or the modification of existing, laws or regulations
could have a material adverse effect on properties in which the company may have
an interest. The discharge of oil, natural gas or other pollutants into the air,
soil or water may give rise to significant liabilities on the part of the
Company to the government and third parties and may require the Company to incur
substantial costs of remediation. Moreover, 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. See "Business and
Properties--Regulation."

Reserve Replacement Risk. The Company's future success depends upon its
ability to find, develop or acquire oil and natural gas reserves that are
economically recoverable. Once established, proved reserves of the Company would
decline as reserves are depleted by production, except to the extent that the
Company conducts successful exploration or development activities, enhanced oil
recovery activities or acquires properties containing proved reserves. In order
to establish reserves and production, the Company must continue its exploration
drilling program or undertake other acquisition activities. The Company's
strategic plan includes increasing its reserve base through exploratory
drilling, development and exploitation of its existing property and acquiring
other producing properties. There can be no assurance, however, that the
Company's planned development and exploitation projects will result in
significant additional reserves or that the Company will have success drilling
productive wells at anticipated finding and development costs.

Control by Existing Stockholders. Upon completion of the Minimum Offering,
directors and executive officers will own approximately 47.9% of the Company's
outstanding Common Stock (approximately 37.2% if the Maximum Offering is
completed). Accordingly, these stockholders, as a group, will be able to control
the outcome of stockholder votes, including votes concerning the election of
directors, the adoption or amendment of provisions in the company's Certificate
of Incorporation or Bylaws and the approval of mergers and other significant
corporate transactions. These factors may also have the effect of delaying or
preventing a change in the management or voting control of the Company,
including transactions that otherwise could involve payment of a premium over
prevailing market prices to holders of Common Stock. See "Principal
Stockholders" and "Certain Anti-Takeover Provisions" below.

Competition. The Company operates in the highly competitive areas of oil
and natural gas exploration, exploitation and acquisition with many other
companies, most of which have substantially larger financial resources,
operations, staffs and facilities. In seeking to acquire desirable producing
properties or new leases for future exploration and in marketing its oil and
natural gas production, the Company faces intense competition from both major
and independent oil and natural gas companies. Many of these competitors have
financial and other resources substantially in excess of those available to the
Company. The effects of this highly competitive environment could have a
material adverse effect on the Company. See "Business and
Properties--Competition."

Acquisition Risks. The Company expects that it may from time to time
evaluate and acquire interests in properties in areas where various members of
management have experience or knowledge which provide attractive investment
opportunities for the addition of production and reserves and that meet
selection criteria established at the time. Successfully acquiring producing
properties or undeveloped acreage would require an assessment of recoverable
reserves, 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 is
inherently uncertain. In connection with such an assessment, the Company will
perform a review of the subject properties in a manner which management believes
to be generally consistent with industry practices. Such review, however, may

<PAGE>

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 and capabilities. Inspections may not be performed on every well,
and structural and environmental problems are not necessary observable even when
an inspection is undertaken. The Company generally would expect to assume
preclosing liabilities, including environmental liabilities and generally
acquire interests in the properties on an "as is" basis. With respect to its
only acquisition to date, the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. There can be no
assurance that any acquisitions will be successful. Any unsuccessful acquisition
could have a material adverse effect on the Company.

Certain Anti-Takeover Provisions. The Company's Certificate of
Incorporation authorizes the Board of Directors to issue up to 5,000,000 shares
of preferred stock without stockholder approval and to set the rights,
preferences and other designations, including voting rights, of those shares as
the Board of Directors may determine. These provisions, together with the
matters described in "Risk Factors--Control by Existing Stockholders," may
discourage transactions involving actual or potential changes of control of the
Company, including transactions that otherwise could involve payment of a
premium over prevailing market prices to holders of Common Stock. The Company
has no plans, arrangements, commitments or understandings relating to potential
issuance of preferred stock. The Company also is subject to provisions of the
Nevada General Corporation Law that may make some business combinations more
difficult. See "Description of Capital Stock--Certain Provisions of the
Company's Charter and Bylaws," and "--Nevada Law Provisions."

Absence of Dividends on Common Stock. 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. See "Dividend Policy."

Shares Eligible for Future Sale; Registration Rights. Upon completion of
the Minimum Offering, the Company will have a total of 8,071,704 shares
outstanding (10,771,704 shares if the Maximum Offering is completed). Of these
shares, the shares offered hereby and 2,623,533 presently outstanding shares
will be freely tradeable without restriction or registration under the
Securities Act of 1933, as amended (the "Securities Act"), by persons other than
"affiliates" of the Company, as defined under the Securities Act. The remaining
5,148,171 outstanding shares of Common Stock will be "restricted securities" as
that term is defined by Rule 144 as promulgated under the Securities Act, of
which 1,800,000 "restricted" outstanding shares, and up to 900,000 additional
restricted shares of Common Stock issuable upon exercise of outstanding
warrants, will be registered for resale. See "Principal and Selling
Securityholders." Upon completion of the Minimum Offering, the Company will also
have options outstanding to purchase an aggregate of 910,000 shares of Common
Stock. See "Executive Compensation and Other Information," "Shares Eligible for
Future Sale" and "Description of Securities."

Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock in any market which may develop. Nevertheless,
sales of substantial amounts of such shares in any public market, or the
perception that such sales could occur, could materially and adversely affect
the market price of the Common Stock and could impair the Company's future
ability to raise capital through an offering of its equity securities.

Immediate and Substantial Dilution. Purchasers of Common Stock in the
Offering will experience an immediate and substantial dilution in net tangible
book value per share of approximately $0.76 (76%) if only the Minimum Offering
is completed, or $0.59 (59%) if all shares offered by the Company are sold. See
"Comparative Data."

<PAGE>

Offering Price Determination. The offering price of the Common Stock being
offered was established by the Company based on such factors as the Company's
capital requirements, financial condition and prospects, percentage ownership to
be held by investors following this Offering, management and the general
condition of securities markets at the time of the Offering. The offering price
does not necessarily bear any relationship to the Company's assets, book value,
earnings history or other established criteria of value. The public offering
price of the Common Stock should not be considered an indication of the actual
value of the Company's securities.

No Prior Public Market; Possible Stock Price Volatility. Before the
Offering, there has been no public market for the Common Stock. The initial
public offering price has been determined by the Company, based on several
factors that may not be indicative of future market prices. There can be no
assurance that the Common Stock will be traded or listed on any public market or
that, if trading does develop, it will be sustained. The market price of the
Common Stock and the price at which the Company may sell securities in the
future could be subject to large fluctuations in response to changes and
variation in the Company's operating results, litigation, general market
conditions, the prices of oil and natural gas, the liquidity of the Company and
the Company's ability to raise additional funds, the number of market makers for
the Company's Common Stock and other factors. In the event that the Company's
operating results are below the expectations of public market analysts and
investors in one or more future periods, it is likely that the price of the
Common Stock will be materially adversely affected. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many energy
companies, particularly emerging and new companies and that often have been
unrelated to the operating performance of such companies. General market
fluctuations may also adversely affect the market price of the Common Stock.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The Commission's regulations generally define a penny stock to be an
equity security that has a price of less than $5.00 per share, subject to
certain exceptions (such exceptions include an equity security listed on NASDAQ
or issued by an issuer that has (1) net tangible assets of at least $2 million,
if such issuer has been in continuous operation for three years, (2) net
tangible assets of at least $5 million, if such issuer has been in continuous
operation for less than three years, or (3) average annual revenues of at least
$6 million, if such issuer has been in continuous operation for less than three
years). None of such exceptions are applicable to the Company. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.

In addition, unless and until the securities of the Company are listed for
trading on NASDAQ or the Company has $2 million in net tangible assets, trading
in the Company's securities will be subject to Rule 15c2-6 promulgated under the
Securities Exchange Act of 1934 for non-NASDAQ and nonexchange listed
securities. Under this rule, broker-dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to the sale of such
securities. Securities would be exempt from this rule if the market price is at
least $5.00 per share.

Because the Common Stock would be characterized as penny stock, the market
liquidity for the Company's securities could be adversely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and the ability of purchasers in this Offering
or other stockholders to sell their securities in the secondary market.

Limitations on Director Liability. The Company's Restated Articles of
Incorporation ("Restated Articles of Incorporation") provide, as permitted by
Nevada law, that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, with certain exceptions. These provisions may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against directors. In addition, the Company's Restated
Articles of Incorporation and bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Nevada law.

<PAGE>

USE OF PROCEEDS

The estimated net proceeds to the Company from this Offering, after
deduction of assumed 10% selling commissions and the estimated expenses of this
Offering, will be approximately $2,660,000 if all shares offered are sold and
$230,000 if only the Minimum Offering is completed. The Company anticipates that
the proceeds of this Offering will be applied and allocated over the next 12
months following this offering in approximately the amounts set forth below:

<TABLE>
<CAPTION>
Minimum Maximum
Shares Sold Shares Sold
----------- -----------
<S> <C> <C>
General and Administrative Expenses
(Officer and employee compensation and benefits, facilities, furniture
and equipment, and professional expenses) ................................ $ - 0 - $ 200,000
Oil and natural gas drilling and other exploration or acquisition
expenses(1) .............................................................. 230,000 2,460,000
--------- ----------
Total ................................................................. $ 230,000 $ 2,660,000
========= ==========
- ------------------
</TABLE>

(1) The Company plans to participate in the drilling of at least four and
perhaps as many as 10 wells on its two natural gas prospects in 1998 at
expected drilling costs to the Company of approximately $60,000 per
well. The first $240,000 of net proceeds from the Offering will be
utilized for these drilling expenses. If at least $1.0 million or more
is raised in the Offering, the Company may utilize a portion of the
proceeds for acquisition of other oil or natural gas properties,
including producing properties. The Company does not currently have any
commitments, agreements, or understandings with respect to any
acquisition of any property.

Pending their use for the foregoing purposes, the Company may invest
the proceeds in whole or in part in short term government or higher rated
investment grade securities.

The foregoing represents the Company's best estimate of its use of the
net proceeds of this Offering based on present planning and business conditions.
The Company may change its use of the proceeds as unanticipated events or
occurrences, such as increased expenses, successful or unsuccessful drill
targets or acquisition opportunities, may cause the Company to redirect its
priorities and reallocate the use of proceeds.

Any funds received by the Company upon exercise of outstanding warrants
will be added to working capital.

<PAGE>

COMPARATIVE DATA

All of the Company's presently outstanding shares of Common Stock were
issued at prices substantially lower than the price of the shares being offered
hereby.

As of December 31, 1997, the net tangible book value of the Company was
approximately $1,694,893 or $0.22 per share. If all shares offered by the
Company are sold, after deducting underwriting commissions and other offering
expenses, the pro forma net tangible book value of the Company would be
approximately $4,365,276 or $0.41 per share, which represents an immediate
increase of approximately $0.19 per share to present stockholders and an
immediate dilution of approximately $0.59 per share (59%) per share to the
investors in this Offering. If only the Minimum Offering is sold, after
deducting commissions and other Offering expenses, the pro forma net tangible
book value of the Company as of December 31, 1997, would be approximately
$1,935,276 or $0.24 per share, which represents an immediate increase of
approximately $0.02 per share to present stockholders and an immediate dilution
of approximately $0.76 per share (76%) to the persons purchasing shares pursuant
to the Offering being made hereby.

The following data illustrates the per share dilution to the investors
purchasing the shares being offered hereby:

Minimum Maximum
Offering Sold Offering Sold
------------- -------------
Offering price ..................................... $ 1.00 $ 1.00
Net tangible book value:
Before offering ................................ 0.22 0.22
After offering ................................. 0.24 0.41
Increase attributable to payment by investors..... 0.02 0.19
Dilution to investors(1)............................ 0.76 0.59
- -----------------

(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the amount paid per share by investors in
this Offering. Dilution will be increased by the amount of the Company's
operating losses for the period from December 31, 1997, to the completion
of the Offering.

The following tables compare the respective investments of current
stockholders and of investors in this Offering assuming the maximum and minimum
shares offered are sold:

<TABLE>
<CAPTION>
Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Minimum Offering Shares Common Stock Common Stock Consideration
- ---------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
New investors........................ 300,000 3.9% $ 1.00 $ 300,000
Existing stockholders................ 7,771,704 96.3% 0.23 1,800,000(1)
--------- ------ ----------
8,071,704 100.0% $ 2,100,000
========= ====== =========
<CAPTION>
Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Maximum Offering Shares Common Stock Common Stock Consideration
- ---------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
New investors........................ 3,000,000 27.9% $ 1.00 $ 3,000,000
Existing stockholders................ 7,771,704 72.1% 0.23 1,800,000(1)
--------- ------ ----------
10,771,704 100.0% $ 4,800,000
========== ====== =========
</TABLE>
- --------------------
(1) Includes $300,000, the net cost incurred by Mr. Fancher in connection with
acquisition and exploration of the Company's properties in excess of the
cash payment from the Company to Mr. Fancher for his interest in the
properties. See "Certain Transactions." Does not include the value of
services for which 250,000 shares were issued in 1997. Also, does not
include consideration paid to the Company prior to 1996 for 135,004 shares
now held by approximately 500 stockholders.

<PAGE>

The dilution figures and other comparative data contained herein do not
take into account the possible exercise of outstanding warrants or options.

DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is not presently traded on any public market. It
is anticipated that the Common Stock may be listed on the NASD's OTC Bulletin
Board Market following the completion of the Offering.

Dividend Policy. The Company has neither declared nor paid any dividends on
its Common Stock, nor does the Company anticipate that dividends will be paid on
its Common Stock in the foreseeable future. The Company's board of directors
presently intends to cause the Company to follow a policy of retaining earnings,
if any, to expand the Company's oil and natural gas business. Any future
determination to pay dividends on the Common Stock will depend on the Company's
results of operations, financial condition and capital requirements. No
assurance can be given that any holder of Common Stock will ever receive
dividends in respect of the holder's shares of Common Stock.

Stockholders. As of the date hereof, the Company had 522 holders of record
of the Company's Common Stock.

MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

The following discussion is intended to provide an analysis of the
Company's financial condition and Plan of Operation and should be read in
conjunction with the Company's financial statements and the notes thereto
contained elsewhere in this Prospectus. The matters discussed in this section
that are not historical or current facts deal with potential future
circumstances and developments. Such forward-looking statements include, but are
not limited to, the drilling plans for natural gas, trends in the results of the
Company's operations, anticipated rates of production, natural gas prices,
operating expenses and the Company's anticipated capital requirements and
capital resources. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed under the caption "Risk Factors."

Plan of Operation

The Company has not generated revenues in any of the last two fiscal years.
The Company plans to generate future revenue through its participation in
drilling with others in the Sacramento basin of cenral California.

The Company plans to identify drilling locations for natural gas that bear
consistent analytical data using 3-D Seismic and AVO technologies. Once such
drilling targets are identified, the Company anticipates participating with a
25% working interest. The cost to the Company to drill a dry hole is expected to
be approximately $65,000. The estimated annual cost for general and
administrative expenses of the Company is anticipated to be approximately
$135,000 and other capital costs associated with the existing properties may
approximate $200,000. At December 31, 1997, the Company had approximately
$419,000 in cash.

Based upon the available working capital at the beginning of 1998, the
Company could cover its anticipated general and administrative costs, capital
lease costs and participate in drilling a maximum of two exploratory wells
before additional funds would be required. If a drilled well is successful,
after payment of the Company's share of completion expenses, the Company would
expect to be able to drill a second well using the proceeds from production of
the successful well in approximately six months after it began producing,
assuming anticipated rates of production and current natural gas prices.

<PAGE>

The Company's anticipated share of the additional costs to complete a
successful natural gas well in the Sacramento Basin would be approximately
$40,000. From a successful well the Company anticipates net monthly revenue of
approximately $13,000, based upon expected average monthly gross gas production
of 45,000 mcf at a price of $1.80 per mcf. Direct costs for drilling and
completing a successful well may be recovered in approximately eight months. The
expected producing life of wells in the area is anticipated to be three to ten
years.

The Company expects at least a portion of outstanding warrants to be
exercised by warrant holders if drilling results in one or more successful wells
producing at anticipated rates. If all outstanding warrants were exercised, the
Company would receive $500,000 by June 2,1998 and an additional $690,000 by
October 31, 1998, the dates of expiration.

Results of Operations

For Year Ended December 31, 1997 Compared to Prior Fiscal Years

During 1996 the Company had no revenue or expenses and limited its
activities to seeking a management team that would add value to the Company. The
Company was successful in identifying an investor during 1996 that purchased a
controlling interest in the Company during 1997.

During 1997, the Company became active as the result of a significant
change in ownership and newly appointed officers and directors. It incurred
$17,856 in legal fees, consulting fees of $50,400 and travel and entertainment
expenses of $14,632. Accounting costs of $25,205 were incurred to prepare the
Company's records for an audit of the fiscal year of 1997 and for internal
management use.

The Company was dormant and had no activity during the two years ended
December 31, 1996. Through December 31, 1996, the Company incurred $6,367 of
liability to a former officer who paid Company expenses incurred in maintaining
the Company's status. The Company issued 636,700 shares to the former officer in
December 1996 in satisfaction of the obligation.

The Company utilizes no internal computer software or computer operating
systems which it believes will be impacted, in any material manner, by Year 2000
issues. Due to the nature of the Company's business, no material adverse impact
on the Company is anticipated due to Year 2000 issues on operators of oil and
natural gas properties in which the Company owns an interest, co-owners,
suppliers, future customers or others.

Liquidity and Capital Resources

At December 31, 1997, the Company's current assets of $424,717 exceeded
current liabilities of $5,315, resulting in working capital of $419,402. The net
proceeds from private placements received by the Company during 1997 was
$1,451,676 for 4,500,000 shares of Common Stock and warrants to purchase an
additional 3,680,000 shares. The Company would receive $1,190,000 during 1998 if
all outstanding warrants are exercised.

On November 11, 1997 the Company completed purchase of its 25% undivided
working interest in two natural gas exploration prospects in California. The
Company disbursed $907,951 in cash and issued 2,250,000 common shares valued at
$300,000 to acquire the prospects. In December 1997 the Company prepaid the
Operator of the properties a nonrefundable deposit of $60,625 to cover the
Company's anticipated drilling costs to drill a targeted exploratory gas well,
drilled in January 1998.

The Company believes that the net proceeds from the Minimum Offering,
together with existing cash and proceeds from the exercise of outstanding
warrants will be sufficient to meet its anticipated cash needs for at least the
next 12 months. Thereafter, if cash generated from anticipated producing wells
is insufficient to satisfy the Company's capital needs, the Company expects that

<PAGE>

it will require additional capital in the future for funding working capital and
drilling additional equity or debt securities or complete other financing. The
Company has no commit ments in place to provide additional capital. In the event
financing is needed in the future, there can be no assurance that it will be
available to the Company in an amount and on terms acceptable to the Company.
See "Risk Factors--Operating Losses and Need for Additional Financing."

BUSINESS AND PROPERTIES

General

The Company is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas reserves. Since
reestablishing its business in 1997 the Company has acquired a 25% working
interest in two exploration prospects, totaling approximately 30,000 acres,
helped to review 3-D Seismic on most of the acreage and participated in one
exploratory well. The Company intends to seek to develop 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
Sacramento Basin in central California where its two exploration prospects are
located. The Company anticipates participating in the drilling of 6 to 12
exploratory or development wells on these properties in 1998 and, depending upon
the success of the initial drilling, the market for natural gas, the
availability of capital and other factors, that as many as 40 wells may be
drilled to fully test and exploit these two prospects. The Company intends to
use its present cash assets, the proceeds of this Offering, and the anticipated
proceeds from the exercise of outstanding stock purchase warrants to meet the
capital requirements for exploration and development of its two current
properties and to acquire similar types of interests in other oil and natural
gas properties in the United States and Canada. The initial well, drilled to
test for the presence of hydrocarbons at approximately 7,400 feet on one of the
prospects, was a dry hole. It is intended that two wells will be drilled in late
June 1998.

The Company presently has no reserves of oil or natural gas, no production
and no cash flow and it is not anticipated that any will develop unless and
until the present exploratory drilling program is successful, and the Company
participates in the development of reserves and production from this property.
The Company does not serve as the Operator in its two present prospects. As
described below, a nonaffiliated independent oil and gas producer serves as the
Operator pursuant to an operating agreement standard in the industry. As a
result, 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, 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.

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 have a good potential to develop significant oil or natural
gas production and reserves utilizing 3-D Seismic and other state-of-the-art
technologies. 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.

Business Strategy

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

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 in which it holds or may acquire an interest based on
acquisition and analysis of 3-D Seismic data and related technologies,
including "amplitude versus offset" or "AVO" analysis, in an effort to
improve drilling success rates and accelerate the development of oil
and natural gas reserves.

<PAGE>

Principal Properties

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 are, in the order of importance, as
follows:

The Winters formation is the deepest and least explored due
to the inadequacy of 2-D seismic in defining prospective drilling
locations. This formation produces natural gas within and on all
sides of each of the Company's two prospects. Average reserves
for wells producing from this formation in the area are 2,500,000
mcf per well ranging in depth between 6,000 to 8,000 feet.

The Starkey formation is immediately above the Winters. The
average reserves for wells producing from this formation are
1,800,000 mcf per well at 4,000 to 6,000 feet.

The Mokelumme formation is at a depth of approximately 3,000
to 4,000 feet and the average reserves for wells producing from
this zone are 500,000 mcf per well.

The Domengine formation is located at a dept of
approximately 2,000 to 3,000 feet, and the average reserves for a
producing well in this formation are 400,000 mcf per well.

<PAGE>

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 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,
1997 the Operator had incurred approximately $3.6 million for land acquisition
and 3-D Seismic data expenses, of which the Company and its predecessor had paid
approximately $1.2 million.

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

The Company has a working interest relating to 16,182 gross acres (14,551
net acres) and 15,476 gross acres (14,551 net acres) in the Fiji and Bali
Prospects, respectively. A 3-D Seismic exploration program has been conducted by
the Operator on each prospect and the data has been processed and most
evaluation has been completed. Drilling was discontinued in January 1998 after
the first well was drilled due to wet field conditions brought about by the
winter's el Nino storms in central California. It is anticipated that drilling
activity will resume late in the second quarter of 1998 after the drill sites
have dried.

<PAGE>

Acreage

The following table sets forth, as of December 31, 1997, the gross and net
acres of undeveloped oil and natural gas leases which the Company beneficially
holds or has the right to acquire. The Company has no interest in any developed
oil or natural gas leases.

Prospect Area Developed Undeveloped
- ------------- ----------------- -----------------
Gross Net Gross Net
----- --- ----- ---
Sacramento Basin:
Bali Prospect ............. - 0 - - 0 - 15,476 3,638
Fiji Prospect ............. - 0 - - 0 - 16,182 3,638
------ ------ ------ -----
Total ............... -- -- 31,658 7,276

Exploration and Development Activities

In January 1998, the Company participated in the drilling of its first
exploratory well which resulted in a dry hole. The Company paid approximately
$61,000 as its 25% portion of drilling and exploratory well expenses.

No reserves or oil or natural gas have been established attributable to the
Company's interests in the above acreage.

Acquisitions

The Company expects that it may evaluate and pursue from time to time
acquisitions of interests in producing, exploratory or development oil and gas
properties that provide attractive investment opportunities for the addition of
production and reserves and that meet the Company's selection criteria. The
successful acquisition of such properties requires an assessment of potential
reserves of oil or natural gas, future oil and natural gas prices, operating
costs, potential environmental and other liabilities and other factors beyond
the Company's control. Such an assessment is necessarily inexact and its
accuracy would be inherently uncertain. The Company intends that upon any such
acquisition, management will perform a review of the subject properties
generally consistent with industry practices. Such a review, however, will not
reveal all existing or potential problems, nor will 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, may become 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

<PAGE>

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. For March 1998, the price paid by
natural gas purchasers in the Sacramento Basin of central California was
approximately $2.00 per mcf. Such prices could be higher or lower at the time
that any production from the Company's exploratory activities is available for
sale, depending upon the above factors and other unforseen circumstances.

Competition

The Company operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies, many
of which have substantially larger financial resources, operations, staffs and
facilities. In seeking to acquire desirable producing properties or production,
the Company faces intense competition from both major and independent oil and
natural gas companies. The company expects that the inventory of unproved
drilling locations in the two prospects in which the Company has an interest
will be the primary source of new reserves, production and cash flow during the
next year. There can be no assurance that the two prospects will yield
substantial economic returns. Failure of the two prospects to yield significant
quantities of economically attractive reserves in production could have a
material adverse impact on the Company's future financial condition and could
result in a writeoff of a significant portion of its investment in the oil and
gas properties. In addition, recent drilling activity by a number of operators
in the Sacramento Basin may reduce or limit the availability of equipment and
supplies or reduce demand for the Company's production, either of which would
impact the Company more adversely than if the Company were geographically
diversified.

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 unable to predict the future
cost or impact of complying with such laws.

The state of California 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.

<PAGE>

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

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

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

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

<PAGE>

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. Although NEPA is a procedural statute only
applicable to the federal government, a significant portion of the Company's
Sacramento Basin acreage is located either 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.

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.

Office Facilities

The Company currently uses approximately 750 square feet of office space in
Scottsdale Arizona which it shares with Arizona Corporate Management, Inc., a
company owned by William E. Grafham, President, and shares offices with its
Chairman, George H. Fancher Jr. in Denver, Colorado. The Company pays $2,000 per
month, on a month-to-month basis, for each office for rent and related services.
See "Certain Transactions."

Employees

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

<PAGE>

MANAGEMENT

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

Names of Executive
Officers and Directors Age Position
- ---------------------- --- --------
George H. Fancher Jr. ..... 58 Chairman of the Board, Chief Operating
Officer and Director
William E. Grafham......... 60 President, Chief Executive Officer and Director
Jeffrey J. Scott........... 35 Vice President and Director
Rex L. Utsler ............. 52 Vice President and Director
George A. Cloudy .......... 64 Director
Albert A. Golusin.......... 43 Secretary and Treasurer

George H. Fancher Jr. Mr. Fancher has been a self employed independent oil
producer, operator and consultant in the Rocky Mountain Area since 1969, doing
business as Fancher Oil Company since 1980. He was employed by Chevron as a
Petroleum Engineer, in Casper, Wyoming, and Denver, Colorado from 1962 until
1966. In 1966, he joined Ball Brothers Research Corporation in Boulder,
Colorado, followed by two years with an independent oil company before forming
Smith-Fancher, independent producers in the Rocky Mountain and Mid-Continent
regions. In 1980, he formed Fancher Oil Company and has operated as a sole
proprietor since that time.

George Fancher has been a director of the Independent Petroleum Association
of America (IPAA), the Independent Petroleum Association of Mountain States
(IPAMS) and the Rocky Mountain Oil and Gas Association (RMOGA). He is a
registered Petroleum Engineer and a member of the Society of Petroleum
Engineers. He also serves 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 Chairman of the Rocky Mountain Producers Advisory Group and on
the Board of Directors of the Petroleum Technology Transfer Council (PTTC).

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 Canadian companies:

<TABLE>
<CAPTION>
Company Public Exchange Type of Business

<S> <C> <C>
Viceroy Research Corporation Toronto Stock Exchange Gold mining
Jerez Energy International, Inc. Alberta Stock Exchange Oil and gas
Jettstar Resource Services Inc. Alberta Stock Exchange Service rigs-oil
Walking Bear Resources Inc. Alberta Stock Exchange Technology
Tellis Gold Mining Company Inc. Vancouver Stock Exchange Mining
</TABLE>
25

<PAGE>

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.

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. From 1991 to 1997 Mr.
Utsler was president and chief executive officer of Grease Monkey Holding
Corporation, a public company, specializing in automotive services.

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

In 1965 he was a co-founder of Digicon Inc., now Veritas DGC. From 1965 to
1984 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 12 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.

<PAGE>

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 fiscal year ended December 31, 1997 (there was no compensation
in prior years) of the chief executive officer at December 31, 1997 and all
officers and directors, as a group.
<TABLE>
<CAPTION>

Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Positions at 12/31/97 Salary Bonus Compensation Options Compensation
- --------------------- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
William E. Grafham ................... - 0 - - 0 - - 0 - 200,000 None
President

All officers and directors,
as a group (five persons) ........... $10,027(1) - 0 - $30,000(2) 800,000 - 0 -
- ---------------------
</TABLE>

(1) Paid to Albert A. Golusin, Secretary, for services as a consultant.
(2) 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.

The Company has an agreement to pay Albert A. Golusin a monthly retainer of
$2,500, as a consultant, for part time accounting and financial reporting
services. In addition, Mr. Golusin will receive 15,000 shares of Common Stock on
July 1, 1998 for services he provides to the Company through June 30, 1998.

Value of Options at December 31, 1997
<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............ 150,000/50,000 $104,000/$39,000
All officers and directors
as a group................... 735,000/65,000 $435,500/$50,700
- ----------------------
</TABLE>

(1) Because there is no trading market, the estimated value is based on the
offering price of $1.00 of the Company's Common Stock less the exercise
price of the options.

Option Grants in the Last Fiscal Year

The Company granted options during 1997 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>
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
- ----------------------
</TABLE>

<PAGE>

(1) These options become exercisable as to one-half of the shares six months
from the date of grant (July 1, 1997) and as to the balance, on July 1,
1998. 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 outstanding. The options for 230,000 shares vest in two equal
installments at six months from the date of grant and at the first anniversary
of the grant. Other outstanding options became vested at December 31, 1997. The
options are exercisable at $0.20 per share for 30,000 shares, $0.22 per share
for 100,000 shares, $0.35 per share for 680,000 shares and $0.50 per share for
options to purchase 100,000 shares granted to George A. Cloudy in April 1998 at
the time he joined the Board of Directors. The outstanding options must be
exercised within 10 years from the date of grant and no later than three months
after termination of employment or service as a director, except that any
optionee who is unable to continue employment or service as a director due to
total and permanent disability may exercise such options within one year of
termination and the options of an optionee who is employed or disabled and who
dies must be exercised within one year after the date of death.

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

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

Compensation of Directors

The Company does not pay cash compensation to directors. Four of the
directors of the Company will be 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 right to receive
such shares will be forfeited if a director is unable or unwilling to perform
the services. 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 becomes exercisable
as to half of the shares six months after the date of grant and as to the
balance one year from the date of grant.

<PAGE>

PRINCIPAL AND SELLING SECURITYHOLDERS

The following table sets forth, as of April 30, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered by the Company pursuant
to this Prospectus, 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, (iii)
each person whose shares have been registered for resale in the Registration
Statement of which this Prospectus is a part (the "Selling Securityholders"),
and (iv) 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 after offering
---------------------------
Percent
Shares Beneficially -----------------
owned prior to offering(1) Shares Minimum Maximum
Name of Beneficial Owner ------------------------- being offered Offering Offering
or Name of Officer or Director Number Percent for sale Number Sold Sold
- -------------------------------------------- ------ ------- ------------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
William E. Grafham, Director .................... 843,568(2) 10.5% -- 843,568 10.1% 7.7%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI

George H. Fancher Jr., Director ................. 3,000,000(3) 35.2% -- 3,000,000 34% 26%
1801 Broadway, Suite 720
Denver, Colorado 80202

Rex L. Utsler, Director ......................... 350,000(4) 4.4% -- 350,000 4.2% 3.2%

Jeffrey J. Scott, Director ...................... 200,000(5) 2.5% -- 200,000 2.5% 1.8%

George A. Cloudy, Director ...................... -- -- -- -- -- --

Albert A. Golusin, Secretary and Treasurer......... 185,000(6) 2.4% -- 185,000 2.3% 1.7%

David Grafham ................................... 650,000(7) 8.0% -- 650,000 7.7% 5.9%
1307 West 8th Avenue
Vancouver, B.C.
Canada V5H 3W4

Roger Duffield .................................. 625,000((9) 7.8% -- 625,000 7.4% 5.7%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)

Euro Securities Ltd. ............................ 650,000(7) 8.0% -- 650,000 7.7% 5.9%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)

Linda Kemble .................................... 650,000(7) 8.0% -- 650,000 7.7% 5.9%
#59 Temple Hill Dr. N.E ................
Calgary, Alberta
Canada T1Y 404

Don Stewart ..................................... 738,000(10) 9.0% -- 738,000 8.7% 6.6%
P. O. Box 245
Grand Cayman, BWI(8)

<PAGE>

<CAPTION>
Shares beneficially
owned after offering
---------------------------
Percent
Shares Beneficially -----------------
owned prior to offering(1) Shares Minimum Maximum
Name of Beneficial Owner ------------------------- being offered Offering Offering
or Name of Officer or Director Number Percent for sale Number Sold Sold
- -------------------------------------------- ------ ------- ------------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Susan Scott ..................................... 415,000(12) 5.2% 300,000(15) 115,000 1.4% 1.1%
#2 2109 4th Avenue, N.W.
Calgary, Alberta, Canada T2N 0N6

Alex Whiteside .................................. 405,000(11) 5.1% 405,000(14) - 0 - -- --
1530--1001 13 Avenue, S.W.
Calgary, Alberta, Canada T2R 0L5

Aldridge Holdings, Ltd. ......................... 300,000(11) 3.7% 300,000(11) - 0 - -- --

Bank Lips, Ltd. ................................. 372,000(14) 4.7% 300,000(12) 72,000 .9% .7%

Colony Investments Limited ...................... 320,000(15) 4.1% 300,000(13) 20,000 .2% .2%

EMB Management Consultants ...................... 300,000(13) 3.8% 300,000(11) - 0 - -- --

Hartford Securities ............................. 300,000(13) 3.8% 300,000(11) - 0 - -- --

Charles Maddin .................................. 300,000(13) 3.8% 300,000(11) - 0 - -- --

Wadeco, Inc. .................................... 345,000(16) 4.4% 195,000(17) 150,000 1.8% 1.4%

All officers and directors as a
group (6 persons) ............................... 4,578,568(17) 49.5% 950,000 4,578,568 47.9% 37.2%
</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, 1998 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 250,000 shares of Common Stock underlying presently exercisable
options and warrants.
(3) Includes 750,000 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 warrants
(5) Includes presently exercisable options to purchase up to 150,000 shares.
(6) Includes 135,000 shares of Common Stock underlying presently exercisable
options and stock purchase warrants.
(7) Includes 325,000 shares of Common Stock underlying presently exercisable
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 225,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.

<PAGE>

(10) Includes 413,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(11) Includes 135,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(12) Includes 215,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(13) Includes 100,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(14) Includes 172,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(15) Includes 120,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(16) Includes 65,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(17) Includes 750,000 shares underlying presently exercisable stock purchase
warrants and 735,000 shares of Common Stock underlying presently
exercisable options

CERTAIN 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 for $690,000 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.

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 total over
30,000 acres and are located in the southern part of the Sacramento Basin. See
"Business--Principal Properties." The Company paid $907,951 in cash and issued
2,250,000 shares at a deemed value of $300,000 for the property. Mr. Fancher
acquired the interests in the properties early in 1997 and incurred
approximately $1,208,000 for acquisition of his interest in the properties and
payment of his portion of exploration and leasehold costs and expenses before
transfer to the Company. The Company also paid $6,247 to Mr. Fancher
representing interest on a portion of Mr. Fancher's cost between the time that
the agreement to acquire the properties was made and the date of completion of
the transaction As additional consideration, the Company agreed to issue 500,000
additional restricted shares to Mr. Fancher if the gross revenue received by the
Company from the prospects is at least equal to all direct costs of the Company
associated with acquiring the interest in the prospects and exploration,
drilling and other related expenses by December 31, 1999. At December 31, 1997
the Company had incurred direct costs of approximately $1,275,491, including the
cash payment 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.

In 1997 the Company paid $18,000 to Arizona Corporation 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 Mr. Fancher was paid $2,000 in
1997 and will be paid $2,000 per month in 1998 for office facilities, use of
certain office equipment and limited administrative and technical support.

<PAGE>

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 non-United States residents.

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.

PLAN OF DISTRIBUTION

Shares of Common Stock Offered by the Company

The offering of shares of Common Stock by the Company is being conducted by
the Company on a 300,000 share minimum (the "Minimum Offering"), 3,000,000 share
maximum (the "Maximum Offering") direct participation basis at an offering price
of $1.00 per share. The six persons who are the Company's officers and directors
will offer the shares of Common Stock on behalf of the Company. Such persons
will not be compensated, directly or indirectly, in connection with
participation in the sale of the shares. In addition, the Company may engage one
or more brokers or dealers which are members of the National Association of
Securities Dealers, Inc. ("NASD') and which are registered as such with the
United States Securities and Exchange Commission to act as nonexclusive agents
(the "Selected Dealers") on behalf of the Company to offer and sell the shares
of Common Stock. Any such Selected Dealer would be paid a commission of 10% of
the purchase price of Common Stock sold by them. No broker-dealer or other
person has made any commitment to purchase or sell any or all of the shares of
Common Stock offered by the Company. It is not anticipated that any Selected
Dealer would sell more than 10% of the shares of Common stock offered by the
Company. The officers and directors of the Company and any Selected Dealers will
use their best efforts to identify purchasers for the shares during the offering
period. The Company will agree to indemnify each Selected Dealer against certain
liabilities, including certain liabilities or claims under the Securities Act or
to contribute to payments the Selected Dealer may be required to make in respect
thereof.

All proceeds from subscriptions with respect to shares of Common Stock
offered and sold by the Company or a Selected Dealer will be deposited promptly
with The Bank of Denver, Denver, Colorado, as Escrow Agent, pursuant to an
Escrow Agreement between the Company and the Escrow Agent. Funds received from
subscriptions will be transmitted to the Escrow Agent no later than noon of the
business day following receipt by the Company and any Selected Dealers. Unless
the Company has completed at least the Minimum Offering and deposited the
proceeds with the Escrow Agent within 120 days from the date of this Prospectus
(which date may be extended for up to an additional 60 days without notice by
the Company), subscriptions will be refunded promptly to subscribers in full
without deduction therefrom or interest thereon. During the 120-day offering
period and any extension, no subscriber will be entitled to a refund of any
subscription.

The Company may sell shares of Common Stock to interested subscribers if
they reside in a state in which the shares may be sold and in which the Company
or a Selected Dealer is permitted to sell the shares. The Company is not
obligated to sell any shares to any person. Additionally, officers, directors
and present stockholders of the Company and affiliates or persons associated
with such persons may purchase up to 100,000 of the shares offered, including
making purchases of amounts necessary to complete the Minimum Offering within
the offering period. Such persons would purchase the shares on the same terms as
purchases by the public provided that shares purchased by officers or directors
or their affiliates would be taken for investment and would not be resold except
in compliance with applicable securities laws. The proceeds from this Offering
will not be utilized, directly or indirectly, to enable anyone to purchase
shares of Common Stock offered by the Company. To the extent that officers,
directors, current stockholders and their affiliates or associates purchase
shares offered by the Company in the Offering, the number of shares in the
Minimum Offering required to be purchased by the general public will be reduced
by a like amount and under such circumstances the control of the Company by the
present stockholders would be increased. The officers and directors of the
Company and any Selected Dealers may be deemed to be "underwriters" as such term
is defined under the Securities Act.

<PAGE>

Selected Dealers or others may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock in any market which
may develop following the Offering, including bidding for, or purchasing shares
of Common Stock in the open market, in stabilization transactions or otherwise.
Any of these activities, if undertaken, could stabilize or maintain the market
price of the Common Stock above independent market levels and could be
discontinued at any time.

Certain provisions included in the Company's Articles of Incorporation and
Bylaws require the Company to indemnify officers or directors for certain
liabilities incurred while serving as an officer or director of the Company.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions, or otherwise, the Company has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and would, therefore,
be unenforceable.

Sale of Shares by Selling Securityholders

The Selling Securityholders described in the table above hold a total of
1,800,000 shares of outstanding Common Stock and warrants entitling them to
purchase up to 900,000 additional shares of Common Stock. The outstanding shares
and the shares to be issued upon exercise of the warrants are restricted
securities as defined in Rule 144 adopted under the Securities Act while held by
the Selling Securities.

Each of the Selling Securityholders has agreed not to sell or otherwise
transfer his or her shares for at least 120 days from the date of this
Prospectus and until the Company has concluded its Offering (the "Lockup
Period"). Thereafter, the Selling Securityholders (or their pledgees, donees,
transferees, or other successors in interest) from time to time may sell all or
a portion of the Shares "at the market" to or through a market maker or into an
existing trading market, if a market then exists, in private sales, including
direct sales to purchasers, or otherwise at prevailing market prices or at
negotiated or fixed prices. The Selling Securityholders may offer and sell
shares following the Lockup Period regardless of the outcome of the Offering by
the Company. By way of example, and not by way of limitation, the Shares may be
sold by one or more of the following methods: (a) a block trade in which a
broker or dealer so engaged will attempt to sell the Shares as agent but may
purchase and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) an exchange
distribution in accordance with the rules of such exchange; and (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers or dealers engaged by the seller may arrange for
other brokers or dealers to participate. Brokers or dealers will receive
commissions or discounts from the seller in amounts to be negotiated with the
Selling Securityholder immediately prior to the sale. It is anticipated that the
per share selling price for the Shares sold when a public market exists will be
at or between the "bid" and "asked" prices of the Company's Common Stock, if
any, as quoted in the over-the-counter market immediately preceding the sale.
Such brokers or dealers and any other participating brokers or dealers may be
deemed to be "underwriters" within the meaning of the Securities Act, in
connection with such sales. A copy of this Prospectus will be delivered by the
Selling Securityholder to each purchaser or as otherwise required at the time of
sale. Expenses of any such sale will be borne by the parties as they may agree.

In addition, any securities covered by the Prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than pursuant to the Prospectus.

The Selling Securityholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Shares
against certain liabilities, including liabilities arising under the Securities
Act. Any commissions paid or any discounts or concessions allowed to any such
broker-dealer which purchases Shares as principal or any profits received on the
resale of such Shares may be deemed to be underwriting discounts and commissions
under the Securities Act.
32

<PAGE>

In order to comply with certain state securities laws, if applicable, the
Shares may be sold in only states where the Shares have been registered or
qualified for sale or an exemption from registration or qualification is
available and is complied with.

The Shares offered hereby will be sold by the Selling Securityholders (or
their pledgees, donees, transferees or other successors in interest) acting as
principals for their own account. The Company will receive none of the proceeds
from such sales.

No underwriting arrangements exist as of the date of this Prospectus for
any Selling Securityholders to sell its shares. Upon being advised of any
underwriting arrangements that may be entered into by a Selling Securityholder
after the date of this Prospectus, the Company will prepare a supplement to this
Prospectus to disclose such arrange ments.

Certain Provisions of the Articles of Incorporation, Bylaws and Nevada Law

The Company's ability to issue shares of new classes of preferred stock and
to determine the rights, preferences, privileges, designations and limitations
of such stock, including the dividend rights, dividend rate, conversion rights,
voting rights, terms of redemption and other terms of conditions of such stock,
could make it more difficult for a person to engage in, or discourage a person
from engaging in, a change in control transaction without the cooperation of
management.

The Company's Articles of Incorporation contain a provision, authorized
under Nevada law, which limits the liability of directors or officers of the
Company for monetary damages for breach of fiduciary duty as an officer or
director other than for intentional misconduct, fraud or a knowing violation of
law or for payment of a dividend in violation of Nevada law. Such provision
limits recourse for money damages which might otherwise be available to the
Company or stockholders for negligence by individuals while acting as officers
or directors of the Company. The Restated Articles of Incorporation do not
provide for the elimination of or any limitation on the personal liability of
directors for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful corporate
distributions, or (iv) any transaction from which such director derives an
improper personal benefit. Although this provision would not prohibit injunctive
or similar actions against directors or officers, the practical effect of such
relief would be limited.

The Articles of Incorporation and Bylaws also contain provisions requiring
the Company to indemnify officers, directors and certain employees for certain
liabilities incurred in connection with actions taken on behalf of the Company,
including expenses incurred in defending against such liabilities. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

Anti-Takeover Statutes

The Nevada General Corporation Law ("Nevada GCL") contains two provisions,
described below as "Combination Provisions" and the "Control Share Act," that
may make more difficult the accomplishment of unsolicited or hostile takeover
transactions.

Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Stockholders. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),

<PAGE>

except those which are approved by the board of directors before the interested
stockholder first obtained a 10% interest in the corporation's stock. There are
additional exceptions to the prohibition, which apply to combinations if they
occur more than five years after the interested stockholder's date of acquiring
shares. The Combination Provisions apply unless the corporation elects against
their application in its original articles of incorporation or an amendment
thereto, or in its bylaws. The Company's Articles of incorporation and Bylaws do
not currently contain a provision rendering the Combination Provisions
inapplicable.

Nevada Control Share Act. Nevada's Control share Acquisition Act (the
"Control Share Act") imposes procedural hurdles on and curtails greenmail
practices of corporate raiders. The Control Share Act temporarily
disenfranchises the voting power of "control shares" of a person or group
("Acquiring Person") purchasing a "controlling interest" in an "issuing
corporation" (as defined in the Nevada GCL) not opting out of the Control Share
Act. In this regard, the Control Share Act will apply to an "issuing
corporation" unless, before an acquisition is made, the articles of
incorporation or bylaws in effect to the 10th day following the acquisition of a
controlling interest provide that it is inapplicable. The Company's Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.

Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of the Company and its
stockholders at the time of the occurrence of a transaction governed by the
Control Share Act (assuming that the Company's Articles of Incorporation or
Bylaws have not theretofore been amended to include opting out provisions) would
determine whether the Control Share Act is applicable.

The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
Interest, " and (2) acquired within 90 days immediately preceding that date. A
"Controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with 1/5)
of all voting power of the corporation. The Acquiring Person may not vote any
control shares without first obtaining approval from the stockholders not
characterized as "interested stockholders" (as defined in the act).

The Company Articles of Incorporation and Bylaws do not include provisions
which preclude effectiveness of the Control Share Act.

The Control share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the 10th day following the acquisition of
a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. The Company's Articles of Incorporation and Bylaws do not address
this matter.

Shares Available for Future Sale

Once the Company has completed or discontinued the primary Offering, the
Selling Securityholders may commence a secondary Offering of shares held by
them. There will be no concurrent offerings. Upon completion of this Offering,
the Company will have 8,071,704 shares of Common Stock outstanding if the
Minimum Offering is completed and 10,771,704 outstanding if the Maximum Offering
is completed assuming no exercise of (1) outstanding warrants for the purchase
of up to 3,680,000 shares or (2) outstanding stock options for the purchase of
810,000 shares. All shares sold in this Offering will be freely transferable by
persons other than "affiliates" of the Company (as that term is defined under
the Securities Act), without restriction or further registration under the
Securities Act.

<PAGE>

The remaining outstanding shares of Common Stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exception from registration is available, including the exemption contained in
Rule 144.

In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate" as
that term is defined in Rule 144, is entitled to sell into a public market,
within any three-month period, a number of "restricted" shares that does not
exceed the greater of 1% of their then outstanding shares of Common Stock or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. Rule 144(k) provides that a person who is not
deemed an "affiliate" and who has beneficially owned shares for at least two
years is entitled to sell such shares at any time under Rule 144 without regard
to the limitations described above.

DESCRIPTION OF SECURITIES

Authorized Stock

The authorized capital stock of the Company consists of 95,000,000 shares
of Common Stock, $0.001 par value per share, and 5,000,000 shares of preferred
stock, $0.001 par value per share. All of the issued and outstanding capital
stock of the Company is fully paid and nonassessable. The following summary
descriptions of the Company's preferred stock and Common Stock are qualified in
their entirety by reference to the Company's Restated Articles of Incorporation,
which were filed as exhibits to the Registration Statement of which this
Prospectus is a part and which are available from the Company upon request. See
"Additional Information."

Common Stock

As of the date of this Prospectus, there were 7,771,704 shares of Common
Stock outstanding, held of record by 522 stockholders. The holders of Common
Stock are entitled to receive ratable dividends when and as declared by the
Board of Directors from funds legally available therefor and to one vote for
each share held of record on each matter submitted to a vote of stockholders. In
the event of a liquidation, dissolution or winding-up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after
payments to creditors and other payments required by law. Holders of Common
Stock have no preemptive rights and no rights to convert their Common Stock into
any other securities. The outstanding shares of Common Stock are fully paid and
nonassessable.

Preferred Stock

There are no shares of preferred stock outstanding. The Company may issue
from time to time in one or more series with such distinctive designations,
rights, preferences and limitations as the Board of Directors shall determine.
The Board of Directors has the authority to determine the rate of dividend,
redemption features, amounts payable upon liquidation, sinking fund provisions,
conversion features and voting powers.

Warrants

General. The following is a brief summary of the material provisions of the
outstanding stock purchase warrants.

As of December 31, 1997, the Company had outstanding 3,680,000 warrants
held by 21 persons. Each warrant entitles the holder thereof to purchase at any
time in whole or in part over a one year period from the date the warrant was
issued, one share of Common Stock at a specified exercise price, subject to
adjustment referred to below. The exercise prices and expiration dates of the
outstanding warrants are: (1) $0.20 per share for 2,500,000 warrants expiring

<PAGE>

June 2, 1998, (2) $0.50 per share for 180,000 warrants expiring October 31, 1998
and (3) $0.60 per share for 1,000,000 warrants also expiring October 31, 1998.
The exercise price and number of shares of Common Stock purchasable upon the
exercise of the warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations and
reclassification of the Common Stock, or sale by the Company of shares of its
Common stock or other securities convertible into Common Stock at a price below
the then applicable exercise price of the warrants. The holder of a warrant may
exercise such warrant by surrendering the certificate representing the warrant
to the Company at its offices in Scottsdale, Arizona and accompanied by payment.
Warrants are issuable in minimum increments of 1,000 shares and no fractional
shares will be issued upon exercise of the warrants.

The Warrants are, and shares of Common Stock of the Company issued upon
exercise of the warrants shall be, nontransferable without the prior written
consent of the Company and may be transferred only in accordance with the
Securities Act. The shares of Common Stock which would be issued upon exercise
of the outstanding warrants have been registered for resale by the holders. See
"Principal and Selling Securityholders."

Transfer Agent and Warrant Agent

Atlas Stock Transfer Corp., Salt Lake City, Utah, is the transfer agent for
the Common Stock.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock being offered
hereby by the Company and by the Selling Securityholders have been passed upon
for the Company by Alan W. Peryam, LLC, Denver, Colorado. Alan W. Peryam was a
director of the Company between March 17, 1997 and May 15, 1997.

EXPERTS

The balance sheet of the Company as of December 31, 1997 and the statements
of operations, stockholders' equity and cash flows for the fiscal year ended
December 31, 1997 and cumulative amounts from January 1, 1997 to December 31,
1997 have been included herein in reliance upon the report of Wheeler Wasoff,
P.C., Denver, Colorado, independent certified public accountants, and statements
of operations, stockholders' equity and cash flows for the fiscal year ended
December 31, 1996 are included herein in reliance upon the report of Darrell
Schvaneveldt, CPA, Salt Lake City, Utah, given upon the authority of those firms
as experts in accounting and auditing. The Board of Directors of the Company
replaced the Company's prior auditor December 24, 1997 due to the relocation of
the Company's executive offices to Denver, Colorado. The report of Mr.
Schvaneveldt, the prior auditor for the Company's financial statements for each
of the two fiscal years ending December 31, 1996, was qualified as to the
Company's ability to continue as a going concern. There have been no
disagreements between the Company and the former accountant.

ADDITIONAL INFORMATION

The Company has filed with the SEC a Registration Statement on Form SB-2
("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act") with respect to the Securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the SEC. For further information with respect to the
Company and the securities offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules thereto, which may be
examined at the SEC's offices without charge, or copies of which may be obtained
from the SEC upon payment of the prescribed fees. Statements made in this
Prospectus as to the contents of any contract, agreement or document are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement, and each such statement is qualified in its entirety by such
reference. The Company is a reporting company registered under the Securities
Exchange Act of 1934, as amended ("1934 Act") and in accordance therewith files
reports and other information with the SEC. All of such reports and other

<PAGE>

information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
regional offices of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
http:\\www.sec.gov.

GLOSSARY OF OIL AND NATURAL GAS TERMS

The following are abbreviations and definitions of terms commonly used in
the oil and natural gas industry and this Prospectus. Unless otherwise indicated
in this Prospectus, natural gas volumes are stated at the legal pressure base of
the state or area in which the reserves are located and at 60 degrees
Fahrenheit.

Amplitude Versus Offset ("AVO"). A seismic technology which utilizes
measurement of the variation of seismic reflection amplitude with offset between
source and receiver. The variation in the strength of the recorded reflections
as the horizontal distance between the source and receiver is changed is a
comparison of "amplitude" with the distance (or "offset").

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to oil or other liquid hydrocarbons.

BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of oil, condensate or natural gas liquids.

Completion. The installation of permanent equipment for the production of
oil or natural gas.

Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.

Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.

Dry hole. A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion of an oil or natural gas
well.

Exploratory well. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.

Gross acres or gross wells. The total acres or wells, as the case may be,
in which the Company has a working interest.

LOE. Lease operating expenses.

Mcf. One thousand cubic feet of natural gas.

Net acres or net wells. Gross acres or wells multiplied, in each case, by
the percentage working interest owned by the Company.

<PAGE>

Net production. Production that is owned by the Company less royalties and
production due others.

Net revenue interest. The portion of total production from an oil or
natural gas well attributable to an interest owner in the well after allowance
for landowner royalties, overriding royalties and other interests in the
production from the well held by others.

Oil. Crude oil or condensate.

Operator. The individual or company responsible for the exploration,
development, and production of an oil or natural gas well or lease.

Proved reserves. The estimated quantities of crude oil, 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, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.

(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by natural gas-oil and/or oil-water contacts, if
any; and (B) the immediately adjoining portions not yet drilled, but which
can be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of information on
fluid contacts, the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir.

(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are included in
the "proved" classification when successful testing by a pilot project, or
the operation of an installed program in the reservoir, provides support
for the engineering analysis on which the project or program was based.

(iii) Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil, natural gas
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics, or
economic factors; (C) crude oil, natural gas and natural gas liquids that
may occur in undrilled prospects; and (D) crude oil, natural gas and
natural gas liquids that may be recovered from oil shales, coal, gilsonite
and other such sources.

Receiver. A sensitive device used to record reflections of acoustic (sound)
waves reflected from rock layers within the earth to the receiver at the
surface.

Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.

Reserves. Proved reserves.

Royalty. An interest in an oil and natural gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted,

<PAGE>

or overriding royalties, which are usually reserved by an owner of the leasehold
in connection with a transfer to a subsequent owner.

Seismic. Technology which measures amplitude of sound waves reflected from
subsurface geological structures. The seismic data is acquired in the field and
processed to yield information about the anticipated subsurface stratigraphy.

2-D seismic. When both sources and receivers are confined to a line, such
as a road or trail, the resulting image is a cross-section of two-dimensional
representation of the earth with the horizontal dimension being the distance
along the line and the vertical dimension being the time it takes the source
energy to be reflected and returned to the receivers.

3-D seismic. When the sources and receivers are not confined to a line but
occupy an area, such as a section or township, they produce a three-dimensional
representation of the earth with the two horizontal dimensions being north and
south and the vertical dimension being time.

Source. The energy used to produce the acoustic waves recorded at the
receivers. In the Sacramental Basin the source is a small charge of dynamite
detonated in a shallow drilled drill hole.

Undeveloped acreage. Lease acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether or not such acreage contains proved
reserves. Included within undeveloped acreage are those lease acres(held by
production under the terms of a lease) that are not within the spacing unit
containing, or acreage assigned to, the productive well holding such lease.

Working interest. An interest in an oil and natural gas lease that gives
the owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations. The share of production to which a working
interest owner is entitled will always be smaller than the share of costs that
the working interest owner is required to bear, with the balance of the
production accruing to the owners of royalties. For example, the owner of a 100%
working interest in a lease burdened only by a landowner's royalty of 12.5%
would be required to pay 100% of the costs of a well but would be entitled to
retain 87.5% of the production.

Workover. Operations on a producing well to restore or increase production.

No person has been authorized to give any
information or to make any representation in
connection with the offering being made hereby not
contained in this Prospectus, and, if given or
made, such information or representation must not
be relied upon as having been authorized. This
Prospectus does not constitute an offer to sell or
solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction in
which it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an
implication that information contained herein is
correct as of any time subsequent to the date
hereof.

FAN ENERGY INC.
-------------------------

Page No.
-------
PROSPECTUS SUMMARY.......................................3
RISK FACTORS.............................................7 3,000,000
USE OF PROCEEDS.........................................14 Shares of Common Stock
COMPARATIVE DATA........................................15
DIVIDEND POLICY AND RELATED
STOCKHOLDER MATTERS.................................16
MANAGEMENT'S DISCUSSION AND
ANALYSIS AND PLAN OF OPERATION......................16 -------------
BUSINESS AND PROPERTIES.................................18
MANAGEMENT..............................................25 PROSPECTUS
EXECUTIVE COMPENSATION..................................27 -------------
PRINCIPAL AND SELLING SECURITYHOLDERS...................29
CERTAIN TRANSACTIONS....................................31
PLAN OF DISTRIBUTION....................................32
DESCRIPTION OF SECURITIES...............................36
LEGAL MATTERS...........................................37
EXPERTS.................................................37
ADDITIONAL INFORMATION..................................37
GLOSSARY OF OIL AND NATURAL GAS TERMS...................38
FINANCIAL STATEMENTS ................................. F-1

May _, 1998

Until ______________________, 1998 (90 days from the
date of this Prospectus) all dealers effecting
transactions in the registered securities, whether
or not participating in this distribution, may be
required to deliver a prospectus. This is in
addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.

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

</TABLE>

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Independent Auditor's Report F-2 - F-3

Balance Sheet
December 31, 1997 F-4

Statements of Operations
Years ended December 31, 1996 and 1997 F-5

Statement of Stockholders' Equity
Years ended December 31, 1996 and 1997 F-6

Statements of Cash Flows
Years ended December 31, 1996 and 1997 F-7 - F-8

Notes To Financial Statements F-9 - F-17

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, 1997 and the related statements of operations,
stockholders' equity and cash flows for the year then ended and cumulative
amounts from January 1, 1997 to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fan Energy Inc. as of December
31, 1997 and the results of its operations and its cash flows for the year then
ended and cumulative amounts from January 1, 1997 to December 31, 1997 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 commenced 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
January 30, 1998

F - 2

<PAGE>

INDEPENDENT AUDITOR'S REPORT

Board of Directors
Eastern Star Mining, Inc.

I have audited the accompanying statements of operations, stockholders equity
and cash flows of Eastern Star Mining, Inc., for the year ended December 31,
1996. These financial statements are the responsibility of the Company's
management. My responsibility is to express on opinion on these financial
statements based on my audit.

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

In my opinion, the aforementioned financial statements present fairly, in all
material respects, the results of operations and cash flows of Eastern Star
Mining, Inc. for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming the company
will continue as a going concern. The Company has an accumulated deficit and
negative cash flows. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management plans in regard to these
matters are also discussed in Note #2. The financial statements do not include
any adjustment that might result from the outcome of the uncertainty.

/s/ Schvaneveldt and Company
SCHVANEVELDT AND COMPANY

February 15, 1997
Salt Lake City, Utah

F - 3

<PAGE>

<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
BALANCE SHEET
December 31, 1997

ASSETS

<S> <C>
CURRENT ASSET
Cash .................................................................... $ 424,717
-----------

Total Current Asset ................................................... 424,717

UNDEVELOPED OIL AND GAS PROPERTIES ........................................ 1,275,491

DEFERRED OFFERING COSTS ................................................... 10,383
-----------
$ 1,710,591
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable ........................................................ $ 5,315
-----------

Total Current Liabilities ............................................. 5,315
-----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)

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 - 7,771,704 shares ......................... 7,772
Additional paid-in capital .............................................. 1,796,236
Deficit accumulated during the development stage ........................ (199,232)
Additional paid-in capital stock options ................................ 100,500
-----------
1,705,276
-----------
$ 1,710,591
===========
</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 OPERATIONS
Years ended December 31, 1996 and 1997

Cumulative
Amounts from
Jan. 1, 1997 to
1996 1997 Dec. 31, 1997
---- ---- ----------------

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

OPERATING EXPENSES
General and administrative .............. -- 192,985 192,985
Interest (Note 3) ....................... -- 6,247 6,247
-------------- ----------- -----------

-- 199,232 199,232
-------------- ----------- -----------

NET (LOSS) ................................ $ -- $ (199,232) $ (199,232)
============== =========== ===========

NET (LOSS) PER COMMON SHARE ............... $ -- $ (.03) $ (.03)
============== =========== ===========

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ..................... 189,077 7,771,704 7,771,704
============== =========== ===========
</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 STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1997

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, 1996 .............................. 135,004 $ 135 $ 498,146 $ (504,648) $ --

Issuance of common stock as satisfaction of
accounts payable - related ........................ 636,700 637 5,730 -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 ............................ 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 ............................................. -- -- 4,545 -- --
Issuance of stock options ............................. -- -- 2,332 -- 100,500
Net (loss) ............................................ -- -- -- (199,232) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ............................ 7,771,704 $ 7,772 $ 1,796,236 $ (199,232) $ 100,500
=========== =========== =========== =========== ===========
</TABLE>

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

F - 6

<PAGE>

<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1997

Cumulative
Amounts from
Jan. 1 to
1996 1997 Dec. 31, 1997
---- ---- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) ...................................................... $ -- $ (199,232) $ (199,232)
Adjustments to reconcile net (loss) to net
cash provided by operating activities ....................... -- -- --
Stock options ................................................. -- 102,832 102,832
Stock for services ............................................ -- 50,000 50,000
Changes in assets and liabilities
Increase in accounts payable ................................ -- 5,315 5,315
Other ....................................................... -- (10,383) (10,383)
----------- ----------- -----------
Net cash (used) by operating activities ......................... -- (51,468) (51,468)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for unproved oil and gas properties ................... -- (975,491) (975,491)
----------- ----------- -----------
Net cash (used) in investing activities ......................... -- (975,491) (975,491)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
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 1,451,676
----------- ----------- -----------
NET INCREASE IN CASH .............................................. -- 424,717 424,717

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

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

F - 7

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996 and 1997

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

During the year ended December 31, 1997 the Company paid cash for interest of
$6,247.

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the year ended December 31, 1996 the Company issued 636,700 shares of
common stock valued at $6,367 ($.01 per share) in full satisfaction of amounts
due a former officer/director of the Company.

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 finders fees in conjunction with the private placement
sale of common stock, valued at $4,545.

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

F - 8

<PAGE>

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

NOTE 1 - ORGANIZATION

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. 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
and acquiring an undivided minority interest in two oil and natural gas
exploratory prospects in California for cash and common stock.

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.

Undeveloped oil and gas properties consist of leases and acreage
acquired by the Company for its exploration and development activities.
As of December 31, 1997, no exploration had been commenced on the
properties. The cost of these nonproducing leases is recorded at the
lower of cost or fair market value. As of December 31, 1997
substantially all costs related to undeveloped oil and gas properties
consists of costs incurred in conjunction with the Company's
acquisition of the properties.

In January 1998 an unsuccessful exploratory well was drilled and
abandoned as a dry hole on one of the Company's prospects.

F - 9

<PAGE>

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. The adoption of
SFAS 121 has not had an impact on the Company's financial statements,
as the Company has determined that no impairment loss for 1997 need to
be recognized for applicable assets of continuing operations.

DEFERRED OFFERING COSTS

Deferred offering costs consist of costs incurred in connection with a
proposed public offering of the Company's common stock. If the offering
is successful, costs incurred will be charged against the proceeds of
the offering. If the offering is not successful, costs incurred will be
charged to operations.

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, 1997, the Company had a net operating loss carryforward
of approximately $95,000 that may be offset against future taxable
income through 2012.

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 $21,900 tax benefit of the loss carryforward has been offset by a
valuation allowance of the same amount. The total tax benefit is
attributable to 1997.

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.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported

F - 10

<PAGE>

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

(LOSS) PER COMMON SHARE

(Loss) per common share is computed based on the weighted average
number of common shares outstanding during each period. Common shares
issued from reactivation as a development stage company, and prior to
completion of the Company's proposed initial public offering (Note 7),
are considered outstanding for 1997. Common stock equivalents,
consisting of 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 year ended December 31, 1997, the Company issued warrants
and options to purchase shares of its common stock (Note 4).

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. At December 31, 1997 cash
on deposit at this financial institution exceeded federally insured

F - 11

<PAGE>

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

amounts by approximately $325,000. 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, 1997 has incurred net operating losses
since reactivation as a development stage company of $199,232 and does
not have sufficient working capital to fund its planned operations
during the next twelve months. Although sufficient funds are available
to meet general and administrative expenses and capital costs
associated with existing oil and gas properties for 1998, additional
funding will be required to complete the Company's planned drilling
program and put successful wells into production. 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
financings.

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

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

NEW TECHNICAL PRONOUNCEMENTS

In February 1997 SFAS No. 129, "Disclosure of Information about Capital
Structure" was issued effective for periods ending after December 15,
1997. The Company has adopted the disclosure provisions of SFAS No. 129
effective with the fiscal year ended December 31, 1997.

In June 1997 SFAS No. 130, "Reporting Comprehensive Income" was issued
effective for fiscal years beginning after December 31, 1997, with

F - 12

<PAGE>

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

earlier application permitted. The Company has elected to adopt SFAS
No. 130 effective with the fiscal year ended December 31, 1998.
Adoption of SFAS No. 130 is not expected to have a material 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 elected to adopt SFAS No. 131 effective with the fiscal
year ended December 31, 1998. Adoption of SFAS No. 131 is not expected
to have a material 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.

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.

F - 13

<PAGE>

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

NOTE 4 - STOCKHOLDERS' EQUITY

COMMON STOCK

In 1996 the Company issued 636,700 shares of common stock, valued at
$6,367 ($.01 per share), to a former officer/director of the Company in
satisfaction of an obligation owed for Company expenses previously
advanced.

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

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

o 2,000,000 units, at a price of $.50 per unit, consisting of
2,000,000 shares of common stock and warrants to purchase
1,000,000 shares of common stock at an exercise price of $.60 per
share before October 31, 1998. 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).

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.

F - 14

<PAGE>

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

NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)

WARRANTS

In 1997 the Company issued warrants to purchase 180,000 shares of
common stock at an exercise price of $.50 per share through October 31,
1998 as partial consideration for a finders fee in conjunction with the
private placement sale of $.50 units described above. The warrants are
valued at $4,545, using the Black-Scholes option pricing model.

At December 31, 1997 the status of outstanding warrants is as follows:

Issue Shares Exercise Expiration
Date Exercisable Price Date

June 3, 1997 2,500,000 $.20 June 2, 1998

October 31, 1997 1,000,000 $.60 October 31, 1998

October 31, 1997 180,000 $.50 October 31, 1998

The per share weighted-average grant date fair value and per share
weighted average exercise price of warrants granted during 1997 are
$.01 and $.32, 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.

F - 15

<PAGE>

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

NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)

At December 31, 1997 the status of outstanding options granted pursuant
to the Plan was as follows:

<TABLE>
<CAPTION>
Unvested
Grant Options Options Options Exercise
Date Granted Vested Outstanding Price

<S> <C> <C> <C> <C> <C>
Officer/Director Jul. 2, 1997 130,000 - 130,000 $.20-.22

Officers/Directors Oct. 30, 1997 670,000 670,000 - .35

Other Oct. 30, 1997 10,000 10,000 - .35
------- ------- ---
810,000 680,000 130,000
======= ======= =======
</TABLE>

The weighted average contractual life of options outstanding at
December 31, 1997 was 9.4 years.

The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date consistent with
the provisions of SFAS No. 123, the Company's net loss and loss per
share for 1997 would have been increased to the pro forma amounts
indicated below:

<S> <C>
Net (loss) applicable to common stockholders - as reported $(199,232)
========
Net (loss) applicable to common stockholders - pro forma (254,950)
========
(Loss) per share - as reported (.03)
========
(Loss) per share - pro forma (.03)
========
Weighted average fair value of options granted in 1997 .20
========
</TABLE>

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: dividend yield of 0%;
expected volatility of 0%; discount rate of 5.50%; and expected lives
of 5 years.

At December 31, 1997 the number of options exercisable was 680,000 and
the weighted average exercise price of these options was $.35.

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

F - 16

<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997

NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)

STOCK SPLIT

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

NOTE 5 - RELATED PARTY TRANSACTIONS

In 1997 the Company paid an aggregate $10,000 to entities controlled by
Officers/Directors of the Company for office space and administrative
services in Scottsdale, Arizona ($8,000) and Denver, Colorado ($2,000),
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).

NOTE 6 - COMMITMENTS

In November 1997 the Company's Board of Director's approved the
issuance of an aggregate 215,000 shares of common stock to officers and
directors of the Company for services to be performed through June 30,
1998, at a deemed value of $.50 per share.

NOTE 7 - PROPOSED STOCK OFFERING

In November 1997, 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
300,000 shares and a maximum 3,000,000 shares of the Company's common
stock at a price of $1.00 per share, on a "best efforts" basis by the
officers and directors of the Company.

F - 17

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Article ELEVENTH of the Registrant's Restated Articles of Incorporation
provides that no director or officer of the Registrant shall be personally
liable to the Registrant or any of its stockholders for damages for breach of
fiduciary duty as a director or officer, except that such provision will not
eliminate or limit the liability of a director or officer for any act or
omission which involves intentional misconduct, fraud or a knowing violation of
law or for the payment of any dividend in violation of Section 78.300 of the
Nevada Revised Statutes.

Section 78.751 of the Nevada Revised Statutes permits the Registrant to
indemnify its directors, officers, employees and agents if such person acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, has no reasonable cause to believe his conduct was
unlawful.

To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, the
corporation must provide indemnification against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense.

Article TWELFTH of the Registrant's Restated Articles of Incorporation
provides as follows:

TWELFTH: The corporation shall, to the fullest extent permitted
by Nevada law as in effect from time to time, indemnify any person
against all liability and expense (including attorneys' fees)
incurred by reason of the fact that he is or was a director or
officer of the corporation or, while serving as a director or
officer of the corporation, he is or was serving at the request of
the corporation as a director, officer, partner or trustee of, or in
any similar managerial or fiduciary position of, or as an employee
or agent of, another corporation, partnership, joint venture, trust,
association, or other entity. Expenses (including attorneys' fees)
incurred in defending an action, suit or proceeding may be paid by
the corporation in advance of the final disposition of such action,
suit or proceeding to the fullest extent and under the circumstances
permitted by Nevada law. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee, fiduciary or agent of the corporation against any
liability asserted against and incurred by such person in any such
capacity or arising out of such person;'s position, whether or not
the corporation would have the power to indemnify against such
liability under the provisions of this Section TWELFTH. The
indemnification provided by this Section TWELFTH shall not be deemed
exclusive of any other rights to which those indemnified may be
entitled under these Articles of Incorporation, any bylaw,
agreement, vote of stockholders or disinterested directors, or
otherwise, and shall inure to the benefit of their heirs, executors
and administrators. The provisions of this Section TWELFTH shall not
be deemed to preclude the corporation from indemnifying other
persons from similar or other expenses and liabilities as the Board
of Directors or the stockholders may determine in a specific
instance or by resolution of general application.

Article VI, Section 1 of the Registrant's Bylaws provides that the
Registrant shall provide indemnification to Registrant's officers, directors and
employees to the fullest extent permitted under the Nevada General Corporation
Law.

Item 25. Other Expenses of Issuance and Distribution.

Expenses (none of which will be paid or reimbursed by the Selling
Stockholders to the Registrant) payable in connection with the issuance and
distribution of the securities being registered hereby are as follows:

II-1

<PAGE>

Securities and Exchange Commission Registration Fee............ $ 2,561*
Accounting Fees and Expenses................................... 10,000*
Legal Fees and Expenses........................................ 20,000*
Printing, Freight and Engraving................................ 2,500*
Escrow Fees ................................................... 2,000
Miscellaneous.................................................. 2,939*
------
Total................................................... $40,000*
- ----------------------

*Estimated.

Item 26. Recent Sales of Unregistered Securities.

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

(a) 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.

(b) 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.

(c) 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 trans action. 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.

(d) 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
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

II-2

<PAGE>

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.

(e) 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.

Item 27. Exhibits.

The following is a list of all exhibits filed as part of this Registration
Statement.

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

(1) Form of Selected Dealer Agreement.*

(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.*

(4.1) Form of Fund Escrow Agreement.*

(4.2) Form of Subscription Agreement.*

(5.1) Opinion dated April 27, 1998, of Alan W. Peryam, LLC regarding
legality of the securities being registered.*

(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 6, 1998
between Registrant and George H. Fancher Jr.*

(10.5) Form of Investment Letter for certain officers and consultants.*

(10.6) Agreement with Albert Golusin.*

II-3

<PAGE>

(10.7) Form of Lockup Agreement for Selling Securityholders.*

(16) Letter of Darrell Schvanveldt, Certified Public Accountant.

(23.1) Consent of Wheeler Wasoff, P.C., Independent Certified Public
Accountants.

(23.2) Consent of Darrell Schvanveldt, Certified Public Accountant.

(23.3) Consent dated April 27, 1998 of Alan W. Peryam, LLC.*

(24) Power of Attorney.*

(27) Financial Data Schedule.

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

*Previously filed.

Item 28. Undertakings

The undersigned Registrant hereby undertakes that it will:

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and

(iii)Include any additional or changed material information on the
plan of distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its legal counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

II-4

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City and County
of Denver, State of Colorado on May 13, 1998.

FAN ENERGY INC.

By /s/ William E. Grafham
-----------------------------------------------
William E. Grafham, Chief Executive Officer

By /s/ Rex L. Utsler
-----------------------------------------------
Rex L. Utsler, Director,
Principal Financial Officer

By /s/ Albert A. Golusinh
-----------------------------------------------
Albert A. Golusin, Principal Accounting Officer

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:

Signature Title Date
- --------- ----- ----

/s/ Willaim E. Grafham Director May 13, 1998
- ----------------------------------------
William E. Grafham

/s/ George H. Fancher Jr. Director May 13, 1998
- ----------------------------------------
George H. Fancher Jr.

Jeffrey J. Scott* Director May 13, 1998
- ----------------------------------------
Jeffrey J. Scott

/s/ Rex L. Utsler Director May 13, 1998
- ---------------------------------------
Rex L. Utsler, Director

/s/ George A. Cloudy Director May 13, 1998
- ---------------------------------------
George A. Cloudy, Director

*By /s/ George H. Fancher Jr. May 13, 1998
------------------------------------
George H. Fancher Jr.
Attorney-in-Fact

II-5

<PAGE>
EXHIBIT INDEX

Exhibit Description Page No.
------ ----------- -------
<S> <C> <C>

(1) Form of Selected Dealer Agreement.*

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

(3.2) Certificate of Amendment of Articles of Incorporation of Eastern N/A
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 N/A
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 N/A
Star Holdings, Inc., as filed with the Nevada Secretary of State
December 10, 1997.*

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

(4.1) Form of Fund Escrow Agreement.* N/A

(4.2) Form of Subscription Agreement.* N/A

(5.1) Opinion dated April 27, 1998, of Alan W. Peryam, LLC regarding N/A
legality of the securities being registered.*

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

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

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

(10.4) Letter regarding conflicts of interest dated March 6, 1998 N/A
between Registrant and George H. Fancher Jr.*

(10.5) Form of Investment Letter for certain officers and consultants.* N/A

(10.6) Agreement with Albert Golusin.* N/A

(10.7) Form of Lockup Agreement for Selling Securityholders.* N/A

(16) Letter of Darrell Schvanveldt, Certified Public Accountant.

(23.1) Consent of Wheeler Wasoff, P.C., Independent Certified Public
Accountants.

(23.2) Consent of Darrell Schvanveldt, Certified Public Accountant.

(23.3) Consent dated April 27, 1998 of Alan W. Peryam, LLC.* N/A

(24) Power of Attorney.* N/A

(27) Financial Data Schedule.

</TABLE>

*Previously filed

SCHVANEVELDT AND COMPANY
Certified Public Accountant
275 E. South Temple, Suite 300
Salt Lake City, Utah 84111
(801) 521-2392

May 13, 1998

United States Securities and
Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549

Re: Fan Energy, Inc.
Registration Statement No. 333-47699

Gentlemen:

A copy of the "Experts" section of the Prospectus included in Amendment No.
2 of the above-referenced Registration Statement has been furnished to me for my
review. Included in such section is a description of the circumstances under
which this firm was dismissed as the auditor for the Issuer and replaced with a
successor auditor. This letter is to confirm that we agree with the statements
made by the Issuer in this section of the Prospectus.

This letter may be filed as an exhibit to Amendment No. 2 to the
Registration Statement when filed with the Securities and Exchange Commission.

Sincerely,

SCHVANEVELDT AND COMPANY

By /s/ Darrell Schvaneveldt
------------------------------------
Darrell Schvaneveldt

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT

We consent to the incorporation by reference in the Registration Statement of
Fan Energy Inc. on Form SB-2 of our report dated January 30, 1998 on our audit
of the financial statements of Fan Energy Inc. as of December 31, 1997.

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

Denver, Colorado
May 13, 1998

SCHVANEVELDT AND COMPANY
Certified Public Accountant
275 E. South Temple, Suite 300
Salt Lake City, Utah 84111
(801) 521-2392

Consent of Independent Auditor

TO THE BOARD OF DIRECTORS OF EASTERN STAR MINING INC.

I hereby consent to the use in the Registration Statement and Prospectus to
be used in connection with a public offering of securities, which you are filing
with the Securities & Exchange Commission of our Opinion dated February 15,
1997, relating to the Financial Statements of Eastern Star Mining, Inc., and
subsequently included in the Prospectus, constituting a part of the Registration
Statement. We also consent to the reference to us in the Prospectus under the
heading "EXPERTS".

/s/ Schvaneveldt and Company
SCHVANEVELDT AND COMPANY

May 13, 1998
Salt Lake City, Utah

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 424,717
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 424,717
<PP&E> 1,275,491
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,710,591
<CURRENT-LIABILITIES> 5,315
<BONDS> 0
0
0
<COMMON> 7,772
<OTHER-SE> 1,697,504
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,247
<INCOME-PRETAX> (199,232)
<INCOME-TAX> 0
<INCOME-CONTINUING> (199,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (199,232)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)

</TABLE>