ADAIR INTERNATIONAL OIL & GAS INC, 10KSB, 2000-09-12

ADAIR INTERNATIONAL OIL & GAS INC
10KSB, 2000-09-12
CRUDE PETROLEUM & NATURAL GAS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-10056

ADAIR INTERNATIONAL OIL AND GAS, INC.
(Exact name of registrant as specified in its charter)

Texas 74-2142545
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

3000 Richmond, Suite 100, Houston, TX 77098
(Address of principal executive offices, including zip code)

(713) 621-8241
(Registrant's telephone number, including area code)

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

Securities registered pursuant to 12(g) of the Exchange Act:
Common Stock, no par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ ]

Revenues for the fiscal year ending May 31, 2000 were $ 62,443.

The aggregate market value of Common Stock held by non-affiliates of the
registrant at September 1, 2000, based upon the last closing price on the OTCBB,
was $33,295,441. As of September 1, 2000, there were 66,590,882 shares of
Common Stock outstanding.

Documents incorporated by reference:
None

Transitional Small Business Disclosure Format [ ] Yes [X]

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TABLE OF CONTENTS

PART I
Item 1. Description of Business 3
Item 2. Description of Properties 13
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16

PART II
Item 5. Market for Common Equity and Related Stockholder Matters 16

Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17

Item 7. Financial Statements. 22

Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 23

PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons 24

Item 10. Executive Compensation 25

Item 11. Security Ownership of Certain Beneficial Owners and
Management 26

Item 12. Certain Relationships and Related Transactions 26

Item 13. Exhibits and Reports on Form 8-K 27

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

Adair International Oil and Gas, Inc. (the "Company") was originally
incorporated in the state of Texas on November 7, 1980, as Roberts Oil and Gas,
Inc. Following a registration of its shares of common stock with the Securities
and Exchange Commission (the "SEC"), the Company began filing periodic reports
with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company began to acquire interests in oil and gas
properties in 1981, participating in various bid groups in the Gulf of Mexico
and conducting exploration and development in that area and the mid continent of
the U.S. However, by the mid-1980's as the oil and gas market collapsed the
Company experienced financial difficulties and did not have sufficient resources
to continue the exploration and development of oil and gas properties. While
the Company continued to hold interests in wells, it had become virtually
inactive. As a consequence, beginning in 1989 and until 1996, the Company filed
its annual report with the SEC and omitted audited financial statements. In
addition during 1989 through 1996, the Company may not have fully complied with
other formalities required under the Exchange Act and the filings due
thereunder.

In July of 1997, the Company changed its name to Adair International Oil
and Gas, Inc. Immediately, the Company began the work to become fully reporting
and in full compliance with the SEC. Since 1997, the Company has made changes in
its operations and the focus of its business. In March of 1999, the Company sold
all of its domestic oil and gas properties to limit plugging liabilities and to
refocus on new projects.

The Company expects to grow into a major independent energy company through
drilling of internally generated oil and gas exploration projects. The Company
seeks to partner with major energy companies to reduce its risk profile on each
project, while maintaining upside potential. Prospects will be pursued in areas
of proven success and the Company will utilize the "state of the art" in
geoscience risk reductions techniques. In addition to oil and gas exploration,
the Company has entered the rapidly growing Merchant Power business in the
United States, playing the role of developer of unique sites for placement of
environmentally friendly, natural gas fired power plants.

OPERATIONS

Adair International Oil and Gas, Inc. is achieving growth with a balanced
portfolio of projects in three major sectors of the energy industry: power,
exploration, and the acquisition of producing oil and gas properties. The
Company and its subsidiaries combine to develop natural gas-fired power plants,
conduct exploratory drilling ventures, and acquire producing oil and gas
properties with existing cash flow and significant remaining economic life for
substantial upside potential. Risk management in these projects is focused on
securing financially strong partners who are generally brought into each project
on a leveraged basis and who exhibit "best in class" expertise, thereby
strengthening the partnership via their business experience.

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ITEM 1. DESCRIPTION OF BUSINESS (continued)

NATURAL GAS POWER PROJECTS

Domestic Activities

A revolution is underway in the electrical power generating industry of the
United States. With the increased awareness of environmental impact, the power
industry has acknowledged that in order to meet state and federal clean air
requirements, any new power plants will likely be fueled with clean burning
natural gas. In states that have deregulated the power industry, a new class of
power plant, known as Merchant power, is being developed at an astonishing rate.
Merchant power is based on the concept that during periods of peak power
consumption, the spot price paid for electricity may exceed the base rate by
factors of 1,000. Power plants based on modular design, utilizing natural gas
fired turbines, can be operated efficiently to meet these peak power needs, and
the sales resulting from these plants justify their development and operation.

Focusing on states where the power industry has already been deregulated or
in areas of high population concentrations where near term power shortages are
already predicted, Adair develops sites to house environmentally friendly,
natural gas fired power plants that are utilized by this fast growing merchant
power business. These unique sites are located on Indian Lands, which due to
their status as a sovereign nation, offer the benefits of simplified permitting
and investment incentives (in the form of accelerated depreciation) offered by
the Federal government to support infrastructure investment on the reservations.

During 1999, taking full advantage of Chairman John W. Adair's heritage as
a Cherokee Indian, the Company identified several key sites on Indian Lands for
building natural gas fired merchant power plants.

Teawaya Energy Center
Southern California

In July of 1999, Adair International Oil and Gas, Inc. and Calpine
Corporation of San Jose, California signed a development agreement with respect
to a site located on the Torres Martinez Indian reservation near Palm Springs in
southern California. During the last half of 1999 and continuing through 2000,
Calpine began to secure the various required permits and to purchase right of
way and critical air quality credits within the State of California. During this
period, both companies were working under a strict confidentiality agreement
regarding the release of information in order to maintain their competitive
advantage on this very advantageous site.

Located half way between the major population centers of Los Angeles and
San Diego, the $275 million Teawaya Energy Center (TEC) will be sited on
reservation land belonging to the Torres Martinez Desert Cahuilla Indians. The
TEC will produce 600 megawatts of electricity providing power for approximately
600,000 households, which represents a significant contribution toward meeting
the power reliability needs of the rapidly growing Coachella Valley and Southern
California. Construction of the project is scheduled to begin in 2001 with
commercial operations scheduled during 2003.

The Teawaya plant will use two advanced technology 501F combustion
turbines, supplied by Siemens-Westinghouse, operated in a highly efficient
combined-cycle with a single steam turbine. The plant will be fueled by
clean-burning natural gas utilizing an advanced emissions control system. As a
result, the TEC will be an environmentally responsible source of electric power
that will help address the growing electricity demand throughout all of Southern
California.

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ITEM 1. DESCRIPTION OF BUSINESS (continued)

As a power project located on Native American land, the permitting process
is being pursued with the federal Bureau of Indian Affairs (BIA). Activities are
underway to insure that the TEC is in full compliance with the National
Environmental Policy Act. The BIA further insures that the development
agreement meets the cultural, environmental, and economic considerations of the
Torres Martinez Indians. As such, the tribe will receive significant economic
benefits resulting from a long-term lease agreement, job creation, and the sale
of water. During the negotiation process Adair helped to secure investment to
improve roads on the reservation and to restore several historical buildings on
the reservation thereby insuring the preservation of an important part of the
history of the Torres Martinez tribal culture.

Additional Sites

The Company is currently conducting preliminary feasibility studies on
other power plant sites located in Oklahoma, Kansas, New Mexico and Florida.
Due to the highly competitive nature of the Merchant power industry at this
time, the Company will release only limited information regarding these sites in
order to protect the competitive advantage gained by early recognition of these
opportunities.

As a result of feasibility and economic studies conducted during 1999,
Adair has lowered the priority of the site located on the Blackfeet Reservation
in Browning, Montana.

International Activities

Aden Sugar Refinery and Cogeneration Power Plant

The Company is currently conducting a feasibility study regarding building
a sugar refinery with associated cogeneration power project to be located in the
country of Yemen. Sugar represents the single largest imported commodity in
Yemen. As there are no sugar refineries currently in Yemen, over 350,000 tons
of refined sugar is imported annually.

The Yemen Sugar Project will build a refinery to process imported raw sugar
cane into table quality packaged product for local consumption. Targeted for
construction within the newly developed Aden Free Trade Zone, the factory will
produce a scheduled 660 metric tons of product per day resulting in annual
production of over 200,000 tons or 60% of the local market demand. The plant
will additionally provide 40 megawatts per day of electricity from an
efficiently designed co-generation power plant. This power will be sold to fuel
industrial development within the Aden Free Trade Zone and associated deep water
port facility.

The Port of Aden, located on the southwestern corner of the Arabian
Peninsula is a strategically located deep water port, operated by the Yemen Port
Authority. The Aden Free Trade Zone is under development by the Yemen government
as a duty free area surrounding the port. The Sugar Refinery Project will be
located within the free zone to take full advantage of investment incentives
being offered by the Yemen government. These incentives include certain tax
holidays and reduced land pricing opportunities. In addition, as the raw cane
will need to be imported via ocean transport, the duty free status of the port
will lower the cost of materials to be used in the manufacture of sugar. As the
free zone develops, it is anticipated that the area will be in need of
additional electrical power, which will be supplied by the cogeneration
capability of the sugar refinery.

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ITEM 1. DESCRIPTION OF BUSINESS (continued)

Consistent with the Company's strategy of associating with "best in class"
partners, Arkel Sugar, Inc. and Adair are working jointly to develop the
project. Arkel, based in Baton Rouge, Louisiana are experts at design,
construction and operation of various modern industrial process plants
throughout the world. Arkel has designed, constructed and currently operates
similar sugar refineries in other third world countries, including Sudan and the
Ivory Coast. Representatives of both Adair and Arkel were in Yemen during August
2000, pursuant to the conduct of the feasibility study.

As many of the critical factors effecting the overall economic feasibility
of this project are yet to be determined, no specific project timing has been
released by the Company. The preliminary results of the feasibility study are
expected by the end of 2000.

Chimichagua Power Project
Colombia

The Company, through its wholly owned subsidiary, Adair Colombia Oil and Gas
S.A., controls 100% working interest in the Chimichagua natural gas field
located in the State of Cesar in the Middle Magdalena Valley of Northern
Colombia. Proven gas reserves are currently 12.8 billion cubic feet (Bcf) while
an additional 41.2 Bcf is expected to be proven with the drilling of one
additional well. While the combined gas reserve of 54 Bcf is significant, no
natural gas pipelines are nearby, thereby preventing gas sales directly to an
end user and immediate commercialization of the gas reserves.

Drawing on their experiences of power plant development in the United
States, the Company is currently in negotiations with Termotasajero, a major
Colombian utility company, to construct a 20-megawatt natural gas fired power
plant. An engineering feasibility study was completed during 1999.

While terms of the deal structure are still under negotiation, general
concepts provide for Adair to supply the gas to fuel the power plant providing
revenues under a long term gas purchase contract. In addition, as an incentive
to provide the fuel for the plant at prices that allow competitive pricing for
the power, Adair will receive equity in the power plant based on the value of
their contribution under the gas purchase contract. This option would allow the
Company to recover additional revenues under the Power Purchase Agreement with
Termotasajero. The gas reserves would provide a twenty year fuel supply for the
power plant delivering approximately 3.3 million cubic feet of natural gas per
day.

All elements of the project, including development of the field with gas
production facilities, construction of the power plant and the construction of a
110 kV transmission line for connection to the national grid is currently
anticipated to be fully financed by Termotasajero, thereby limiting any
additional capital investment in the project by Adair.

6
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ITEM 1. DESCRIPTION OF BUSINESS (continued)

EXPLORATION

Major growth in the company is anticipated through the development of
exploratory drilling ventures that are risk managed by securing partners on a
promoted basis. In February of 2000, the Company greatly enhanced internal oil
and gas exploration and development capabilities through an acquisition of
Partners In Exploration, Inc., (PIE), a privately held geoscience consulting
firm located in Dallas, Texas. This group, now known as Adair Exploration,
Inc., is a wholly owned subsidiary of Adair International Oil & Gas, Inc. and is
responsible for all oil and gas operations for the Company. The president of
Adair Exploration, Inc. is Richard G. "Dick" Boyce.

In addition to highly qualified geoscience staff and state of the art
geoscience workstation equipment and software, two active projects were acquired
with the acquisition of PIE. These projects include the balance of the Sabatain
Block 20 project located in the Republic of Yemen, and the Wolfcamp Carbonate
Play, located in the Permian Basin of West Texas.

International Activities
Sabatain Block 20
Republic of Yemen

During the fourth quarter of 1999, the Company signed a Memorandum of
Understanding with the Republic of Yemen for exclusive exploration and
production rights on Block 20. In January of 2000, Occidental Petroleum farmed
into this project taking a 50% working interest and carrying Adair through a 3D
seismic program. In February of 2000, an additional 20% working interest was
conveyed to Saba Oil and Gas Company, a local Yemeni company. On April 2, 2000
these partners jointly signed a Production Sharing Agreement with the government
on this lucrative acreage. On September 2, 2000, the President of Yemen signed
decree number 21, which passes into law the Production Sharing Agreement for
Block 20. This decree establishes the effective date for the contract and is
therefore an important milestone to the Company.

Adair Yemen Exploration Limited, a wholly owned subsidiary of Adair
International Oil and Gas, Inc. retains a 30% working interest and will operate
the exploration phase of the project, with Occidental named as development and
production operator. This unique arrangement recognizes the geological and
operational expertise of Dick Boyce, President of Adair Yemen, who as
exploration manager for Yemen Hunt in the early 1990's, operated large 3D
seismic programs and discovered over 300 million barrels of oil in this area.

Block 20, located in the Marib-Shabwa basin, is situated in the heart of
prolific production (currently 160,000 barrels/day) operated by Yemen Hunt Oil
Company. Since its discovery in 1984, this basin's prolific Alif Petroleum
System has produced over 700 million barrels of light sweet crude oil. Pipelines
and facilities are available for the immediate export of any oil discovered.

Utilizing an extensive grid of 2D seismic data, Adair has mapped several
prospects that may contain up to 340 million barrels of recoverable oil.
Prospects are located at depths of 5,000 to 8,000 feet, with exploratory wells
costing approximately two million dollars to drill and complete. Wells in the
prolific Alif sand typically flow at rates of 2,500 barrels of oil per day.

7
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ITEM 1. DESCRIPTION OF BUSINESS (continued)

The identified program includes both lower risk field offset drilling
(proved undeveloped "PUD") and higher risk exploration prospects. A recent
discovery announced by Vintage Petroleum Yemen, Inc., at their Annaeem #1 well
tested water free at rates of 40 million cubic feet per day of gas and 1,020
barrels of condensate. This well is currently being offset by Vintage to
explore for a potential oil leg that may be present down dip from the gas cap
tested in the #1 well. The Annaeem wells are drilled approximately 500 meters
due southeast of the boundary with Block 20 and will test a structure that the
Company believes may straddle the block boundary.

The initial work program will focus on acquiring a minimum of 200 square
kilometers of new 3D seismic data, which has been shown on other blocks in this
trend to be effective at limiting the risk of drilling dry holes. This seismic
program is scheduled to begin acquisition during the fourth quarter of 2000, or
as soon there after as equipment availability allows. The seismic program will
be followed in 2001 with an aggressive drilling program to test the prospects
mapped with the 3D seismic data. In September of 2000, Adair Yemen Exploration
Limited opened an office in Sana'a, Yemen to begin operations.

Occidental has maintained a long standing position in Yemen, including
non-operated working interests in both the prolific Masilla production (210,000
bbls/day) and in the East Shabwa block (50,000 bbls/day). Their relationship
with the government of Yemen and their world wide expertise in exploration and
production is a valuable addition to the partner group exploring Block 20. Saba
Oil and Gas Company is a privately held Yemeni oil company that is owned by the
Al-Rowaishan Group based in Sana'a, Yemen. Al-Rowaishan is a highly respected
merchant group in Yemen, and also provides unique value to the Block 20 group,
particularly in the areas of governmental and cultural relations.

Domestic Activities

Wolfcamp Carbonate Play
Permian Basin, West Texas

Adair Exploration, Inc. has mapped six leads based on 3D seismic data in
the prolific Wolfcamp carbonates of West Texas. Wells in this trend typically
produce over one million (1,000,000) barrels of oil each, flowing at rates up to
500 barrels of oil per day. Analog fields range between two and eight wells,
covering areas of 40 to 600 acres. Drilling costs to reach these targets at
9,500 feet are relatively low ($275,000 dry hole) owing to the fact that wells
can be safely tested without the need to set expensive intermediate protective
casing strings.

These leads have estimated proved reserves in excess of 13.5 million
barrels of oil and 2.7 Bcf of gas.

Historically these prospects have been overlooked by previous explorers,
even those using 3D seismic due to the fact that the porosity development that
defines the production can only be mapped using advanced seismic technologies,
not generally applied to data in this area. Advanced seismic processing and
interpretation techniques have been demonstrated to enhance exploration success
and reduce finding cost. Adair personnel have previously utilized these methods
to successfully drill these types of prospects.

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ITEM 1. DESCRIPTION OF BUSINESS (continued)

Activities are currently focused on the reprocessing of a large
(approximately 130 square miles) speculative 3D seismic database that covers the
identified leads. Once the advanced geophysical processing techniques have been
completed, a thorough reinterpretation of that data will be undertaken to
further qualify and high grade the identified leads bringing them to "drillable"
status. Some of the prospects are located on open acreage that can be leased on
favorable terms. Other prospects may involve securing farmouts prior to
drilling. Once the drillable prospects have been leased, additional decisions
regarding the leveraging of these opportunities will be made.

While much work remains to be completed, it is anticipated that wells on
these prospects could be drilled as early as the second quarter of 2001.

ACQUISITION OF PRODUCING PROPERTIES

While oil and gas prices are currently at record high levels, limiting the
traditional opportunities of buying reserves at bargain prices, never the less,
the Company believes that a unique window of opportunity may exist for the
acquisition of producing oil and gas properties. As an unprecedented number of
companies have been subjected to merger and acquisition activities over the last
five years, many of the survivor companies now have recently inherited a wide
range of producing assets. As companies have the opportunity to review their
portfolios of properties, they continually weed out properties for sale that no
longer fit their corporate guidelines. In some instances, the reasons for sale
do not reflect the value of the property but rather are sold for reasons of
geography or dispersion of focus outside of core areas.

The Company maintains an active vigil to identify a producing property that
can provide needed near term cash flow but with long lived reserves resulting in
significant upside potential.

GOVERNMENTAL REGULATIONS

The Company's current and contemplated activities are in the areas of oil
and gas drilling and production, and electric power generation. Federal, state
and local laws and regulations have been enacted regulating these activities.
Moreover, so-called "toxic tort" litigation has increased markedly in recent
years as persons allegedly injured by chemical contamination seek recovery for
personal injuries or property damage. These legal developments present a risk
of liability should the Company be deemed to be responsible for contamination or
pollution. There can be no assurance that the Company's policy of establishing
and implementing proper procedures for complying with environmental regulations
will be effective at preventing the Company from incurring a substantial
environmental liability. If the Company were to incur a substantial uninsured
liability for environmental damage, its financial condition could be materially
adversely affected. The government can, however, impose new standards. If new
regulations were to be imposed, the Company may not be able to comply.

EMPLOYEES

The Company currently has 12 full-time employees, 3 of who are in
management positions. None of the Company's employees are represented by a
union and the Company considers its employee relations to be good.

TRANSFER AGENT AND REGISTRAR

The transfer agent of the Company is Chase Mellon Shareholder Services, 499
S. Hope Street, 4th Floor, Los Angeles, CA 0071, (213) 553-9726.

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RISK FACTORS

The prospects of the Company are subject to a number of risks. There may
exist, however, other factors which constitute additional risks but which are
not currently foreseen or fully appreciated by management.

Liquidity and Capital Resources

The Company incurred net operating losses for the two years ending May 31,
2000 and 1999 and currently has negative working capital. As a result of the
Company's acquisition of interests in the Teayawa Energy Center, the Company has
been actively engaged in obtaining financing to effect its plan to develop
additional sites for gas-fired power plants and to proceed with its exploration
projects. Additionally, the Company has the option to market a portion of its
interest in the Yemen exploration project as an alternative source of funding of
future operations. As discussed in Item 6, future internal revenues from site
development fees, operator fees, and technical services are expected to fund
future operating expenses and other financial obligations which have previously
been met primarily, by the issuance of Company stock. There is no assurance
that the Company will be able to secure adequate financing nor to continue to
sell stock to fund operations.

Insufficiency of Working Capital

Presently, the Company lacks sufficient working capital and has depended on
financing activities such as the sale of its common stock to obtain working
capital. There are no assurances, however, that the Company can: (1) raise the
necessary capital to enable it to continue the execution of its revenue growth
strategy; or (2) generate sufficient revenue growth and improvements in
operating margins to meet its working capital requirements if such capital is
obtained. To the extent that funds generated from operations are insufficient,
the Company will have to raise additional working capital. No assurance can be
given that funds will be available from any source when needed by the Company
or, if available upon terms and conditions reasonably acceptable to the Company.

Ability to Obtain Additional Capital

In order to obtain financing, the Company is reviewing a number of
financing alternatives, which include the issuance of debt by the
Company secured by its interests in the existing power project. The Company is
limited in its ability to borrow from banks in the United States with respect
to foreign properties although the Company retains and option to sell or
collateralize all or a portion of its interest in the Yemen exploration venture.

There can be no assurance, however, that the Company will be able to obtain
any financing. If the Company is able to borrow funds from lenders, assets of
the Company will probably have to be pledged as collateral and loan terms may
restrict the Company's operation. No assurance can be given that funds
will be available from any source when needed by the Company or, if
available upon terms and conditions reasonably acceptable to the Company.

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RISK FACTORS (continued)

Reliance on Efforts of Others

The Company forms joint ventures with industry participants in order to
leverage, finance and facilitate its activities. In some instances, the Company
will depend on other companies to develop and operate its properties and
projects. The prospects of the Company will be highly dependent upon the
ability of such other parties. As indicated by the nature of the partners, with
which the Company is participating in current projects, management believes the
risk in relying on such partners is minimal.

Foreign Political Climate

The Company has direct oil and gas interests in the Republic of Yemen and
the Republic of Colombia.

Recently a Memorandum of Understanding was signed between the Republic of
Yemen and the Kingdom of Saudi Arabia to establish a clear and well-defined
border between these two countries. When completed, this will resolve a
long-standing issue that has served to generate civil unrest in Yemen.
Additionally, with the improvement in relations between Yemen and Saudi, the
status of Yemen in the international community has noticeably improved. This is
evidenced by recent visits to Canada and the USA by the President of Yemen, the
first such visits since the Gulf War of 1990.

Colombia remains a difficult political climate for the conduct of
international business. No political changes are observed on the horizon that
will improve either the security or business climate of the country. Any changes
in the political climate of Colombia could have a negative impact on the
Company, up to and including the complete loss of these interests.

International Operations

The Company anticipates that a significant portion of its future
international revenues could be derived from its oil and gas interests located
in Yemen and Colombia. Currency controls and fluctuations, royalty and tax
rates, import and export regulations and other foreign laws or policies
governing the operations of foreign companies in the applicable countries, as
well as the policies and regulations of the United States with respect to
companies operating in the applicable countries, could all have an adverse
impact on the operations of the Company.

The Company's interests could also be adversely affected by changes in any
contracts applicable to the Company's interests, including the renegotiating of
terms by foreign governments or the expropriation of interests.

It should be noted that the Production Sharing Agreement in Yemen enjoys
the protection of having been ratified and passed into law by the Republic of
Yemen, thereby preserving the sanctity of the Agreement as a law of the land,
limiting the opportunities for renegotiation of terms. During the lifetime of
petroleum production in Yemen, no expropriation of interests has occurred.

In addition, the contracts are governed by foreign laws and subject to
interpretation by foreign courts. Foreign properties, operations and investments
may also be adversely affected by geopolitical developments.

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RISK FACTORS (continued)

Oil and Gas Price Volatility

The revenues generated by the Company are highly dependent upon the prices
of crude oil and natural gas. Fluctuations in the energy market make it
difficult to estimate future prices of crude oil and natural gas. Such
fluctuations are caused by a number of factors beyond the control of the
Company, including regional and international demand, energy legislation of
various countries, taxes imposed by applicable countries and the abundance of
alternative fuels. International political and economic conditions may also
have a significant impact on prices of oil and gas. There can be no assurance
of profitable operations even if there is substantial production of oil and gas.

Environmental Regulation

The oil and gas industry is subject to substantial regulation with respect
to the discharge of materials into the environment or otherwise relating to the
protection of the environment. The exploration, development and production of
oil and gas are regulated by various governmental agencies with respect to the
storage and transportation of the hydrocarbons, the use of facilities for
processing, recovering and treating the hydrocarbons and the clean up of
drilling sites. Many of these activities require governmental approvals before
they can be undertaken. The costs associated with compliance with the
applicable laws and regulations have increased the costs associated with the
planning, designing, drilling, installing, operating and plugging or abandoning
of wells. To the extent that the Company owns an interest in a well it may be
responsible for costs of environmental regulation compliance even after the
plugging or abandonment of that well.

Operating Hazards and Uninsured Risks

The operation of an oil or gas well is subject to risks such as blowouts,
cratering, pollution and fires, any of which could result in damage or
destruction of the well or production facility or the injury or death of persons
working at those facilities. The operator of the well may be unable to purchase
adequate insurance against each of these risks. The occurrence of such a
significant event could have a material adverse affect on the Company.

General Risks of the Oil and Gas Industry

The Company's operations will be subject to those risks generally
associated with the oil and gas industry. Such risks include exploration,
development and production risks, title risks, and weather risks, shortages or
delay in delivery of equipment and the stability of operators and contractor
companies.

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ITEM 2. DESCRIPTION OF PROPERTIES

The Company's principal executive offices are located in leased facilities
at 3000 Richmond, Suite 100, Houston, Texas 77098, which consist of a total of
approximately 4,763 square feet. The current monthly rental for these executive
offices is $6,351. The lease for the executive offices will expire in August,
2001. The Company believes that its offices are adequate for its present needs
and that suitable space will be available to accommodate its future needs.

Domestic Oil and Gas Properties

The Company has not commenced any drilling activity during the last three
years. In 1999, the Company sold all of its domestic oil and gas production.
In March, 1999 the company sold 25 wells located in the continental U.S. due to
the fact the wells were essentially depleted or the interest was such a minor
portion that it was not economically feasible to maintain ownership. Also taken
into consideration was the plugging liability that the company could possibly
face.

For 1999, the average sales price per barrel of oil produced was $20.31,
and the average sales price per MCF of gas produced was $2.23, and the average
lifting cost per barrel of oil was $5.00, and the average lifting cost per MCF
was $0.20.

Republic of Colombia Oil and Gas Properties

In 1997, the Company acquired, subject to certain consents, rights with
respect to a contract relating to the exploration, drilling and development of
oil and gas properties in the Republic of Colombia (the "Chimichagua
Concession"). The rights acquired consisted of the rights and obligations of
Geopozos (a Colombian company) with respect to a contract known as the
Chimichagua Association Contract (the "Association Contract"). The Company
received a copy of a letter from Ecopetrol which authorized the assignment of
the Association Contract from Geopozos to the Company effective June 29, 1998.
The Association Contract grants the right to explore, drill and extract
hydrocarbons from a specified area in Colombia. The Association Contract
relates to an area of approximately 25,000 acres in the Magdalena valley of
Colombia, approximately 500 miles north of Bogota. The Association Contract was
originally acquired by Esso Colombia in 1988 and, following an intervening
assignment, was acquired by Geopozos on September 14, 1996. Ecopetrol is a
government organization of Colombia which regulates oil and gas activity.

The Association Contract, between Ecopetrol and the Company, provides that
the parties shall share equally the hydrocarbons produced from the relevant
properties, subject to an overriding royalty interest of 20% which is reserved
for Ecopetrol, and the expenses of development of the properties. The Company
is responsible for the exploration of the properties but has the right to
receive reimbursement of those costs with respect to fields which are
commercially developed by the parties. The effective date of the Association
Contract was January 20, 1989, and the contract terminates for all purposes 28
years thereafter. The Association Contract provides for an exploration period
of six years, subject to certain extensions, and an exploitation period of 22
years. Under the terms of the Association Contract, a portion of the property
which has not been commercially developed is reduced over a period of years,
beginning in the sixth year. In a letter to the Company dated August 4, 1997,
Geopozos indicated that 50% of the original area covered by the Association
Contract had been returned to Ecopetrol and that Ecopetrol had not issued any
declarations of commercialism with respect to the remaining area. The current
size of the area in which the Company may explore is approximately 25,000 acres.
See below, Petroleum Reserves in the Chimichagua Concession.
-----------------------------------------------------

13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES (continued)

In connection with the agreement between Geopozos and the Company, Geopozos
retained a 2% overriding royalty interest in hydrocarbons produced from the
properties developed under the Association Contract. The Geopozos
Agreement also provides that Geopozos may nominate a person to serve on the
board of directors of the Company. Geopozos has not nominated any person to
serve on the Company's board.

Petroleum Reserves in the Chimichagua Concession. In a report dated
-----------------------------------------------------
September 13, 1999, L.A. Martin & Associates, Inc., a petroleum engineering
firm, reported on its review of Geopozos' and Ecopetrol's well logs and tests in
the Chimichagua Concession. L.A. Martin & Associates, Inc. stated that the
estimated reserves were 22.15 BCF of proved reserves of natural gas.
Realization of the value of these reserves is contingent upon the Company or
WARTSILA obtaining financing to fund the development costs.

On November 6, 1998, the Company executed a memorandum of understanding
with Wartsila NSD Ecuador to develop this property. The feasibility study
on this project was completed in July, 1999. Subsequent to the
feasibility study, Wartsila opted to forego participation in the project. The
Company then entered in a dialog with Termotasajero, a major Colombian utility
company, to construct a 20-megawatt natural gas fired power plant. A
preliminary proposal was received by the Company in August, 2000. The general
concepts provide for Adair to supply the gas to fuel the power plant providing
revenues under a long term gas purchase contract. In addition, as an incentive
to provide the fuel for the plant at prices that allow competitive pricing for
the power, Adair will receive equity in the power plant based on the value of
their contribution under the gas purchase contract. This option would allow the
Company to recover additional revenues under a power purchase agreement with
Termotasajero. Realization of the value of reserves is contingent upon the
Company concluding an agreement to construct a power plant utilizing gas from
the field.

14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

The Company was named as a defendant in the matter of Mark Singleton v. Adair
International Oil and Gas, Inc., 98-2672, 215th Judicial District Court, Harris
County, Texas. The plaintiff was seeking rescission for the purchase of 195,000
shares of common stock of the Company. The plaintiff dismissed the suit.

The Company was named as a defendant in the matter of Santa Fe Natural
Resources, Inc. v. Adair International Oil and Gas, Inc., CV-42, 061, 142nd
Judicial District Court, Midland County, Texas. The plaintiff claimed that
the Company breached a contract in connection with a bid on an oil and gas
prospect in Eddy County, New Mexico. The plaintiff is also claimed an amount
due from the Company in connection with services rendered for an oil and gas
prospect known as the Saunders prospect in New Mexico. The lawsuit was
resolved with the Company paying the plaintiff $20,000 in cash and issuing
10,000 shares of Company stock to the plaintiff valued at $20,000.

The Company was named as a defendant in the matter of John A. Braden, Robert D.
Goldstein, James L. Bennink and S. Cleve Gazaway, Individually, and as the
Partners for Braden, Bennink, Goldstein, Gazaway & Company, P.L.L.C. v. John W.
Adair, Individually, Jalal Alghani, Individually, Adair International Oil and
Gas, Inc. and ChaseMellon Shareholder Services, L.L.C., 2000-16454, 152nd
Judicial District Court, Harris County, Texas. The plaintiffs claim damages
resulting from breach of an alleged contract between the plaintiffs and the
Company. The Company has recorded a liability on its books in the total amount
of $ 32,487.75 which represents the balance of the obligation for which this
lawsuit arose. The Company intends to defend itself vigorously in this matter.

15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The regular annual meeting of shareholders was held on February 22, 2000,
At which time the following persons were elected directors:

Name Votes for
---- ----------

John W. Adair 27,634,210
Earl K. Roberts 27,879,610
Jalal Alghani 27,879,678

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is currently traded on the over the counter
bulletin board ("OTCBB") symbol "AIGI.OB." The following table sets forth, for
the periods indicated, the high and low closing bid prices for the Common
Stock of the Company as reported on the OTCBB. The bid prices reflect
inter-dealer quotations, do not include retail mark ups, markdowns or
commissions and do not necessarily reflect actual transactions.

COMMON STOCK PRICE RANGE
HIGH BID LOW BID
Fiscal Quarter Ended:

August 31, 1998 $ .375 $ .0781
November 30, 1998 $ .0938 $ .0469
February 28, 1999 $ .0938 $ .0312
May 31, 1999 $ .0625 $ .0312

August 31, 1999 $ .2031 $ .0312
November 30, 1999 $ .5938 $ .0938
February 29, 2000 $ 3.7188 $ .3750
May 31, 2000 $ 2.5625 $ .4062

On September 1, 2000, the closing price for the Common Stock of the Company
on the OTCBB was $ .5000. On September 1, 2000, there were approximately
897 stockholders of record of the Common Stock, including broker-dealers
holding shares beneficially owned by their customers.

DIVIDEND POLICY

The Company has not paid, and the Company does not currently intend to pay
cash dividends on its Common Stock in the foreseeable future. The current policy
of the Company's Board of Directors is for the Company to retain all earnings,
if any, to provide funds for operation and expansion of the Company's business.
The declaration of dividends, if any, will be subject to the discretion of the
Board of Directors, which may consider such factors as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others.

16
<PAGE>
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(continued)

RECENT SALES OF UNREGISTERED SECURITIES

During the years ended May 31, 2000 and 1999, the following
transactions were effected by the Company in reliance upon exemptions from
registration under the Securities Act of 1933 as amended (the "Act") as
provided in Section 4(2) thereof. Each certificate issued for unregistered
securities contained a legend stating that the securities have not been
registered under the Act and setting forth the restrictions on the
transferability and the sale of the securities. No underwriter participated
in, nor did the Company pay any commissions or fees to any underwriter in
connection with any of these transactions. None of the transactions involved a
public offering. The Company believes that each of the persons had knowledge
and experience in financial and business matters which allowed them to evaluate
the merits and risk of the purchase or receipt of these securities of the
Company. The Company believes that each of the persons were knowledgeable
about the Company's operations and financial condition.

On February 1, 2000, Adair International Oil and Gas, Inc. (the Company)
acquired 100% of the outstanding common stock of Partners In Exploration, Inc.
(PIE). Pursuant to this acquisition, the Company conveyed 4,200,000 shares of
restricted common stock for all of the outstanding shares of Exploration which
totalled 4,200,000 shares. See Item 6, Acquisition of Subsidiary.

The Company issued stock in lieu of cash in transactions summarized as
follows for the years ended May 31, 2000 and 1999. The Summary Compensation
Table at Item 10, Executive Compensation, details the number of shares issued
for compensation to each Company officer.

<TABLE>
<CAPTION>
Nature of transaction 2000 1999
------------------------------- ----------------------- ---------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Consultants and professional fees 678,203 $ 187,150 4,187,416 $ 173,108
Salaries 2,363,770 360,000 2,886,262 180,000
Accrued salaries 2,304,983 192,500 - -
Acc'ts payable and acc'd liability 1,416,143 68,315 - -
Furniture and fixtures - - 500,000 20,000
Other expenses 1,061,050 276,000 248,123 13,026
---------- ---------- ---------- ----------
7,824,149 $1,083,965 7,821,801 $ 386,134
========= ========== ========== ==========
</TABLE>

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, includes certain forward-looking
statements. The forward-looking statements reflect the Company's expectations,
objectives and goals with respect to future events and financial performance,
and are based on assumptions and estimates which the Company believes are
reasonable. However, actual results could differ materially from anticipated
results. Important factors which may affect the actual results include, but are
not limited to, commodity prices, political developments, market and economic
conditions, industry competition, the weather, changes in financial markets and
changing legislation and regulations. The forward-looking statements contained
in this report are intended to qualify for the safe harbor provisions of Section
21E of the Securities Exchange Act of 1934, as amended. The Notes to
Consolidated Financial Statements contain information that is pertinent to the
following analysis.

17
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

Implementation of Business Strategy

The fiscal period from May 1999 through May 2000 represents major
advancements in the Company's stated goal to become a substantial energy
company. During this time period we have seen our internal capabilities of
conducting business in the oil and gas sector greatly enhanced by our merger
with Partners In Exploration, Inc., which brings well seasoned management and
"state of the art" technical capacity to the company. Through this merger, the
Company has also enhanced the quality and quantity of its exploration projects,
specifically a major Production Sharing Agreement in the Republic of Yemen and a
significant opportunity in the Permian Basin of West Texas.

Concurrent with our activities in oil and gas, we expanded our efforts in
the power business. In 1999, we signed our first development agreement with
Calpine Corporation for what is now known as the Teawaya Energy Center located
on Native American lands in southern California. Additional sites are currently
under assessment and the Company is evolving it's site development strategy to
include securing the necessary permits required to greatly enhance the value of
its sites.

During the past fiscal year and subsequent to May 31, 2000, the Company has
entered into two major projects, an exploration program in Block 20, located in
the Republic of Yemen and a power plant located in Southern California, more
completely described in Item 1, Business. Both of these projects will provide
internally generated funds to apply toward budgeted expenditures during the next
fiscal year.

Financial Impact - Block 20, Republic of Yemen

A participation agreement between Adair Yemen Exploration Limited,
Occidental Yemen Sabatain, Inc. and Saba Yemen Oil Company Limited, dated March
31, 2000 provides for the payment of $750,000 to the Company by the major
partner, Occidental Petroleum, within ten (10) days of the effective date of the
Production Sharing Agreement (PSA). The effective date established by
Presidential decree number 21 was September 2, 2000.

In addition Occidental shall pay from its sole account one hundred percent
(100%) of the costs to acquire and process up to two hundred (200) square
kilometers of 3D seismic, such expenditure to be capped at four million dollars
($4,000,000).

Adair Exploration, Inc., under the terms of a Technical Services Contract
with the project partners, will provide interpretational services for the
program. It is estimated that fees from this work will total $900,000 and
$1,000,000, respectively, in the first and second program years.

The Company, as operator, is to receive an administrative overhead fee
based on varying percentages of the total work program costs. Based on the
current work program budget, during the same two program periods, these fees are
estimated to be $235,000 and $136,000, respectively.

18
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

Contractor group working interests in the block are Occidental 50%, Adair
30%, and Saba 20%. The working interests as a group are subject to a 5% carried
interest held by the Yemen Company For Investments In Oil and Minerals (YICOM)
in the concession area.

The minimum work commitment to the Yemen government includes reprocessing
of existing 2D seismic data, the acquisition of 100 square kilometers of 3D
seismic and the drilling of two exploration wells within the first three year
exploration period. This work program commitment is guaranteed by the partners
through placement of a Letter of Credit in the amount of $8.3 million which is
refunded as work commitments are completed. A second three year exploration
period is optional, providing for an overall six year exploration opportunity,
and if a commercial discovery is made, a twenty year production period is
granted.

The Production Sharing Agreement allows for recovery of investment cost
made by the contractor group from the oil produced. Oil not used for cost
recovery is then "split" between the contractor group and the Yemen government.
For example, initially the Adair-Oxy-Saba contractor group will receive up to
66% of the first 25,000 barrels of oil produced each day from fields on Block
20. "This opportunity to recover all of our costs up front improves the project
economics. We believe the production splits reflect recognition by the Yemen
government of providing investment incentives while retaining a fair share for
the future of Yemen", stated Dick Boyce, President of Adair Yemen Exploration
Limited.

A one time signature bonus of $400,000 was payable on the effective date by
The group to the Government of Yemen. Additionally each year, the contractor
group funds $250,000 which is used exclusively for the technical raining
of the professional staff at the Ministry of Oil and Mineral Resources, and for
various institutional and social development projects in Yemen. Thes e costs
are shared proportionally by the working interest partners.

Financial Impact - Teayawa Energy Center, Southern California

The Teayawa Energy Center (TEC) Site Development Agreement, dated November
30, 1999, provides for the payment of a development fee of $1,000,000 payable in
two installments: $500,000 at the financial closing estimated to occur in
quarter one, 2001, and $500,000 upon the commercial operation date estimated to
occur in quarter three, 2002. The Company receives $12,000 per month consulting
fee until the commercial commissioning of the project.

Additionally, the Agreement provides for a royalty payable to the Company
on the basis of a sliding scale between 3% and 4% of the earnings before
interest, taxes, depreciation, and amortization for a period of 20 years.
Current economic models project annual royalties of from $1,100,000 to
$1,800,000 per year from commercial operation. These models are based on
assumptions and estimates which the Company believes are reasonable, however,
actual results could differ materially from anticipated results.

19
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

The Company also has the option, exercisable at or before financial
closing, to purchase up to 20% of the output of the plant under a long-term
power sales agreement. The purchase price of this power shall be negotiated at
a discount to prevailing market prices and shall approximate the fuel,
operations and maintenance, financing and management expenses for the project.
The Company many assign its rights to the power sales agreement and is subject
to a right of first refusal in favor of Calpine. While the value of this option
is difficult to assess at this point in time, management believes that the
impact will be substantial owing to the fact that the output of the plant will
maintain both a base load sales opportunity and peak generating capacity that
can be sold as Merchant power at spot market prices. Current economic models
project annual total revenues of from $11,000,000 to $13,000,000 per year from
commercial operation. These models are based on assumptions and estimates which
the Company believes are reasonable, however, actual results could differ
materially from anticipated results.

Company costs during the development phase are included in budgeted general
and administrative costs and the Company has no obligation for any of the direct
development expenditures or capital investment in the plant.

Financial Impact - Internal and External Capital Sources

Subsequent to May 31, 2000, internal funding of all expenditures, has been
through the sale of Company stock and the consulting fees on the TEC. As a
result of the Company's acquisition of interests in the Teayawa Energy Center,
the Company has been actively engaged in obtaining financing to effect its plan
to develop additional sites for gas-fired power plants and to proceed with its
exploration projects. Alternatively, the Company has the option to market all or
a portion of its interest in the Yemen exploration project as an alternative
source of funding of future operations. There is no assurance, however, that the
Company would be successful in its efforts to sell the interest at the value
estimated. Future internal revenues from site development fees, operator fees,
and technical services are expected to provide partial funding of operating
expenses and other financial obligations which have previously been met
primarily, by the issuance of Company stock.

The revenues from the Yemen exploration project and the TEC, in combination
with either the acquisition of financing or the marketing of a portion of its
exploration interests, are projected to take the Company to the commercial
revenues of both projects. Such funding would facilitate continuing as well as
the development of other projects as described in Item 1, Business. The Company
is continuing its efforts to acquire major equity partners on a risk managed
basis for its projects.

Acquisition of Subsidiary

On February 1, 2000, Adair International Oil and Gas, Inc. (the Company)
acquired 100% of the outstanding common stock of Partners In Exploration, Inc.
(PIE). Coincident with the acquisition of PIE, the name of Partners In
Exploration, Inc. was changed to Adair Exploration, Inc. (Exploration). The
terms and conditions of the stock exchange were determined by the parties
through arms length negotiations. However, no appraisal was conducted. The
financial results of Exploration are consolidated into the Company's financial
statements effective on the date of acquisition.

Exploration is a Texas corporation located in Dallas, Texas. It has the
professional staff and equipment to evaluate complex geology to include state of
the art 3-D seismic information. Exploration has done extensive work in the
Yemen area where the Company currently has a large concession. Pursuant to this
acquisition, the Company conveyed 4,200,000 shares of restricted common stock
for all of the outstanding shares of Exploration which totalled 4,200,000
shares. The assets of Exploration include extensive 2D seismic, well reports,
and a regional database encompassing the Company's Yemen concession; 2D seismic,
gravity data, technical reports, and regional geologic data in Eritrea; and 3D
seismic on other geological data encompassing part of West Texas. PIE has the
software, computers, and 3-D work stations to interpret and evaluate existing
data. It is the intention of Exploration and the Company to utilize these assets
to interpret and evaluate future acquisitions. Exploration also had an equal
interest with the Company in a signed Memorandum of Understanding (MOU) with
regard to the exploration of Block 20 in the Republic of Yemen. Subsequent to
the acquisition, both the Company and Exploration conveyed their interests in
the MOU by assignment to Adair Yemen Exploration Limited, a wholly owned
subsidiary of the Company.

20
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

RESULTS OF OPERATIONS

FISCAL YEAR ENDED MAY 31, 2000 COMPARED TO FISCAL YEAR ENDED MAY 31, 1999.

The following summarizes oil and gas revenues and operating expenses for
the year ended May 31, 1999. There were no oil and gas revenues for the
year ended May 31, 2000 as the Company sold all of its domestic production in
the previous year.
Year Ended
May 31, 1999
-------------
Oil and Gas Sales $ 33,008
Lease Operating Expenses 13,966
------------
Operating Income $ 19,042
============

Revenues. During fiscal 1999, the Company's total revenues were the
$33,008 from its domestic properties which were sold March 31, 1999. In fiscal
2000, total revenues of $62,443 were from consulting fees in the natural gas
site development area ($60,000) and technical geophysical services ($2,443).

Lease Operating Expenses. During fiscal 1999, lease operating expenses
of $13,966 were attributable to properties sold as indicated above.

Depreciation. Depreciation and expense decreased from $60,435 in fiscal
1999 to $10,802 in fiscal 2000, an increase of $49,633.

Interest Expense. During fiscal 2000, the Company had incurred interest
expense on a note payable in the amount of $4,337, which represented an increase
of $2,069 over fiscal 1999

General and administrative Expenses. The Company experienced an
increase in general and administrative expenses of from $1,396,887 in fiscal
1999 to $1,747,112 in fiscal 2000, an increase of $350,225. $260,556 of this
increase was attributable to the general and administrative expenses of Adair
Exploration, Inc. from February 1, 2000 through May 31, 2000. Increases of
$164,215 in shareholder services, $156,557 in travel expenses, and the
settlement of a fee dispute of $40,000 totalled $360,772. Decreases in
consulting of $142,078 and legal and accounting fees of $97,695 totalled
$239,773. These changes combined with others combined to constitue the overall
increase.

21
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

RESULTS OF OPERATIONS (continued)

The net loss for the year ended May 31, 2000 was ($1,699,808) or ($0.03)
per share on revenues of $62,443 versus a net loss of ($1,509,458) or ($0.04)
per shares on revenues of $33,008 in 1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company is liable for $120,000 of a $400,000 standby letter of credit
posted by its wholly owned subsidiary, Adair Yemen Exploration, Limited. On
April 2, 2000 Adair Yemen was a party to a Production Sharing Agreement (PSA)
with the Yemen Government for the exploration of Sabatain Block 20 as described
more fully in Item 1, Business, and in the Notes to Consolidated Financial
Statements regarding Commitments. The company has no bank debt other than that
described in the foregoing.

The Company expects that its existing cash reserves, cash flows from
Operations, partial project farmins, and financing, if available, will be
sufficient to cover the Company's cash requirements for fiscal 2000.
However, there can be no assurance that these sources of cash will cover the
Company's requirements for fiscal 2000.

Year 2000 Issues

The Company did not experience any significant disruptions in its
operations during the transition into the Year 2000. While the Company did not
experience any significant Year 2000 disruptions during the transition into the
Year 2000, it will continue to monitor its operations and systems and address
any date-related problems that may arise as the year progresses.

ITEM 7. FINANCIAL STATEMENTS

The information required hereunder is included in this report as set forth
on pages 29-53.

22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

Braden, Bennink, Goldstein, Gazaway & Company, P.L.L.C. ("Braden") audited
the financial statements of the Company for the year ended May 31, 1998 and
resigned on July 2, 1999. The Company engaged Jack Sisk & Co. ("Sisk")
as its new independent auditor on July 26, 1999, to audit the financial
statements of the Company for the year ended May 31, 1999. Sisk was replaced
by the firm of Jackson and Rhodes, P.C. ("J&R") on May 15, 2000.

There were no disagreements between the Company and Braden nor Sisk whether
resolved or not resolved, on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved, would have caused them to make reference to the subject
matter of the disagreement in connection with their report. Since June 1,
1997, and through the present, there were no reportable events requiring
disclosure with respect to each auditor's period of engagement.

The reports of both Braden and Sisk for the previous two fiscal years did
not contain any adverse opinion or disclaimer of opinion but Braden's opinion
was qualified as to uncertainty and audit scope, and both opinions contained
going concern modifications.

The decision to change principal accountants was recommended and approved
by the Company's Board of Directors and made at their request.

On February 28, 2000, the Company engaged J&R to audit its subsidiary,
Adair Exploration, Inc. (formerly Partners In Exploration, Inc.), which was
acquired effective February 1, 2000. In the course of that engagement, the
Company consulted with J&R regarding the application of accounting principles
and other matters as would be ordinary and necessary for J&R to render an
opinion on the financial statements of the subsidiary for the years ending
December 31, 1999 and 1998. The nature, extent, and result of all such
consultations are best described in the reading of Combined Financial Statements
of Partners In Exploration, Inc., for the years ending December 31, 1999 and
1998, which are included in Form 8-K, Amendment Number 1, dated February 1,
2000.

Additionally, the Company conferred verbally with J&R with regard to the
accounting for the acquisition by the Company. The result of such consultations
are best described in the reading of the Notes to Pro Forma Consolidated
Financial Data which are included in Form 8-K, Amendment Number 1, dated
February 1, 2000.

The consultations referred to in the preceding two paragraphs did not cause
the Company to make any significant changes on any accounting, auditing or
financial reporting issue.

Sisk has provided a letter addressed to the Securities and Exchange
Commission pursuant to Regulation S-B Item 304.

23
<PAGE>
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The following table sets forth the directors and executive officers of the
Company.

Name Age Title
---- --- -----

John W. Adair 58 Chairman of Board, Chief Executive Officer
and Director

Earl K. Roberts 73 President and Director

Jalal Alghani 41 Chief Financial Officer and Director

Richard G. Boyce 46 President, Adair Exploration, Inc.

Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company or until their successors are elected
and qualified. Officers serve at the discretion of the Board of Directors. There
is no family relationship between or among any of the directors and executive
officers of the Company.

BIOGRAPHIES

Mr. Adair has been a Director and the CEO of the Company since 1997. Prior
to his joining the Company in 1997, he served as the president and chief
executive officer of Dresser Engineering Co., a company which specializes in oil
and gas engineering services, from 1995 to 1997. Since 1988, Mr. Adair has
served as president of Adair Oil International, Inc.

Mr. Roberts has been a Director of the Company since 1981, and has served
as the president of the Company since its inception in 1988 and was the chief
executive officer of the Company until June, 1997.

Mr. Alghani has been a Director of the Company since 1997. Prior to his
joining the Company in 1997, he served as vice president of sales and marketing
of Dresser Engineering Co. from 1995 to 1997. Since 1990 Mr. Alghani has served
as an executive officer of Adair Oil International, Inc.

Mr. Boyce has served as President of Adair Exploration, Inc. since its
inception prior to acquisition this year. He was graduated from the Colorado
School of Mines and has served in numerous positions as Chief Geophysicist
implementing state-of-the-art computer technology. He has over twenty years of
worldwide oil and gas exploration and development experience. He has worked for
Superior Oil Company and Hunt Oil Company, the later in the area in the Republic
of Yemen in which the Company is now operating.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

John W. Adair, Jalal Alghani, Earl K. Roberts, and Richard G. Boyce each
failed to file Form 4 reports during the last fiscal year concerning receipt of
restricted common stock received as compensation from the Company.

24
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

The Company does not currently pay any cash director's fees, but it pays
the expenses, if any, of its directors in attending board meetings. The three
Directors of the Company are also Executive Officers of the Company. These
persons receive restricted stock as compensation. See, Executive Compensation.

EXECUTIVE COMPENSATION

Beginning in June, 1997, the Company agreed to pay John W. Adair, Earl K.
Roberts and Jalal Alghani each a salary of $5,000 per month, when funds are
available. In January 1998, this compensation was increased to include, for
each person, per month, $5,000 worth of restricted common stock of the Company,
based on the market price of the common stock at the end of each month.
Effective with the acquisition of Adair Exploration, Inc. on February 1, 2000,
it was agreed to pay Richard G. Boyce compensation as President of Adair
Exploration, Inc., the amount of $10,000 per month.

The following table reflects all forms of compensation for services to the
Company for the fiscal years ended May 31 , 1999, 1998 and 1997 of the all of
the executive officers of the Company.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------

ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------- ----------------------
AWARDS PAYOUTS
------ -------
OTHER ALL
NAME AND ANNUAL RESTRICTED SECURITIES OTHER
PRINCIPAL COMPEN- STOCK UNDERLYING LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARDS OPTIONS/SARS PAYOUTS SATION
--------- ---- ------------- ----- ------ ------ ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John W. 2000 $ 120,000 (1) -0- -0- -0- -0- -0- -0-
Adair 1999 $ 120,000 (2) 0- -0- -0- -0- -0- -0-
CEO 1998 $ 85,000 -0- -0- -0- -0- -0- -0-

Earl K. 2000 $ 120,000 (1) -0- -0- -0- -0- -0- -0-
Roberts 1999 $ 120,000 (3) -0- -0- -0- -0- -0- -0-
President 1998 $ 85,000 -0- -0- -0- -0- -0- -0-

Jalal 2000 $ 120,000 (1) -0- -0- -0- -0- -0- -0-
Alghani 1999 $ 120,000 (3) -0- -0- -0- -0- -0- -0-
CFO 1998 $ 85,000 -0- -0- -0- -0- -0- -0-

Richard G. 2000 $ 40,000 (4) -0- -0- -0- -0- -0- -0-
Boyce
President of Adair Exploration, Inc.

<FN>
----------------------------
(1) $ 120,000 was paid in-kind with 474,090 of restricted stock.

(2) Of which $15,000 was paid in cash, $45,000 was accrued to be paid in cash,
$50,000 was paid in-kind with 827,014 shares of restricted common stock of the
Company, and $10,000 was accrued to be paid in-kind in common stock.

(3) Of which $12,500 was paid in cash, $47,500 was accrued to be paid in
cash, $50,000 was paid in-kind with 827,014 shares of restricted common stock of
the Company, and $10,000 was accrued to be paid in-kind in common stock.

(4) $ 40,000 was paid in-kind with 48,961 shares of restricted stock.
</TABLE>

25
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of September 1, 2000,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who is known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company and (iv) all executive officers and
directors of the Company as a group. Unless otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
shown.

NAME AND ADDRESS OF BENEFICIAL TITLE OF PERCENT
BENEFICIAL OWNER OWNERSHIP CLASS OF CLASS
---------------------------------------------------------------------------
Jalal Alghani 6,640,986(1) Common Stock 10.0%
3000 Richmond, Suite 100
Houston, Texas 77098

John W. Adair 6,358,695 Common Stock 9.5%
3000 Richmond, Suite 100
Houston, Texas 77098

Richard G. Boyce 4,264,961 Common Stock 6.4%
1001 Hampshire Lane
Richardson, Texas 75080

Earl K. Roberts 3,404,107 Common Stock 5.1%
3000 Richmond, Suite 100
Houston, Texas 77098

All directors and executive 20,668,749 Common Stock 31.0%
officers as a group (4) persons)
--------------------------------
(1) Includes 6,240,986 shares owned directly, and 400,000 shares owned
indirectly through a trust for the benefit of the daughter of Mr.
Alghani.

The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Board of Directors of the Company has adopted a policy that Company
affairs will be conducted in all respects by standards applicable to
publicly-held corporations and that the Company will not enter into any
transactions and/or loans between the Company and its officers, directors and 5%
stockholders unless the terms are no less favorable than could be obtained from
independent, third parties and will be approved by a majority of the
independent, disinterested directors of the Company.

26
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)

On June 16, 1997, the Company entered into an agreement with Adair
International Oil Canada, Inc. (the "Agreement") pursuant to which the Company
issued to Adair International Oil Canada, Inc. ("AOI") 10,200,000 shares of
common stock of the Company in exchange for a 5% interest in each of certain
assets held by AOI related to oil and gas interests in Yemen and Paraguay. In
connection with the Agreement, three members of the Company's board of directors
agreed to resign and three persons designated by AOI were elected to the

Company's board. John W. Adair and Jalal Alghani, each of whom is an executive
officer of the Company and a member of its board of directors, each own
one-third of the stock of AOI. The terms of this transaction were based on
negotiations by the Company, and the Company believes the terms to be fair and
reasonable, but no independent appraisal was conducted. In 1999, AOI
transferred 3,400,000 of these shares to AIG, Inc, an investment firm controlled
by Mr. Alghani, and 3,400,000 of these shares to Mr. Adair.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
----------- ---------------
3.1 * Certificate of Incorporation of the Registrant, as amended.
3.2 * Bylaws of the Registrant, as amended.
4.1 * See Exhibits 3.1 and 3.2. for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining rights of
holders of common stock of the Registrant.
4.2 * Common Stock specimen.
10.1 ** Wartsila Agreement.
10.2 ** PIE Agreement.
10.20 *** Memorandum of Understanding.
10.21 *** Participation Agreement.
10.30 *** Site Development Agreement.
16.1 *** Letter from Sisk.
21.1 *** Subsidiaries.
27.1 *** Financial Data Schedule.
----------------------
* Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1997, and incorporated by
reference thereto.
** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1999, and incorporated by
reference thereto.
*** Filed herewith

(B) REPORTS ON FORM 8-K

Change in Registrants Certifying Accountants, May 15, 2000.
Acquisition of Partners in Exploration, Inc., February 1,2000.

27
<PAGE>
SIGNATURES

In accordance with the requirements of Section 13 of 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on September 12, 2000.

ADAIR INTERNATIONAL OIL AND GAS, INC.

/s/ John W. Adair
------------------------------
John W. Adair
Chairman of the Board, Director and
Chief Executive Officer

Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:

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

/s/ John W. Adair Director September 12, 2000
-------------------
John W. Adair Chairman of the Board and
Chief Executive Officer

/s/ Earl K. Roberts Director and President September 12, 2000
-------------------
Earl K. Roberts

/s/ Jalal Alghani Director and September 12, 2000
-------------------
Jalal Alghani Chief Financial Officer

28
<PAGE>
PART I.

ITEM 1. FINANCIAL STATEMENTS

ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
MAY 31, 2000 AND 1999

Independent Auditors' Reports 30-31

Consolidated Balance Sheets 32

Consolidated Statements of Operations 33

Consolidated Statements of Changes in Shareholders' Equity 34

Consolidated Statements of Cash Flows 35

Notes to Financial Statements 36-53

29
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors
Adair International Oil & Gas, Inc.

We have audited the accompanying consolidated balance sheet of Adair
International Oil & Gas, Inc. and subsidiaries as of May 31, 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Adair International
Oil & Gas, Inc. and subsidiaries as of May 31, 2000, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

Jackson & Rhodes, P.C.

Dallas, Texas
September 2, 2000

30
<PAGE>
INDEPENDENT AUDITOR'S REPORT

JACK SISK & CO.

A Professional Corporation of Certified Public Accountants

To The Board of Directors
Adair International Oil and Gas, Inc.
Houston, Texas

We have audited the consolidated balance sheet of Adair International Oil and
Gas, Inc. (a Texas corporation) as of May 31, 1999, and the related consolidated
statement of income, retained earnings, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of Adair International Oil and Gas, Inc.
as of May 31, 1998, were audited by other auditors. Their report, dated August
28, 1998, on those statements included explanatory paragraphs describing
conditions that raised substantial doubt about the Company's ability to continue
as a going concern, their inability to satisfy themselves of the valuation of
the property described in Note 2 and an emphasis on the litigation described in
note 9.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant losses for the past
two years and continues to have negative working capital. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Adair International Oil and
Gas, Inc. as of May 31, 1999, and the results of their operations, changes in
stockholders' equity and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.

JACK SISK & CO.

/s/ JACK SISK

Houston, Texas
September 13, 1999

31
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND 1999

ASSETS
2000 1999
------------- ------------

<S> <C> <C>
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 14,854 $ 1,739
ACCOUNTS RECEIVABLE 24,000 -
INVENTORY -
PREPAID EXPENSES - -
REFUNDABLE DEPOSITS - -
------------- ------------
TOTAL CURRENT ASSETS 38,854 1,739
------------- ------------

PROPERTY AND EQUIPMENT:
OIL AND GAS PROPERTIES AND EQUIPMENT
UNDER THE FULL COST METHOD OF ACCOUNTING 3,000,000 3,000,000
FURNITURE AND EQUIPMENT 268,323 27,399
------------- ------------
3,268,323 3,027,399
LESS ACCUMULATED DEPRECIATION (88,345) (6,417)
------------- ------------
NET PROPERTY AND EQUIPMENT 3,179,978 3,020,982
------------- ------------

OTHER ASSETS:
GEOPHYSICAL DATA AND INTELLECTUAL PROPERTY 4,984,717 -
DEPOSITS AND OTHER ASSETS 18,805 6,726
------------- ------------
TOTAL OTHER ASSETS 5,003,522 6,726
------------- ------------

$ 8,222,354 $ 3,029,447
============= ============

LIABILITIES AND SHAREHOLDER'S EQUITY

CURRENT LIABILITIES:
NOTE PAYABLE $ - $ 30,380
ACCOUNTS PAYABLE 91,992 198,916
ACCRUED EXPENSES 248,997
TAXES PAYABLE 41,832 37,573
------------- ------------
TOTAL CURRENT LIABILITIES 133,824 515,866
------------- ------------

COMMITMENTS AND CONTINGENCIES (NOTE 10) - -

SHAREHOLDERS' EQUITY:
COMMON STOCK, WITHOUT PAR VALUE, AT STATED
CAPITAL: AUTHORIZED 100,000,000 SHARES,
64,381,625 AND 45,232,148 SHARES
ISSUED AND OUTSTANDING 19,073,136 11,798,379
ACCUMULATED DEFICIT (10,984,606) (9,284,798)
------------- ------------
TOTAL SHAREHOLDER'S EQUITY 8,088,530 2,513,581
------------- ------------

$ 8,222,354 $ 3,029,447
============= ============

See accompanying notes to consolidated financial statements.
</TABLE>

32
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2000 AND 1999

2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
CONSULTING FEES $ 62,443 $ -
OIL AND GAS SALES - 33,008
------------ ------------
62,443 33,008
------------ ------------

COSTS AND EXPENSES:
LEASE OPERATING EXPENSE - 13,966
DEPRECIATION AND DEPLETION 10,802 60,435
INTEREST EXPENSE 4,337 2,268
GENERAL AND ADMINISTRATIVE 1,747,112 1,396,887
------------ ------------

TOTAL COSTS AND EXPENSES 1,762,251 1,473,556
------------ ------------

OPERATING LOSS (1,699,808) (1,440,548)

LOSS ON SALE OF ASSETS - (68,910)
------------ ------------

NET LOSS BEFORE INCOME TAXES (1,699,808) (1,509,458)

INCOME TAXES - -
------------ ------------

NET LOSS $(1,699,808) $(1,509,458)
============ ============

NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.03) $ (0.03)
------------ ------------

AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 63,507,341 45,232,148
------------ ------------

See accompanying notes to consolidated financial statements.
</TABLE>

33
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 2000 AND 1999

NO. SHARES TOTAL
ISSUED AND COMMON ACCUMULATED SHAREHOLDERS'
OUTSTANDING STOCK DEFICIT EQUITY
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1998 27,939,847 $10,955,548 $(7,775,340) $ 3,180,208

ISSUANCE OF COMMON STOCK FOR CASH 9,470,500 456,697 456,697

ISSUANCE OF COMMON STOCK FOR COMPANY
OBLIGATIONS 7,821,801 386,134 386,134

NET LOSS (1,509,458) (1,509,458)
------------ ------------ ------------- --------------

BALANCE AT MAY 31, 1999 45,232,148 11,798,379 (9,284,798) 2,513,581

ISSUANCE OF COMMON STOCK FOR CASH 6,251,044 1,124,254 1,124,254

ISSUANCE OF COMMON STOCK FOR COMPANY
OBLIGATIONS 7,824,149 1,068,965 1,068,965

CORRECTION OR PRIOR YEARS' OUTSTANDING 874,284
STOCK

ISSUANCE OF COMMON STOCK FOR THE
ACQUISITION OF ADAIR EXPLORATION, INC. 4,200,000 5,081,538 5,081,538

NET LOSS (1,699,808) (1,699,808)
------------ ------------ ------------- --------------

BALANCE AT MAY 31, 2000 64,381,625 $19,073,136 $(10,984,606) $ 8,088,530
============ ============ ============= ==============

See accompanying notes to consolidated financial statements.
</TABLE>

34
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2000 AND 1999

2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,699,808) $ (1,509,458)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
USED BY OPERATING ACTIVITIES:
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE (24,000) 2,411
(INCREASE) IN DEPOSITS AND OTHER ASSETS (12,079) (6,351)
COST OF OIL AND GAS PROPERTIES SOLD 68,910
NOTE PAYABLE (30,380)
ACCOUNTS PAYABLE (106,924) 86,590
ACCRUED LIABILITIES (248,997)
PAYROLL TAXES PAYABLE 4,259 23,311
DEPRECIATION 81,928 60,435
ISSUANCE OF STOCK FOR EXPENSES 1,068,965 366,134
ALLOWANCE FOR NOTE RECEIVABLE 188,500
------------- -------------
NET CASH PROVIDED-OPERATING ACTIVITIES
TOTAL ADJUSTMENTS (763,152) 965,249
------------- -------------

NET CASH USED IN OPERATING ACTIVITIES (936,656) (544,209)
------------- -------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (144,103) -
ACQUISITION OF SUBSIDIARY 5,081,538
PROCEEDS FROM SALE OF OIL AND GAS PROPERTIES - 23,241
NET CASH PROVIDED BY INVESTING ACTIVITIES 144,103 23,241
------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
DECREASE IN NOTE PAYABLE (30,380) 30,380
ADDITIONAL SHARES ISSUED 1,124,254 456,697
NET CASH PROVIDED BY FINANCING ACTIVITIES 109,874 487,077
------------- -------------

NET CHANGE IN CASH EQUIVALENTS 13,115 (33,891)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 1,739 35,630
------------- -------------
END OF YEAR $ 14,854 $ 1,739
============= =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
CASH PAID DURING THE YEAR FOR INTEREST $ 4,337 $ 2,268
============= =============
CASH PAID DURING THE YEAR FOR INCOME TAXES $ - $ -
============= =============

</TABLE>
<TABLE>
<CAPTION>

ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2000 AND 1999

2000 1999
------------- -------------
<S> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,699,808) $ (1,509,458)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
USED BY OPERATING ACTIVITIES:
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE (24,000) 2,411
(INCREASE) IN DEPOSITS AND OTHER ASSETS (12,079) (6,351)
COST OF OIL AND GAS PROPERTIES SOLD 68,910
DECREASE IN ACCOUNTS PAYABLE (106,924) 86,590
DECREASE IN ACCRUED LIABILITIES (248,997) 175,309
INCREASE IN PAYROLL TAXES PAYABLE 4,259 23,311
DEPRECIATION 81,928 60,435
ISSUANCE OF STOCK FOR EXPENSES 1,068,965 366,134
ALLOWANCE FOR NOTE RECEIVABLE 188,500
------------- -------------
TOTAL ADJUSTMENTS 763,152 965,249
------------- -------------

NET CASH USED IN OPERATING ACTIVITIES (936,656) (544,209)
------------- -------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (144,103) -
PROCEEDS FROM SALE OF OIL AND GAS PROPERTIES - 23,241
------------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES (144,103) 23,241
------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE (DECREASE) IN NOTE PAYABLE (30,380) 30,380
ADDITIONAL SHARES ISSUED 1,124,254 456,697
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,093,874 487,077
------------- -------------

NET CHANGE IN CASH EQUIVALENTS 13,115 (33,891)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 1,739 35,630
------------- -------------
END OF YEAR $ 14,854 $ 1,739
============= =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
------------- -------------
CASH PAID DURING THE YEAR FOR INTEREST $ 4,337 $ 2,268
============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

35
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 1. Summary of Significant Accounting Policies
-----------------------------------------------------------

Basis of Presentation -- The consolidated financial statements include the
accounts of Adair International Oil and Gas, Inc. and its wholly owned
subsidiaries, Adair Exploration, Inc. (formerly Partners in Exploration, Inc. -
see Note 2), and Adair Yemen Exploration Limited, and Adair Colombia Oil and
Gas, S.A. All material intercompany balances and transactions have been
eliminated in consolidation.

Organization -- Adair International Oil and Gas, Inc., (formerly Roberts Oil and
Gas, Inc.)("the Company") was incorporated under the laws of the state of
Texas on November 7, 1980. On June 16, 1997, a 51% interest in the Company's
outstanding common stock was acquired by Adair Oil and Gas International
of Canada, a Bahamian Corporation, and the Company name was changed to Adair
International Oil and Gas, Inc. The 51% common stock of Adair Oil and Gas
International of Canada was subsequently reissued to the individual
shareholders. Since inception the Company's primary purpose has been the
exploration, development and production of oil and gas properties in the United
States. During the year ended May 31, 1997, as described in Note 2, the Company
acquired properties located in Colombia. During the year ended May 31, 1999,
the Company has changed its focus to the development of natural gas fired power
generation projects. Effective February 1, 2000, the Company acquired all of
the outstanding stock of Partners In Exploration, Inc. (PIE). The acquisition
provided "state of the art" 3-D seismic works stations and technical support not
previously available in house. With this acquisition the Company broadened its
basic objectives to include exploration, evaluation of producing properties for
potential acquisition, and the technical evaluation of oil and gas properties.

Accounting Method for the Acquisition -- The acquisition (PIE) was accounted for
under the purchase method of accounting. Adair International Oil & Gas, Inc.
(the Company) is considered the acquiring company for accounting purposes under
this method and its operations are considered the historical operations of the
reporting entity. Under purchase accounting, the total purchase price was
allocated to the tangible and intangible assets and liabilities of PIE upon
their respective fair values as of the closing date based upon evaluations and
other analyses (See Note 2).

36
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------------------------

Financial Strategy -- The Company has responded to losses incurred in the past
two years by implementing a new business strategy. With the deregulation of
the natural gas industry, management has proceeded with the development of
natural gas fired power generation projects. On July 8, 1999 the Company and a
major power developer signed an agreement with the Torres Martinez tribe to
develop what has become the Teayawa Energy Center (TEC), a 600 megawatt natural
gas fired power generation project. The related revenues and long-term impact
to the Company are described in more detail in Note 6, Revenues. For the
fiscal year ending May 31, 2001, the Site Development Agreement provides for
$644,000 in revenues to the Company. Concurrent with the development of the
TEC, the Company has identified additional sites located on Native American
Reservations in the Western, Midwestern, and Southeastern United States. As
additional sites are developed, the Company expects to receive developer fees,
carried royalty interests, and the right to invest as an equity partner.

On July 28, 1999, the Company signed a joint venture agreement with an
exploration and geophysical company for the purpose of acquiring and exploring
for oil and gas in the Republic of Yemen. As described in Note 2,
Acquisition of Subsidiary, the Company subsequently acquired the joint venture
Company, now Adair Exploration, Inc., to obtain enhanced in house geophysical
capabilities for exploration and production and to provide technical services.
The balance of what has come to be the Block 20 exploration program became 100%
owned by the Company. As described in Note 10, Exploration of Block 20 in the
Republic of Yemen, the Company brought a major partner in to the program which
officially began on September 2, 2000. This project is generating a $750,000
prospect bonus and significant administrative fees for the Company as originator
of the project and as initial operator. Adair Exploration, Inc. is further
contracting with the exploration group to provide the technical services through
the exploration phase. Again, as indicated in the Company's plan last year to
reverse the going concern issues, partnering with companies which have the
expertise and resources complimentary to those of the Company are generating
near term revenues with long term revenue potential.

The Company is actively seeking additional capital based on the projects
described above to develop additional natural gas projects, exploration
activities, and evaluate the acquisition of producing properties with
exploitation potential. Management believes it has demonstrated its
strategies to be successful in reversing the experience of the past two fiscal
years.

37
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------------------------

Cash and cash equivalents -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents.

Oil and Gas Properties -- The Company follows the full cost method of
accounting for its oil and gas properties. Accordingly, all costs associated
with acquisition, exploration and development of oil and gas reserves,
including directly related overhead costs, are capitalized. All capitalized
costs of oil and gas properties, including the estimated future costs to develop
proved reserves, are amortized on the unit-of-production method using estimates
of proved reserves. Investments in unproved properties and major
development projects are not amortized until impairment occurs. If the
results of an assessment indicate that the properties are impaired, the
amount of the impairment is added to the capitalized costs to be amortized.

In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties. Depletion of oil and
gas properties is computed using all capitalized costs and estimated future
development and abandonment costs, exclusive of oil and gas properties not
yet evaluated, on a unit of production method based on estimated proved
reserves.

Property and equipment -- The cost of other categories of property and
equipment are capitalized at cost and depreciated using the "straight-line"
method over their estimated useful lives for financial statement purposes
as follows:

Furniture and office equipment 7 years
Computer software and equipment 5 years

Depreciation expense for the years ended February 29, 2000 and February 28 1999
were $10,802 and $60,435, respectively.

38
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------------------------

Geophysical data and intellectual property - The carrying value of the
geophysical data and intellectual property acquired incident to the acquisition
of Partners In Exploration, Inc. was determined as described in Form 8-K dated
February 1, 2000, and as amended. It is the policy of the Company to carry
these as other assets until such time as the Company is engaged in an
exploration activity or under contract for geophysical analysis which utilizes
specific proprietary data. At such time the asset would be classified as either
costs as those incurred under the full cost method of accounting for oil and gas
properties or costs incident to geophysical analysis contracts. As described
below, the Company signed a production sharing agreement subsequent to the
balance sheet date to which a significant portion of the acquired geophysical
data and intellectual property will be utilized.

Income Taxes -- The Company accounts for income taxes pursuant to the asset and
liability method of computing deferred income taxes. Deferred tax assets
and liabilities are established for the temporary differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. When necessary, valuation allowances are established to
reduce deferred tax assets to the amount expected to be realized. No
provision is made for current or deferred income taxes because the Company has
an excess net operating loss carryforward.

Earnings Per Share -- Basic earnings per share are computed by dividing
earnings (loss) by the weighted average number of common shares outstanding
adjusted for conversion of common stock equivalents, where applicable,
outstanding during the period.

39
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 1. Summary of Significant Accounting Policies (ontinued)
-----------------------------------------------------------------------

Use of Estimates -- Management uses estimates and assumptions in preparing
financial statements. Those estimates and assumptions affect the amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could differ from
those estimates. In 2000 and 1999 the management estimated sales prices,
costs, and statutory income tax rates in calculating future net cash flows
of proven oil and gas reserves.

Note 2. Acquisition of Subsidiary
----------------------------------------

There were no material relationships between or among any of the companies or
shareholders in this acquistion except as described in the following paragraph.

On July 28, 1999, the Company signed a joint venture agreement with Partners In
Exploration, LLC (LLC), and oil and gas exploration geophysical firm, for the
purpose of acquiring leases and exploring for oil and gas in Yemen. In October,
1999, the principals dissolved the LLC. Richard Boyce, one of the partners in
the LLC and the principal stockholder of PIE transferred the above described
assets from the LLC to PIE.

40
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 2. Acquisition of Subsidiary (continued)
-----------------------------------------------------

The purchase price and preliminary adjustments to the historical book value of
PIE are as follows:

Purchase price based on value of common stock issued $ 5,081,538
Less: Book value of net assets acquired (85,813)
Add: Book value of net liabilities acquired 74,756
-------------
Purchase price allocable to assets acquired $ 5,070,481
=============

Allocation of purchase price:
Geophysical data and intellectual property $ 4,984,717
Software, equipment, and office furniture and fixtures 85,764
-------------
$ 5,070,481
=============

The acquired geophysical data and intellectual property will be amortized on a
unit of production basis on exploration projects to which they pertain.

Unaudited pro forma results of operations, as if Adair Exploration, Inc. had
been acquired at the beginning of each of the respective periods are as follows:

Year Ended Year Ended
May 31, 2000 May 31, 1999
-------------- -------------

Revenues $ 714,036 $ 1,611,379
-------------- -------------

Net loss $ (1,940,924) $ (1,370,118)
-------------- -------------

Net loss per common share $ (0.03) $ (0.03)
-------------- -------------

The pro forma financial information above includes Exploration for the fiscal
years ended December 31, 1999 and 1998, because it was deemed impractical to
bring Exploration's financial information to the Company's fiscal year basis.
It was determined that the pro forma fiscal information would not be materially
different had information been available from the records of Exploration and its
affiliates on the same chronological basis.

41
<PAGE>
AIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 3. Oil and Gas Properties
--------------------------------------

On February 27, 1997, the Company entered into an agreement with Geopozos, S.A.
("Geopozos") pursuant to which it agreed to issue shares of its common stock to
Geopozos (the "Geopozos Agreement"), subject to approval by the Company's board
of directors and to be implemented on May 20, 1997. As part of the Geopozos
Agreement the company agreed to issue to Geopozos two million (2,000,000) shares
of its common stock and a contingency agreement for $600,000. In connection
with the acquisition of those assets, on March 14, 1997, the Company was
directed by ROGI International S.A., (a party to the Geopozos Agreement and
an unrelated company incorporated under the laws of Panama), to issue the
aforementioned two million (2,000,000) shares of its common stock to two
entities and four million (4,000,000) shares of its common stock to seven
foreign corporations and one individual in exchange for the assets being
acquired. The assets which were transferred to the Company in exchange for the
contingency agreement of $600,000 and the issuance of shares consisted of 100%
of the interest in the Chimichagua Association Contract in Colombia.

The Company received a copy of a letter from Ecopetrol which authorized
the assignment of the Association Contract from Geopozos to the Company
effective June 29, 1998. Ecopetrol is a government organization of Colombia
which regulates oil and gas activity. The terms of all of the transactions
relating to the properties in Colombia were based on negotiations by the
Company, and the Company believes the terms to be fair and reasonable, but
they were not based on independent appraisals.

The shares issued in connection with this acquisition were authorized but
unissued shares of the company. To date, the Company has not been informed of
the relationship or affiliation, if any, among the entities to whom these shares
were issued.

At May 31, 2000, the Chimichagua gas field contained proven non-producing
gas reserves, as described in Note 9, "Supplemental Oil and Gas Disclosures",
which has been recorded at a cost basis of $3,000,000. The gas field was
purchased by issuing 6,000,000 common shares valued at $0.50 per share.
Pursuant to the purchase agreement, will receive a 2% overriding royalty in
all hydrocarbons produced from the properties.

On November 6, 1998, the Company executed a memorandum of understanding with
Wartsila NSD Ecuador to develop this property. The feasibility study on
this project was completed in July, 1999. Subsequent to the feasibility
study, Wartsila opted to forego participation in the project. The Company then
entered in a dialog with Termotasajero, a major Colombian utility company, to
construct a 20-megawatt natural gas fired power plant. A preliminary proposal
was received by the Company in August, 2000. The general concepts provide for
Adair to supply the gas to fuel the power plant providing revenues under a long
term gas purchase contract. In addition, as an incentive to provide the fuel
for the plant at prices that allow competitive pricing for the power, Adair will
receive equity in the power plant based on the value of their contribution under
the gas purchase contract. This option would allow the Company to recover
additional revenues under a power purchase agreement with Termotasajero.
Realization of the value of reserves is contingent upon the Company
concluding an agreement to construct a power plant utilizing gas from the field.

42
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 4. Stock Option
--------------------------

On October 30, 1998, a consultant was extended two options for the purchase of
restricted (shares not be sold within twelve months) common stock of the Company
as compensation for services rendered. The two options may be exercised at any
time within twenty-four months of their extension. The first option was to
purchase 500,000 shares of restricted stock for par value of $0.01 each. The
first option was exercised concurrently with the offer when the open trading
value was $0.0625 per share. It was agreed that this first option was in
exchange for consulting services valued at $15,000. The second option was to
purchase 500,000 shares of restricted common stock for a price of $0.25 per
share.

NOTE 5. Nonmonetary Stock Transactions
---------------------------------------------

The Company issued stock in lieu of cash in transactions summarized as follows
for the years ended May 31, 2000 and 1999:

Nature of transaction 2000 1999
----------------------------- ---------------------- --------------------
Shares Amount Shares Amount
---------- ---------- --------- ---------
Consultants and professional fees 678,203 $ 187,150 4,187,416 $ 173,108
Salaries 2,363,770 360,000 2,886,262 180,000
Accrued salaries 2,304,983 192,500 - -
Acc'ts payable and acc'd liability 1,416,143 68,315 - -
Furniture and fixtures - - 500,000 20,000
Other expenses 1,061,050 276,000 248,123 13,026
---------- ---------- --------- ---------
7,824,149 $1,083,965 7,821,801 $ 386,134
========= ========== ========= =========

43
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 6. Revenues
---------------------

The Company receives a monthly retainer of $12,000 per month in exchange for the
time of its personnel spent through the development period. The retainer is
part of a Site Development Agreement signed with Calpine Corporation on November
30, 1999. The Teayawa Energy Center (TEC) Site Development Agreement provides
for the payment of a development fee of $1,000,000 payable in two installments:
$500,000 at the financial closing estimated to occur in quarter one, 2001, and
$500,000 upon the commercial operation date estimated to occur in quarter three,
2002. The Company receives $12,000 per month consulting fee until the commercial
commissioning of the project.

Note 7. Sale of Domestic Oil and Gas Production
----------------------------------------------------------

On March 31, 1999, the Company sold all of its domestic oil and gas interests to
Fountain Energy Company for $30,000. This action was consistent with the
Company's emphasis on the development of natural gas fired power generation
projects and exploration in Yemen as described in Note 1.

NOTE 8. Related Party Transactions
-----------------------------------------

As described in Note 3 the Company has not been informed of the relationship or
affiliation, if any, of the entities who obtained stock in connection with the
Colombian acquisition.

Shareholders of the Company also have interest in Adair Oil and Gas
International of Canada with which the Company has had dealings as described
more fully in Note 3.

44
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 9. Income Taxes
--------------------------

The difference between the approximate effective rates presented for federal
income taxes and the amounts which would be determined by applying the statutory
federal rates for fiscal 2000 fiscal 1999, to earnings before provision for
federal income taxes are presented below:

Years ended May 31,
--------------------------------------
2000 1999
----------------- -------------------
% of % of
Pretax Pretax
Amount Income Amount Income
---------- ------ ----------- ------
Federal income tax at statutory rate $(595,000) 35% $(528,310) 35%
Valuation allowance 595,000 (35%) 528,310 (35%)
---------- ------ ----------- ------
Income tax expense $ 0 0% 0 0%
========== ====== =========== ======

The sources of deferred tax assets are as follows:

Years ended May 31,
-------------------------
2000 1999
------------ -----------
Note receivable written off $ 0 $ 65,975
Effect of net operating losses 1,746,000 1,151,272
Valuation allowance (1,746,000) 1,217,247)
----------- -----------
Deferred tax assets $ 0 $ 0
=========== ===========

Deferred tax assets result from net operating losses in 1998 forward. Net
operating losses incurred in 1997 and prior no longer exist because of a greater
than 50% ownership change in 1997. Losses for 1998, 1999 and 2000 may be
carried forward for 20 years from the year and affect future income. Because
of the uncertainty of realization (see Note 1, Going concern) a valuation
allowance equal to the deferred tax asset was established by management.

45
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 10. Commitments and Contingencies
---------------------------------------------

Exploration of Block 20 in the Republic of Yemen
------------------------------------------------

On April 3, 2000, Adair Yemen Exploration Limited (Adair Yemen), a wholly owned
subsidiary of the Company, together with Saba Yemen Oil Company Limited (Saba),
Occidental Yemen Sabatain, Inc. (Occidental), The Yemen Company For Investment
In Oil and Minerals (YICOM), and the Ministry of Oil and Mineral Resources
(MOMR), entered into a Production Sharing Agreement (PSA) in the Sabatain Area,
Block 20, in the Marib-Shabwa Governorates, Republic of Yemen. On September 2,
2000, the President of Yemen signed decree number 21, which passes into law the
Production Sharing Agreement for Block 20. This decree establishes the effective
date for the Participation Agreement among Adair Yemen, Saba, and Occidental
(the Parties).

The Participation Agreement was signed by the parties on March 31, 2000. The
agreement provides for the general financial arrangements among the parties with
regard to the PSA and other joint management and operating agreements. The
basic financial provisions of all the agreements are discussed below.

The PSA provides for a signature bonus in the amount of $400,000 which was
secured by a irrevocable letter of credit to the MOMR and to be drawn on the
effective date. The Parties effected the letter of credit on May 3, 2000,
through the Yemen Commercial Bank. The Company's obligation in the amount of
$120,000 was secured by the personal guarantees of John W. Adair and Jalal
Alghani. The PSA further provides for the annual payment of a training,
institutional, and social bonus to be paid annually over the six year
exploration period: the first being payable on the effective date. The PSA
requires a basic work program in the amount of $8,300,000 to be secured by an
irrevocable letter of credit with the MOMR within 30 days of the effective date.
The parties are to provide for the instrument in proportion to their respective
interests (Occidental 50%, Adair Yemen 30%, and Saba 20%) except for the first
$4,000,000 cost of 3D seismic which is to be paid by Occidental. The Company is
in the process of arranging for its portion of the total work program commitment
and the officers Adair and Alghani have pledged shares of stock as partial
collateral to date.

Under the PSA, revenues derived from the commercial development of the project
are in the form of royalties on a sliding percentage scale of from 3% on
production under 25,000 barrels per day to 10% on production over 100,000
barrels per day. The royalties are further defined as "Cost Oil" and "Share
Oil." Cost oil is up to 50% of the royalty to reimburse exploration,
development, operating costs, pipeline tariffs, and general and administrative
expense to the Parties. Share oil is payable to the Parties on a sliding scale
of from 37% on production under 12,500 barrels per day to 18% on production over
100,000 barrels per day. The share oil is subject to a carried interest to
YICOM of 5% born by the Parties in proportion to their interest. Adair Yemen,
therefore, has a net revenue interest (NRI) of 28.5% under the PSA.

46
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 10. Commitments and Contingencies (continued)
----------------------------------------------------------

Exploration of Block 20 in the Republic of Yemen (continued)
---------------------------------------------------------------------

Under the terms of the Participation Agreement signed by the Parties, Adair
Yemen is to receive a prospect bonus of $750,000 from Occidental within ten days
of the effective date. Such fee is currently receivable. Under the terms of the
joint operating and management agreements among the Parties, Adair Yemen is to
be the operator in the exploration phase. As such, Adair Yemen is to receive a
general and administrative fee based on a percentage of the total work program
expenditures on an annual basis. The annual percentages and amounts are 4% on
the first $5,000,000, 2% on the second $5,000,000, and 1% of annual amounts in
excess of $10,000,000.

Adair Exploration, Inc., will provide technical services to the Parties as part
of the work program while Adair Yemen is operator. This phase of the program is
projected to last for a period of approximately 18 to 24 months to
commerciality, at which time Occidental will become the operator.

Legal Proceedings
-----------------

The Company was named as a defendant in the matter of Mark Singleton v. Adair
International Oil and Gas, Inc., 98-2672, 215th Judicial District Court, Harris
County, Texas. The plaintiff was seeking rescission for the purchase of
195,000 shares of common stock of the Company. The plaintiff dismissed the
suit.

47
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

Note 10. Commitments and Contingencies (continued)
----------------------------------------------------------

Legal Proceedings

The Company was named as a defendant in the matter of John A. Braden, Robert D.
Goldstein, James L. Bennink and S. Cleve Gazaway, Individually, and as the
Partners for Braden, Bennink, Goldstein, Gazaway & Company, P.L.L.C. v. John W.
Adair, Individually, Jalal Alghani, Individually, Adair International Oil and
Gas, Inc. and ChaseMellon Shareholder Services, L.L.C., 2000-16454, 152nd
Judicial District Court, Harris County, Texas. The plaintiffs claim damages
resulting from breach of an alleged contract between the plaintiffs and the
Company. The Company intends to defend itself vigorously in this matter.

The nature of the Company's operations exposes it to numerous potential legal
risks.

Failure to file reports under the Exchange Act
-----------------------------------------------------

The Company had filed a registration statement with the Commission under the
Securities Act of 1933 in November, 1981, and therefore became subject to the
requirement that it file reports thereafter under the Securities Exchange Act of
1934 (the "Exchange Act"). The Company filed reports under the Exchange Act,
including annual reports on Form 10-K, during a portion of the 1980's.
However, the Company experienced financial difficulties during the mid-1980's
due to a downturn in the market for oil and gas and by the late 1980's had
become essentially a dormant company. It continued to hold interests in oil
and gas wells but was generating very little revenue. Consequently, by
1989 the Company could no longer afford the costs associated with audited
financial statements. The Company filed its Form 10-K under the Exchange Act
in 1989 without including audited financial statements and continued to
make 10-K filings under the Exchange Act without audited financial
statements until the filing of a Form 10-KSB for the fiscal year ended May 31,
1997. During the period that the Company failed to file audited financial
statements, it has also failed to comply with other reporting requirements of
the Exchange Act with respect to other required reports and proxy statements.
During the past two fiscal years, John W. Adair, Jalal Alghani, Earl K. Roberts,
and Richard G. Boyce each failed to file reports on Form 4 concerning receipt of
restricted stock received as compensation from the Company. During the year
ended May 31, 1999, each of Adair, Alghani, and Roberts received 827,014 shares
of stock valued at $50,000 of compensation. During the year ended May 31, 2000,
each of Adair, Alghani, and Roberts received 474,090 shares of stock valued at
$120,000. Also during the year ended May 31, 2000, the officers received
accrued compensation in shares of stock as follows: Adair, $47,500 with 938,280
shares and each of Alghani and Roberts, $45,000 with 906,270 shares.

48
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-------------------------------------------------------

LEASE COMMITMENTS
------------------

THE COMPANY LEASES PROPERTY AND EQUIPMENT UNDER VARIOUS OPERATING LEASES.
AGGREGATE MINIMUM LEASE PAYMENTS UNDER EXISTING NONCAPITALIZED LONG-TERM LEASES
ARE ESTIMATED TO BE $170,713, $148,513, $107,324, $33,957, AND $17,292 FOR THE
YEARS 2001-2005, RESPECTIVELY.

CONCENTRATIONS
--------------

THE COMPANY MAINTAINS A CASH BALANCE AT A FINANCIAL INSTITUTION. AT CERTAIN
TIMES, THE COMPANY'S CASH BALANCES EXCEED THE FEDERALLY INSURED AMOUNTS. THE
COMPANY HAS NOT EXPERIENCED LOSSES RELATING TO ITS CASH.

NOTE 11. SUBSEQUENT EVENTS
-------------------------------

ON SEPTEMBER 2, 2000, THE PRESIDENT OF YEMEN SIGNED PRESIDENTIAL DECREE NUMBER
21, THEREBY PASSING INTO LAW THE PRODUCTION SHARING AGREEMENT GOVERNING BLOCK
20. THE PSA WAS SIGNED APRIL 2, 2000 BY ADAIR AND PARTNERS WITH THE MINISTRY OF
OIL AND MINERAL RESOURCES FOR THE REPUBLIC OF YEMEN. SEE NOTE 10, COMMITMENTS
AND CONTINGENCIES, EXPLORATION OF BLOCK 20 IN THE REPUBLIC OF YEMEN.

49
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
------------------------------------------------------------------

Costs Incurred and Capitalized Costs in Oil and Gas Producing Activities are
as follows:

May 31, 2000 United
------------ States Colombia Total
---------- ---------- ----------
Oil and Gas Properties $ 0 $3,000,000 $3,000,000
Less accumulated depletion
And depreciation 0 0 0
---------- ---------- ----------
Capitalized costs, net $ 0 $3,000,000 $3,000,000
========== ========== ==========
Property and equipment $ 0 $ 0 $ 0
Less accumulated depreciation 0 0 0
---------- ---------- ----------
Total net property and equipment $ 0 $ 0 $ 0
========== ========== ==========
Total net property and equipment $ 0 $3,000,000 $ 0
========== ========== ==========

May 31, 1999 United
------------ States Colombia Total
---------- ---------- ----------
Oil and Gas Properties $ 0 $3,000,000 $3,000,000
Less accumulated depletion
And depreciation 0 0 0
---------- ---------- ----------
Capitalized costs, net $ 0 $3,000,000 $3,000,000
========== ========== ==========
Property and equipment $ 27,399 $ 0 $ 27,399
Less accumulated depreciation 6,417 0 6,417
---------- ---------- ----------
Total net property and equipment $ 20,982 $ 0 $ 20,982
========== ========== ==========
Total net property and equipment $ 20,982 $3,000,000 $3,020,982
========== ========== ==========

50
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) (continued)
--------------------------------------------------------------------------------

The Company incurred no costs in oil and gas property acquisitions, exploration,
nor development during the past two fiscal years. Oil and gas depletion
expense in 1999 was $56,192.

Presented below is a summary of proved reserves of the Company's oil and gas
Properties.
Year ended May 31, 2000
--------------------------------------
United
States Colombia Total
-------- -------- -----------
OIL (BARRELS)
Proved reserves:
Beginning of year 0 0 0
Acquisition, exploration and
development of minerals in place 0 0 0
Revisions of previous estimates 0 0 0
Production 0 0 0
Sales of minerals in place 0 0 0
-------- -------- -----------
End of year 0 0 0
======== ========= ===========
GAS (THOUSANDS OF CUBIC FEET)
Proved reserves:
Beginning of year 0 22,150,000 22,150,000
-------- ---------- -----------
Acquisition, exploration and
Development of minerals in place 0 0 0
Revisions of previous estimates 0 0 0
Production 0 0 0
Sales of mineral in place 0 0 0
-------- ---------- -----------
End of year 0 22,150,000 22,150,000
======== ========== ===========

Year Ended May 31, 1999
--------------------------------------
United
States Colombia Total
-------- -------- -----------
OIL (BARRELS)
Proved reserves:
Beginning of year 1,351 0 1,351
Acquisition, exploration and
development of minerals in place 0 0 0
Revisions of previous estimates (42) 0 (42)
Production 0 0 0
Sales of minerals in place (1,309) 0 (1,309)
-------- ---------- -----------
End of year 0 0 0
======== ========== ===========
GAS (THOUSANDS OF CUBIC FEET)
Proved reserves:
Beginning of year 116,102 22,150,000 22,266,102
-------- ---------- -----------
Acquisition, exploration and
Development of minerals in place 0 0 0
Revisions of previous estimates 0 0 0
Production (28,595) 0 (28,595)
Sales of mineral in place (87,507) 0 (87,507)
-------- ---------- -----------
End of year 0 22,150,000 22,150,000
======== ========== ===========

51
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) (continued)
-----------------------------------------------------------------------

STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES

2000
----
United
States Colombia Total
--------- ------------ -----------
(US Dollars)
Future cash inflows $ 0 $27,647,500 $27,647,500
Future production costs 0 (7,865,130) (7,865,130)
Future development costs 0 (6,956,000) (6,956,000)
Future income tax expenses 0 (4,210,006) (4,210,006)
--------- ------------ -----------
Future net cash flows 0 8,616,364 8,616,364
10 percent annual discount for
estimated timing of cash flows 0 (4,652,836) (4,652,836)
--------- ------------ -----------
Standard measure of discounted
Future net cash flows $ 0 $ 3,963,528 $3,963,528
========= ============ ===========

1999
----
United
States Colombia Total
--------- ------------ -----------
(US Dollars)
Future cash inflows $ 0 $27,647,500 $27,647,500
Future production costs 0 (7,865,130) (7,865,130)
Future development costs 0 (6,956,000) (6,956,000)
Future income tax expenses 0 (4,210,006) (4,210,006)
--------- ------------ -----------
Future net cash flows 0 8,616,364 8,616,364
10 percent annual discount for
estimated timing of cash flows 0 (4,652,836) (4,652,836)
--------- ------------ -----------
Standard measure of discounted
Future net cash flows $ 0 $ 3,963,528 $3,963,528
========= ============ ===========

52
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999

NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) (continued)

The following are the principal sources of changes in the measure of
discounted future net cash flows during 2000 and 1999:

2000
United
States Colombia Total
---------- ------------ -----------
(US Dollars)
Balance at beginning of year $ 0 $6,796,500 $ 6,796,500
Acquisitions, discoveries and extension 0 0 0
Sales and transfers of oil and gas
produced, net of production costs 0 0 0
Changes in estimated future
development costs 0 0 0
Net changes in prices, net of production
costs 0 0 0
Sales of reserves in place 0 0 0
Development costs incurred during the
period 0 0 0
Changes in production rates and other 0 0 0
Revisions of previous estimates 0 0
Accretion of discount 0 0 0
Net change in income taxes 0 (2,832,972) (2,832,972)
---------- ------------ ------------
Balance at end of year $ 0 $ 3,963,528 $ 3,963,528
========== ============ ============

1999
United
States Colombia Total
---------- ------------ ------------
(US Dollars)
Balance at beginning of year $ 216,426 $ 6,796,500 $ 7,012,926
Acquisitions, discoveries and extension 0 0 0
Sales and transfers of oil and gas
produced, net of production costs (19,042) 0 (19,042)
Changes in estimated future
development costs 0 0 0
Net changes in prices, net of production
costs 0 0 0
Sales of reserves in place (23,290) 0 (23,290)
Development costs incurred during the
period 0 0 0
Changes in production rates and other 0 0 0
Revisions of previous estimates (174,094) 0 (174,094)
Accretion of discount 0 0 0
Net change in income taxes 0 (2,832,972) (2,832,972)
---------- ------------ ------------
Balance at end of year $ 0 $ 3,963,528 $ 3,963,528
========== ============ ============

53
<PAGE>