UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the fiscal year ended March 31,
      2010





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the transition period from ________ to
_________





Commission
File Number 001-33034





BMB MUNAI,
INC.


(Exact
name of registrant as specified in its charter)





Nevada
            
            30-0233726(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)202
      Dostyk Ave, 4th
      FloorAlmaty, Kazakhstan
            
            050051(Address
      of principal executive offices)
            
            (Zip
      Code)





+7 (727)
237-51-25


(Registrant’s
telephone number, including area code)





Securities
registered under Section 12(b) of the Exchange Act:





Title of Each Class
            
            Name of Exchange on Which
      RegisteredCommon
      - $0.001
            
            NYSE
      Amex






Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule405 of
      the Securities Act.
            Yeso
          NoxIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or15(d)
      of the Exchange Act.
            Yes
      o
          No xIndicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of
      the Securities Exchange Act of 1934 during the preceding 12 months (or for
      such shorter period that theregistrant
      was required to file such reports), and (2) has been subject to such
      filing requirements for the past 90 days.
            Yes
      x
          No oIndicate
      by check mark whether the registrant has submitted electronically and
      posted on its corporate Web site, if any, every Interactive Data File
      required to be submitted and posted pursuant to Rule 405 of Regulation S-T
      (§232.405 of this chapter) during the preceding 12 months (or for such
      shorter period that the registrant was required to submit and post such
      files.)
            Yes o  No
      o    
 Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter)  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-K or any amendment to this Form
      10-K.
                oIndicate
      by check mark whether the registrant is a large accelerated filed, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See the definitions of “large accelerated
      filer,” “accelerated filer” and
      “smaller reporting
      company” in Rule 12b-2 of the Exchange
  Act.
  Large
      accelerated filer o
                Accelerated
      filer oNon-accelerated
      filer o
                Smaller
      reporting company x(Do
      not check if smaller reporting company)
 Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the ExchangeAct.
              Yeso
          NoxThe
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common
      equity was last sold as of the last business day of the registrant’s most
      recently completed second fiscal quarter was
      $36,237,666.As
      of June 2, 2010, the registrant had 51,865,015 shares of common stock, par
      value $0.001, issued and outstanding.Documents
      Incorporated by
Reference:  None










Table
of Contents





PART
      IPageItem
      1.
            Business
            5Item
      1A.
            Risk
      Factors
            10Item
      1B.
            Unresolved
      Staff Comments
            21Item
      2.
            Properties
            22Item
      3.
            Legal
      Proceedings
            33Item
      4.
            [Removed
      and Reserved]
            33PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            34Item
      6.
            Selected
      Financial Data
            36Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            37Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            53Item
      8.
            Financial
      Statements and Supplementary Data
            54Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            54Item
      9A.
            Controls
      and Procedures
            54Item
      9B.
            Other
      Information
            57PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            57Item
      11.
            Executive
      Compensation
            64Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            78Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            80Item
      14.
            Principal
      Accounting Fees and Services
            82Item
      15.
            Exhibits,
      Financial Statement Schedules
            83PART
      IVSIGNATURES
            88








Forward Looking
Information





This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended that are
based on management’s beliefs and assumptions and on information currently
available to our management.  For this purpose any statement contained
in this report that is not a statement of historical fact may be deemed to
be forward-looking, including, but not limited to, statements about our results
of operations, cash flows, capital resources and liquidity, drilling plans and
future exploration, production and well operations, reserves, licensing,
commodity price environment, actions, intentions, plans, strategies and
objectives.  Without limiting the foregoing, words such as “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “budget,” “plan,” “forecast,” “predict,” “may,” “should,” “could,” “will” or comparable
terminology are intended to identify forward-looking
statements.  These statements by their nature involve substantial
risks and uncertainties and actual results may differ materially depending on a
variety of factors, many of which are not within our control.  These
factors include, but are not limited to, market factors, market prices
(including regional basis differentials) of natural gas and oil, results for
future drilling and marketing activity, future production and costs, economic
conditions, competition, legislative requirements and changes and the effect of
such on our business, sufficiency of future working capital, borrowings, capital
resources and liquidity and other factors detailed herein and in our other
Securities and Exchange Commission filings.  Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those
indicated.





Forward-looking
statements are predictions and not guarantees of future performance or
events.  The forward-looking statements are based on current industry,
financial and economic information, which we have assessed but which by their
nature are dynamic and subject to rapid and possibly abrupt
changes.  Our actual results could differ materially from those stated
or implied by such forward-looking statements due to risks and uncertainties
associated with our business.  We hereby qualify all our
forward-looking statements by these cautionary statements.





These
forward-looking statements speak only as of their dates and should not be unduly
relied upon.  We undertake no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information, future
events or otherwise.





Throughout
this report, unless otherwise indicated by the context, references herein
to the “Company”, “BMB”, “we”, our” or “us” means BMB Munai, Inc, a Nevada
corporation, and its corporate subsidiaries and
predecessors.  Throughout this report all references to dollar
amounts ($) refers to U.S. dollars unless otherwise indicated.





The following discussion should be read
in conjunction with our financial statements and the related notes contained
elsewhere in this report and in out our other filings with the Securities and
Exchange Commission.












PART
I





Item
1.   Business





Overview





BMB
Munai, Inc., is a Nevada corporation, that originally incorporated in the State
of Utah in 1981.  Our business activities focus on oil and natural gas
exploration and production in the Republic of Kazakhstan (also referred to
herein as the “ROK” or “Kazakhstan”). We hold an exploration contract that
allows us to conduct exploration drilling and oil production in the Mangistau
Province in the southwestern region of Kazakhstan.   Since the
date of execution of the original exploration contract, we have successfully
negotiated several amendments to the contract that have extended the term of our
contract to January 2013.  The exploration territory of our contract
area is approximately 850 square kilometers.





Our
original contract area comprised the ADE Block.   As a result of
our drilling and exploration activities this block now contains our Aksaz,
Dolinnoe and Emir oil and gas fields.    During our 2005
fiscal year we were granted an area extension which we designated as the
Southeast Block, which now includes our Kariman oil and gas field and our
unexplored Borly and Yessen structures.  During our 2009 fiscal year
we successfully negotiated a second area extension, which we have designated the
Northwest Block.  All of our exploration territory is
contiguous.  The ADE Block, the Southeast Block and the Northwest
Block are collectively referred to herein as “our properties.”  For
additional information regarding our contract and license to our properties
please see Item 2. Properties
below.





Our
Strategy





Since
2004 we have been actively drilling wells in each field on the ADE Block and
since 2005 we have been drilling in the Southeast Block in the Kariman
field.  Our activities have been funded through private placements of
equity and debt securities as well as income generated from sales of our
exploration stage oil production.





Our
drilling activities have consisted of drilling an array of exploratory wells to
delineate reservoir structures and developmental wells intended to provide
income to the Company.  Our operational focus during the last fiscal
year has been to work on improving and stabilizing production from our existing
wellstock, while temporarily postponing our drilling
activities.  Throughout the year we have completed a number of
workover activities on existing wells.  In addition to the workover
activities completed this year, we have continued to research various production
enhancement methods and technologies to increase production from existing wells.
Currently, we have 1,230 gross (1,230 net) proved developed producing acres,
plus 180 gross (180 net) acres of proved undeveloped reserves. We also hold
approximately 112,260 gross (112,260 net) unproved, undeveloped
acres.










During
the year we have reduced capital expenditures to a minimum amount and managed to
successfully fulfill working program requirements set forth in our contract with
the government of Kazakhstan through the negotiating of a “roll forward” of
previously drilled wells whereby we were allowed to count previously drilled
wells as fulfillment of our drilling obligations under our minimum work program
for fiscal year 2010.  Such actions allowed us to achieve significant
progress in remedying working capital problems we faced during fiscal year
2009.  All free cash flow was diverted to reduction of accounts
payable, which coupled with our other efforts allowed us to reduce accounts
payable from $21.8 million at March 31, 2009, to $3.9 million at March 31,
2010.





Our strategy for the current year is to
establish a sound financial basis to support our development of a long-term and
profitable oil and gas exploration and production business. We intend to do this
by focusing our attention in the next fiscal year on the following
objectives:


Complete elimination of current
accounts payable. We will continue efforts to eliminate current accounts
payables barring those arising in the normal course of business.





Conduct field operations focused on
stabilization and enhancement of production from existing
wells.  We will continue our efforts in researching and
applying modern methods and technologies for maintaining and increasing
production from existing wells.  Such efforts may entail substituting
the electric submersible pumps used on the Kariman field for more powerful and
productive ones and finding the right methodology to enhance production from the
Aksaz and Dolinnoe wells.





Conduct directional/horizontal
drilling on existing wells. If we have sufficient funds, we plan to apply
directional/horizontal drilling on the existing wells in the Kariman field
during fiscal year 2011.  We have plans for drilling two directional
sidetracks on the Kariman existing wells.  We plan to apply such
technology with focus on significant production increases while keeping capital
expenditures under control as such sidetracks cost significantly less than
drilling of a vertical well.  We also believe drilling two directional
wells will contribute to the minimum working program requirements set for the
current year.





Complete geological study of the ADE
Block and Kariman field.  Our existing wells are sufficient in
number to allow us to integrate our geological and geophysical reports, seismic
data, drilling logs and testing and production logs to create a complete profile
of the ADE Block and Kariman field.  Similar to most oil production in
Kazakhstan, our oil is produced mainly from carbonate rocks of limestone and
dolomite.   These formations can present challenges when
attempting to understand oil field structure, designate well locations and
determine the number of wells required to develop a field.  A full
understanding of these issues is critical, as they can have a substantial impact
on a field’s commercial viability and the expected return on
investment.  We plan to retain experts from the United States that
have experience working in Kazakhstan to complete the geological study during
fiscal year 2011.





Commence investigation of the
Northwest Block.  Our contract territory nearly doubled during
the last fiscal year due to our successful negotiation of an amendment to our
exploration contract to acquire rights to the Northwest
Block.   The Northwest Block did have limited Soviet-period
exploration and drilling conducted on it, but needs further study if we are to
start developing it. We commenced 3D seismic shooting during the year ended
March 31, 2010.  We anticipate that the seismic shooting,
interpretation and subsequent resource potential evaluation report by Chapman
Petroleum Engineering Ltd. will be complete during the summer of
2010.











Our strategy and plans for the 2011
fiscal year are contingent on our ability to renegotiate the terms of our 5.0%
Convertible Senior Notes due 2012, as discussed in detail in the Liquidity and Capital Resourcessection of Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations beginning on page 47 of
this report, and our having adequate funds to undertake such
activities.


Oil
and Natural Gas Reserves





Please see Item 2. Propertiesof this report for
a complete description of our oil and gas reserves and related
information.





Industry
and Economic Factors





Our business is subject to many factors
beyond our control.  One such factor is the fluctuation of oil and gas
prices.  Historically, oil and gas markets have been cyclical and
volatile.  During fiscal year 2010 we experienced wide fluctuation in
the world price for oil.  We expect prices to continue to be difficult
to predict.





While our revenues are a function of
both production and prices, wide swings in commodity prices will likely continue
to have a significant impact on our results of operations. We have not elected
to engage in hedging transactions because we do not have the necessary
infrastructure or the required flexibility in our rights to conduct export
transactions.





Our operations entail significant
complexities due to the depth and geological makeup of the structures we are
entering.  Advanced technologies requiring highly trained personnel
are utilized in both exploration and development.  Even when the
technology is properly used we still may not know conclusively whether
hydrocarbons will be present or the rate at which they may be produced when
wells are completed.  Despite our best efforts to limit our risks,
exploration drilling is a high-risk activity that may not yield commercial
production or reserves.





Marketing
and Sales to Major Customers





There are
a variety of factors which affect the market for oil and natural gas, including
the extent of domestic production and imports, the availability, proximity and
capacity of pipelines and other transportation facilities, demand, the marketing
of competitive fuels and the effects of state and federal regulations on oil and
natural gas production and sales.





In the
exploration, development and production business, production is normally sold to
relatively few customers.  We are now exporting nearly all of our test
production for sale in the world market.  Currently, 95% of our
production is being sold to one client, Titan Oil (formerly Euro-Asian Oil
AG).  Revenue from oil sold to Titan Oil made up 98% of our total
revenue.  The loss of Titan Oil may have a material adverse effect on
our operations in the short-term.  Based on current demand for crude
oil and the fact that alternate purchasers are readily available, we believe the
loss of Titan Oil would not materially adversely affect our operations
long-term.










Distribution
Method





Our crude
oil exports are transported via the Aktau sea port to world markets. Pursuant to
our agreement with Titan Oil, delivery is FCA (Incoterms 2000) at the railway
station in Mangishlak.  The oil is shipped via railway cars provided
by Titan Oil.  The volume and sales price are determined on a monthly
basis, with all payments being covered by an irrevocable standby letter of
credit opened through a first-class international bank.  Sales prices
is based on the average quoted Brent crude oil price from Platt's Crude Oil
Marketwire for the three days following the bill of lading date less a discount
for transportation expenses, freight charges and other expenses.  The
quality of crude oil supplied must meet minimum quality
specifications.





Competition





Competition
in Kazakhstan and Central Asia includes other junior hydrocarbons exploration
companies, mid-size producers and major exploration and production
companies.  We compete for additional exploration and production
properties with these companies who in many cases have greater financial
resources and larger technical staffs than we do.





We face
significant competition for capital from other exploration and production
companies and industry sectors.  At times, other industry sectors may
be more in favor with investors, limiting our ability to obtain necessary
capital.





We
believe we have a competitive advantage in Kazakhstan in that our management
team is comprised of Kazakh nationals who have developed trusted relationships
with many of the departments and ministries within the government of
Kazakhstan.





Government
Regulation





Our
operations are subject to various levels of government controls and regulations
in both the United States and Kazakhstan.  We focus on compliance with all
legal requirements in the conduct of our operations and employ business
practices that we consider to be prudent under the circumstances in which we
operate.  It is not possible for us to separately calculate the costs of
compliance with environmental and other governmental regulations as such costs
are an integral part of our operations.





In
Kazakhstan, legislation affecting the oil and gas industry is under constant
review for amendment or expansion.  Pursuant to such legislation, various
governmental departments and agencies have issued extensive rules and
regulations which affect the oil and gas industry, some of which carry
substantial penalties for failure to comply.  These laws and regulations
can have a significant impact that can adversely affect our profitability by
increasing the cost of doing business and by imposition of new taxes, tax rates
and tax schemes.  Inasmuch as new legislation affecting the industry is
commonplace and existing laws and regulations are frequently amended or
reinterpreted, we are unable to predict the future cost or impact of complying
with such laws and regulations.










Environmental
Matters





Oil and
gas operations are subject to numerous laws and regulations controlling the
generation, use, storage and discharge of materials into the environment or
otherwise relating to the protection of the environment. These laws and regulations
may:





•
            require
      the acquisition of a permit or other authorization before construction or
      drilling commences;





•
            restrict
      the types, quantities and concentrations of various substances that can be
      released into the environment in connection with drilling, production, and
      natural gas processing activities;





•
            suspend,
      limit or prohibit construction, drilling and other activities in certain
      lands lying within wilderness, wetlands, areas inhabited by threatened or
      endangered species and other protected
areas;





•
            require
      remedial measures to mitigate pollution from historical and on-going
      operations such as the use of pits and plugging of abandoned
      wells;





•
            restrict
      injection of liquids into subsurface strata that may contaminate
      groundwater; and





•
            impose
      substantial liabilities for pollution resulting from our
      operations.





Environmental
permits that the operators of properties are required to possess may be subject
to revocation, modification, and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations and
permits, and violations are subject to injunction, civil fines, and even
criminal penalties. Our management believes that we are in substantial
compliance with current environmental laws and regulations, and that we will not
be required to make material capital expenditures to comply with existing laws.
Nevertheless, changes in existing environmental laws and regulations or
interpretations thereof could have a significant impact on our operations as
well as the oil and gas industry in general, and thus we are unable to predict
the ultimate cost and effects of future changes in environmental laws and
regulations.





We are
not currently involved in any administrative, judicial or legal proceedings
arising under environmental protection laws and regulations, which would have a
material adverse effect on our respective financial positions or results of
operations. We do not maintain insurance against the costs of clean-up
operations and we are not fully insured against all such risks. A serious
incident of pollution may result in the suspension or cessation of operations in
the affected area.





Employees





We have approximately 390 full-time
employees.  None of our employees are covered by collective bargaining
agreements.  From time to time we utilize the services of independent
consultants and contractors to perform various professional
services.  Field and on-site production operation services, such as
pumping, maintenance, dispatching, inspection and testing are generally provided
by independent contractors.










Reports
to Security Holders





We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and other items with the Securities and Exchange Commission
(“SEC”).  We provide free access to all of these SEC filings, as soon
as reasonably practicable after filing, on our Internet web site located at
www.bmbmunai.com.  In
addition, the public may read and copy any documents we file with the SEC at the
SEC's Public Reference Room at 100 F Street N.E., Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains its Internet site www.sec.gov, which
contains reports, proxy and information statements and other information
regarding issuers like BMB Munai.





Item
1A. Risk Factors





We
do not currently have the funds, or the ability to raise the funds, necessary to
repurchase the Notes.





In 2007 we raised $60,000,000 in
connection with the issuance of 5.0% Convertible Senior Notes due 2012 (the
“Notes”).  The terms of the original indenture governing the Notes
(the “Original Indenture”) provided for three put dates that allowed the holders
of the Notes to redeem the Notes prior to their 2012 maturity
date.  The first two put dates passed unexercised.  The
third put date is July 13, 2010.  In connection with ongoing
negotiations with the holders of the Notes to restructure the Notes, we entered
into a Supplemental Indenture which grants the Noteholders a fourth put date
that commences on June 13, 2010 and expires on September 13, 2010.  In
exchange for the granting of the fourth put date, the Noteholders separately
agreed they will not exercise their put option for the third put date and they
will not exercise their put option for the fourth put date prior to September 1,
2010; provided, however, the Noteholders may exercise such put options at any
time upon the occurrence of any of the following: (i) an
default  occurs under the Indenture, excluding certain defaults that
occurred prior to June 7, 2010, (ii) failure by us or Emir to timely pay any
Indebtedness (as defined in the Indenture) or any guarantee of any Indebtedness
that exceeds U.S. $1,000,000, or any Indebtedness becomes due and payable prior
to its stated maturity other than at our or Emir’s option, or (iii) the
Noteholders holding a majority in outstanding principal amount of the Notes
provide notice to us that negotiations with respect to restructuring the Notes
have terminated.  Therefore, it is possible the Noteholders could
exercise a put option with respect to the Notes prior to September 1, 2010 if
any of the foregoing events occur.










Prior to entering into the Supplemental
Indenture, we were in default under certain covenants contained in Article 9 of
the Indenture requiring us to maintain a minimum net debt to equity ratio and to
comply with certain notice, delivery and other provisions.  The
Noteholders separately agreed to waive these defaults until the earlier of: (i)
September 1, 2010 or (ii) the fourth put date, with the understanding that such
waiver will not constitute a waiver of any default under the Indenture that
remains ongoing as of September 1, 2010 or that occurs after June 8,
2010.  We currently believe we will not be able to remedy the default
of the net debt to equity ratio covenant by September 1, 2010 and, therefore, we
anticipate we will be in default under the Indenture at September 1, 2010 unless
a future waiver is obtained from the Noteholders.  There is no
assurance the Noteholders will provide any future waiver or any further
extension of their redemption put rights under the
Indenture.  Moreover, there is no assurance that we will be successful
in renegotiating the terms and conditions of the Notes.





If we are unable to extend the waiver
of default beyond September 1, 2010, or at any time we are in default under the
Indenture, the Noteholders have the right to accelerate the Notes and require us
to make immediate payment of all unpaid interest and principal.  As of
March 31, 2010, the outstanding balance of unpaid principal and interest under
the Notes was $62,819,786.  If the Noteholders were to accelerate the
Notes, we would have insufficient funds to pay the Notes.  We do not
anticipate obtaining sufficient funds to retire the Notes in the near
future.  If we default on the Notes, the Noteholders could seek any
legal remedies available to them to obtain repayment of the Notes, including
forcing us into bankruptcy, which would likely also result in Emir Oil being
forced into bankruptcy.  Pursuant to Kazakhstan law and the terms of
our exploration license, the government of the Republic of Kazakhstan has the
right to cancel our licenses to the ADE Block, the Southeast Block and the
Northwest Block in the event Emir Oil becomes insolvent or enters into
bankruptcy proceedings.  If such were to happen, we would be left with
limited assets, no operations and ability to generate revenue or otherwise repay
the Notes.





Our
ability to obtain additional financing or use our operating cash flow to fund
operations may be adversely affected by our level of indebtedness.





Our level
of indebtedness could have negative consequences, which include, but are not
limited to, the following:





•
            Our
      ability to obtain additional financing to fund capital expenditures,
      acquisitions, working capital, repay debts or for other purposes may be
      impaired;•
            Our
      ability to use operating cash flow in other areas of our business may be
      limited because we must dedicate a substantial portion of these funds to
      repay debt obligations;•
            We
      may be unable to compete with others who may not be as highly leveraged;
      and•
            Our
      debt may limit our flexibility to adjust to changing market conditions,
      changes in our industry and economic
downturns.





The financial
crisis and economic conditions have and may continue to have a material adverse
impact on our business and financial condition that we cannot
predict.





The
global economic conditions have deteriorated during the past two fiscal years
and continue to remain unstable.  The global financial markets have
experienced a period of unprecedented turmoil and upheaval characterized by
extreme volatility and declines in prices of securities, diminished liquidity
and credit availability, inability to access capital, bankruptcy, failure,
collapse or sale of financial institutions and an unprecedented level of
intervention from the U.S. federal government and other
governments.  In particular, the cost of raising money in the debt and
equity capital markets has increased substantially while the availability of
funds from those markets generally has diminished significantly.  As a
result of the concerns about the stability of financial markets generally and
the solvency of existing debtors specifically, the cost of obtaining money from
credit markets has increased.  Many lenders and institutional
investors have increased interest rates, enacted tighter lending standards,
refused to refinance existing debt at maturity and have either reduced or, in
many cases, ceased to provide any new funding.










Although
we cannot predict the impacts on us of the deteriorating economic conditions,
they could materially adversely affect our business in the following
ways:


•
            our
      ability to obtain credit and access the capital markets may continue to be
      restricted adversely affecting our financial position and our ability to
      continuing exploration and drilling activities on our
      territory;•
            the
      values we are able to realize in transactions we engage in to raise
      capital may be reduced, thus making these transactions more difficult to
      consummate and more dilutive to our
  shareholders; and•
            the
      demand for oil and natural gas may decline due to weak international
      economic conditions.





We may not be
able to replace our reserves or generate cash flows if we are unable to raise
capital.





In order
to increase our asset base, we will need to make substantial capital
expenditures for the exploration, development, production and acquisition of oil
and gas reserves and the construction of additional facilities. These
maintenance capital expenditures may include capital expenditures associated
with drilling and completion of additional wells to offset the production
decline from our producing properties or additions to our inventory of unproved
properties or our proved reserves to the extent such additions maintain our
asset base.  These expenditures could increase as a result
of:


•
            changes
      in our reserves;•
            changes
      in oil and gas prices;•
            changes
      in labor and drilling costs;•
            our
      ability to acquire, locate and produce reserves;•
            changes
      in license acquisition costs; and•
            government
      regulations relating to safety and the
  environment.





Our cash
flow from operations and access to capital is subject to a number of variables,
including:


•
            our
      proved reserves;•
            the
      success or our drilling efforts;•
            the
      level of oil and gas we are able to produce from existing
      wells;•
            the
      prices at which our oil and gas is sold; and•
            our
      ability to acquire, locate and produce new
  reserves.










Historically,
we have financed these expenditures primarily with cash raised through the sale
of our equity and debt securities and revenue generated by
operations.   If our revenues or borrowing base decreases, which
is expected, as a result of lower oil and natural gas prices, operating
difficulties or declines in reserves, we may have limited ability to expend the
capital necessary to undertake or complete future drilling programs. Additional
debt or equity financing or cash generated by operations may not be available to
meet these requirements.  Due to the current low prices for oil and
gas and the restrictions in the capital markets largely caused by the global
financial crisis, we anticipate that we will not have enough capital available
during the upcoming fiscal year to make substantial capital
expenditures.





Oil and gas
prices are characteristically volatile, and if they remain low for a prolonged
period, our revenues, profitability and cash flows will decline.  A
sustained period of low oil and natural gas prices would adversely affect our
business operations, our asset values and our financial condition and ability to
meet our financial commitments.





The
global financial crises and economic downturn has resulted in a significant
decline in oil and natural gas prices from their highs of 2008. The prices we
receive for our oil and natural gas production heavily influence our revenue,
profitability, access to capital and future rate of growth. The prices we
receive for our production, and the levels of our production, depend on a
variety of additional factors that are beyond our control, such as:


•
            the
      domestic and foreign supply of and demand for oil and natural
      gas;•
            the
      price and level of foreign imports of oil and natural
  gas;•
            the
      level of consumer product demand;•
            weather
      conditions;•
            overall
      domestic and global economic conditions;•
            political
      and economic conditions in oil and gas producing countries, including
      embargoes and continued hostilities in the Middle East and other sustained
      military campaigns, acts of terrorism or sabotage;•
            actions
      of the Organization of Petroleum Exporting Countries and other
      state-controlled oil companies relating to oil price and production
      controls;•
            the
      impact of the U.S. dollar exchange rates on oil and gas
      prices;•
            technological
      advances affecting energy consumption;•
            domestic
      and foreign governmental regulations and taxation;•
            the
      impact of energy conservation efforts;•
            the
      costs, proximity and capacity of gas pipelines and other transportation
      facilities; and•
            the
      price and availability of alternative
fuels.





Our
revenue, profitability and cash flow depend upon the prices and demand for oil
and gas, and a drop in prices can significantly affect our financial results and
impede our growth. In particular, price declines or sustained low prices for oil
and gas will:


•
            negatively
      impact the value of our reserves because declines in oil and natural gas
      prices would reduce the amount of oil and natural gas we can produce
      economically;•
            reduce
      the amount of cash flow available for capital
      expenditures; and•
            limit
      our ability to borrow money or raise additional
  capital.










Future price
declines may result in a write-down of our asset carrying
values.





Lower oil
and natural gas prices may not only decrease our revenues, profitability and
cash flows, but also reduce the amount of oil and gas that we can produce
economically.  This may result in downward adjustments to our
estimated proved reserves.  Substantial decreases in oil and gas
prices could render our future planned exploration and development projects
uneconomical.  If this occurs, or if our estimates of development
costs increase, production data factors change or drilling results deteriorate,
accounting rules may require us to write down, as a non-cash charge to earnings,
the carrying value of our properties for impairments.  We are required
to perform impairment tests on our assets periodically and whenever events or
changes in circumstances warrant a review of our assets.  To the
extent such tests indicate a reduction of the estimated useful life or estimated
future cash flows of our assets, the carrying value may not be recoverable and
may, therefore, require a write-down of such carrying value.  We may
incur impairment charges in the future, which could have a material adverse
effect on our results of operations in the period incurred and on our ability to
borrow funds under our credit agreements.





Unless
we replace our oil and natural gas reserves, our reserves and future production
will decline, which would adversely affect our cash flows and
income.





Unless we
conduct successful development, exploration and exploitation activities, our
proved reserves will decline as those reserves are
produced.  Producing oil and natural gas reservoirs generally are
characterized by declining production rates that vary depending upon reservoir
characteristics and other factors.  Our future oil and natural gas
reserves and production, and, therefore our cash flow and income, are highly
dependent upon our success in efficiently developing and exploiting our current
reserves and economically finding or acquiring additional recoverable
reserves.  If we are unable to develop, exploit, find or acquire
additional reserves to replace our current and future production, our cash flow
and income will decline as production declines, until our existing properties
would be incapable of sustaining commercial production.





Drilling for and
producing oil and gas is a costly and high-risk activity with many uncertainties
that could adversely affect our financial condition or results of
operations.





Our
drilling activities are subject to many risks, including the risk that we will
not discover commercially productive reservoirs.  The cost of
drilling, completing and operating a well is often uncertain, and cost factors,
as well as the market price of oil and natural gas, can adversely affect the
economics of a well.  Furthermore, our drilling and producing
operations may be curtailed, delayed or canceled as a result of other factors,
including:


•
            high
      costs, shortages or delivery delays of drilling rigs, equipment, labor or
      other services;•
            adverse
      weather conditions;•
            equipment
      failures or accidents;•
            pipe
      or cement failures or casing collapses;•
            compliance
      with environmental and other governmental requirements;•
            environmental
      hazards, such as gas leaks, oil spills, pipeline ruptures and discharges
      of toxic gases;











•
            lost
      or damaged oilfield drilling and service tools;•
            loss
      of drilling fluid circulation;•
            unexpected
      operational events and drilling conditions;•
            unusual
      or unexpected or difficult geological formations;•
            natural
      disasters, such as fires;•
            blowouts,
      surface cratering and explosions; and•
            uncontrollable
      flows of oil, gas or well fluids.




A
productive well may become uneconomical in the event deleterious substances are
encountered which impair or prevent the production of oil or gas from the
well.  In addition, production from any well may be unmarketable if it
is contaminated with water or other deleterious substances.  We may
drill wells that are unproductive or, although productive, do not produce oil or
gas in economic quantities.  Unsuccessful drilling activities could
result in higher costs without any corresponding
revenues.  Furthermore, the successful completion of a well does not
ensure a profitable return on the investment.





Reserve
estimates depend on many assumptions that may turn out to be inaccurate. Any
material inaccuracies in these reserve estimates or underlying assumptions will
materially affect the size and present value of our reserves.





The
process of estimating oil and natural gas reserves is complex.  It
requires interpretations of available technical data and many assumptions,
including assumptions relating to economic factors.  Any significant
inaccuracies in these interpretations or assumptions could materially affect the
estimated quantities and present value of reserves shown in this
report.





In order
to prepare estimates, we must project production rates and timing of development
expenditures.  We must also analyze available geological, geophysical,
production and engineering data.  The extent, quality and reliability
of this data can vary.  The process also requires economic assumptions
about matters such as oil and natural gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of
funds.  Therefore, estimates of oil and natural gas reserves are
inherently imprecise.





Actual
future production, oil and natural gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and natural
gas reserves most likely will vary from our estimates.  Any
significant variance could materially affect the estimated quantities and
present value of reserves shown in this report.  In addition, we may
adjust estimates of proved reserves to reflect production history, results of
exploration and development, prevailing oil and natural gas prices and other
factors, many of which are beyond our control.





You
should not assume that the present value of future net revenues from our proved
reserves referred to in this report is the current market value of our estimated
oil and natural gas reserves.  In accordance with SEC requirements, we
generally base the estimated discounted future net cash flows from our proved
reserves on prices and costs on the date of the estimate.  Actual
future prices and costs may differ materially from those used in the present
value estimate.  If future values decline or costs increase, it could
have a negative impact on our ability to finance operations; individual
properties could cease being commercially viable; affecting our decision to
continue operations on producing properties or to attempt to develop
properties.  All of these factors would have a negative impact on
earnings and net income, and most likely the trading price of our
securities.










We
will be unable to produce up to 76% of our proved reserves if we are not able to
obtain a commercial production contract or extend our current exploration
contract, which would likely require us to terminate our
operations.





Under our
exploration contract on our properties we have the rights to produce oil and gas
only until January 2013, yet 76% of our proved reserves are scheduled to be
produced after January 2013. We have the exclusive right to negotiate a
commercial production contract as per the terms of our exploration
contract.  The Ministry of Oil and Gas of the Republic of Kazakhstan
(the “MOG”) does not make public its determinations on the granting of
commercial production rights.  Based on discussions with the MOG, we
have learned that the primary factors used by the MOG in determining whether to
grant commercial production rights are whether the contract holder has fulfilled
its minimum work program commitments, proof of commercial discovery and
submission of an approved development plan by a third-party petroleum institute
in Kazakhstan to exploit the established commercial
reserves.  Typically, if commercial production rights are not granted
it is because the contract holder has failed to make a commercial discovery
within their contract territory and had decided to abandon the contract
territory or the contract holder has insufficient funds to complete its minimum
work program requirement and was unable to complete the necessary work to
substantiate the presence of commercially producible reserves to the
MOG.  Our efforts are focused toward meeting our minimum work program
requirements and making and substantiating commercial discoveries in as many of
the identified structures as possible to support our application for commercial
production rights.  If we are not granted commercial production rights
prior to the expiration of our exploration contract, we may lose our right to
produce the reserves on our current properties.  If we are unable to
produce those reserves, we will be unable to realize revenues and earnings and
to fund operations and we would most likely be unable to continue as a going
concern.





Prospective
properties that we decide to drill may not yield oil or natural gas in
commercially viable quantities or quantities sufficient to meet our targeted
rate of return.





The structures we have located on our
territory are typically at a depth of 3,100 to 3,800 meters and some structures
may be deeper in the Northwest Block.  The rock is generally
carbonates of limestone and dolomite, which can inhibit oil flow and well
drainage and thereby results in higher risk drilling, reduced well drainage
areas, lower production rates and higher than expected well decline
rates.   These factors in turn adversely affect the valuation of
our reserve base.  We attempt to address these challenges through
careful selection of drilling sites and we are now in process of developing
models of our oil fields that will guide our well locations, drilling activities
and technology deployment.










A “prospect” is a property which, based
on available seismic and geological data, we believe shows potential oil or
natural gas.  Our prospects are in various stages of evaluation and
interpretation.  There is no way to accurately predict in advance of
incurring drilling and completion costs whether a prospect will be economically
viable.  Even with seismic data and other technologies and the study
of producing fields in the same area, we cannot know conclusively prior to
drilling whether oil or natural gas will be present or, if present, will be
present in commercial quantities.  The analysis that we perform using
data from other wells, more fully explored prospects and producing fields may
not be useful in predicting the characteristics and potential reserves
associated with our drilling prospects. When we drill unsuccessful wells, our
drilling success rate declines and we may not achieve our targeted rate of
return.





We
may incur substantial losses and be subject to substantial liability claims as a
result of our operations.





We are
not insured against all risks.  Losses and liabilities arising from
uninsured and underinsured events could materially and adversely affect our
business, financial condition or results of operations. Our oil and natural gas
exploration and production activities are subject to all of the operating risks
associated with drilling for and producing oil and natural gas, including the
possibility of:





•
            environmental
      hazards, such as uncontrollable flows of oil, natural gas, brine, well
      fluids, toxic gas or other pollution into the environment, including
      groundwater contamination;•
            abnormally
      pressured formations;•
            mechanical
      difficulties, such as stuck oil field drilling and service tools and
      casing collapse;•
            fires
      and explosions;•
            personal
      injuries and death; and•
            natural
      disasters.





Any of
these risks could adversely affect our ability to conduct operations or result
in substantial losses.  In instances when we believe that the cost of
available insurance is excessive relative to the risks presented we may elect
not to obtain insurance.  In addition, pollution and environmental
risks generally are not fully insurable.  If a significant accident or
other event occurs that is not fully covered by insurance, it could adversely
affect us.





We
are subject to complex laws that can affect the cost, manner or feasibility of
doing business.





Exploration,
development, production and sale of oil and natural gas are subject to extensive
governmental regulation.  We may be required to make large
expenditures to comply with these regulations.  Matters subject to
regulation include:





•
            discharge
      permits for drilling operations;•
            reports
      concerning operations;•
            the
      spacing of wells;•
            unitization
      and pooling of properties; and•
            taxation.










Under
these laws, we could be liable for personal injuries, property damage and other
damages.  Failure to comply with these laws may also result in the
suspension or termination of our licenses or operations and could subject us to
administrative, civil and criminal penalties.  Moreover, these laws
could change in ways that substantially increase our costs.  Any such
liabilities, penalties, suspensions, terminations or regulatory changes could
materially adversely affect our financial condition and results of
operations.  We believe that there is political and legal risk doing
business in Kazakhstan, as the country has existed for less than two decades and
is still in process of developing stable and predictable laws required to
underpin a free market economy and foster private enterprise.





We
may incur substantial liabilities to comply with environmental laws and
regulations.





Our oil
and natural gas operations are subject to governmental laws and regulations
relating to the release or disposal of materials into the environment or
otherwise relating to environmental protection.  These laws and
regulations may require the acquisition of permits before drilling commences,
restrict the types, quantities and concentration of substances that can be
released into the environment in connection with drilling and production
activities and impose substantial liabilities for pollution resulting from our
operations.  Failure to comply with these laws and regulations may
result in the assessment of administrative, civil and criminal penalties,
imposition of investigatory or remedial obligations or even injunctive
relief.  Changes in environmental laws and regulations occur
frequently.  Any changes that result in more stringent or costly waste
handling, storage, transport, disposal or cleanup requirements could require us
to make significant expenditures to maintain compliance, and may otherwise have
a material adverse effect on our results of operations, competitive position or
financial condition as well as on the industry in general.  Under
these environmental laws and regulations, we could be held strictly liable for
the removal or remediation of previously released materials or property
contamination regardless of whether we were responsible for the release or
whether our operations were standard in the industry at the time they were
performed.





Because of our
lack of asset and geographic diversification, adverse developments in our
operating area would adversely affect our results of
operations.





Substantially
all of our assets are currently located in southwestern
Kazakhstan.  As a result, our business is disproportionately exposed
to adverse developments affecting this region.  These potential
adverse developments could result from, among other things, changes in
governmental regulation, capacity constraints with respect to storage
facilities, transportation systems and pipelines, curtailment of production,
natural disasters or adverse weather conditions in or affecting these
regions.  Due to our lack of diversification in asset type and
location, an adverse development in our business or the area in which we operate
would have a significantly greater impact on our financial condition and results
of operations than if we maintained more diverse assets and operating
areas.










The
unavailability or high price of transportation systems could adversely affect
our ability to deliver our oil on terms that would allow us to operate
profitably, or at all.





Because of the location of our
properties, the crude oil we produce must be transported by truck or by
rail.  In the future it will likely also be transported by
pipelines.  These railways and pipelines are operated by state-owned
entities or other third-parties, and there can be no assurance that these
transportation systems will always be functioning and available, or that the
transportation costs will not become cost prohibitive.  In addition,
any increase in the cost of transportation or reduction in its availability to
us could have a material adverse effect on our results of
operations.  There is no assurance that we will be able to procure
sufficient transportation capacity on economical terms, if at all.





We depend on one
customer for sales of crude oil.  A reduction by this customer in the
volumes of oil it purchases could result in a substantial decline in our
revenues and net income.





During
the year ended March 31, 2010, we sold approximately 95% of our crude oil
production to Titan Oil.  Revenue from oil sold to Titan Oil made up
98% of our revenue during the year ended March 31, 2010.  The loss of
Titan Oil may have a material adverse effect on our operations in the
short-term.  Based on current demand for crude oil and the fact that
alternate purchasers are readily available, we believe the loss of Titan Oil
would not materially adversely affect our operations long-term.





If
you purchase shares of our stock, your investment will be subject to the same
risks inherent in international operations, including, but not limited to,
adverse governmental actions, political risks, and expropriation of assets, loss
of revenues and the risk of civil unrest or war.





While we
have significant experience working in Kazakhstan, and feel we have good
relationships with government agencies at many levels, we  remain
subject to all the risks inherent in international operations, including adverse
governmental actions, uncertain legal and political systems, and expropriation
of assets, loss of revenues and the risk of civil unrest or war.  Our
primary oil and gas properties are located in Kazakhstan, which until 1990 was
part of the Soviet Union.  Kazakhstan retains many of the laws and customs
of the former Soviet Union, but has and is continuing to develop its own legal,
regulatory and financial systems.  As the political and regulatory
environment changes, we may face uncertainty about the interpretation of our
agreements; in the event of dispute, we may have limited recourse within the
legal and political system.





Prior to
the expiration of our exploration rights, we plan to make application for
commercial production rights to the extent we have established commercially
producible reserves on our properties.  We have the exclusive right to
negotiate a commercial production contract for the ADE Block, the Southeast
Block and the Northwest Block and the government is required to conduct these
negotiations under the “Law of Petroleum” in Kazakhstan.  The terms of the
commercial production contract will establish the Mineral Extraction Tax, Rent
Export Tax and other payments due to the government in connection with
commercial production.  At the time the commercial production contract
is issued, we will be required to begin repaying the government its historical
investment costs of exploration and development of the ADE Block, the Southeast
Block and the Northwest Block, as well as a Commercial Discovery
Bonus.  The historical investment costs associated with the ADE Block,
the Southeast Block and the Northwest Block are approximately $6 million, $5.3
million and $5.4 million respectively.  We currently do not know the
amount of any required Commercial Discovery Bonus, but anticipate it could be as
high as $3.2 million. If satisfactory terms for commercial production rights
cannot be negotiated, it could have a material adverse effect on our financial
position.










Risks
Relating to Our Common Stock





Our stock price
may be volatile.





The
following factors could affect our stock price:


•
            our
      operating performance and future prospects;•
            quarterly
      variations in the rate of growth of our financial indicators, such as net
      income per share, net income and revenues;•
            actual
      or anticipated variations in our reserve estimates and quarterly operating
      results;•
            fluctuations
      in oil and natural gas prices;•
            speculation
      in the press or investment community;•
            sales
      of our common stock by large block stockholders;•
            short-selling
      of our common stock by investors;•
            the
      outcome of current litigation;•
            issuance
      of a significant number of shares to raise additional capital to fund our
      operations;•
            changes
      in applicable laws or regulations;•
            changes
      in market valuations of similar companies;•
            additions
      or departures of key management personnel;•
            actions
      by our creditors;  and•
            international
      economic, legal and regulatory factors unrelated to our
      performance.





It is unlikely
that we will be able to pay dividends on our common
stock.





We have
never paid dividends on our common stock.  We cannot predict with
certainty that our operations will result in sufficient revenues to enable us to
operate profitably and with sufficient positive cash flow so as to enable us to
pay dividends to the holders of common stock.





The percentage
ownership evidenced by the common stock is subject to
dilution.





We are
authorized to issue up to 500,000,000 shares of common stock and are not
prohibited from issuing additional shares of such common
stock.  Moreover, to the extent that we issue any additional common
stock, a holder of the common stock is not necessarily entitled to purchase any
part of such issuance of stock.  The holders of the common stock do
not have statutory “preemptive rights” and therefore are not entitled to
maintain a proportionate share of ownership by buying additional shares of any
new issuance of common stock before others are given the opportunity to purchase
the same. Accordingly, you must be willing to assume the risk that your
percentage ownership, as a holder of the common stock, is subject to change as a
result of the sale of any additional common stock, or other equity interests in
the Company.











Our common stock
is an unsecured equity interest.





Just like
any equity interest, our common stock will not be secured by any of our
assets.  Therefore, in the event of our liquidation, the holders of
our common stock will receive distributions only after all of our secured and
unsecured creditors have been paid in full. There can be no assurance that we
will have sufficient assets after paying its secured and unsecured creditors to
make any distribution to the holders of our common stock.





Provisions in
Nevada law could delay or prevent a change in control, even if that change would
be beneficial to our stockholders.





Certain
provisions of Nevada law may delay, discourage, prevent or render more difficult
an attempt to obtain control of us, whether through a tender offer, business
combination, proxy contest or otherwise.  The provisions of Nevada law
are designed to discourage coercive takeover practices and inadequate takeover
bids.  These provisions are also designed to encourage persons seeking
to acquire control of us to first negotiate with our board of
directors.





Item
1B. Unresolved Staff Comments





None.









Item
2.  Properties





Our properties comprise an 850
contiguous square kilometer area in the Mangistau Region of southwestern
Kazakhstan.
























Exploratory
and Developmental Acreage





The
following table summarizes our gross and net developed and undeveloped mineral
acreage by block at March 31, 2010.





Developed
            
            Undeveloped
            
            TotalGross
            
            Net
            
            Gross
            
            Net
            
            Gross
            
            NetADE
      Block
            950
            
            950
            
            46,805
            
            46,805
            
            47,755
            
            47,755Southeast
      Block
            670
            
            670
            
            65,245
            
            65,245
            
            65,915
            
            65,915Northwest
      Block
            -
            
            -
            
            96,370
            
            96,370
            
            96,370
            
            96,370




Development
of Oil and Gas Properties in Kazakhstan





Under the
statutory scheme in the Republic of Kazakhstan prospective oil fields are
developed in two stages.  The first stage is an exploration and
appraisal stage during which a private contractor is given a license to explore
for oil and gas on a territory for a set term of years.  During this
stage the primary focus is on the search for a commercial discovery, i.e., a
discovery of a sufficient quantity of oil and gas to make it commercially
feasible to pursue execution of, or transition to, a commercial production
contract with the government.   Under the terms of an exploration
contract the contract holder has the right to sell all oil and natural gas
produced during the term of the exploration contract.


We
currently own a 100% interest in both a license to use subsurface mineral
resources and a hydrocarbon exploration contract issued by the ROK in 1999 and
2000, respectively (collectively referred to herein as the “license” or the
“exploration contract”).   When initially granted, the
exploration and development stage of our exploration contract had a five year
term, with provision for two extensions for a period of two years
each.  On June 24, 2008 the MEMR (the predecessor to the MOG) agreed
to extend the exploration stage of our exploration contract until January
2013.





Initially,
the exploration contract granted us the right to engage in exploration and
development activities in an area of approximately 200 square kilometers
referred to herein as the “ADE Block.”  The ADE Block is comprised of
three fields, the Aksaz, Dolinnoe and Emir fields.  During our 2006
fiscal year our exploration contract was expanded to include an additional 260
square kilometers of land adjacent to the ADE Block, which we refer to herein as
the “Southeast Block”, which includes the Kariman oil and gas field and the
Borly and Yessen structures.  In October 2008 the MEMR granted a
further extension of the territory covered under our exploration contract to
include an additional 390 square kilometer area, bringing our total contract
area to 850 square kilometers (approximately 210,000 acres). The additional
territory is located to the north and west of our current exploration territory,
extending the exploration territory toward the Caspian Sea and is referred to
herein as the “Northwest Block.”  The Southeast Block and the
Northwest Block are governed by the terms of our exploration
contract.





In order
to be assured that adequate exploration activities are undertaken during
exploration stage, the MOG establishes an annual mandatory minimum work program
to be accomplished in each year of the exploration contract.  Under
the minimum work program the contractor is required to invest a minimum dollar
amount in exploration activities within the contract territory, which may
include geophysical studies, construction of field infrastructure or drilling
activities.  During the exploration stage, the contractor is also
required to drill sufficient wells in each field to establish the existence of
commercially producible reserves in any field for which it seeks a commercial
production license.  Failure to complete the minimum work program
requirements for any particular field during the term of the exploration
contract could preclude the contractor from receiving a longer-term production
contract for such field, regardless the success of the contractor in proving
commercial reserves during the partial fulfillment of the minimum work
program.










The
contract we hold follows the above format.  The contract sets the
minimum dollar amount we must expend during each year of our work
program.  Through July 2009, our work program year ended on July 9
each year.  As a result of certain changes to our exploration license,
our work program year end has now changed to January 9 of each year through
January 9, 2013.  Therefore our work program year does not coincide
with our fiscal year.  As a result of these timing differences, the
amounts reflected in the table below as “Actually Made” may differ from amounts
disclosed elsewhere in Item 7.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations or the consolidated financial
statements included in this report, which present figures based on our fiscal
year rather than our work program year.





Amount
      of Expenditure
            Mandated
      by Contract
            Actually
      MadePrior
      to July 2007
            $40,200,000
            $104,750,000July
      2007 to July 2008
            $8,480,000
            $115,040,000July
      2008 to July 2009
            $1,845,000
            $44,900,000July
      2009 to January 2010
            $8,565,000
            $15,970,000January
      2010 to January 2011
            $21,520,000
            $8,727,000*January
      2011 to January 2012
            $27,300,000
            $
      -January
      2012 to January 2013
            $14,880,000
            $
      -Total
            $122,790,000
            $289,387,000





*
Investment as of March 31, 2010





Under the
rules of the MOG there is a process whereby expenditures above the minimum
requirements in one period may be carried over to meet minimum obligations in
future periods. As the above chart shows we have significantly exceeded the
minimum expenditure requirement in each period of the contract and have more
than doubled the total minimum capital expenditure requirement during the
exploration stage.





In
addition to mandatory minimum capital expenditures in each year, exploration
contracts typically require the contract holder to drill a certain number of
wells in each structure for which it plans to seek commercial production
rights.










In
Kazakhstan, typically, one exploratory well and two appraisal wells are
sufficient to support a claim of commercially producible reserves in a
particular field, although in some cases, commercial reserves have been
demonstrated with fewer wells.  The total number of wells the MOG
requires during exploration stage is generally determined by the number of
fields or structures identified by the seismic studies done on a
territory.  3D seismic studies completed on the ADE Block and the
Southeast Block, have identified six potential fields or
structures.  We plan to perform 3D seismic studies on the Northwest
Block to identify potential structures in that Block.





To date,
we have drilled a total of 24 wells as set forth in more detail
below:





Structures
            Aksaz
            Dolinnoe
            Emir
            Kariman
            Borly
            Yessen
            Northwest
      BlockExploratory
      Wells
            1
            1
            1
            1
            1
            1
            3(1)Appraisal
      Wells
            2
            2
            2
            2
            2
            2
            *Existing
      Wells
            5
            6
            3
            10
            0
            0
            0Wells
      in Progress
            0
            0
            0
            0
            0
            0
            0Remaining
      Wells to
              Drill
      by 2013
            0
            0
            0
            0
            3
            3
            *





(1)
            Addendum
      No. 6 to our exploratory contract requires the drilling of three
      exploratory wells.  Depending upon the results of 3D seismic
      studies of the Northwest Block we may need to drill additional exploratory
      and appraisal wells in the Northwest
Block.


*
            Unknown at this
      time.





Pursuant
to the terms of the extensions of our exploration contract, we will be required
to drill not less than nine new wells by January 9, 2013.  If we
discover structures in the Northwest Block, we will need to drill additional
wells to determine and establish the existence of commercially producible
reserves within the various structures in our license territory.





The
bottom half of the above chart shows current progress on drilling of exploratory
and appraisal wells.





To date
we have been conservative in our approach to exploration.  It has been
our practice to drill our first few wells serially.  Our first well
was the Dolinnoe-2 well drilled in 2004.  This was followed by the
Dolinnoe-3 well, and then the Aksaz-4 and Kariman-1 wells.  While we
have verified the presence of oil and gas in all our wells thus far, not all our
wells produce oil at commercial levels.  We have expended substantial
time and money to study our wells.





The
purpose of the exploration stage is to study the geology and geophysical
characteristics of each field and individual well, with a view to qualifying for
a longer-term production contract.  Once drilling of a well is
completed, our emphasis focuses on an extended period of testing a well’s
production characteristics and capacities to determine the best method for
producing oil from that well and to gain insight into the further development of
the entire field.  During exploration, oil production is subject to
wide fluctuations caused by varying pressures commonly experienced in new wells
and by significant periods of well closure to accommodate mandatory
testing.  Maximizing oil production only becomes the central focus
during the post-exploration phase when exploiting the commercial discovery
commences under a production contract.










Under our
exploration contract, we have the exclusive right to apply for and negotiate a
commercial production contract.  The government is required to
negotiate the terms of these rights in good faith in accordance with the Law of
Petroleum of Kazakhstan.  Based on discussions with the MOG, the
primary factors used by the MOG in determining whether to grant commercial
production rights are whether the contract holder has fulfilled the minimum work
program commitments, proved the existence of a commercial discovery and
submitted and received approval of a development plan prepared by a third-party
petroleum institute in Kazakhstan for the exploitation of the established
commercial reserves.  All our efforts during exploration stage have
and will continue to focus on meeting these criteria.


The terms of our commercial production
rights will be negotiated at the time we apply to transition to commercial
production.  We became subject to a new tax code on January 1,
2009.  Under the new tax code, the royalty we previously paid was
replaced by a mineral extraction tax.  The rate of the mineral
extraction tax depends on annual production output.  The new code
currently provides for a 5% mineral extraction tax rate (6% starting from 2013
and 7% starting from 2014) on production sold to the export market, and a 2.5%
tax rate (3% in 2013 and 3.5% starting from 2014) on production sold to the
domestic market.  The mineral extraction tax expense is reported as
part of oil and gas operating expense.  In January 2009 we also became
subject for a rent export tax, which is calculated based on the export sales
price.  This tax ranges from as low as 0% if the price is less than
$40 per barrel to as high as 32% if the price per barrel exceeds
$190.




Drilling
Operations





Over the past financial year we have
concentrated our operational efforts on stabilizing and maintaining production
through continuous work with the existing wellstock.  No new wells
were drilled due to the difficult financial situation we have experienced over
the past fiscal year when most of our financial resources were diverted to
alleviating working capital problem.





We have
also continued our preparatory work for eventual transition of a portion of
existing assets to commercial production. We have retained the services of a
third-party independent consulting company to prepare a geological model of the
Kariman, Aksaz and Dolinnoe fields.  This work is ongoing and is
expected to be completed prior to the end of fiscal year 2011.  This
step, in conjunction with cooperation with the Kazakhstani design institute,
should prepare us for eventual transition to commercial production.





During
fiscal year 2010 we signed a contract for the shooting of 3D seismic and
interpretation over a portion of the Northwest Block with GeoSeismic LLP, a
company affiliated with Mr. Toleush Tolmakov, General Director of Emir Oil LLP,
and a Company shareholder.  The total value of the contract is $3.8
million with GeoSeismic LLP agreeing to accept payment in BMB common stock in
lieu of cash payment at the rate of $2.00 per share, at our option. We expect 3D
seismic interpretation results to be completed in the first quarter of fiscal
year 2011.  Once the results are interpreted, we will furnish them to
our independent petroleum engineers, Chapman Petroleum Engineering Ltd., and
retain their services for assessing resource potential of the Northwest
Block.  We expect this project to be fully completed by the end of our
second fiscal quarter 2011.










We are
continuing the process of researching various available options for using
different design pumps at the Dolinnoe and Aksaz fields, both of which have
higher natural gas content making it impossible to utilize the type of
electronic submersible pumps currently used on the Kariman field.





We expect
to continue working with the existing wellstock for the remainder of the 2011
fiscal year with the intent of increasing and sustaining production rates from
existing wells.





Well
Performance and Production





The
following table sets forth our gross and net working interests in exploratory
and development wells drilled during the three years ended March 31,
2010:





2008
            
            2009
            
            2010Gross
            
            Net
            
            Gross
            
            Net
            
            Gross
            
            NetExploratoryProductiveOil
            18
            
            18
            
            24
            
            24
            
            24
            
            24Gas
            -
            
            -
            
            -
            
            -
            
            -
            
            -Dry
      wells
            -
            
            -
            
            -
            
            -
            
            -
            
            -Total
            18
            
            18
            
            24
            
            24
            
            24
            
            24DevelopmentProductiveOil
            -
            
            -
            
            -
            
            -
            
            -
            
            -Gas
            -
            
            -
            
            -
            
            -
            
            -
            
            -Dry
      wells
            -
            
            -
            
            -
            
            -
            
            -
            
            -Total
            -
            
            -
            
            -
            
            -
            
            -
            
            -





As of the fiscal year ended March 31,
2010, each of the 24 wells identified above was in test production, testing or
under or awaiting workover.  Each of the above listed wells is Company
operated.





According
to the laws of the Republic of Kazakhstan, we are required to test every
prospective target on our properties separately; this includes the completion of
well surveys on different modes with various choke sizes on each
horizon.





In the
course of well testing, when the transfer from target to target occurs, the well
must be shut in; oil production ceases for the period of
mobilization/demobilization of the workover rig, pull out of the hole, run in
the hole, perforation, packer installation time, etc.  This has the
effect of artificially diminishing production rates averaged over a set period
of time.










During
our fourth fiscal quarter 2010, our average daily crude oil production was 2,940
barrels per day.  Following is a brief description of the production
rates of each of our 24 wells during the fiscal year ended March 31,
2010.





Well
            
            Single
      Interval Production Rate for the year ended March 31,
      2010
            
            Average
      Daily Production Rate for the quarter ended March 31,
      2010
            
            Diameter
      Choke SizeAksaz
      -1
            
            31
      - 57 bpd
            
            31
      - 38 bpd
            
            4
      mmAksaz
      -2
            
            0 -
      13 bpd(1)
            
            6
      bpd(1)
            
            3
      mmAksaz-3
            
            0 -
      377 bpd(1)
            
            226
      - 296 bpd(1)
            
            7
      mmAksaz
      -4
            
            50
      - 57 bpd
            
            50
      bpd
            
            4
      mmAksaz
      -6
            
            25
      - 63 bpd
            
            25
      bpd
            
            5
      mmDolinnoe
      -1
            
            0 -
      157 bpd
            
            63
      bpd
            
            5
      mmDolinnoe
      -2
            
            0 -
      189 bpd(2)
            
            25
      – 69 bpd(2)
            
            6
      mmDolinnoe
      -3
            
            0 -
      176 bpd
            
            0 -
      176 bpd
            
            14
      mmDolinnoe
      -5
            
            0
      bpd
            
            0
      bpd
            
            0
      mmDolinnoe
      -6
            
            0 -
      94 bpd(2)
            
            0 -
      19 bpd(2)
            
            0
      mmDolinnoe
      -7
            
            0 -
      371 bpd(2)
            
            0 -
      371 bpd(2)
            
            4
      mmEmir
      -1
            
            0
      bpd
            
            0
      bpd(3)
            
            0
      mmEmir
      - 2
            
            0 -
      38 bpd
            
            0
      bpd(3)
            
            0
      mmEmir
      -6
            
            0 -
      94 bpd
            
            0
      bpd(3)
            
            0
      mmKariman
      -1
            
            0 -
      63 bpd(4)
            
            0 -
      63 bpd(4)
            
            0
      mmKariman
      -2
            
            0 -
      660 bpd(4)
            
            0 -
      660 bpd(4)
            
            14
      mmKariman
      -3
            
            0 -
      50 bpd(5)
            
            0 -
      38 bpd(5)
            
            0
      mmKariman
      -4
            
            170
      - 403 bpd(4)
            
            170
      - 315 bpd(4)
            
            10
      mmKariman
      -5
            
            0 -
      132 bpd(5)
            
            0 -
      75 bpd(5)
            
            0
      mmKariman
      -6
            
            0 -
      409 bpd(4)
            
            0 -
      302 bpd(4)
            
            9
      mmKariman
      -7
            
            0 -
      415 bpd(4)
            
            0 -
      415 bpd(4)
            
            12
      mmKariman
      -8
            
            0 -
      434 bpd(4)
            
            201
      - 384 bpd(4)
            
            12
      mmKariman
      -10
            
            0 -
      321 bpd(4)
            
            0 -
      189 bpd(4)
            
            10
      mmKariman-11
            
            0 -
      346 bpd(4)
            
            126
      - 239 bpd(4)
            
            12
      mm





(1)
            We
      have performed acid treatment at these
wells.


(2)
            We
      have performed workover at these wells and moved to new
      horizons.


(3)
            Emir
      wells are on temporary abandonment as the Company is planning for
      submission of an application for pilot development project for this
      field.


(4)
            We
      have installed centrifugal submersible pumps at these
      wells.  After a brief period of testing and fine tuning,
      production from this well stabilized.  Stabilized production
      rates are included in the table
above.


(5)
            We
      have installed beam pumpcentrifugal submersible pumps at these
      wells.  After a brief period of testing and fine tuning,
      production from this well stabilized.  Stabilized production
      rates are included in the table
above.





We plan
to continue working with the existing wellstock in the next fiscal year and are
reviewing various alternatives for increasing production.  We will
have researched and, funds permitting, plan to employ directional/horizontal
drilling on the existing wells on the Kariman field.  We plan to
complete directional drilling on one or two existing Kariman fields during
fiscal year 2011.











Proved
Reserves Disclosures





Recent SEC Rule-Making
Activity. In December 2008, the SEC announced that it had approved
revisions to modernize the oil and gas reserve reporting disclosures. The new
disclosure requirements include provisions that:





·
            Introduce
      a new definition of oil and gas producing activities. This new definition
      allows companies to include in their reserve base volumes from
      unconventional resources. Such unconventional resources include bitumen
      extracted from oil sands and oil and gas extracted from coal beds and
      shale formations.





·
            Report
      oil and gas reserves using an unweighted average price using the prior
      12-month period, based on the closing prices on the first day of each
      month, rather than year-end prices.





·
            Permit
      companies to disclose their probable and possible reserves on a voluntary
      basis. In the past, proved reserves were the only reserves allowed in the
      disclosures.  We have chosen not to make disclosure under these
      categories.





·
            Requires
      companies to provide additional disclosure regarding the aging of proved
      undeveloped reserves.





·
            Permit
      the use of reliable technologies to determine proved reserves if those
      technologies have been demonstrated empirically to lead to reliable
      conclusions about reserves volumes.





·
            Replace
      the existing “certainty” test for areas beyond one offsetting drilling
      unit from a productive well with a “reasonable certainty”
      test.





·
            Require
      additional disclosures regarding the qualifications of the chief technical
      person who oversees the company’s overall reserve estimation process.
      Additionally, disclosures regarding internal controls over reserve
      estimation, as well as a report addressing the independence and
      qualifications of its reserves preparer or auditor will be
      mandatory.





We
adopted the rules effective March 31, 2010.





The new
rule does not allow for prior-year reserve information to be restated, so all
information related to periods prior to 2010 is presented consistent with prior
SEC rules for the estimation of proved reserves.





Oil
and Natural Gas Reserves





The following table sets forth our
estimated net proved oil and natural gas reserves and the standardized measure
of discounted future net cash flows related to such reserves as of March 31,
2010.  The standardized measure of discounted future net cash flows is
not intended to represent the current market value of our estimated oil and
natural gas reserves.  The oil and natural gas reserve data included
in, or incorporated by reference in this document, are only estimates and may
prove to be inaccurate.












Proved
      reserves to be recovered by January 9, 2013(1)
            
            Proved
      reserves to be recovered after January 9, 2013(1)Developed(2)
            
            Undeveloped(3)
            
            Developed(2)
            
            Undeveloped(3)
            
            TotalOil
      and condensate (MBbls)(4)
            5,195
            
            307
            
            14,960
            
            2,264
            
            22,726Natural
      gas (MMcf)
            -
            
            -
            
            -
            
            -
            
            -Total
      BOE (MBbls)
            5,195
            
            307
            
            14,960
            
            2,264
            
            22,726Standardized
      Measure of discounted future net cash flows(5)
      (in thousands of U.S. Dollars)
            
            
            
            
            
            
            
            
            $ 268,322





(1)
            Under
      our exploration contract we have the right to sell the oil and natural gas
      we produce while we undertake exploration stage activities within our
      licensed territory.   As discussed in more detail in “Risk
      Factors” and “Properties” we have the right to engage in exploration stage
      activities until January 9, 2013.  To retain our rights to
      produce and sell oil and natural gas after that date, we must apply for
      and be granted commercial production rights by no later than January 2013
      or obtain a further extension of our exploration contract.  If
      we are not granted commercial production rights or another extension by
      that time, we would expect to lose our rights to the licensed territory
      and would expect to be unable to produce reserves after January
      2013.


(2)
            Proved
      developed reserves are proved reserves that are expected to be recovered
      from existing wells with existing equipment and operating
      methods.


(3)
            Proved
      undeveloped reserves are proved reserves which are expected to be
      recovered from new wells on undrilled acreage or from existing wells where
      a relatively major expenditure is required for
    recompletion.


(4)
            Includes
      natural gas liquids.


(5)
            The
      standardized measure of discounted future net cash flows represents the
      present value of future net cash flow net of all
  taxes.





As of
March 31, 2010 our estimated proved reserves had a pre-tax PV10 value of
approximately $422.1 million and a standardized measure of discounted future
cash flows of approximately $268.3 million.





The
following table summarizes our total net proved reserves, pre-tax PV10 value and
Standardized Measure of Discounted Future Net Cash Flows as of March 31,
2010.





Oil
              (Bbl)
            
            Pre-Tax
      PV10 Value
            
            Standardized
      Measure of Discounted Future
              Net
      Cash FlowsOil
      and condensate (MBbls)(4)
            22,726
            
            $
      422,121
            
            $
      268,322Natural
      gas (MMcf)
            -
            
            -
            
            -Total
      BOE (MBbls)
            22,726
            
            $
      422,121
            
            $
      268,322





Proved
Undeveloped Reserves





Our reserve estimates
as of March 31, 2010 and 2009 include 2.6 million BOE as proved undeveloped
reserves, respectively. There were no changes in proved undeveloped
reserves during the year ended March 31, 2010. We did not incur capital
expenditures for conversion of proved undeveloped reserves to proved developed
reserves as of year ended March 31, 2010.










Internal
Controls Over Reserves Estimates.





We
engaged Chapman Petroleum Engineering, Ltd. (“Chapman”), to estimate our net
proved reserves, projected future production and the standardized measure of
discounted future net cash flows as of March 31, 2010.  Chapman’s
estimates are based upon a review of production histories and other geologic,
economic, ownership and engineering data provided by us.  Chapman has
independently evaluated our reserves for the past several years.  In
estimating the reserve quantities that are economically recoverable, Chapman
used oil and natural gas prices in effect as of March 31, 2010 without giving
effect to hedging activities.  In accordance with requirements of the
Securities and Exchange Commission (the “SEC”) regulations, no price or cost
escalation or reduction was considered by Chapman.  Our reserves
estimates are reviewed and approved by our Chief Executive Officer and our
President.  Our Chief Financial Officer reviews the reserves estimates
to assure compliance with SEC reporting requirements.  A letter which
identifies the professional qualifications of the individual who was responsible
for overseeing the preparation of our reserve estimates as of March 31, 2010 has
been filed as Exhibit 99.1 to this report.





Cost
Information





Estimated Costs Related to
Conversion of Proved Undeveloped Reserves to Proved Developed
Reserves





The
following table indicates projected reserves that we currently estimate will be
converted from proved undeveloped or proved developed non-producing to proved
developed, as well as the estimated costs per year involved in such
development.





Year
            
            Total
      BOE
            
            Estimated
              Development
      Costs2011
            
            3,074,000
            
            1,170,0002012
            
            1,175,000
            
            600,0002013
            
            6,868,000
            
            1,720,0002014
            
            -
            
            -2015
            
            -
            
            -





Our
average daily production for the month of March 31, 2010, was 2,685 Boe per
day.





The
reserve data set forth herein represents estimates only.  Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact manner.  The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment.  As a
result, estimates made by different engineers often vary.  In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of such estimates, and such revisions may be
material.  Accordingly, reserve estimates are generally different from
the quantities of oil and natural gas that are ultimately
recovered.  Furthermore, the estimated future net revenue from proved
reserves and the present value thereof are based upon certain assumptions,
including current prices, production levels and costs that may vary from what is
actually incurred or realized.










No estimates of proved reserves
comparable to those included herein have been included in reports to any federal
agency other than the SEC.





In accordance with SEC regulations, the
Chapman Report used oil and natural gas average prices in effect during the year
ended March 31, 2010.  The prices used in calculating the standardized
measure of discounted future net cash flows attributable to proved reserves do
not necessarily reflect market prices for oil and natural gas production
subsequent to March 31, 2010.  There can be no assurance that all of
the proved reserves will be produced and sold within the periods indicated, that
the assumed prices will actually be realized for such production or that
existing contracts will be honored or judicially enforced.





Capitalized
Costs





Capitalized costs and accumulated
depletion, depreciation and amortization relating to our oil and natural gas
producing activities, all of which are conducted in the Republic of Kazakhstan,
are summarized below:





As
      of March 31, 2010
            
            As
      of March 31, 2009Developed
      oil and natural gas properties
            $
      246,979,803
            
            $
      221,374,856Unevaluated
      oil and natural gas properties
            25,924,087
            
            40,580,015Accumulated
      depletion, depreciation andamortization
            (34,302,048)
            
            (23,226,458)Net
      capitalized cost
            $
      238,601,842
            
            $
      238,728,413





Exploration, Development and
Acquisition Capital Expenditures





The following table sets forth certain
information regarding the total costs incurred associated with exploration,
development and acquisition activities.





For
      the year ended March 31, 2010
            
            For
      the year ended March 31, 2009
            
            For
      the year ended March 31, 2008Acquisition
      costs:Unproved
      properties
            $                    -
            
            $                    -
            
            $                    -Proved
      properties
            -
            
            -
            
            -Exploration
      costs
            -
            
            2,275,021
            
            3,024,386Development
      costs
            10,949,019
            
            63,727,311
            
            83,950,096Subtotal
            10,949,019
            
            66,002,332
            
            86,974,482Asset
      retirement costs
            -
            
            86,438
            
            1,300,576Total
      costs incurred
            $
      10,949,019
            
            $
      66,088,770
            
            $
      88,275,058










Oil
and Natural Gas Volumes, Prices and Operating Expense





The following table sets forth certain
information regarding production volumes, average sales price and average
operating expense associated with our sale of oil and natural gas for the
periods indicated.





For
      the Year Ended
              March
      31, 2010
            
            For
      the Year Ended
              March
      31, 2009
            
            For
      the Year Ended
              March
      31, 2008Production:Oil
      and condensate (Bbls)
            1,016,221
            
            1,080,895
            
            907,823Natural
      gas liquids (Bbls)
            -
            
            -
            
            -Natural
      gas (Mcf)
            -
            
            -
            
            -Barrels
      of oil equivalent (BOE)
            1,016,221
            
            1,080,895
            
            907,823Sales(1)(3):Oil
      and condensate (Bbls)
            1,036,070
            
            1,073,754
            
            896,256Natural
      gas liquids (Bbls)
            -
            
            -
            
            -Natural
      gas (Mcf)
            -
            
            -
            
            -Barrels
      of oil equivalent (BOE)
            1,036,070
            
            1,073,754
            
            896,256Average Sales Price(1):Oil
      and condensate ($ per Bbl)
            $  55.28
            
            $  64.84
            
            $  67.16Natural
      gas liquids ($ per Bbl)
            $          -
            
            $          -
            
            $          -Natural
      gas ($ per Mcf)
            $          -
            
            $          -
            
            $          -Barrels
      of Oil equivalent ($ per BOE)
            $  55.28
            
            $  64.84
            
            $  67.16Average
      oil and natural gas operating expenses
              including
      production and ad valorem taxes
              ($
      per BOE)(2)(3)
            $  8.27
            
            $
      7.01
            
            $
      6.15





(1)
            During
      the years ended March 31, 2010, 2009 and 2008, the Company has not engaged
      in any hedging activities, including
  derivatives.


(2)
            Includes
      transportation cost, production cost and ad valorem taxes (except for rent
      export tax).


(3)
            We
      use sales volume rather than production volume for calculation of per unit
      cost because not all volume produced is sold during the
      period.  The related production costs were expensed only for the
      units sold, not produced based on a matching principle of
      accounting.  Therefore, oil and gas operating expense per BOE
      was calculated by dividing oil and gas operating expenses for the year by
      the volume of oil sold during the
year.




Office
Facilities





Our principal executive and corporate
offices are located in an office building located at 202 Dostyk Avenue, in
Almaty, Kazakhstan.  We lease this space and believe it is sufficient
to meet our needs for the foreseeable future.





We also maintain an administrative
office in Salt Lake City, Utah. The address is 324 South 400 West, Suite 225,
Salt Lake City, Utah 84101, USA.





Item
3.   Legal Proceedings





See Note
23“Commitments and
Contingencies” to the notes to the consolidated financial
statements under Part II – Item 8 of this report.




Item
4.  [Removed and Reserved]
  33






PART
II




Item 5.   Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities




Our
common stock is traded on the NYSE Amex under the symbol “KAZ.” Our shares
are also traded on XETRA , the Deutsche Borse electronic trading
system under SE code DL-,001 DMW US09656A1051.





The
following table presents the high and low sales price for the fiscal year ended
March 31, 2010 and March 31, 2009, as reported by the NYSE Amex.





Fiscal
      year ended March 31, 2010
            
            High
            
            LowFourth
      quarter
            
            $
      1.45
            
            $
      0.94Third
      quarter
            
            $
      1.31
            
            $
      0.88Second
      quarter
            
            $
      1.14
            
            $
      0.78First
      quarter
            
            $
      1.79
            
            $
      0.56Fiscal
      year ended March 31, 2009Fourth
      quarter
            
            $
      1.90
            
            $
      0.36Third
      quarter
            
            $
      3.54
            
            $
      0.80Second
      quarter
            
            $
      6.00
            
            $
      2.96First
      quarter
            
            $
      7.88
            
            $
      5.26





Holders





As of
June 2, 2010, we had approximately 366 shareholders of record holding 51,865,015
shares of our common stock.  The number of record holders was
determined from the records of our stock transfer agent and does not include
beneficial owners of common stock whose shares are held in the names of various
security brokers, dealers, and registered clearing agencies.





Dividends





We have not declared or paid a cash
dividend on our common stock during the past two fiscal years.  Our
ability to pay dividends is subject to limitations imposed by Nevada
law.  Under Nevada law, dividends may be paid to the extent that a
corporation’s assets exceed it liabilities and it is able to pay its debts as
they become due in the usual course of business.At the present time, our
board of directors does not anticipate paying any dividends in the foreseeable
future; rather, the board of directors intends to retain earnings that could be
distributed, if any, to fund operations and develop our business.





Performance
Graph





We are a smaller reporting company, as
defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, and
accordingly are not required to provide this information.










Recent
Sales of Unregistered Securities





On
January 1, 2010, we granted, subject to certain vesting requirements, restricted
stock awards to certain executive officers, directors, employees and outside
consultants of the Company pursuant to the BMB Munai, Inc. 2004 Stock Incentive
Plan (the “2004 Plan.”)  The total number of shares granted was
1,500,000.  The restricted stock grants were valued at $1.14 per
share, the closing price of our common stock on the date of grant.





Grants were made to 15 people, 13 of
whom are non-U.S. persons.  The restricted stock grants were made
without registration pursuant to Regulation S of the Securities Act Rules and/or
Section 4(2) under the Securities Act of 1933. Among
the parties receiving restricted stock grants were the following:


Name
              
              Position
      with Company
              
              Restricted
      Stock GrantedBoris
      Cherdabayev
              
              Chairman
      of the Board of Directors
              
              280,000Gamal
      Kulumbetov
              
              Chief
      Executive Officer
              
              80,000Askar
      Tashtitov
              
              President
              
              230,000Toleush
      Tolmakov
              
              Director
      Emir Oil LLP
              
              215,000Evgeny
      Ler
              
              Chief
      Financial Officer
              
              110,000Anuarbek
      Baimoldin
              
              Chief
      Operating Officer
              
              20,000


All of the restricted stock grants were
awarded on the same terms and subject to the same vesting
requirements.  The restricted stock grants will vest to the grantees
at such time as either of the following events occurs (the “Vesting Events”): i)
the one-year anniversary of the grant date; or ii) the occurrence of an
Extraordinary Event.  An “Extraordinary Event” is defined in the
restricted stock agreement as any consolidation or merger of the Company or any
of its subsidiaries with another person, or any acquisition of the Company or
any of its subsidiaries by any person or group of persons, acting in concert,
equal to fifty percent (50%) or more of the outstanding stock of the Employer or
any of its subsidiaries, or the sale of forty percent (40%) or more of the
assets of the Employer or any of its subsidiaries, or one (1) person or more
than one person acting as a group, acquires fifty percent (50%) or more of the
total voting power of the stock of the Employer.  In the event of an
Extraordinary Event, the grants shall be deemed full vested one day prior to the
effective date of the Extraordinary Event.  The Board of Directors
shall determine conclusively whether or not an Extraordinary Event has occurred
and the grantees have agreed to be bound by the determination of the Board of
Directors.





Issuer
Purchases of Equity Securities





We did
not repurchase any equity securities of the Company during the quarter ended
March 31, 2010.












Item
6. Selected Financial Data





The selected consolidated financial
information set forth below is derived from our consolidated balance sheets and
statements of operations as of and for the years ended March 31, 2010, 2009,
2008, 2007 and 2006. The data set forth below should be read in conjunction with
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated
financial statements and related notes thereto included in
this report.




For
      the year ended March 31,2010
              
              2009
              
              2008
              
              2007
              
              2006Consolidated
      Statements of Operations Data:Revenues
              $
      57,274,526
              
              $
      69,616,875
              
              $
      60,196,626
              
              $
      15,785,784
              
              $  5,956,731Oil
      and gas operating expenses
              8,568,453
              
              7,530,653
              
              5,515,403
              
              2,272,251
              
              875,319General
      and administrative expenses
              14,042,577
              
              22,262,248
              
              14,747,754
              
              10,757,727
              
              9,724,597Depletion
              11,075,590
              
              10,403,328
              
              9,419,655
              
              2,006,834
              
              1,167,235Income/(loss)
      from operations
              7,888,299
              
              11,595,582
              
              30,020,087
              
              404,843
              
              (5,949,170)Net
      income/(loss)
              8,993,473
              
              17,157,558
              
              31,310,564
              
              2,188,100
              
              (6,192,943)Basic
      income/(loss) per common share
              $
      0.18
              
              $
      0.37
              
              $
      0.70
              
              $
      0.05
              
              $
      (0.18)Diluted
      income/(loss) per common share
              $
      0.18
              
              $
      0.37
              
              $
      0.70
              
              $
      0.05
              
              $
      (0.18)As
      of March 31,2010
              
              2009
              
              2008
              
              2007
              
              2006Balance
      Sheet Data:Current
      assets
              $
      16,947,713
              
              $
      12,891,196
              
              $
      26,519,810
              
              $
      18,276,626
              
              $
      57,336,327Oil
      and gas properties, full cost method, net
              238,601,842
              
              238,728,413
              
              183,042,971
              
              104,187,568
              
              67,497,230Total
      assets
              291,880,018
              
              288,346,061
              
              254,838,093
              
              144,796,045
              
              127,396,589Total
      current liabilities
              9,392,879
              
              24,109,901
              
              23,225,460
              
              9,120,299
              
              4,623,975Total
      long term liabilities
              72,224,647
              
              72,111,959
              
              71,808,702
              
              9,814,127
              
              8,992,420Total
      Shareholders' equity
              $
      210,262,492
              
              $
      192,124,201
              
              $
      159,803,931
              
              $
      125,861,619
              
              $
      113,780,194










Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations




This discussion summarizes the
significant factors affecting our consolidated operating results, financial
condition, liquidity and capital resources during the fiscal years ended March
31, 2010, 2009 and 2008.  This discussion should be read in
conjunction with the consolidated financial statements and footnotes to the
consolidated financial statements included in this report.





Results
of Operations





This section includes a discussion of
our results of operations for the fiscal years ended March 31, 2010, 2009 and
2008.  The following table sets forth selected operating data for the
fiscal years indicated:





For
      the year ended
              March
      31, 2010
            
            For
      the year ended
              March
      31, 2009
            
            For
      the year ended
              March
      31, 2008Revenues:Oil
      and gas sales
            
            $
      57,274,526
            
            $
      69,616,875
            
            $
      60,196,626Expenses:Rent
      export tax
            
            10,032,857
            
            467,359
            
            -Export
      duty
            
            -
            
            6,783,278
            
            -Oil
      and gas operating(1)
            
            8,568,453
            
            7,530,653
            
            5,515,403Depletion
            
            11,075,590
            
            10,403,328
            
            9,419,655Interest
      expense
            
            4,604,446
            
            1,138,874
            
            -Depreciation
      and amortization
            
            613,953
            
            324,028
            
            239,155Accretion
            
            448,351
            
            449,025
            
            254,572General
      and administrative
            
            14,042,577
            
            22,262,248
            
            14,747,754Net
      Production Data:Oil
      (Bbls)
            
            1,016,221
            
            1,080,895
            
            907,823Natural
      gas (Mcf)
            
            -
            
            -
            
            -Barrels
      of Oil equivalent (BOE)
            
            1,016,221
            
            1,080,895
            
            907,823Net
      Sales Data(3):Oil
      (per Bbl)
            
            1,036,070
            
            1,073,754
            
            896,256Natural
      gas (Mcf)
            
            -
            
            -
            
            -Barrels
      of Oil equivalent
            
            1,036,070
            
            1,073,754
            
            896,256Average
      Sales Price:Oil
      (per Bbl)
            
            55.28
            
            64.84
            
            67.16Natural
      gas (per Mcf)
            
            -
            
            -
            
            -Equivalent
      price (per BOE)
            
            55.28
            
            64.84
            
            67.16Expenses
      ($ per BOE)
      (3):Oil
      and gas operating(1)
            
            8.27
            
            7.01
            
            6.15Depreciation,
      depletion andamortization(2)
            
            10.69
            
            9.69
            
            10.51


(1)
            Includes
      transportation cost, production cost and ad valorem taxes (excluding rent
      export tax).


(2)
            Represents
      depletion of oil and gas properties
only.


(3)
            We
      use sales volume rather than production volume for calculation of per unit
      cost because not all volume produced is sold during the
      period.  The related production costs are expensed only for the
      units sold, not produced, based on a matching principle of
      accounting.  Oil and gas operating expense per BOE is calculated
      by dividing oil and gas operating expenses for the year by the volume of
      oil sold during the year.












Year
ended March 31, 2010 compared to the year ended March 31, 2009.





Revenue
and Production





The following table summarizes
production volumes, average sales prices and operating revenue for our oil and
natural gas operations for the year ended March 31, 2010 and the year ended
March 31, 2009.





Year
      ended
              March
      31, 2010
              to
      the year ended
              March
      31, 2009For
      the year
            
            For
      the year
            
            $
            
            %Ended
            
            ended
            
            Increase
            
            IncreaseMarch
      31,2010
            
            March
      31, 2009
            
            (Decrease)
            
            (Decrease)Production
      volumes:Natural
      gas (Mcf)
            -
            
            -
            
            -
            
            -Natural
      gas liquids (Bbls)
            -
            
            -
            
            -
            
            -Oil
      and condensate (Bbls)
            1,016,221
            
            1,080,895
            
            (64,674)
            
            (6%)Barrels
      of Oil equivalent (BOE)
            1,016,221
            
            1,080,895
            
            (64,674)
            
            (6%)Sales
      volumes:Natural
      gas (Mcf)
            -
            
            -
            
            -
            
            -Natural
      gas liquids (Bbls)
            -
            
            -
            
            -
            
            -Oil
      and condensate (Bbls)
            1,036,070
            
            1,073,754
            
            (37,684)
            
            (4%)Barrels
      of Oil equivalent (BOE)
            1,036,070
            
            1,073,754
            
            (37,684)
            
            (4%)Average Sales Price(1)Natural
      gas ($ per Mcf)
            -
            
            -
            
            -
            
            -Natural
      gas liquids ($ per Bbl)
            -
            
            -
            
            -
            
            -Oil
      and condensate ($ per Bbl)
            $
      55.28
            
            $
      64.84
            
            $
      (9.56)
            
            (15%)Barrels
      of Oil equivalent($
      per BOE)
            $
      55.28
            
            $
      64.84
            
            $
      (9.56)
            
            (15%)Operating
      Revenue:Natural
      gas
            -
            
            -
            
            -
            
            -Natural
      gas liquids
            -
            
            -
            
            -
            
            -Oil
      and condensate
            $
      57,274,526
            
            $
      69,616,875
            
            $ (12,342,349)
            
            (18%)Gain
      on hedging and derivatives(2)
            -
            
            -
            
            -
            
            -





(1)
            At
      times, we may produce more barrels than we sell in a given period. The
      average sales price is calculated based on the average sales price per
      barrel sold, not per barrel
produced.


(2)
            We
      did not engage in hedging transactions, including derivatives, during the
      year ended March 31, 2010 or the year ended March 31,
  2009.












Revenue. We generate revenue
under our exploration contract from the sale of oil recovered during test
production. During the year ended March 31, 2010 our oil production decreased 6%
compared to the year ended March 31, 2009.





During the year ended March 31, 2010 we
realized revenue from oil sales of $57,274,526 compared to $69,616,875 during
the year ended March 31, 2009.   The largest contributing factor
to the 18% decrease in revenue was a 15% decrease in the price per barrel we
received for oil sales during the year ended March 31, 2010 compared to the
fiscal year ended March 31, 2009. During the fiscal years ended March 31, 2010
and 2009 we exported 95% and 81% of our oil, respectively, to the world markets
and realized the world market price for those sales.  Revenue from oil
sold to the world markets made up 98% and 94% of total revenue, respectively,
during the years ended March 31, 2010 and 2009. Revenue also decreased as a
result of a 6% decrease in production during the 2010 fiscal year.





As
discussed above, our revenue is sensitive to changes in prices received for our
oil.  Political instability, the economy, changes in legislation and
taxation, reductions in the amount of oil we are allowed to export to the world
markets, weather and other factors outside our control may also have an impact
on both supply and demand and on revenue.





Costs
and Operating Expenses




The
following table presents details of our expenses for the years ended March 31,
2010 and 2009:





For
      the year ended
              March
      31, 2010
            
            For
      the year ended
              March
      31, 2009Expenses:Rent
      export tax
            $ 10,032,857
            
            $
      467,359Export
      duty
            -
            
            6,783,278Oil
      and gas operating(1)
            8,568,453
            
            7,530,653General
      and administrative
            14,042,577
            
            22,262,248Depletion
            11,075,590
            
            10,403,328Interest
      expense
            4,604,446
            
            1,138,874Accretion
      expenses
            448,351
            
            449,025Amortization
      and depreciation
            613,953
            
            324,028Consulting
      expenses
            -
            
            8,662,500Total
            $
      49,386,227
            
            $
      58,021,293Expenses
      ($ per BOE):Oil
      and gas operating(1)
            $
      8.27
            
            $
      7.01Depletion
      (2)
            $
      10.69
            
            $
      9.69











(1)
            Includes
      transportation cost, production cost and ad valorem taxes (excluding rent
      export tax).


(2)
            Represents
      depletion of oil and gas properties
only.





Rent export tax. Rent export
tax is calculated based on the export sales price and ranges from as low as 0%
if the export sales price is less than $40 per barrel to as high as 32% if the
price per barrel exceeds $190. During the year ended March 31, 2010 rent
export tax paid to the government amounted to $10,032,857 compared to $467,359
for the year ended March 31, 2009.  This increase was due to increased
realized price for oil during the fiscal year ended 2010, and the fact that we
were not subject to rent export tax during the first three fiscal quarters of
the year ended March 31, 2009.












Export Duty.On
April 18, 2008 the government of the Republic of Kazakhstan introduced an export
duty on several products (including crude oil).  We became subject to
the duty in June 2008.  In December 2008 the government of the
Republic of Kazakhstan repealed the export duty effective January 26,
2009.  We are now subject to a new tax code that went into effect on
January 1, 2009, as discussed in more detail below.  As a result of
the export duty being repealed, we paid no export duty during the year ended
March 31, 2010 compared to $6,783,278 during year ended March 31,
2009.  Export duty was not recorded as part of oil and gas operating
expense and was not included in oil and gas operating expense per BOE
calculation.





Oil and Gas Operating
Expenses.  During the year ended March 31, 2010 we incurred
$8,568,453 in oil and gas operating expenses compared to $7,530,653 during the
year ended March 31, 2009. This increase is primarily the result of increased
production and transportation expense.





Oil and
gas operating expenses for the year ended March 31, 2010 and 2009 consist of the
following expenses:





For
      the year ended March 31,2010
            
            2009Total
            
            Per
      BOE
            
            Total
            
            Per
      BOEOil
      and Gas Operating Expenses:Production
            $
      1,635,039
            
            $
      1.58
            
            $
      808,663
            
            $
      0.75Transportation
            3,423,803
            
            3.30
            
            4,462,883
            
            4.16Royalty
            -
            
            -
            
            1,744,075
            
            1.62Mineral
      extraction tax
            3,509,611
            
            3.39
            
            515,032
            
            0.48Total
            $
      8,568,453
            
            $
      8.27
            
            $
      7,530,653
            
            $
      7.01





The 102%
increase in production expense during the year ended March 31, 2010 was due to
the purchase of light crude oil for blending purposes from a third party in the
amount of $877,603.





Transportation
expenses decreased $1,039,080 or 23% as a result of the decreased volume of oil
we produced and transported, as well as the consequences of a cost-cutting
policy implemented by the Company.  We anticipate transportation
expenses will continue to fluctuate in proportion to production
volume.





The
mineral extraction tax replaced the royalty we were paying under prior tax code.
The rate of this tax depends on annual production output. The new code currently
provides for a 5% mineral extraction tax rate (6% starting from 2013 and 7%
starting from 2014) on production sold to the export market, and a 2.5% tax rate
(3% in 2013 and 3.5% starting from 2014) on production sold to the domestic
market. The mineral extraction tax expense is reported as part of oil and gas
operating expense.












During
the year ended March 31, 2010 mineral extraction tax paid to the government
amounted to $3,509,611, which presents increase of 581% compared to $515,032
paid during the fiscal year ended March 31, 2009.  The increase was
due to the fact that we were not subject to the mineral extraction tax during
the first three fiscal quarters of the year ended March 31, 2009.





We
calculate oil and gas operating expense per BOE based on the volume of oil
actually sold rather than production volume because not all volume produced
during the period is sold during the period.  The related production
costs are expensed only for the units sold, not produced.  Expense per
BOE is a function of total expense divided by the number of barrels of oil we
sell.  During the year ended March 31, 2009 we sold 1,073,754 barrels
of oil, during the year ended March 31, 2010 we sold 1,036,070 barrels of oil.
The 4% decrease in sales volume coupled with the 14% increase in oil and gas
operating expenses resulted in a $1.26, or 18%, increase in oil and gas
operating expense per BOE.





General and Administrative
Expenses.  General and administrative expenses during the year
ended March 31, 2010 were $14,042,577 compared to $22,262,248 during the year
ended March 31, 2009.  This represents a 37% decrease.  This
decrease in general and administrative expenses was the result of:





•
            a
      57% decrease in non-cash compensation expense as the price for our stock
      declined and the non-cash compensation expense we incurred decreased
      significantly;•
            a
      53% decrease in professional services resulting from decreased legal fees
      incurred in our ongoing litigation as we changed the legal firm providing
      those services and decreased audit consulting expenses;•
            a
      27% decrease in business trip and related transportation
      expenses;•
            an
      11% decrease in payroll expenses;•
            a
      68% decrease in environmental payments for flaring of unused natural gas
      resulting from production, such decrease in the amount of environmental
      payments totaling $208,087 and $652,026 during the year ended March 31,
      2010 and 2009, respectively; and•
            a
      27% decrease in rent expenses.





During
the year ended March 31, 2010 we recognized non-cash compensation expense in the
amount of $3,171,633 resulting from restricted stock grants previously made to
executive officers, directors, employees and outside consultants of the Company.
By comparison, during the year ended March 31, 2009 we recognized non-cash
compensation expense in the amount of $7,450,211 for restricted stock grants
previously made to employees and outside consultants.





Depletion.  Depletion
expense for the year ended March 31, 2010 increased by $672,262 compared to the
year ended March 31, 2009. The increase in depletion expense was attributable to
the fact that we continued workover on existing wells and developed additional
infrastructure during fiscal year 2010.





Amortization and
Depreciation.  Amortization and depreciation expense for the
year ended March 31, 2010 increased 89% compared to the year ended March 31,
2009.  The increase resulted from purchases of fixed assets during the
2010 fiscal year.












Interest
Expense.  During the year ended March 31, 2010 we incurred
interest expense of $4,604,446 compared to interest expense of $1,138,874 during
the same period of 2009.  We have not drilled any new wells since the
end of the 2009 calendar year; therefore, all interest expense incurred in
connection with our convertible notes since that time has been
expensed.


Income from
Operations.  During the year ended March 31, 2010 we realized
income from operations of $7,888,299 compared to income from operations of
$11,595,582 during the year ended March 31, 2009.  This decrease in
income from operations during fiscal 2010 is primarily the result of the 18%
decrease in revenue recognized during fiscal 2010, which was only partially
offset by the 15% decrease in our total costs and operating
expenses.





Other
Expense.  During the fiscal year ended March 31, 2010 we
incurred total other expense of $446,888 compared to total other income of
$4,533,704 during the fiscal year ended March 31, 2009.  This change
from income to expense is largely attributable to:





•
            a
      $353,401 foreign exchange loss resulting from the strengthening of the
      Kazakh Tenge against the U.S. Dollar during the year ended March 31, 2010
      compared with the foreign exchange gain in the amount $2,592,341 realized
      in year ended March 31, 2009;•
            the
      receipt of a one-time payment for disgorgement of funds received of
      $1,650,293 during the 2009 fiscal year, earned in violation of the
      short-swing profit rules of Section 16(b) of the Securities Exchange Act
      of 1934;•
            a  $116,087
      decrease in interest income;  and•
            a
      $268,470 increase in other expense during the fiscal year ended March 31,
      2010 compared the fiscal year ended March 31,
  2009.




Net Income.  For
the foregoing reasons, during the year ended March 31, 2010 we realized net
income of $8,993,473 or $0.18 per share compared to net income of $17,157,558 or
$0.37 basic and diluted income per share for the fiscal year ended March 31,
2009.












Year
ended March 31, 2009 compared to the year ended March 31, 2008.





Revenue
and Production





The following table summarizes
production volumes, average sales prices and operating revenue for our oil and
natural gas operations for the year ended March 31, 2009 and the year ended
March 31, 2008.





Year
      ended
              March
      31, 2009
              to
      the year ended
              March
      31, 2008For
      the year
            
            For
      the year
            
            $
            
            %Ended
            
            ended
            
            Increase
            
            IncreaseMarch
      31,2009
            
            March
      31, 2008
            
            (Decrease)
            
            (Decrease)Production
      volumes:Natural
      gas (Mcf)
            -
            
            -
            
            -
            
            -Natural
      gas liquids (Bbls)
            -
            
            -
            
            -
            
            -Oil
      and condensate (Bbls)
            1,080,895
            
            907,823
            
            173,072
            
            19%Barrels
      of Oil equivalent (BOE)
            1,080,895
            
            907,823
            
            173,072
            
            19%Sales
      volumes:Natural
      gas (Mcf)
            -
            
            -
            
            -
            
            -Natural
      gas liquids (Bbls)
            -
            
            -
            
            -
            
            -Oil
      and condensate (Bbls)
            1,073,754
            
            896,256
            
            177,498
            
            20%Barrels
      of Oil equivalent (BOE)
            1,073,754
            
            896,256
            
            177,498
            
            20%Average Sales Price(1)Natural
      gas ($ per Mcf)
            -
            
            -
            
            -
            
            -Natural
      gas liquids ($ per Bbl)
            -
            
            -
            
            -
            
            -Oil
      and condensate ($ per Bbl)
            $
      64.84
            
            $
      67.16
            
            $
      (2.32)
            
            (3%)Barrels
      of Oil equivalent
              ($
      per BOE)
            $
      64.84
            
            $
      67.16
            
            $
      (2.32)
            
            (3%)Operating
      Revenue:Natural
      gas
            -
            
            -
            
            -
            
            -Natural
      gas liquids
            -
            
            -
            
            -
            
            -Oil
      and condensate
            $
      69,616,875
            
            $
      60,196,626
            
            $
      9,420,249
            
            16%Gain
      on hedging and derivatives(2)
            -
            
            -
            
            -
            
            -





(1)
            At
      times, we may produce more barrels than we sell in a given period. The
      average sales price is calculated based on the average sales price per
      barrel sold, not per barrel
produced.


(2)
            We
      did not engage in hedging transactions, including derivatives, during the
      year ended March 31, 2009 or the year ended March 31,
  2008.





Revenue. We generate revenue
under our exploration contract from the sale of oil recovered during test
production. During the year ended March 31, 2009 our oil production increased
19% compared to the year ended March 31, 2008.  This increase in
production is primarily attributable to the fact that we had twenty four wells
in testing or test production during all or some portion of the year ended March
31, 2009 compared to sixteen wells during all or some portion of the year ended
March 31, 2008.





During the year ended March 31, 2009 we
realized revenue from oil sales of $69,616,875 compared to $60,196,626 during
the year ended March 31, 2008.   The largest contributing factor
to the 16% increase in revenue was a 20% increase in sales volume, which was
partially offset by 3% decrease in the price per barrel we received for oil
sales during the year ended March 31, 2009 compared to the fiscal year ended
March 31, 2008. During the fiscal years ended March 31, 2009 and 2008 we
exported 81% and 91% of our oil, respectively, to the world markets and realized
the world market price for those sales.  Revenue from oil sold to the
world markets made up 94% and 96% of total revenue, respectively, during the
years ended March 31, 2009 and 2008.  We anticipate production to
remain fairly constant and currently anticipate revenues will be flat in
upcoming quarters.










As
discussed above, our revenue is sensitive to changes in prices received for our
oil.  Most of our production is currently being sold at the prevailing
world market price, which fluctuates in response to many factors that are
outside our control.  Imbalances in the supply and demand for oil can
have a dramatic effect on the price we receive for our
production.  Similarly, if we were denied an export quota, our export
quota were reduced or we were otherwise forced to sell all, or a significant
portion, of our production to the domestic market in
Kazakhstan.  Historically the price per barrel of oil we receive for
oil sold in Kazakhstan has been significantly lower than the price we realize
for oil we export.  For a period during the year, as a result of the
material decline in world oil prices and the export duty enacted by the
government, we realized greater returns by selling to the local
market.  As a result of the material drop in world oil prices our
revenue decreased significantly during the year.  Political
instability, the economy, changes in legislation and taxation, weather and other
factors outside our control may also have an impact on both supply and
demand.





Historically,
sales to the domestic market in Kazakhstan would have resulted in a significant
reduction in revenue and income from operations because the domestic market
price has been markedly lower than world oil prices. As the gap between world
oil prices and domestic prices shrank and as a result of the export duty, we
found it more financially attractive to sell our oil to the domestic market for
the period from November 2008 through January 2009.





Costs
and Operating Expenses





The following table presents details of
our expenses for the years ended March 31, 2009 and 2008:





For
      the year ended
              March
      31, 2009
            
            For
      the year ended
              March
      31, 2008Expenses:Rent
      export tax
            $
      467,359
            
            $                 -Export
      duty
            6,783,278
            
            -Oil
      and gas operating(1)
            7,530,653
            
            5,515,403General
      and administrative
            22,262,248
            
            14,747,754Depletion
            10,403,328
            
            9,419,655Interest
      expense
            1,138,874
            
            -Accretion
      expenses
            449,025
            
            254,572Amortization
      and depreciation
            324,028
            
            239,155Consulting
      expenses
            8,662,500
            
            -Total
            $
      58,021,293
            
            $
      30,176,539Expenses
      ($ per BOE):Oil
      and gas operating(1)
            7.01
            
            6.15Depletion
      (2)
            9.69
            
            10.51


(1)
            Includes
      transportation cost, production cost and ad valorem taxes (excluding rent
      export tax).


(2)
            Represents
      depletion of oil and gas properties
only.





Rent Export Tax.This tax is
calculated based on the export sales price and ranges from as low as 0% if the
export sales price is less than $40 per barrel to as high as 32% if the price
per barrel exceeds $190. During the year ended March 31, 2009 rent export
tax paid to the government amounted to $467,369.  We were not subject
to the rent export tax during the year ended March 31, 2008 or during the first
three fiscal quarters of the year ended March 31, 2009.












Export Duty.On
April 18, 2008 the government of the Republic of Kazakhstan introduced an export
duty on several products (including crude oil). We became subject to the duty in
June 2008. The export duty for year ended March 31, 2009 amounted to $6,783,278.
The formula for determining the amount of the crude oil export duty was based on
a sliding scale that was tied to the world market price for oil. The amount of
the export duty changed with fluctuations in world oil prices. Fluctuations in
the export duty, however, lagged behind fluctuations in world oil prices by
about 90 days.  In December 2008 the government of the Republic of
Kazakhstan repealed the export duty effective January 26, 2009.  We
are now subject to the new tax code that went into effect on January 1, 2009, as
discussed in more detail below.





Oil and Gas Operating
Expenses. During the year ended March 31, 2009 we incurred $7,530,653 in
oil and gas operating expenses compared to $5,515,403 during the year ended
March 31, 2008. This increase is primarily the result of several factors,
including increased production volumes, royalty payments, salary and
transportation expenses and increased repair costs.





During
the year ended March 31, 2009 royalty paid to the government increased by
$186,688 or 12% compared to the year ended March 31, 2008. While royalty
expenses increased, as a percentage of total revenue, royalty expense remained
nearly unchanged.  Royalties were replaced by a mineral extraction tax
when we became subject to the new tax code effective January 1,
2009.





Mineral Extraction Tax.This
tax replaced the royalty we were paying previously.  The rate of this
tax depends upon annual production output.  At current production
rates, we are subject to a 5% mineral extraction tax rate on production sold to
the export market and a 2.5% tax rate on production sold to domestic market. The
mineral extraction tax expense is reported as part of oil and gas operating
expense. During the year ended March 31, 2009 mineral extraction tax paid to the
government amounted to $515,032.  As noted above, we were not subject
to the mineral extraction tax during the year ended March 31, 2008 or during the
first three fiscal quarters of year ended March 31, 2009.





During
the year ended March 31, 2009 payroll and related payments to production
personnel increased $158,816 or 24% compared to the year ended March 31,
2008.  As production volume increased we retained additional
production personnel during the year ended March 31, 2009.





Transportation
expenses increased $1,154,715 or 35% as a result of the increased volume of oil
we produced and transported.  We anticipate transportation expenses
will continue to fluctuate in proportion to production volume.





We
calculate oil and gas operating expense per BOE based on the volume of oil
actually sold rather than production volume because not all volume produced
during the period is sold during the period.  The related production
costs are expensed only for the units sold, not produced.












While oil
and gas operating expenses increased 37% during the year ended March 31, 2009
compared to the year ended March 31, 2008, expense per BOE increased only 14%
from $6.15 per BOE during the year ended March 31, 2008 to $7.01 during the year
ended March 31, 2009. During the year ended March 31, 2008 we sold 896,256
barrels of oil, during the year ended March 31, 2009 we sold 1,073,754 barrels
of oil.  As expense per BOE is a function of total expense divided by
the number of barrels of oil sold, the 20% increase in sales volume more than
offset the 45% increase in expenses resulting in the 14% increase in oil and gas
operating expense per BOE.





General and Administrative
Expenses.  General and administrative expenses during the year
ended March 31, 2009 were $22,262,248 compared to $14,747,754 during the year
ended March 31, 2008.  This represents a 51% increase in general and
administrative expenses.  This increase in general and administrative
expenses was the result of several factors such as increases in non-cash
compensation expense, payroll and related costs, rent expense and professional
services.  This increase was partially offset by a $332,516, or 34%,
reduction in environmental payments for flaring of unused natural
gas.





During
the year ended March 31, 2009 we recognized non-cash compensation expense of
$7,450,211 resulting from restricted stock grants made previously to employees.
By comparison, during the year ended March 31, 2008 we recognized non-cash
compensation expense in the amount of $2,303,078 for restricted stock grants
issued to employees and outside consultants.





The increase in general and
administrative expense during the 2009 year was also attributable
to:





•
            a
      35% increase in rent expense from renting special equipment, apartments
      and additional vehicles;•
            a
      32% increase in payroll and related costs as we hired additional
      administrative personnel to fulfill business needs, increased employee pay
      rates for existing employees;•
            a
      30% increase in professional services resulting from legal fees incurred
      in our ongoing litigation.





Depletion.  Depletion
expense for the year ended March 31, 2009 increased by $983,673 compared to the
year ended March 31, 2008.  The major reason for this increase in
depletion expense was a 20% increase in sales volume in fiscal 2009 compared to
fiscal 2008.  The increase in depletion expense was also attributable
to the fact that we drilled additional wells, continued workover on existing
wells and developed additional infrastructure during fiscal year
2009.





Depreciation and
Amortization.  Depreciation and amortization expense for the
year ended March 31, 2009 increased 35% compared to the year ended March 31,
2008.  The increase resulted from purchases of fixed assets during the
year.





Consulting
Expense.   In November 2007 we retained a consultant to
assist us in negotiating an extension of the exploration period of our contract
and with potential acquisitions.  On June 24, 2008, we were granted an
extension of our existing exploration contract from July 2009 to January
2013.  Compensation expense for consulting services was recorded in
the amount of $11,727,500, which included $1,000,000 paid upon the execution of
consulting agreement and non-cash share-based compensation in the amount of
$10,727,500 as the success fee for the extension of time period for exploration.
The share-based compensation represents 1,750,000 (500,000 shares for each
additional year of the extension of exploration status) valued at $6.13 per
share which was the closing market price of our common shares on June 24,
2008.










On
September 16, 2008 this consulting agreement was revised and the parties agreed
to decrease the number of shares issued for services provided by 500,000 shares.
The non-cash compensation expenses for consulting services were reversed in the
amount of $3,065,000 (500,000 shares valued at $6.13 per share which was the
closing market price of our common shares on June 24, 2008) for the year ended
March 31, 2009.





Income from
Operations.  During the year ended March 31, 2009 we realized
income from operations of $11,595,582 compared to income from operations of
$30,020,087 during the year ended March 31, 2008.  This decrease in
income from operations during fiscal 2009 is the result of the 92% increase in
total expenses during fiscal 2009, which increase was only partially offset by a
16% increase in revenue.





Other
Income.  During the fiscal year ended March 31, 2009 we
realized total other income of $4,533,704 compared to $1,186,895 during the
fiscal year ended March 31, 2008.  This 282% increase is largely
attributable to a $2,592,341 foreign exchange gain resulting mainly from the
revaluation of accounts payable denominated in Kazakhstani tenge and $1,650,293
we received from a shareholder of the Company as disgorgement of profits earned
in violation of the short-swing profit rules of Section 16(b) of the Securities
Exchange Act of 1934.





Net Income.  For
all of the foregoing reasons, during the year ended March 31, 2009 we realized
net income of $17,157,558 or $0.37 basic and diluted income per share compared
to a net income of $31,310,564 or $0.70 basic and diluted income per share for
the year ended March 31, 2008.





Liquidity
and Capital Resources





For the
period from inception on May 6, 2003 through March 31, 2010, we have incurred
capital expenditures of $289,387,000 for exploration, development and
acquisition activities.  Funding for our activities has historically
been provided by funds raised through the sale of our common stock and debt
securities and revenue from oil sales.  From inception to March 31,
2010 we raised approximately $94.6 million through the sale of our common
stock.  Additionally, during the quarter ended December 31, 2007 we
completed the placement of $60 million in principal amount of 5.0% Convertible
Senior Notes due in 2012.  The net proceeds from the Note issuance of
approximately $56.2 million were used to pursue our drilling
program.  For additional detail regarding the Notes, including
adjustments to the initial conversion price and the registration right of the
Noteholders, see Note 11to the notes to the consolidated financial statements, March
31, 2010, included in this report..





Problems in the credit markets, the
significant declines in worldwide oil prices and volatility and downward trends
in the stock markets have caused many junior exploration and production
companies, including us, to seek additional capital in order to stay in
business.  Some companies have been acquired by larger companies and
others have failed.












At March
31, 2010, our current assets exceeded current liabilities by
$7,554,834.





In 2007 we raised $60,000,000 in
connection with the issuance of 5.0% Convertible Senior Notes due 2012 (the
“Notes”).  The terms of the original indenture governing the Notes
(the “Original Indenture”) provided for three put dates that allowed the holders
of the Notes to redeem the Notes prior to their 2012 maturity
date.  The first two put dates passed unexercised.  The
third put date is July 13, 2010.  In connection with ongoing
negotiations with the holders of the Notes to restructure the Notes, we entered
into a Supplemental Indenture which grants the Noteholders a fourth put date
that commences on June 13, 2010 and expires on September 13, 2010.  In
exchange for the granting of the fourth put date, the Noteholders separately
agreed they will not exercise their put option for the third put date and they
will not exercise their put option for the fourth put date prior to September 1,
2010; provided, however, the Noteholders may exercise such put options at any
time upon the occurrence of any of the following: (i) a
default  occurs under the Indenture, excluding certain defaults that
occurred prior to June 7, 2010, (ii) failure by us or Emir to timely pay any
Indebtedness (as defined in the Indenture) or any guarantee of any Indebtedness
that exceeds U.S. $1,000,000, or any Indebtedness becomes due and payable prior
to its stated maturity other than at our or Emir’s option, or (iii) the
Noteholders holding a majority in outstanding principal amount of the Notes
provide notice to us that negotiations with respect to restructuring the Notes
have terminated.  Therefore, it is possible the Noteholders could
exercise a put option with respect to the Notes prior to September 1, 2010 if
any of the foregoing events occur.





Prior to entering into the Supplemental
Indenture, we were in default under certain covenants contained in Article 9 of
the Indenture requiring us to maintain a minimum net debt to equity ratio and to
comply with certain notice, delivery and other provisions.  The
Noteholders separately agreed to waive these defaults until the earlier of: (i)
September 1, 2010 or (ii) the fourth put date, with the understanding that such
waiver will not constitute a waiver of any default under the Indenture that
remains ongoing as of September 1, 2010 or that occurs after June 8,
2010.  We currently believe we will not be able to remedy the default
of the net debt to equity ratio covenant by September 1, 2010 and, therefore, we
anticipate we will be in default under the Indenture at September 1, 2010 unless
a future waiver is obtained from the Noteholders.  There is no
assurance the Noteholders will provide any future waiver or any further
extension of their redemption put rights under the
Indenture.  Moreover, there is no assurance that we will be successful
in renegotiating the terms and conditions of the Notes.





If we are unable to extend the waiver
of default beyond September 1, 2010, or at any time we are in default under the
Indenture, the Noteholders have the right to accelerate the Notes and require us
to make immediate payment of all unpaid interest and principal.  As of
March 31, 2010, the outstanding balance of unpaid principal and interest under
the Notes was $62,819,786.  If the Noteholders were to accelerate the
Notes, we would have insufficient funds to pay the Notes.  We do not
anticipate obtaining sufficient funds to retire the Notes in the near
future.  If we default on the Notes, the Noteholders could seek any
legal remedies available to them to obtain repayment of the Notes, including
forcing us into bankruptcy, which would likely also result in Emir Oil being
forced into bankruptcy.  Pursuant to Kazakhstan law and the terms of
our exploration license, the government of the Republic of Kazakhstan has the
right to cancel our licenses to the ADE Block, the Southeast Block and the
Northwest Block in the event Emir Oil becomes insolvent or enters into
bankruptcy.  If such were to happen, we would be left with limited
assets, no operations and ability to generate revenue or otherwise repay the
Notes.












Cash
Flows





During
the year ended March 31, 2010 cash was primarily used to fund exploration
expenditures.  See below for additional discussion and analysis of
cash flow.





Year
      ended
            
            Year
      ended
            
            Year
      endedMarch
      31,
            
            March
      31,
            
            March
      31,2010
            
            2009
            
            2008Net
      cash provided by operating activities
            $
            14,094,980
            
            $       
      53,383,138
            
            $    
       49,981,194Net
      cash used in investing activities
            $    
      (11,410,131)
            
            $     
      (63,916,431)
            
            $  (101,454,730)Net
      cash (used in)/provided by financing activities
            $      
      (3,000,000)
            
            $        
          50,001
            
            $    
      56,539,433NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            $      
      (315,151)
            
            $ 
      (10,483,292)
            
            $
         5,065,897





Our
principal source of liquidity during the year ended March 31, 2010 was cash and
cash equivalents.  At March 31, 2009 cash and cash equivalents totaled
approximately $6.8 million. At March 31, 2010 cash and cash equivalents had
decreased to approximately $6.4 million. During the year ended March 31, 2010 we
spent approximately $11.4 million to fund our exploration and development
activities.





Certain
operating cash flows are denominated in local currency and are translated into
U.S. dollars at the exchange rate in effect at the time of the transaction.
Because of the potential for civil unrest, war and asset expropriation, some or
all of these matters, which impact operating cash flow, may affect our ability
to meet our short-term cash needs.





Contractual
Obligations and Contingencies





The
following table lists our significant commitments at March 31, 2010, excluding
current liabilities as listed on our consolidated balance sheet:





Payments
      Due By PeriodContractual
      obligations
            Total
            Less
      than 1 year
            2-3
      years
            4-5
      years
            After
      5 yearsCapital
      ExpenditureCommitment(1)
            $  54,973,000
            $  19,618,000
            $  35,355,000
            $   -
            $   -Due
      to the Government of
              the
      Republic of Kazakhstan(2)
            17,141,956
            250,000
            592,924
            3,343,391
            12,955,641Liquidation
      Fund
            4,712,345
            -
            4,712,345
            -
            -Convertible
      Notes with Interest(3)
            71,823,785
            3,000,000
            68,823,785
            -
            -Total
            $  148,651,086
            $  22,868,000
            $  109,484,054
            $  3,343,391
            $ 
  12,955,641












(1)
            Under
      the terms of our subsurface exploration contract we are required to spend
      a total of $55 million in exploration activities on our properties,
      including a minimum of $12.8 million by January 2011, $27.3 million by
      January 2012 and $14.9 million by January 2013.  The rules of
      the MOG provide a process whereby capital expenditures in excess of the
      minimum required expenditure in any period may be carried forward to meet
      the minimum obligations of future periods.  Our capital
      expenditures in prior periods have exceeded our minimum required
      expenditures by more than $200
million.


(2)
            In
      connection with our acquisition of the oil and gas contract covering the
      ADE Block, the Southeast Block and the Northwest Block, we are required to
      repay the ROK for historical costs incurred by it in undertaking
      geological and geophysical studies and infrastructure
      improvements.  Our repayment obligation for the ADE Block is
      $5,994,200, for the Southeast Block is $5,350,680 and our repayment
      obligation for the Northwest Block is $5,372,076.  The terms of
      repayment of these obligations, however, will not be determined until such
      time as we apply for and are granted commercial production rights by the
      ROK.  Should we decide not to pursue commercial production
      rights, we can relinquish the ADE Block, the Southeast Block and/or the
      Northwest Block to the ROK in satisfaction of their associated
      obligations. The recent addenda to our exploration contract which granted
      us with the extension of exploration period and the rights to the
      Northwest Block also require us to:


·
            make
      additional payments to the liquidation fund, stipulated by the
      Contract;


·
            make
      a one-time payment in the amount of $200,000 to the Astana Fund by the end
      of 2010; and


·
            make
      annual payments to social projects of the Mangistau Oblast in the amount
      of $100,000 from 2010 to 2012.


(3)
            On
      July 16, 2007 the Company completed the private placement of $60 million
      in principal amount of 5.0% convertible senior notes due 2012 (“Notes”).
      The Notes carry a 5% coupon and have a yield to maturity of
      6.25%.  Interest will be paid at a rate of 5.0% per annum on the
      principal amount, payable semiannually.  The Notes are callable
      and subject to early redemption in July 2010.  Unless previously
      redeemed, converted or purchased and cancelled, the Notes will be redeemed
      by the Company at a price equal to 107.2% of the principal amount thereof
      on July 13, 2012. The Notes constitute direct, unsubordinated and
      unsecured, interest bearing obligations of the Company.  For
      additional details regarding the terms of the Notes, see Note 11 –Convertible Notes
      Payable to the notes to our consolidated financial
      statements.





Off-Balance Sheet
Financing Arrangements





As of
March 31, 2010, we had no off-balance sheet financing arrangements.





Critical
Accounting Policies





We have
identified the accounting policies below as critical to our business operations
and an understanding of our financial statements.  The impact of these
policies and associated risks are discussed throughout Management’s Discussion
and Analysis where such policies affect our reported and expected financial
results.  A complete discussion of our accounting policies is included
in Note 2 of the notes to consolidated financial statements.





Foreign Exchange
Transactions





Transactions
denominated in foreign currencies are reported at the rates of exchange
prevailing at the date of the transaction.  Monetary assets and
liabilities denominated in foreign currencies are translated to United States
Dollars at the rates of exchange prevailing at the balance sheet
dates.  Any gains or losses arising from a change in exchange rates
subsequent to the date of the transaction are included as an exchange gain or
loss in the Consolidated Statements of Operations.












Share-Based
Compensation





We  account
for options granted to non-employees at their fair value in accordance with FASC
Topic 718.  Under FASC Topic 718, share-based compensation is
determined as the fair value of the equity instruments issued.  The
measurement date for these issuances is the earlier of the date at which a
commitment for performance by the recipient to earn the equity instruments is
reached or the date at which the recipient’s performance is
complete.  Stock options granted to the “selling agents” in private
equity placement transactions have been offset against the proceeds as a cost of
capital.  Stock options and stock granted to other non-employees is
recognized in the Consolidated Statements of Operations.





We have
stock option plans as described in Note 15.  Compensation expense for
options and stock granted to employees is determined based on their fair value
at the time of grant, the cost of which is recognized in the Consolidated
Statements of Operations over the vesting periods of the respective
options.





Share-based
compensation incurred for the years ended March 31, 2010, 2009 and 2008 was
$3,171,633, $7,450,211 and $2,303,078, respectively.





Full Cost Method of
Accounting





We follow
the full cost method of accounting for oil and gas properties.  Under
this method, all costs associated with acquisition, exploration and development
of oil and gas properties are capitalized.  Costs capitalized include
acquisition costs, geological and geophysical expenditures and costs of drilling
and equipping productive and non-productive wells.  Drilling costs
include directly related overhead costs.  These costs do not include
any costs related to production, general corporate overhead or similar
activities.  Under this method of accounting, the cost of both
successful and unsuccessful exploration and development activities are
capitalized as property and equipment.  Proceeds from the sale or
disposition of oil and gas properties are accounted for as a reduction to
capitalized costs unless a significant portion of our proved reserves are sold
(greater than 25 percent), in which case a gain or loss is
recognized.





Capitalized
costs less accumulated depletion and related deferred income taxes shall not
exceed an amount (the full cost ceiling) equal to the sum of:





a)
            the
      present value of estimated future net revenues computed by applying
      current prices of oil and gas reserves to estimated future production of
      proved oil and gas reserves, less estimated future expenditures (based on
      current costs) to be incurred in developing and producing the proved
      reserves computed using a discount factor of ten percent and assuming
      continuation of existing economic
conditions;


b)
            plus
      the cost of properties not being
amortized;


c)
            plus
      the lower of cost or estimated fair value of unproven properties included
      in the costs being amortized;


d)
            less
      income tax effects related to differences between the book and tax basis
      of the properties.












Given the
volatility of oil and gas prices, it is reasonably possible that the estimate of
discounted future net cash flows from proved oil and gas reserves could
change.  If oil and gas prices decline, even if only for a short
period of time, it is possible that impairment of our oil and gas properties
could occur.  In addition, it is reasonably possible that impairments
could occur if costs are incurred in excess of any increases in the cost
ceiling, revisions to proved oil and gas reserves occur or if properties are
sold for proceeds less than the discounted present value of the related proved
oil and gas reserves.





All
geological and geophysical studies, with respect to the licensed territory, have
been capitalized as part of the oil and gas properties.





Our oil
and gas properties primarily include the value of the license and other
capitalized costs.





All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves and estimated future costs to plug and abandon
wells and costs of site restoration, less the estimated salvage value of
equipment associated with the oil and gas properties, are amortized on the
unit-of-production method using estimates of proved reserves as determined by
independent engineers.





Ceiling
test





Capitalized
oil and gas properties are subject to a “ceiling test.”  The full cost
ceiling test is an impairment test prescribed by Rule 4-10 of SEC Regulation
S-X.  The test determines a limit, or ceiling, on the book value of
oil and gas properties.  That limit is basically the after tax present
value of the future net cash flows from proved crude oil and natural gas
reserves.  This ceiling is compared to the net book value of the oil
and gas properties reduced by any related deferred income tax
liability.  If the net book value reduced by the related deferred
income taxes exceeds the ceiling, impairment or non-cash write down is
required.  Ceiling test impairment can cause a significant loss for a
particular period; however, future depletion expense would be
reduced.





Recent
Accounting Pronouncements





For
details of applicable new accounting standards, please, refer to Recent accounting pronouncementsin Note 2of ourconsolidated financial
statements.





Effects
of Inflation and Pricing





The oil
and natural gas industry is very cyclical and the demand for goods and services
of oil field companies, suppliers and others associated with the industry puts
extreme pressure on the economic stability and pricing structure within the
industry.  Typically, as prices for oil and natural gas increase, so
do all associated costs.  Material changes in prices have an impact on
revenue, estimates of future reserves, borrowing base calculations of bank loans
and the value of properties in purchase and sale
transactions.  Material changes in prices can impact the value of oil
and natural gas companies and their ability to raise capital, borrow money and
retain personnel.










Item
7A. Qualitative and Quantitative Disclosures about Market Risk





Our primary market risks are
fluctuations in commodity prices and foreign currency exchange
rates.  We do not currently use derivative commodity instruments or
similar financial instruments to attempt to hedge commodity price risks
associated with future crude oil production.


Commodity
Price Risk





Our revenues, profitability and future
growth depend substantially on prevailing prices for crude
oil.  Prices also affect the amount of cash flow available for capital
expenditures and our ability to either borrow or raise additional
capital.  Price affects our ability to produce crude oil economically
and to transport and market our production either through export to
international markets or within Kazakhstan.  Our fiscal year 2010
crude oil sales in the international export market were based on prevailing
market prices at the time of sale less applicable discounts due to
transportation.





Historically, crude oil prices have
been subject to significant volatility in response to changes in supply, market
uncertainty and a variety of other factors beyond our control.  Crude
oil prices are likely to continue to be volatile and this volatility makes it
difficult to predict future oil price movements with any
certainty.  Any declines in oil prices would reduce our revenues, and
could also reduce the amount of oil that we can produce
economically.  As a result, this could have a material adverse effect
on our business, financial condition and results of operations.





During the fiscal year ended March 31,
2010, we sold 1,036,070 barrels of oil and condensate.  We realized an
average sales price per barrel of $55.281. For purposes of illustration,
assuming the same sales volume but decreasing the average sales price we receive
from oil sales by $5.00 and $10.00 respectively would change total revenue from
oil sales as follows:





Average
      Price
              Per
      Barrel
            
            Barrels
      of Oil Sold
            
            Approximate
      Revenue from Oil Sold
              (in
      thousands)
            
            Reduction
              in
      Revenue
              (in
      thousands)Actual
      sales for the year ended March 31, 2010
            
            $55.281
            
            1,036,070
            
            $57,275Assuming
      a $5.00 per barrel reduction in average price per barrel
            
            $50.281
            
            1,036,070
            
            $52,094
            
            $
      5,181Assuming
      a $10.00 per barrel reduction in average price per barrel
            
            $45.281
            
            1,036,070
            
            $46,914
            
            $10,361












Foreign
Currency Risk





Our
functional currency is the U.S. Dollar.  Emir Oil, LLP, our
Kazakhstani subsidiary, also uses the U.S. dollar as its functional
currency.  To the extent that business transactions in Kazakhstan are
denominated in the Kazakh Tenge we are exposed to transaction gains and losses
that could result from fluctuations in the U.S. Dollar—Kazakh Tenge exchange
rate.  We do not engage in hedging transactions to protect us from
such risk.





Our
foreign-denominated monetary assets and liabilities are revalued on a monthly
basis with gains and losses on revaluation reflected in net income.  A
hypothetical 10% favorable or unfavorable change in foreign currency exchange
rate at March 31, 2010 would have affected our net income by less than $1
million.




Item
8.  Financial Statements and Supplementary Data




The
consolidated financial statements and supplementary data required by this item
are included at page F-1 herein.





Item
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure




During
the fiscal year ended March 31, 2010 there were no changes in and disagreements
with our independent registered public accounting firm on accounting and
financial disclosure.





Item 9A.  Controls and
Procedures





Evaluation of Disclosure
Controls and Procedures





Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)), as of March 31, 2010. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2010, our disclosure controls and procedures were effective
in (1) recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act and (2) ensuring that information disclosed by us in such
reports is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.





Management's Report on
Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the
company’s principal executive officer and principal financial officer and
effected by the company’s board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:










•
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;•
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and•
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of March 31, 2010. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control - Integrated
Framework. Based on this assessment, our management concluded that as of
March 31, 2010, our internal control over financial reporting is effective based
on those criteria.





Hansen,
Barnett & Maxwell, P.C. the independent registered public accounting firm
that audited the consolidated financial statements included in this Annual
Report on Form 10-K, has also audited management’s assessment of our internal
control over financial reporting and the effectiveness of our internal control
over financial reporting as of March 31, 2010, as stated in their report which
is included herein.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal controls over financial reporting during the
quarter ended March 31, 2010 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.










HANSEN,BARNETT& MAXWELL,
    P.C.A
      Professional CorporationCERTIFIED
      PUBLIC ACCOUNTANTS5
      Triad Center, Suite 750Salt
      Lake City, UT 84180-1128Phone:
      (801) 532-2200Fax:
      (801) 532-7944www.hbmcpas.com








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and


Stockholders
of BMB Munai, Inc.





We have
audited BMB Munai, Inc. and subsidiary’s internal control over financial
reporting as of March 31, 2010, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). BMB Munai Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, BMB Munai, Inc. and subsidiary maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2010, based
on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related statements
of income, stockholders’ equity and comprehensive income, and cash flows of BMB
Munai, Inc. and subsidiaries, and our report dated June 23, 2010 expressed an
unqualified opinion.








/s/ Hansen, Barnett & Maxwell,
P.C.


HANSEN, BARNETT & MAXWELL,
P.C.





Salt Lake
City, Utah


June 23,
2010









Item
9B.  Other Information





None.





PART
III




Item
10. Directors, Executive Officers and Corporate Governance




The following table sets forth as of
June 2, 2010 our directors and executive officers, promoters and control
persons, their ages, and all offices and positions held.  Directors
are elected for a period of one year and thereafter serve until their successor
is duly elected by the stockholders and qualified.  Officers and other
employees serve at the will of the board of directors.





Name
      of Director or
              Executive
      Officer
            
            Age
            
            Positions
      with
              the
      Company
            
            Director
      Since
            
            Officer
      SinceGamal
      Kulumbetov
            
            34
            
            Chief
      Executive Officer
            
            
            
            August
      2007Askar
      Tashtitov
            
            31
            
            President
      and Director
            
            May
      2008
            
            May
      2006Evgeniy
      Ler
            
            27
            
            Chief
      Financial Officer
            
            
            
            April
      2009Anuarbek
      Baimoldin
            
            32
            
            Chief
      Operating Officer
            
            
            
            April
      2009Boris
      Cherdabayev
            
            56
            
            Chairman
      of the Board of Directors
            
            November
      2003Jason
      Kerr
            
            39
            
            Independent
      Director
            
            May
      2008Troy
      Nilson
            
            44
            
            Independent
      Director
            
            December
      2004Daymon
      Smith
            
            32
            
            Independent
      Director
            
            September
      2009Leonard
      Stillman
            
            67
            
            Independent
      Director
            
            October
      2006Valery
      Tolkachev
            
            44
            
            Independent
      Director
            
            December
      2003





A brief description of the background
and business experience of each of the above listed individuals
follows.





Gamal
Kulumbetov.  Mr. Kulumbetov graduated from the Kazakh National
Technical University, Department of Oil and Gas Geology located in Almaty,
Kazakhstan in 1997 where he was awarded a Bachelors degree in
Geology.  Mr. Kulumbetov is now in the process of completing a Ph.D.
from the same university.  Since graduating in 1997 Mr. Kulumbetov has
completed various oil and gas and geological trainings from Japan National Oil
Corporation, MI Drilling Fluids LLC of Germany, Chevron Texaco of Houston,
Petroleum Industry Training Center of Almaty, Kazakhstan, and Ernst & Young
Company of Almaty, Kazakhstan.  In 2000 Mr. Kulumbetov was employed by
Halliburton as a Surface Data Logging Engineer.  From 2001 through
April 2005 Mr. Kulumbetov was employed by LLP TengizChevroil (“TCO”) as the
Deputy Manager of the TCO Fields Development Project.  From April 2005
to December 2005 Mr. Kulumbetov was employed at Big Sky Energy Corporation as
Chief Geologist.  Mr. Kulumbetov joined BMB Munai, Inc. as a Vice
President of Operations in December of 2005 and has served as CEO since August
2007.










Askar
Tashtitov.  Mr. Tashtitov has been with the Company since 2004
and has served as President since 2006 and as a director since May
2008.  Prior to joining the Company, from 2002 to 2004, Mr. Tashtitov
was employed by PA Government Services, Inc.  Mr. Tashtitov worked as
a management consultant specializing in oil and gas projects.  In May
2002, Mr. Tashtitov earned a Bachelor of Arts degree from Yale University
majoring in Economics and History.  Mr. Tashtitov passed the AICPA
Uniform CPA Examination in August, 2006. Mr. Tashtitov is not, nor has he in the
past five years been, a director or nominee of any other SEC
registrant.





Evgeniy Ler.Mr. Ler has been
with the Company since 2006. Prior to being appointed as CFO Mr. Ler served in
other capacities for the Company including Finance Manager and Reporting
Manager. Prior to joining the Company, from 2002 to 2006, Mr. Ler was employed
by Deloitte & Touche where he held the position of Senior Auditor in
Financial Services & Industries Group, Audit. In that position he led large
engagements for banks, financial institutions and oil and gas companies. In 2003
Mr. Ler was awarded a Bachelors degree in Financial Management from the
Kazakh-American University located in Almaty, Kazakhstan. In 2008 Mr. Ler passed
the AICPA Uniform CPA Examination. Mr. Ler has also completed trainings in
London on oil and gas financial reporting in accordance with IFRS and US GAAP
and internal Deloitte trainings on audit, financial reporting and due
diligence.





Anuarbek Baimoldin. Mr.
Baimoldin has been with the Company since October 2007. Prior to being appointed
COO, Mr. Baimoldin served as the Company’s Facilities Manager. Prior to joining
the Company, from March 2006 to November 2007, Mr. Baimoldin was the Managing
Director of JSC National Innovation Fund where his responsibilities included
researching potential innovation projects and performing project feasibility
studies. From June 2005 through March 2006 Mr. Baimoldin served as the President
of Caspiy Corporation LLP where he was responsible for general company
management, financial and operational planning and coordination of the company’s
departments. From August 2002 through June 2005 Mr. Baimoldin was employed by
TengizChevroil LLP. From January 2003 to June 2005 he served as the Coordinator
for the Field Development Project.  His responsibilities included
preparation and obtaining approval for the Second Generation Project, Gas
Reinjection Project, Exploration and Development Program and compliance of
operations and licensing with Kazakhstani authorities. From August 2002 through
January 2003 Mr. Baimoldin served as Senior Specialist for Kazakhstani Companies
Development Department and worked to replace foreign contractors with local
contractors and assisted local contractors to enhance product and service
quality. In 1999 Mr. Baimoldin received an Associate of Science in Management
from Mount Ida College of Business located in Mount Ida, Massachusetts and in
2002 was awarded a Bachelors of Arts in International Economics from Boston
University located in Boston, Massachusetts. In 2005 Mr. Baimoldin was awarded a
Bachelors of Science in Exploration of Oil and Gas Fields from Atyrau Oil and
Gas Institute located in Atyrau, Kazakhstan. Mr. Baimoldin has also received
extensive trainings from the Ernst & Young Business Academy located in
Almaty, Kazakhstan.










Boris
Cherdabayev.  Mr. Cherdabayev joined the Company’s board of
directors and was appointed Chairman of the board of directors in November
2003.  From May 2000 to May 2003, Mr. Cherdabayev served as Director
at TengizChevroil LLP multi-national oil and gas company owned by Chevron,
ExxonMobil, KazMunayGas and LukOil.  From 1998 to May 2000, Mr.
Cherdabayev served as a member of the Board of Directors, Vice-President of
Exploration and Production and Executive Director on Services Projects
Development for NOC “Kazakhoil”, an oil and gas exploration and production
company.  From 1983 to 1988 and from 1994 to 1998 he served as a
people’s representative at Novouzen City Council (Kazakhstan); he served as a
people’s representative at Mangistau Oblast Maslikhat (regional level
legislative structure) and a Chairman of the Committee on Law and
Order.  For his achievements Mr. Cherdabayev has been awarded with a
national “Kurmet” order.  Mr. Cherdabayev earned an engineering degree
from the Ufa Oil & Gas Institute, with a specialization in “machinery and
equipment of oil and gas fields” in 1976.  Mr. Cherdabayev also earned
an engineering degree from Kazakh Polytechnic Institute, with a specialization
in “mining engineer on oil and gas fields’ development.”  During his
career he also completed an English language program in the USA, the СНАМР Program
(Chevron Advanced Management Program) at Chevron Corporation offices in
San-Francisco, CA, USA, and the CSEP Program (Columbia Senior Executive Program)
at Columbia University, New York, NY USA.  Mr. Cherdabayev is not
currently, nor has he in the past five years been, a director or nominee of any
other SEC registrant.





Jason M. Kerr.  Mr.
Kerr graduated from the University of Utah in 1995 with a Bachelors of Science
degree in Economics and in 1998 with a Juris Doctorate from the same university
where he was named the William H. Leary Scholar. Since 2006 Mr. Kerr has been
the associate general counsel of Basic Research, LLC, concentrating in
intellectual property litigation. Prior to joining Basic Research, Mr. Kerr was
a partner with the law firm of Plant, Christensen & Kanell in Salt Lake
City, Utah. Mr. Kerr was employed with Plant, Christensen & Kanell from 1996
through 2001 and from 2004 to 2006. From 2001 through 2004 Mr. Kerr was employed
as a commercial litigator with the Las Vegas office of Lewis and
Roca.  Mr. Kerr became a Company director in May 2008.  Mr.
Kerr is not currently, nor has he in the past five years been, a nominee or
director of any other SEC registrant.





Troy F. Nilson,
CPA.  Since February 2001, Mr. Nilson has served as an Audit
Partner with Chisholm, Bierwolf Nilson & Morrill, Certified Public
Accountants, in Bountiful, Utah.  From December 2000 to February 2001,
he served as an Audit Manager for Crouch, Bierwolf & Associates, Certified
Public Accountants, in Salt Lake City, Utah.  Prior to that time, Mr.
Nilson served as the Senior Auditor for Intermountain Power Agency in Salt Lake
City, Utah from March 1995 to December 2000.  In the past five years,
Mr. Nilson has had extensive public and private company audit, audit review and
Securities and Exchange Commission disclosure and reporting
experience.  Mr. Nilson received licensure as a Certified Public
Accountant in 1997.  Mr. Nilson earned a Masters of Science Degree in
Business Information Systems from Utah State University in December 1992, and a
Bachelor of Science in Accounting from Utah State University in August
1990.  Mr. Nilson became a Company director in December
2004.  Mr. Nilson is not currently, nor has he in the past five years
been, a director or nominee of any other SEC registrant.










Daymon M. Smith. Dr. Smith is
currently engaged in independent research and writing projects.  From
August 2007 to June 2009 Dr. Smith was a Visiting Assistant Professor at the
University of Alabama-Birmingham, where he was a lecturer and
researcher.  He has also taught at Weber State University and at Utah
Valley University, and has received numerous research grants and academic
awards.  From 2001 to 2007 Dr. Smith was a William Penn Fellow at the
University of Pennsylvania.  As a Fellow, Dr. Smith was responsible
for conducting course instruction and evaluation, student assessments and
ethnographic research.  From 2006 to 2007 Dr. Smith was employed with
the Corporation of the Presiding Bishop as an International Media
Scientist.  Here Dr. Smith served as lead analyst for the Audiovisual
Department.  He also served from 2005 to 2006 as a cultural materials
consultant to SynTech Energy, an oil-shale extraction company, providing support
in its dealings with major U.S. airlines and with Jordanian
firms.  Dr. Smith earned a Bachelors of Science degree in Anthropology
from the University of Utah in 2001, and a PhD in Anthropology from the
University of Pennsylvania in 2007.  Dr. Smith is not currently, nor
has he in the past five years been, a director or nominee of any other SEC
registrant.





Leonard M. Stillman, Jr. Mr.
Stillman received his Bachelor of Science degree in mathematics from Brigham
Young University and Master of Business Administration from the University of
Utah.  He began his career in 1963 with Sperry UNIVAC as a programmer
developing trajectory analysis software for the Sergeant Missile system. Mr.
Stillman spent many years as a designer and teacher of computer language classes
at Brigham Young University, where he developed applications for the
Administrative Department including the school’s first automated teacher
evaluation system. During that time, he was also a Vice-President of Research
and Development for Automated Industrial Data Systems, Inc and the Owner of
World Data Systems Company, which provided computerized payroll services for
companies such as Boise Cascade.  Mr. Stillman has over 35 years of
extensive business expertise including strategic planning, venture capital
financing, budgeting, manufacturing planning, cost controls, personnel
management, quality planning and management, and the development of standards,
policies and procedures.  He has extensive skills in the design and
development of computer software systems and computer evaluation. Mr. Stillman
helped found Stillman George, Inc. in 1993.  He has been employed with
Stillman George, Inc., since that time.  Mr. Stillman’s primary
responsibilities include managing information, technical development and
financial analysis projects and development as well as involved in general
company management and consulting activities.  Stillman George
consolidates a broad variety of skills from a growing group of business
professionals to provide needed support in finance, marketing, management,
sales, planning, product development and more to businesses
worldwide.  Mr. Stillman is not currently, nor has he in the past five
years been, a director or nominee of any other SEC registrant.





Valery
Tolkachev.  Since August 2009, Mr. Tolkachev has served as
Advisor to the CEO at Moscow-based MaxWellBank.  Mr. Tolkachev also
serves on the board of directors at MaxWellBank and is waiting a pending
appointment as CEO.  From August 2008 to March 2009, Mr. Tolkachev was
employed with Slavyansky Bank in Moscow, Russia, where he served as the Deputy
Chairman. From 1991 to 2008, Mr. Tolkachev served in various positions with
various employers including UniCreditAton, MDM Bank, InkomBank, InkomCapital and
others.  Mr. Tolkachev graduated with Honors from the High Military
School in Kiev, USSR in 1989.  In 2005 he completed his studies at the
Academy of National Economy, as a qualified lawyer.  Mr. Tolkachev
serves on the Compensation Committee and the Corporate Governance and Nominating
Committee of the Company.  Mr. Tolkachev became a Company director in
December 2003.  Mr. Tolkachev also serves as a director of Caspian
Services, Inc., and Bekem Metals, Inc.  Both are SEC
registrants.  Other than as disclosed herein, Mr. Tolkachev is not
currently, nor has he in the past five years been, a director or nominee of any
other SEC reporting issuer.










When
determining whether it is appropriate for a director to serve on the board of
directors, the Company focuses primarily on the information provided in each of
the director’s individual biographies set forth above and its knowledge of the
character and strengths of the sitting directors. With regard to Mr.
Cherdabayev, the Company considered his extensive experience in the oil and gas
industry in the Republic of Kazakhstan.  The Company considered Mr.
Kerr’s educational background in economics and his professional experience as an
attorney.  Mr. Nilson’s experience as a U.S. Certified Public
Accountant auditing SEC reporting issuers was taken into account in his
appointment to the board.  With regard to Mr. Smith the Company
considered his background in anthropology and media messaging.  Mr.
Stillman’s training in business management, strategic planning, corporate
finance and information management was considered a significant factor in his
serving on the board.  The board considered Mr. Tashtitov’s detailed
understanding of the Company’s operations and strategic goals in connection with
his appointment to the board.  With regard to Mr. Tolkachev, the
Company considered his extensive investment experience and his related finance
and banking background.





Procedures
for Security Holders to Nominate Candidates to the Board of
Directors





There
have been no material changes to the procedures set forth in our proxy statement
filed with the SEC on November 18, 2009, by which security holders may recommend
nominees to our board of directors.





Leadership
Structure





We have
separate individuals serving as Chairman of the Board as Chief Executive Officer
and as President. The President and CEO are responsible for setting the
strategic direction of the Company and managing the day-to-day leadership and
performance of the Company, while the Chairman provides guidance to the CEO and
the President, sets the agenda for meetings of the Board and presides over
meetings of the full Board. The Company believes this structure strengthens the
role of the board in fulfilling its oversight responsibility and fiduciary
duties to the Company’s shareholders while recognizing the day-to-day management
direction of the Company by its CEO Gamal Kulumbetov and its President Askar
Tashtitov.





Oversight
of Risk Management





Board-level
risk oversight is primarily performed by our full Board, although the Audit
Committee oversees our internal controls and regularly assesses financial and
accounting processes and risks. Our risk oversight process includes an
ongoing dialogue between management and the Board and the Audit
Committee, intended to identify and analyze risks that face the Company. Through
these discussions with management and their own business experience and
knowledge, our directors are able to identify material risks for which a
full analysis and risk mitigation plan are necessary. The Board (or the Audit
Committee, with respect to risks related to internal controls, financial and
accounting matters) monitors risk mitigation action plans developed by
management, in order to ensure such plans are implemented and are effective in
reducing the targeted risk.










Family
Relationships





Our Chief
Operating Officer, Anuarbek Baimoldin, is the nephew of Boris Cherdabayev, a
Company director and Chairman of the board of directors. There are no other
family relationships among our directors, executive officers and/or
nominees.





Involvement
in Certain Legal Proceedings





During
the past ten years none of our executive officers, directors, promoters or
control persons has been involved in any of the following events that could be
material to an evaluation of his ability or integrity, including:





(1) Any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time.





(2) Any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);





(3) Being
subject to any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining him from, or otherwise limiting the following activities:





(i)  Acting
      as a futures commission merchant, introducing broker, commodity trading
      advisor, commodity poll operator, floor broker, leverage transaction
      merchant, and other person regulated by the Commodity Futures Trading
      Commission (“CFTC”), or an
      associated person of any of the foregoing, or as an investment adviser,
      underwriter, broker or dealer in securities, or as an affiliate person,
      director or employee of any investment company, bank savings and loan
      association or insurance company, or engaging in or continuing any conduct
      or practice in connection with such activity;(ii)  Engaging
      in any type of business practice; or(iii)
      Engaging in any activity in connection with the purchase or sale of any
      security or commodity or in connection with any violation of Federal or
      State securities laws or Federal commodities
  laws.





(4)  Being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any Federal or State authority barring, suspending or otherwise
limiting for more than 60 days the rights of such person to engage in any
activity described in (3)(i) above, or to be associated with persons engaged in
any such activity.












(5)  Being
found by a court of competent jurisdiction in a civil action or by the
Securities and Exchange Commission to have violated any Federal or State
securities law, and the judgment in such civil action or finding by the
Commission has not be subsequently reversed, suspended or vacated.





(6)  Being
found by a court of competent jurisdiction in a civil action or by the Commodity
Futures Trading Commission to have violated any Federal commodities law, and the
judgment in such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended, or
vacated.





(7)  Being the subject of, or
a party to any Federal or State judicial or administrative order, judgment,
decree or finding, not subsequently reversed, suspended or vacated, relating to
an alleged violation of:





(i)  Any
      Federal or State securities or commodities law or regulations;
      or(ii)
      Any law or regulation prohibiting mail or wire fraud or fraud in
      connection with any business entity;
or





(8)  Being the subject of, or
a party to, any sanction or order, not subsequently reversed, suspended or
vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of
the Exchange Act (15 U.S.C. 78c(a)(26)))), any registered entity (as defined in
Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any
equivalent exchange, association, entity or organization that has disciplinary
authority over its members or persons associated with a member.





BOARD
COMMITTEES





The board
has standing audit, compensation, and corporate governance and nominating
committees.  The board has adopted written charters for each of these
committees.  These charters are available on the Company’s website at
www.bmbmunai.com.





Audit
Committee





Our board of directors has adopted an
audit committee charter and established an audit committee, whose principal
functions are to:





●
            assist
      the board in the selection, review and oversight of our independent
      registered public accounting firm;●
            approve
      all audit, review and attest services provided by the independent
      registered public accounting firm;●
            assess
      the integrity of our reporting practices and evaluate of our internal
      controls and accounting procedures;  and●
            resolve
      disagreements between management and the independent registered public
      accountants regarding financial
reporting.












The audit committee has the sole
authority to retain and terminate our independent registered public accounting
firm and to approve the compensation paid to our independent registered public
accounting firm.  The audit committee is responsible for the
pre-approval of all non-audit services provided by our independent registered
public accounting firm.  Non-audit services are only provided by our
independent registered public accounting firm to the extent permitted by
law.  The audit committee is comprised of three independent directors,
Troy Nilson, Daymon Smith and Jason Kerr.  Mr. Nilson has and will
continue to act as chairman of the committee.  Our board of directors
has determined that Mr. Nilson qualifies as an “audit committee financial
expert” under the rules of the SEC adopted pursuant to the requirements of the
Sarbanes-Oxley Act of 2002.  As discussed above, our board of
directors has also determined that Mr. Nilson, Mr. Smith and Mr. Kerr each
qualifies as “independent” in accordance with the applicable regulations adopted
by the SEC and NYSE Amex.





Our board may establish other
committees from time to time to facilitate our management.





CODE
OF ETHICS





We have adopted a Code of Ethics that
applies to our principal executive, financial and accounting officers and
persons performing similar duties.  The Code is designed to deter
wrong-doing and promote honest and ethical behavior, full, fair, timely,
accurate and understandable disclosure and compliance with applicable
governmental laws, rules and regulations.  It is also designed to
encourage prompt internal reporting of violations of the Code to an appropriate
person and provides for accountability for adherence to the Code.  A
copy of our Code of Ethics has been posted on our website and may be viewed at
http://www.bmbmunai.com.  A
copy of the Code of Ethics will be provided to any person without charge upon
written request to our Corporate Secretary at our U.S. offices, 324 South 400
West, Suite 225, Salt Lake City, Utah 84101.





COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT





Directors, executive officers and
holders of more than 10% of our outstanding common stock are required to comply
with Section 16(a) of the Securities Exchange Act of 1934, which requires
generally that such persons file reports regarding ownership of and transactions
in securities of the Company on Forms 3, 4, and 5.  Based solely on
management’s review of these reports during the year ended March 31, 2010, it
appears that Daymon Smith filed a Form 3 in September 2009 disclosing his
beneficial ownership of shares of our common stock on day late.  It
also appears that Askar Tashtitov filed a late Form 4 in July 2009 disclosing
the acquisition of 10,000 shares in December 2007 pursuant to a restricted stock
grant.





Item
11.  Executive Compensation





We have a
compensation committee of three independent directors.  That committee
has been delegated authority from our board of directors and its activities are
governed by a compensation committee charter.  One of the roles of the
compensation committee under its charter is to review and approve annually all
compensation decisions relating to our executive officers.  Our
compensation committee utilizes external analyses to inform its executive
compensation decisions and processes.












Objectives
and Philosophy of Our Executive Compensation Program





The
primary objectives of our executive compensation program are to:





●
            
            attract,
      retain and motivate skilled and knowledgeable executive
      talent;●
            
            ensure
      that executive compensation is aligned with our corporate strategies and
      business objectives;●
            
            promote
      the achievement of key strategic and financial performance measures by
      linking short-term and long-term cash and equity incentives to the
      achievement of measurable corporate and individual performance goals;
      and●
            
            align
      executives’ incentives with the creation of stockholder
    value.





In setting executive compensation our
compensation committee has historically relied on compensation comparisons to
energy industry companies with revenues between $25 million and $99.9
million.  From time to time, the compensation committee has also
considered a peer group of a few similarly sized oil and gas exploration
companies in Kazakhstan to assist in establishing the compensation packages of
its executive officers.  Although the compensation committee did not
consider the peer group during the 2010 fiscal year because of difficulty
obtaining accurate compensation information of the compensation packages of the
peer group companies during the year.





The compensation committee has
historically tried to maintain total executive compensation within a range
between the 25th
percentile and the general industry average.  To accomplish this
objective, while at the same time recognizing the Company’s need for cash, the
compensation committee has historically targeted total cash compensation within
the 25th
percentile of the general industry comparison.  The committee has
historically relied on setting long-term incentive compensation, in the form of
restricted stock grants, above the industry average to provide a total
compensation package in a range between the 25th
percentile and the industry average.




While the compensation committee
engages in compensation comparisons, it is not the sole, or even the principal
factor they consider in setting executive compensation.  The committee
also takes into account a number of other factors, including key strategic,
financial and operational goals set by our board of directors, such as
satisfying our annual minimum work program or special achievements attained by
executive management.





As
discussed above, the compensation committee has historically provided a portion
of executive compensation in the form of equity awards that vest over
time.  We believe this will help to retain our named executive
officers and align their interests with those of our stockholders by allowing
the executives to participate in our longer term success as reflected in asset
growth and stock price appreciation.










Components
of our Executive Compensation Program





At this
time, the primary elements of our executive compensation program
are:





●
            
            base
      salaries;●
            
            nonequity
      incentive compensation;●
            
            bonuses;●
            
            equity
      incentive awards; and●
            
            benefits
      and other compensation.





We do not
have any formal or informal policy or target for allocating compensation between
long-term and short-term compensation, between cash and non-cash compensation or
among the different forms of non-cash compensation.  Instead, we
determine subjectively on a case-by-case basis the appropriate level and mix of
the various compensation components.





Base
salaries





Base
salaries are used to recognize the experience, skills, knowledge and
responsibilities required of all our employees, including our named executive
officers.  Base salaries for our named executive officers typically
have been set in our offer letter to the individual at the outset of
employment.  We rely on several factors to determine the base salaries
of our executive officers.  As noted above, our compensation committee
considers various factors, including salaries paid by the energy industry
comparison companies.  The committee has historically attempted to
maintain base salaries within the 25th
percentile of the general industry average.  While the committee
relies upon compensation comparisons in determining base salaries, it is not the
sole, or necessarily the principal factor determining base
salaries.  The principal factor in determining base salaries is the
negotiation process between the Company and the named executive
officer.  While we have has historically stayed within the
compensation levels discussed above, there may be instances when, based on an
individual’s performance, experience or expertise, need, or local market or
labor conditions the compensation committee may award base salaries that exceed
the compensation it has historically relied on in order to retain current or
attract new executive talent.





Under the
terms of our employment agreements, consistent with our executive compensation
program objectives, base salaries for our executives, together with other
components of compensation, may be evaluated by our compensation committee for
adjustment based on an assessment of an executive’s performance and compensation
trends in our industry.





During
the fiscal year ended March 31, 2010, the compensation committee awarded no base
salary increases to any of the named executive officers except Evgeny Ler and
Anuarbek Baimoldin, who were awarded base salary increases in connection with
their promotions to CFO and COO, respectively.












Nonequity
incentive compensation





From time
to time we may make cash awards to our employees, including the named executive
officers. Such awards may be designed to incentivize employees over a specified
period of time pursuant to pre-established, performance-based criteria, the
accomplishment of which is substantially uncertain at the time the criteria are
established.  In the event this type of cash award was made, it would
be reflected in the “Summary
Compensation Table” under a separate column entitled “Nonequity Incentive Plan
Compensation.”  We may use nonequity incentive compensation to
incentivize our employees.  The criteria for earning such nonequity
incentive bonuses may be based on corporate financial performance measures that
would be developed by our compensation committee at the time such nonequity
incentive plan is established.  Our compensation committee has
discretion to determine the applicable performance measures and the appropriate
weighting of such measures at the time it establishes any nonequity incentive
plan.  The compensation committee did not establish a nonequity
incentive compensation plan during the fiscal year ended March 31, 2010 and no
nonequity incentive compensation was awarded during the year.





Bonuses





We may
also make cash awards to employees that are not part of any pre-established,
performance-based criteria.  Awards of this type are completely
discretionary and subjectively determined by the compensation committee at the
time they are awarded.  Such awards are reported in the “Summary Compensation Table”
in the column entitled “Bonus.”  In 2008
and 2009 the compensation committee, of its own discretion, determined to award
to each of the named executive officers a bonus equal to one month of the
executive officer’s salary.  The bonuses were not awarded pursuant to
any pre-established, performance-based criteria set by the compensation
committee, but in recognition of the growth in the Company’s production, revenue
and net income during the year.  The Company was under no obligation
to award the cash bonuses.  The compensation committee awarded no
bonuses to any named executive officer during the fiscal year ended March 31,
2010.





Equity
incentive awards





Our
equity award program is the primary vehicle for offering long-term incentives to
our executives.  Our equity awards to executives have typically been
made in the form of restricted stock grants and stock
options.  Although we do not have any equity ownership guidelines for
our executives, we believe that equity grants provide our executives with a
direct link to our long-term performance, create an ownership culture and align
the interests of our executives and our stockholders.  In addition,
the vesting feature of our equity grants should further our objective of
executive retention because this feature provides an incentive to our executives
to remain in our employ during the vesting period.





In
determining the size of equity grants to our executives, our compensation
committee and board of directors consider comparative share ownership of
executives in our energy industry comparison companies, the Company’s
performance, the applicable executive’s performance, the amount of equity
previously awarded to the executive, the vesting of such awards and the
recommendations of management.










Grants of
equity awards, including those to named executive officers, are all approved by
our compensation committee and the board of directors and are granted based on
the fair market value of our common stock.  Vesting of equity awards
has varied from immediate vesting to vesting of periods ranging from one to five
years depending on the purpose of the award.  When we have made equity
awards that vested immediately, they were typically in recognition of services
already rendered or goals already accomplished.





Generally,
our compensation committee meets annually to review our executive compensation
program objectives and make recommendations to our board of directors regarding
equity awards and incentives to retain employees.  We do not have a
program, plan or practice of selecting grant dates for equity compensation to
our executive officers in coordination with the release of material non-public
information.  Equity award grants are made from time to time in the
discretion of our compensation committee consistent with our executive
compensation program objectives.  In January 2010, our board of
directors, at the recommendation of the compensation committee, awarded
restricted stock grants to certain executive officers, directors, employees and
outside consultants of the Company in recognition of services rendered to the
Company.  The aggregate number of restricted common shares granted was
1,500,000.  The total number of grant recipients was 15, including our
named executive officers.





Benefits
and other compensation





Under the
terms of their employment contracts, our named executive officers are permitted
to participate in such pension, profit sharing, bonus, life insurance,
hospitalization, major medical and other employee benefit plans as may be in
effect from time to time to the extent the executive is eligible under the terms
of such plans.





Under the
employment agreements with our named executive officers, we agree to pay all
taxes and dues under applicable laws of Kazakhstan for our named executive
officers including income and social taxes and government pension fund
payments.





Income
tax





As is the custom in Kazakhstan, we pay
the income taxes of our employees, including the named executive
officers.  The income tax rate for individuals in Kazakhstan is
currently 10%.





Social
tax





We make payments of mandatory social
tax in an amount 11% of employee wages. These costs are recorded in the period
when they are incurred and presented as salary related tax expense in the income
statement.





Pension fund
payment





In
accordance with the legislative requirements of the Republic of Kazakhstan we
were required to pay into an employee pension fund an amount equivalent to 10%
of each employee’s wages, up to a maximum of $700 per month.  Pension
fund payments are withheld from employees’ salaries and included with other
salary costs in the income statement.  We do not have any other
liabilities related to any supplementary pensions, post retirement health care,
insurance benefits or retirement indemnities.












Summary
Compensation Table





The table below summarizes compensation
paid to or earned by our Chief Executive Officer, our Chief Financial Officer
and our other most highly compensated officers, who we refer to collectively as
our “named executive officers.”





Name
      and
              Principal
      Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards(4)
              ($)
            All
      Other
              Compen-sation
              ($)
            Total
              ($)Boris  Cherdabayev
            2010
            192,000
            -0-
            319,200
            59,309
            570,509Chairman
            2009
            228,000
            20,000
            1,659,000
            67,054
            1,974,0542008
            263,184
            20,000
            -0-
            73,123
            356,307Gamal
      Kulumbetov
            2010
            96,873
            -0-
            91,200
            31,448
            219,521CEO
            2009
            147,581
            13,000
            553,000
            48,705
            762,2862008
            148,066
            10,000
            -0-
            48,162
            206,228Evgeny
      Ler
            2010
            89,309
            -0-
            125,400
            29,927
            244,636CFO(1)
            2009
            73,117
            5,000
            442,400
            30,762
            551,2792008
            59,773
            5,000
            -0-
            28,145
            92,918Leonard
      Stillman
            2010
            4,500
            -0-
            -0-
            38,351
            42,851Former
      Interim
            2009
            138,290
            -0-
            -0-
            9,547
            147,837CFO(2)
            2008
            -0-
            -0-
            -0-
            -0-
            -0-Askar
      Tashtitov
            2010
            115,200
            -0-
            262,200
            37,417
            414,817President
            2009
            130,255
            10,000
            774,200
            44,570
            959,0252008
            138,153
            10,000
            -0-
            44,292
            192,445Toleush
      Tolmakov
            2010
            108,473
            -0-
            245,100
            27,608
            381,181General
      Director of
            2009
            127,841
            -0-
            829,500
            32,550
            989,891Emir
      Oil LLP
            2008
            137,508
            -0-
            -0-
            27,580
            165,088Anuarbek
      Baimoldin
            2010
            84,731
            -0-
            22,800
            29,869
            137,400COO(3)
            2009
            60,000
            5,000
            -0-
            21,081
            86,0812008
            27,273
            5,000
            -0-
            10,519
            42,792





(1)
            In
      April 2009 Mr. Ler was appointed CFO of the
  Company.


(2)
            Mr.
      Stillman served as the Company’s interim CFO from June 17, 2008 to April
      13, 2009.  Mr. Stillman’s compensation for the 2009 fiscal year
      presented in the chart above is for the period from June 17, 2008 to March
      31, 2009.


(3)
            In
      April 2009 Mr. Baimoldin was appointed COO of the
  Company.


(4)
            For
      details regarding the assumptions made in the valuation of stock award,
      please see “Valuation of
      Stock Awards” below.


(5)
            For
      details regarding the assumptions made in the valuation of option awards,
      please see “Valuation of
      Option Awards” below.












Valuation of Stock
Awards





On July 18, 2005, we awarded restricted
stock grants to three officers of the under our 2004 Stock Incentive Plan (the
“2004 Plan”). The total number of restricted stock grants was
90,000.  The grants vested in three equal installments of 10,000
shares per year to each officer.  The restricted stock grants were
valued at $4.75 per share, the closing price of our common stock on the date of
grant.  Compensation expense for vested stock grants in the amount of
$31,523 and $124,477 was recognized in the Consolidated Statements of Operations
and Consolidated Balance Sheets for the years ended March 31, 2008 and 2007,
respectively.





On June 20, 2006, we granted common
stock to officers, directors and certain employees and consultants of the
Company under the Plan. The total number of restricted common shares granted was
495,000. The restricted stock grants were valued at $7.00 per share, the closing
price of our common stock on the date of grant.  $3,465,000 was
recognized in the Consolidated Statements of Operations and Consolidated Balance
Sheet for the year ended March 31, 2007.





On March 30, 2007, we granted common
stock to officers, employees and outside consultants of the Company under the
2004 Plan. The total number of restricted common shares granted was 950,000. The
restricted stock grants were valued at $5.38 per share, the closing price of our
common stock on the date of grant. The restricted stock grants will vest on the
earlier of July 9, 2009 and the occurrence of an Extraordinary Event (as it is
defined in the 2004 Plan).





Non-cash compensation expense related
to the vesting of share-based compensation in the amount of $567,889, $2,271,556
and $2,303,078 was recognized in the Consolidated Statement of Operations and
Consolidated Balance Sheet for the years ended March 31, 2010, 2009 and 2008,
respectively.





On July 17, 2008, we granted, subject
to certain vesting requirements, restricted stock awards to certain executive
officers, directors, employees and outside consultants of the Company pursuant
to the 2004 Plan.  The total number of shares granted was
1,330,000.  The restricted stock grants were valued at $5.53 per
share, the closing price of our common stock on the date of Grant.





Non-cash compensation expense in the
amount of $2,176,244 and $5,178,655 was recognized in the Consolidated Statement
of Operations and Consolidated Balance Sheet for the years ended March 31, 2010
and 2009.





On January 1, 2010, we granted, subject
to certain vesting requirements, restricted stock awards to certain executive
officers, directors, employees and outside consultants of the Company pursuant
to the 2004 Plan.  The total number of shares granted was
1,500,000.  The restricted stock grants were valued at $1.14 per
share, the closing price of our common stock on the date of Grant.





As of
March 31, 2010, there was $1,282,500 of total unrecognized non-cash compensation
expense related to non-vested share-based compensation arrangements granted
under the Plan. That cost is expected to be recognized over a weighted-average
period of 0.75 years.










All
Other Compensation





The table below provides additional
information regarding “all other compensation” awarded to the named executive
officers as disclosed in the “All Other Compensation” column of the “Summary Compensation Table”
above.





Name
            Year
            Income
              Tax
            SocialTax
            Health
      Insurance
            Pension
      Fund
            Fitness
      Club
              Membership
            Non-Employee
              Director
      FeesBoris
      Cherdabayev
            2010
            $27,119
            $23,885
            $912
            $7,393
            $-0-
            $-0-2009
            35,093
            22,834
            466
            8,661
            -0-
            -0-2008
            38,900
            26,024
            -0-
            7,457
            742
            -0-Gamal
      Kulumbetov
            2010
            $11,254
            $12,066
            $735
            $7,393
            $-0-
            $-0-2009
            22,898
            14,612
            375
            8,661
            2,159
            -0-2008
            22,861
            15,161
            283
            7,457
            2,400
            -0-Evgeny
      Ler
            2010
            $10,530
            $11,269
            $735
            $7,393
            $-0-
            $-0-2009
            11,765
            7,802
            375
            8,661
            2,159
            -0-2008
            9,967
            8,038
            283
            7,457
            2,400
            -0-Len
      Stillman
            2010
            $-0-
            $-0-
            $-0-
            $-0-
            $-0-
            $38,3512009
            -0-
            -0-
            -0-
            -0-
            -0-
            9,547(1)Askar
      Tashtitov
            2010
            $14,776
            $14,513
            $735
            $7,393
            $-0-
            $-0-2009
            20,380
            12,995
            375
            8,661
            2,159
            -0-2008
            19,931
            14,221
            283
            7,457
            2,400
            -0-Toleush
      Tolmakov
            2010
            $9,881
            $9,197
            $-0-
            $8,530
            $-0-
            $-0-2009
            14,112
            9,777
            -0-
            8,661
            -0-
            -0-2008
            10,267
            9,181
            -0-
            8,132
            -0-
            -0-Anuarbek
      Baimoldin
            2010
            $10,616
            $11,125
            $735
            $7,393
            $-0-
            $-0-2009
            7,682
            5,687
            333
            7,379
            -0-
            -0-2008
            3,595
            3,677
            126
            3,121
            -0-
            -0-





(1)
            Mr.
      Stillman served as the Company’s interim CFO from June 17, 2008 to April
      13, 2009.  Prior to June 17, 2008, Mr. Stillman served as a
      non-employee member of our board of directors and received non-employee
      director fees for his services.





Employment
Agreements





We have
employment agreements with each of our named executive officers.





On
December 31, 2009, the Company entered into new employment agreements with the
following executive officers of the Company, Gamal Kulumbetov, Askar Tashtitov,
Evgeniy Ler and Anuarbek Baimoldin.












Except
for annual salary, and as otherwise specifically addressed herein, the terms and
conditions of the employment agreement of each of the executive and
non-executive level officers are the same in all material respects. The
employment agreements provide for an initial term of one year with three
consecutive one-year renewals unless terminated by either party prior to the
beginning of the renewal term. A form of the Employment Agreement was filed as
an exhibit to the current report on Form 8-K we filed on January 6,
2010.





Under the
agreements, salary is reviewable no less frequently than annually and may be
adjusted up or down by the compensation committee in its sole discretion, but
may not be adjusted below the initial annual salary amount listed in the
agreement.  The agreements provide that each of the officers is
entitled to participate in such pension, profit sharing, bonus, life insurance,
hospitalization, major medical and other employee benefit plans of the Company
that may be in effect from time to time, to the extent the individual is
eligible under the terms of those plans.  The agreements provide that
each officer is eligible at the discretion of the compensation committee and the
board of directors to receive performance bonuses.  Each officer is
entitled to 28 days vacation in accordance with the vacation policies of the
Company, as well as paid holidays and other paid leave set forth in the
Company’s policies.  There is no accrual of vacation days and
holidays.





The
agreements and all obligations thereunder may be terminated upon the occurrence
of the following events: i) death, ii) disability; iii) for cause immediately
upon notice from the Company or at such time as indicated by the Company in said
notice; iv) for good reason upon not less than 30 days notice from an officer to
the Company; v) an extraordinary event, unless otherwise agreed in
writing.





Under the
agreements the named executive officer may be deemed disabled if for physical or
mental reasons he is unable to perform his duties for 120 consecutive days or
180 days during any 12 month period. Such disability will be determined by a
jointly agreed upon medical doctor.





The
agreements provide that any of the following will constitute “cause”: i) breach
of the employment agreement; ii) failure to adhere to the written policies of
the Company; iii) appropriation by the officer of a material business
opportunity; iv) misappropriation of funds or property of the Company; v)
conviction, indictment or the entering of a guilty plea or a plea of no contest
to a felony.





“Good
reason” under the agreements may mean any of the following: i) a material breach
of the employment agreement; ii) assignment of the officer without his consent
to a position of lesser status or degree of responsibility.; iii) relocation of
the Company’s principal executive offices outside the Republic of Kazakhstan;
iv) if the Company requires the officer to be based somewhere other than
principal executive offices of the Company without the officer’s
consent.





Each of
the employment agreements, provides that an “extraordinary event” is defined as
any consolidation or merger of the Company or any of its subsidiaries with
another person, or any acquisition of the Company or any of its subsidiaries by
any person or group of persons, acting in concert, equal to fifty percent (50%)
or more of the outstanding stock of the Company or any of its subsidiaries, or
the sale of forty percent (40%) or more of the assets of the Company or any of
its subsidiaries, or if one or more persons, acting alone or as a group,
acquires fifty percent (50%) or more of the total voting power of the Company.
In addition to these provisions, the employment agreement of Mr. Tashtitov
provides that the following events also constitute an extraordinary event: i)
that a disposition by the Chairman of the Company’s board of directors or by the
General Director of the Company’s subsidiary, of seventy five (75%) or more of
the shares either individual currently owns, including stock attributed to
either of them by Internal Revenue Code Section 318; or ii) should the Company
terminate the registration of any of its securities under Section 12 of the
Exchange Act of 1934, voluntarily ceases, or shall terminate its obligation to
file reports with United States Securities Commission pursuant to Section 13 of
the Exchange Act of 1934.










Potential
Payments Upon Termination or Change in Control





The
employment agreements of certain of our named executive officers provide for
potential payments upon termination or change in control.  The
following table shows the cash and equity benefits payable to the named
executive officers upon termination of employment for various reasons, including
a change in control of the Company.  For purposes of this table, it is
assumed that the termination of employment occurred on March 31,
2010.  The Company is not contractually obligated to make payments
upon termination or change in control to any named executive officer not
included in the table below.





Name
            
            Termination
      Scenario
            
            Cash
      Benefit
            
            Equity
      AwardsGamal
      Kulumbetov
            
            For
      Good Reason(1)
            
            $ 64,502
            
            $ 0For
      Cause(2)
            
            $ 0
            
            $ 0Disability(3)
            
            $ 64,502
            
            $ 0Death(4)
            
            $ 0
            
            $ 0Extraordinary
      Event(5)
            
            $ 385,722
            
            $ 76,800(6)Askar
      Tashtitov
            
            For
      Good Reason(1)
            
            $ 76,589
            
            $ 0For
      Cause(2)
            
            $ 0
            
            $ 0Disability(3)
            
            $
      76,589
            
            $ 0Death(4)
            
            $ 0
            
            $ 0Extraordinary
      Event(5)
            
            $ 3,000,000
            
            $ 220,800(6)Evgeny
      Ler
            
            For
      Good Reason(1)
            
            $ 60,722
            
            $ 0For
      Cause(2)
            
            $ 0
            
            $ 0Disability(3)
            
            $ 60,722
            
            $ 0Death(4)
            
            $ 0
            
            $ 0Extraordinary
      Event(5)
            
            $ 363,118
            
            $ 105,600(6)Anuarbek
      Baimoldin
            
            For
      Good Reason(1)
            
            $ 60,722
            
            $ 0For
      Cause(2)
            
            $ 0
            
            $ 0Disability(3)
            
            $ 60,722
            
            $ 0Death(4)
            
            $ 0
            
            $ 0Extraordinary
      Event(5)
            
            $ 363,118
            
            $ 19,200(6)Toleush
      Tolmakov
            
            Termination
      for Any Reason
            
            $ 7,000
            
            $ 206,400














(1)
            In
      the event of termination for good reason by the officer, the Company will
      pay the officer the remainder of his salary for the calendar month in
      which the termination is effective and for six consecutive calendar months
      thereafter.  The officer shall also be entitled to any portion
      of incentive compensation for the year, prorated to the date of
      termination.  Notwithstanding the foregoing, if the officer
      obtains other employment prior to the end of the six-month period, salary
      payments by the Company after he begins employment with a new employer
      shall be reduced by the amount of the cash compensation received from the
      new employer.


(2)
            If
      the officer is terminated for cause, he will receive salary only through
      the date of termination and will not be entitled to any incentive
      compensation for the year in which his employment is
      terminated.


(3)
            If
      the termination is the result of a disability, the Company will pay salary
      for the rest of the month during which termination is effective and for
      the shorter of six consecutive months thereafter or until disability
      insurance benefits commence.


(4)
            If
      employment is terminated as a result of the death of the officer, his
      heirs shall be entitled to salary through the month in which his death
      occurs and to incentive compensation prorated through the month of his
      death.


(5)
            If
      the employment is terminated as a result of an extraordinary event, the
      officer shall be entitled to severance pay as
  follows:





Completed
      Years of EmploymentService with the Employer
            Severance
Amount





Less
      than one (1) year
            10%
      of Basic Compensation Salary





At
      least one (1) year but less than two (2) years
            150%
      of Basic Compensation Salary





More
      than two years
            299%
      of Basic Compensation Salary





As of
March 31, 2009, each of the named executive officers had been employed with the
Company more than two years.


(6)
            This
      column reflects the dollar value of additional shares (if any) that would
      vest at such time as the occurrence of an extraordinary event, calculated
      at $0.96 per share, which was the closing price of the Company’s common
      stock on March 31, 2010.





All benefits terminate on the date of
termination of the employment agreement.  The named executive officer
shall be entitled to accrued benefits pursuant to such plans as provided in such
plans or grants thereunder.  The named executive officer will not
receive any payment or other compensation for vacation, holiday, sick leave, or
other leave unused as of the date of the notice of
termination.





On
December 31, 2009 we entered into a Consulting Agreement with Boris Cherdabayev,
the Chairman of the Company’s board of directors.  Pursuant to the
Consulting Agreement, in addition to his services as Chairman of the board of
directors, Mr. Cherdabayev will provide such consulting and other services as
may reasonably be requested by Company management.  The Consulting
Agreement became effective on January 1, 2010.  The initial term of
the agreement is five years unless earlier terminated as provided in the
agreement. The initial term will automatically renew for additional one-year
terms unless and until terminated. The agreement may be terminated for Mr.
Cherdabayev’s death or disability and by the Company for cause.  The
Company may also terminate the agreement other than for cause, but will be
required to pay the full fee required under the agreement, which would have been
$912,000, if the agreement had been terminated as of March 31,
2010.












Pursuant
to the Consulting Agreement, Mr. Cherdabayev will be paid a base compensation
fee of $192,000 per year. This base compensation fee will be net of Social Tax
and Social Insurance Tax in the Republic of Kazakhstan, which shall be paid by
the Company. Mr. Cherdabayev will be responsible for Personal Income Tax and
Pension Fund Tax.  The success of projects involving Mr. Cherdabayev
shall be reviewed on an annual basis to determine whether the initial base
consulting fee should be increased.





The
Consulting Agreement provides for an extraordinary event payment equal to the
greater of $5,000,000 or the base compensation fee for the remaining initial
term of the Consulting Agreement. The Consulting Agreement defines an
extraordinary event as any consolidation or merger of the Company or any of its
subsidiaries with another person, or any acquisition of the Company or any of
its subsidiaries by any person or group of persons, acting in concert, equal to
fifty percent (50%) or more of the outstanding stock of the Company or any of
its subsidiaries, or the sale of forty percent (40%) or more of the assets of
the Company or any of its subsidiaries, or if one or more persons, acting alone
or as a group, acquires fifty percent (50%) or more of the total voting power of
the Company.





Had a
change in control event occurred as of March 31, 2010 an unvested restricted
stock grant of 280,000 common shares made to Mr. Cherdabayev as of January 1,
2010 would have immediately vested to Mr. Cherdabayev.  The value of
the shares based on the closing market price of the Company’s common stock as of
March 31, 2010 was $268,800.





Grants
of Plan-Based Awards





Name
            Grant
      Date
            All
      Other Stock Awards: Number of  Shares or Units of
      Stock(#)
            Grant Date Fair Value of
      Stock  Awards(1)Boris
      Cherdabayev
            01/01/2010
            280,000
            319,200Gamal
      Kulumbetov
            01/01/2010
            80,000
            91,200Askar
      Tashtitov
            01/01/2010
            230,000
            262,200Evgeny
      Ler
            01/01/2010
            110,000
            125,400Toleush
      Tolmakov
            01/01/2010
            215,000
            245,100Anuarbek
      Baimoldin
            01/01/2010
            20,000
            22,800





(1)
            For
      details regarding the assumptions made in the valuation of stock award,
      please see “Valuation of
      Stock Awards” on page 71.





Outstanding
Equity Awards at Fiscal Year End





The following table sets forth
information regarding the outstanding stock options and unvested restricted
stock grants held by our named executive officers as of March 31,
2009.













Option
      awards
            Stock
      awardsName
            Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
            Option
      exercise price
            Option
      expiration date
            Number
      of Shares or Units of Stock That Have Not Vested
              (#)
            Market
      Value of Shares or Units of Stock That Have Not Vested
  ($)Boris
      Cherdabayev
            410,256
      (1)
            4.75
            07/18/2010
            150,000(2)
            $
      807,000Boris
      Cherdabayev
            -0-
            -0-
            -
            280,000(2)
            319,200Gamal
      Kulumbetov
            -0-
            -0-
            -
            80,000(2)
            91,200Askar
      Tashtitov
            -0-
            -0-
            -
            230,000(2)
            262,200Evgeny
      Ler
            -0-
            -0-
            -
            110,000(2)
            125,400Toleush
      Tolmakov
            -0-
            -0-
            -
            215,000(2)
            245,100Anuarbek
      Baimoldin
            -0-
            -0-
            -
            20,000(2)
            22,800





(1)
            Option
      awards vested at the date they were granted.  The options to
      acquire 150,000 shares at an exercise price of $7.00 expired unexercised
      on June 20, 2009.


(2)
            The
      stock grants will vest on January 1,
2011.





Option
Exercises and Stock Vested





During
the 2010 fiscal year none of the named executive officers exercised
options.  The following table sets forth information regarding the
restricted shares vested as of March 31, 2010:





Name
            
            Number
      of Shares
              Acquired
      on Vesting
              (#)
            
            Value
      Realized
              On
      Vesting
              ($)Boris
      Cherdabayev
            
            150,000
            
            127,500(1)Boris
      Cherdabayev
            
            300,000
            
            258,000(2)Gamal
      Kulumbetov
            
            100,000
            
            85,000(1)Gamal
      Kulumbetov
            
            100,000
            
            86,000(2)Askar
      Tashtitov
            
            100,000
            
            85,000(1)Askar
      Tashtitov
            
            140,000
            
            120,400(2)Evgeny
      Ler
            
            80,000
            
            68,800(2)Toleush
      Tolmakov
            
            100,000
            
            85,000(1)Toleush
      Tolmakov
            
            150,000
            
            129,000(2)





(1)
            These
      shares vested on July 9, 2009.  Value realized on vesting was
      calculated based on a closing market price of $0.85 per share, which was
      the closing market price of the Company’s common stock on the date the
      shares vested.


(2)
            These
      shares vested on July 17, 2009.  Value realized on vesting was
      calculated based on a closing market price of $0.86 per share, which was
      the closing market price of the Company’s common stock on the date the
      shares vested.





Pension
Benefits





We do not currently offer pension
benefits to any of our employees including the named executive
officers.





Nonqualified
Deferred Compensation





We offer no defined contribution or
other plan that provide for the deferral of compensation on a basis that is not
tax-qualified to any of our employees including the named executive
officers.










Compensation
of Directors





We use a
combination of cash and equity-based compensation to attract and retain
candidates to serve on our board of directors.  We compensate the
non-employee members of our board of directors.





Director
Fees





Members of the board of directors who
are not also employees of the Company or its subsidiary are paid a $40,000
stipend per year.





Meeting
Fees





We also
pay the non-employee members of our board of directors $1,000 for each directors
meeting or shareholder meeting attended in person, plus airfare and hotel
expenses.





Equity
Compensation





We do not
currently have a fixed plan for the award of equity compensation to our
non-employee directors.  Equity compensation of independent directors,
if any, is typically recommended by the compensation committee or management and
is subject to approval of the full board of directors.  All equity
grants to directors are granted at a price equal to the fair market value of our
common stock on the date of the grant.





Director
Compensation Table





The following table sets forth a
summary of the compensation we paid to our non-employee directors for services
on our board during our 2010 fiscal year.  We do not compensate our
employee directors for their services on our board of directors.





Name
            Fees
      Earned or Paid in Cash
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)
            Non-Equity
      Incentive Plan Compensation
              ($)
            Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            All
      Other
              Compen-sation
              ($)
            Total
              ($)Jason
      Kerr
            40,000
            -0-
            -0-
            -0-
            -0-
            -0-
            40,000Troy
      Nilson
            40,000
            -0-
            -0-
            -0-
            -0-
            -0-
            40,000Stephen
      Smoot(2)
            16,739
            -0-
            -0-
            -0-
            -0-
            -0-
            16,739Leonard
      Stillman
            38,355
            -0-
            -0-
            -0-
            -0-
            4,500(1)
            42,855Valery
      Tolkachev
            40,000
            -0-
            -0-
            -0-
            -0-
            -0-
            40,000Daymon
      Smith(2)
            23,261
            -0-
            -0-
            -0-
            -0-
            -0-
            23,261Boris
      Cherdabayev(3)
            -0-
            319,200
            -0-
            -0-
            -0-
            251,309
            570,509Askar
      Tashtitov(3)
            -0-
            262,200
            -0-
            -0-
            -0-
            152,617
            414,817





(1)
            Mr.
      Stillman served as interim CFO of the Company from June 2008 to April
      2009.  The amount disclosed in this table represents salary paid
      to Mr. Stillman as interim CFO during our 2010 fiscal year.  For
      additional information regarding compensation paid to Mr. Stillman during
      the period he served as interim CFO, please see the “Summary Compensation
      Table” on page 69.


(2)
            Mr.
      Stephen Smoot resigned as a Company director on August 31,
      2009.  On September 3, 2009 Mr. Daymon Smith was appointed to
      fill the vacancy created on the board of directors by Mr. Smoot’s
      resignation.


(3)
            In
      addition to serving on the Company’s board of directors, Mr. Cherdabayev
      and Mr. Tashtitov are also employed by the Company.  All
      compensation paid to these individual, as reflected in the above table,
      was paid in connection with their employment with the
      Company.  For additional information regarding compensation paid
      to Mr. Cherdabayev and Mr. Tashtitov please see the “Summary Compensation
      Table” on page 69.












Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





The following table sets forth as of
June 2, 2010 the name and the number of shares of our common stock, par value of
$0.001 per share, held of record or beneficially by each person who held of
record, based on filings with the SEC, or was known by us to own beneficially,
more than 5% of the 51,865,015 issued and outstanding shares of our common
stock, and the name and shareholdings of each director and of all officers and
directors as a group.





Type of Security
            Name and Address
            Amount
      & Nature ofBeneficial
      Ownership
            %
      ofClass(5)Common
            Anuarbek
      Baimoldin
            20,000(4)
            *202
      Dostyk Ave., 4th
      FloorAlmaty,
      Kazakhstan 050051Common
            Boris
      Cherdabayev
            6,658,983(1)(4)
            12.7%202
      Dostyk Ave, 4th
      FloorAlmaty,
      Kazakhstan 050051Common
            JSC
      Compass Asset Management
            4,423,494
            8.5%240
      V Furmanov StreetAlmaty,
      Kazakhstan 050059Common
            Jason
      Kerr
            -0-
            *1038
      South 750 EastKaysville,
      Utah 84037Common
            Gamal
      Kulumbetov
            280,000(4)
            *202
      Dostyk Ave, 4th
      FloorAlmaty,
      Kazakhstan 050051Common
            Evgeniy
      Ler
            190,000(4)
            *202
      Dostyk Ave, 4th FloorAlmaty,
      KazakhCommon
            Troy
      Nilson
            -0-
            *533
      West 2600 South #250Bountiful,
      Utah 84010Common
            Daymon
      M. Smith
            -0-
            *352
      East 426 NorthAlpine,
      Utah 84004













Common
            Leonard
      M. Stillman
            -0-
            *5794
      West PollMountain
      Green, Utah 84050Common
            Askar
      Tashtitov
            480,000(4)
            *202
      Dostyk Ave, 4th
      FloorAlmaty,
      Kazakhstan 050051Common
            Valery
      Tolkachev
            150,000(2)
            *92
      Vernadskogo ave., app. 427Moscow,
      Russia 119571Common
            Toleush
      Tolmakov(3)
            6,036,960(4)
            12.1%Daulet
      village, oil storage depotAktau,
      Kazakhstan 466200Officers,
      Directors and Nominees
            7,778,983(4)
            14.9%as
      a Group: (10 persons)Total
            18,239,437(4)
            34.8%












(1)
            The
      shares attributed to Mr. Cherdabayev include 4,128,601 shares held of
      record by Mr. Cherdabayev, 2,106,126 shares held of record by or for the
      benefit of Westfall Group Limited, 14,000 shares held of record by Asael
      T. Sorensen for the benefit of Boris Cherdabayev and immediately
      exercisable options held by Mr. Cherdabayev to acquire 410,256 shares of
      our common stock at an exercise price of $4.75.  This option
      expires on July 18, 2010.  Mr. Cherdabayev is the sole owner of
      Westfall Group Limited.(2)
            The
      shares attributed to Mr. Tolkachev include 81,579 shares of common stock
      held of record by Mr. Tolkachev and immediately exercisable options to
      acquire 68,421 shares of our common stock at an exercise price of
      $4.75.  This option expires on July 18,
2010.(3)
            The
      shares attributed to Mr. Tolmakov include 3,265,365 shares held of record
      by Mr. Tolmakov and 2,986,595 shares held of record by Simage
      Limited.  Simage Limited is a company owned by Mr.
      Tolmakov.  Mr. Tolmakov is the General Director of our
      wholly-owned subsidiary Emir Oil LLP.(4)
            This
      includes shares awarded as restricted stock grants on January 1,
      2010.  Please see the Recent Sales of Unregistered
      Securities section of Item 5 Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securitieson page 34 of this report for details regarding the
      amount, terms and conditions of such grants.(5)
            The
      percentages reflect the increase in the number of common shares that would
      be issued in connection with the exercise of outstanding options held by
      the individual.











Mr. Baimoldin, Mr. Kulumbetov, Mr. Ler
and Mr. Tashtitov are executive officers of the Company.   Mr.
Cherdabayev, Mr. Kerr, Mr. Nilson, Dr. Smith, Mr. Stillman, Mr. Tashtitov and
Mr. Tolkachev comprise the board of directors of the Company.





Change
in Control





To the knowledge of the management,
there are no present arrangements or pledges of our securities the operation of
which may at a subsequent date result in a change in control of the
Company.





Securities
Authorized for Issuance Under Equity Compensation Plans





As of June 2, 2010, shares of our
common stock were subject to issuance upon the exercise of outstanding options
or warrants as set forth below.












Plan
      category
            Number
      of securities
              to
      be issued  upon
              exercise
      of
              outstanding
      options,
              warrants
      and rights
              
              (a)
            Weighted-average
              exercise
      price of
              outstanding
              options,
      warrants
              and
      rights
              
              (b)
            Number
      of securities
              remaining
      available for future issuance under equity
              compensation
      plans
              (excluding
      securities reflected in columns (a))
              (c)Equity
      compensation plans approved by security holders
            920,783
            $5.04
            4,025,000Equity
      compensation plans not approved by security holders
            -0-
            n/a
            n/aTotal
            920,783
            $5.04
            4,025,000





On July 18, 2005 our Board of Directors
approved stock option grants under our 2004 Stock Incentive Plan.  The
total number of option grants was 820,783.  The options are
exercisable at a price of $4.75, the closing price of our common stock on the
OTCBB on July 18, 2005.  The options expire five years from the grant
date.  The options vested immediately.  Among the parties
receiving stock options were the following executive officers and
directors:





Name
            
            Positions
      with Company
            
            Options
      GrantedBoris
      Cherdabayev
            
            Director
            
            410,256Valery
      Tolkachev
            
            Director
            
            68,421





In January 2006, we entered into a
separation agreement with our former CFO, Anuar Kulmagambetov, to issue Mr.
Kulmagambetov an option to purchase up to 100,000 shares of restricted common
stock of the Company at $7.40 per share expiring five years from the date of
grant.




Item
13. Certain Relationships and Related Transactions and Director
Independence




Related
Party Transactions





In accordance with the written policy
adopted by our board of directors and the NYSE Amex listing standards, our audit
committee is charged with monitoring and reviewing issues involving potential
conflicts of interests and reviewing and approving all related party
transactions.  In general, for purposes of the Company’s written
policy, a related party transaction is a transaction, or a material amendment to
any such transaction, involving a related party and the Company involving
$120,000 or more.  Our policy requires the audit committee to review
and approve related party transactions.  In reviewing and approving
any related party transaction or material amendment to any such transaction, the
audit committee must satisfy itself that it has been fully informed as to the
related party’s relationship to the Company and interest in the transaction and
as to the material facts of the transaction, and must determine that the related
party transaction is fair to the Company.










During our fiscal 2010, 2009 and 2008
we leased land, oil storage facilities and office and warehouse space in Aktau,
Kazakhstan from Term Oil LLC. During the fiscal years ended March 31, 2010, 2009
and 2008 we paid Term Oil $96,541, $221,903 and $254,427, respectively for the
use of these facilities.  Toleush Tolmakov, a BMB shareholder and the
General Director of Emir Oil, is the sole owner of Term Oil.  We
expect to continue to lease these facilities during our 2011 fiscal
year.





On June
26, 2009 we entered into a Debt Purchase Agreement with Simage Limited, a
British Virgin Islands international business corporation (“Simage”). Simage is
a company owned by Toleush Tolmakov.  Prior to the date of the Debt
Purchase Agreement, Simage had acquired by assignment, certain accounts
receivable owed by Emir to third-party creditors of Emir in the amount of
$5,973,185 (the “Obligations”). Pursuant to the terms of the Agreement, Simage
assigned to the Company all rights, title and interests in and to the
Obligations in exchange for the issuance of 2,986,595 shares of common stock of
the Company.  The market value of the shares of common stock issued to
Simage, at the agreement date, was $3,076,193.  The market value was
based on $1.03 per share, which was the closing market price of the Company’s
shares on June 26, 2009.





As a
result of this Agreement, the Company has effectively been released of accounts
payable obligations amounting to $5,973,185. The Company has treated this
Agreement as a related party transaction, due to the fact that Simage is owned
by a Company shareholder. Therefore, the difference between the settled amount
of accounts payable and the value of the common stock issued, which amounts to
$2,896,997, has been treated as a capital contribution by the shareholder and
recognized as an addition to additional-paid-in-capital rather than a gain on
settlement of debt.





On March 31, 2010 Emir Oil entered into
an agreement for the Conduction of 3D Seismic Survey with Geo Seismic Service
LLP (“Geo Seismic”) to carry out 3D seismic exploration activities of the
Begesh, Aday, North Aday and West Aksaz structures, an area of approximately 96
square kilometers within the Company’s Northwest Block.  In exchange
for these services, Emir will pay Geo Seismic 570,000,000 Kazakh tenge
($3,800,000 USD).  In lieu of payment in Kazakh tenge, Emir, at its
sole election, may deliver restricted shares of BMB common stock at the agreed
value of the higher of: (i) the average closing price of BMB Munai, Inc. common
shares over the five days prior to final acceptance by Emir of the 3D seismic
work; or (ii) $2.00 per share.  The maximum number of shares which may
be delivered as payment in full shall not exceed 1,900,000 restricted common
shares.  Toleush Tolmakov is a 30% owner of Geo Seismic.





As discussed above in Item 11. Executive Compensation on
December 31, 2009, we entered into a Consulting Agreement with Boris
Cherdabayev, the Chairman of our board of directors.  Pursuant to the
Consulting Agreement, in addition to his services as Chairman of the board of
directors, Mr. Cherdabayev will provide such consulting and other services as
may reasonably requested by Company management.  The Consulting
Agreement is for an initial term of five years and provides for an annual
salary, net of Kazakhstani social taxes and social insurance.  We
anticipate payments to Mr. Cherdabayev under the Consulting Agreement during our
2011 fiscal year will be at least $192,000.  See Item 11. Executive Compensationbeginning on page 64 of this report for additional information regarding
the Consulting Agreement and compensation paid to Mr. Cherdabayev.












Director
Independence





The board
of directors has determined that Boris Cherdabayev the Chairman of our board of
directors and Askar Tashtitov, our Company president would not be considered
“independent directors” as that term is defined in the listing standards of the
NYSE Amex.  The board of directors has determined that Jason Kerr,
Troy Nilson, Leonard Stillman, Daymon Smith and Valery Tolkachev are
“independent directors” as that term is defined in the listing standards of the
NYSE Amex.  Such independence definition includes a series of
objective tests, including that the director is not an employee of the company
and has not engaged in various types of business dealings with the
company.  In addition, as further required by NYSE Amex listing
standards, the board of directors has made a subjective determination as to each
independent director that no relationships exist which, in the opinion of the
board of directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.





Item
14.  Principal Accountant Fees and Services





Hansen, Barnett and Maxwell, P.C.
served as the Company’s independent registered public accounting firm for the
years ended March 31, 2010 and 2009 and is expected to serve in that capacity
for the 2011 fiscal year.  Principal accounting fees for professional
services rendered for us by Hansen, Barnett & Maxwell, P.C. for the years
ended March 31, 2010 and 2009, are summarized as follows:





Fiscal
      2010
            
            Fiscal
      2009Audit
            $
      231,949
            
            $ 164,221Audit
      related
            37,225
            
            13,585Tax
            34,444
            
            2,777All
      other
            -
            
            -Total
            $
      303,618
            
            $
      180,583





Audit Fees.  Audit
fees were for professional services rendered in connection with the audit of the
financial statements included in our Annual Report on Form 10-K and review of
the financial statements included in our Quarterly Reports of Form 10-Q and for
services normally provided by our independent registered public accounting firm
in connection with statutory and regulatory filings or engagements and fees for
Sarbanes-Oxley 404 audit work.





Tax Fees.  Hansen
Barnett & Maxwell, P.C. billed us an aggregate of $34,444 for professional
services rendered for tax compliance, tax advice and tax planning within the
United States for the fiscal year ended March 31, 2009.





Audit Committee Pre-Approval
Policies and Procedures.   The Audit Committee had not, as
of the time of filing this Annual Report on Form 10-K with the Securities and
Exchange Commission, adopted policies and procedures for pre-approving all audit
services and  permitted non-audit services to be performed by our
independent auditors. Instead, the Audit Committee has adopted a practice to
meet as a whole to pre-approve any such services prior to the time they are
performed.  In the future, our Audit Committee may adopt pre-approval
policies and procedures to approve the services of our independent registered
public accounting, provided the policies and procedures are detailed as to the
particular service, the Audit Committee is informed of each service, and such
policies and procedures do not include delegation of the Audit Committee’s
responsibilities to our management.










The Audit
Committee has determined that the provision of services by Hansen, Barnett &
Maxwell, P.C. described above are compatible with maintaining Hansen, Barnett
& Maxwell, P.C.’s independence as our independent registered public
accounting firm.







Item
15.  Exhibits, Financial Statement Schedules




(a)           The
following documents are filed as part of this report:





Financial
Statements





Report of
Independent Registered Public Accounting Firm – Hansen, Barnett & Maxwell,
P.C. dated June 23, 2010





Consolidated Balance Sheets as of March
31, 2010 and 2009





Consolidated
Statements of Operations for the years ended March 31, 2010, 2009 and
2008





Consolidated
Statements of Shareholders’ Equity for the years ended March 31, 2010, 2009 and
2008





Consolidated
Statements of Cash Flows for the years ended March 31, 2010, 2009 and
2008





Notes to
the Consolidated Financial Statements





Supplementary
Financial Information of Oil and Natural Gas Exploration, Development and
Production Activities (unaudited)





Financial Statement
Schedules





Schedules
are omitted because the required information is either inapplicable or presented
in the consolidated financial statements or related notes.












Exhibits





Exhibit
      No.
            
            Exhibit
      Description2.1
            
            Certificate
      of Merger dated February 15, 1994(1)2.2
            
            Plan
      and Agreement of Merger dated February 15, 1994(2)2.3
            
            Plan
      and Agreement of Merger(7)3.1
            
            Certificate
      of Incorporation of AU ‘N AUG dated February 15, 1994(1)3.2
            
            Certificate
      of Amendment to Certificate of Incorporation of AU ‘N AUG dated April 11,
      1994(1)3.3
            
            Certificate
      of Amendment to Certificate of Incorporation of InterUnion Financial
      Corporation dated October 17, 1994(1)3.4
            
            Amended
      Certificate of Incorporation(8)3.5
            
            Articles
      of Incorporation of BMB Munai, Inc.(13)3.6
            
            Amendment
      to Articles of Incorporation of BMB Munai, Inc.(16)3.7
            
            Bylaws
      of InterUnion Financial Corporation(1)3.8
            
            Amended
      By-Laws(11)3.9
            
            By-Laws
      of BMB Munai, Inc. (as amended through January 13, 2005)(13)3.10
            
            By-Laws
      of BMB Munai, Inc. (as amended through June 23, 2006)(16)3.11
            
            Certificate
      of Amendment of By-Laws of BMB Munai, Inc. (as amended through March 26,
      2008)(22)4.1
            
            Instruments
      Defining the Rights of Security Holders Including Indentures(2)4.2
            
            BMB
      Munai, Inc. 2004 Stock Incentive Plan(12)4.3
            
            Registration
      Rights Agreement dated December 2005(15)4.4
            
            Trust
      Deed Relating to U.S. $60,000,000 5.0 per cent Convertible Notes due
      2012(19)4.5
            
            Registration
      Rights Agreement dated July 13, 2007(19)4.6
            
            Paying
      and Conversion Agency Agreement dated July 13, 2007(19)4.7
            
            Form
      of 5.0% Convertible Notes due 2012(19)4.8
            
            Indenture
      dated September 19, 2007(20)4.9
            
            Form
      of 5.0% Convertible Senior Note due 2012(20)4.10
            
            BMB
      Munai, Inc. 2009 Equity Incentive Plan(23)10.1
            
            ITM
      Software Development Agreement(2)10.2
            
            Letter
      of Understanding dated November 30, 1995(2)10.3
            
            Investment
      Management Agreement dated December 20, 1995(3)10.4
            
            Agreement
      between Havensight Holdings Ltd. and InterUnion Financial Corporation
      dated January 19, 1995(3)10.5
            
            Letter
      of Understanding dated September 26, 1996(4)10.6
            
            Letter
      Agreement dated January 7, 1997(4)10.7
            
            Amendment
      to Letter of Understanding dated April 16, 1997(5)10.8
            
            Services
      Agreement dated July 5, 2002(6)10.9
            
            Agency
      Agreement dated November 26, 2003(7)10.10
            
            Share
      Purchase and Sale Agreement dated May 24, 2004(9)10.11
            
            Addendum
      No.3 to Emir Oil Contract(14)10.12
            
            Form
      Restricted Stock Agreement of BMB Munai, Inc. dated March 30, 2007 (17)10.13
            
            Form
      Employment Agreement(18)10.14
            
            Placement
      Agreement dated July 13, 2007(19)











10.15
            
            Indenture
      dated September 19, 2007(20)10.16
            
            Consulting
      Agreement dated November 19, 2007(21)10.17
            
            Addendum
      No. 5 to Emir Oil Contract(24)10.18
            
            Form
      Restricted Stock Agreement of BMB Munai, Inc. dated July 17, 2008 (25)10.19
            
            Employment
      Agreement – Leonard Stillman(25)10.20
            
            Revised
      Consulting Agreement dated September 16, 2008(26)10.21
            
            Addendum
      No. 6 to Emir Oil Contract(27)10.22
            
            Addendum
      No. 7 to Emir Oil Contract(28)10.23
            
            Contract
      No. EO-EAO/30-12 for the Sales and Purchase of Crude Oil (export)(29)10.24
            
            Additional
      Agreement #9A to the Contract No. EO-EAO/30-12(29)10.25
            
            Enclosure
      #1 to the Contract No. EO-EAO/30-12(29)10.26
            
            Additional
      Agreement #27A to the Contract No. EO-EAO/30-12(29)10.27
            
            Debt
      Purchase Agreement, dated June 26, 2009, between BMB Munai, Inc. and
      Simage Limited(30)10.28
            
            Form
      of BMB Munai, Inc. Restricted Stock Agreement dated January 1, 2010(31)10.29
            
            Form
      of Employment Agreement dated December 31, 2009(31)10.30
            
            Consulting
      Agreement, dated December 31, 2009, between BMB Munai, Inc. and Boris
      Cherdabayev(31)10.31
            
            Conduction
      of 3D Seismic Survey, dated March 31, 2010, between “Geo Seismic Services”
      LLP and “Emir-Oil” LLP(32)10.32
            
            Supplemental
      Indenture No. 1, dated June 1, 2010, between BMB Munai, Inc. and The Bank
      of New York Mellon, as trustee(33)12.1
            
            Computation
      of Earnings to Fixed Charges14.1
            
            Code
      of Ethics(10)21.1
            
            Subsidiaries23.1
            
            Consent
      of Chapman Petroleum Engineering Ltd., Independent Petroleum
      Engineers*23.2
            
            Consent
      of Hansen, Barnett & Maxwell, P.C., Independent Registered Public
      Accounting Firm*31.1
            
            Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*31.2
            
            Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*32.1
            
            Certification
      of Principal Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002*32.2
            
            Certification
      of Principal Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002*99.1
            
            Chapman
      Petroleum Engineering Ltd. Letter on its estimation of our proved oil and
      gas reserves at March 31, 2010*










*   Filed
herewith.


(1)  Incorporated
by reference to the Registration Statement of the Registrant on Form 10-SB filed
with the Commission on August 7, 1996.


(2)  Incorporated
by reference to the Amended Registration Statement of the Registrant on Form
10-SB/A filed with the Commission on November 14, 1996.


(3)  Incorporated
by reference to the Amended Registration Statement of the Registrant on Form
10-SB/A filed with the Commission on March 31, 1997.


(4)  Incorporated
by reference to the Amended Registration Statement of the Registrant on Form
10-SB/A filed with the Commission on April 15, 1997.


(5)  Incorporated
by reference to Registrant’s Annual Report on Form 10-KSB filed with the
Commission on June 20, 1997.


(6)  Incorporated
by reference to the Registration Statement of the Registrant on S-8 filed with
the Commission on August 30, 2002.


(7)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on December 11, 2003.


(8)  Incorporated
by reference to Registrant’s Quarterly Report on Form 10-QSB filed with the
Commission on February 20, 2004.


(9)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on May 25, 2004.


(10)  Incorporated
by reference to Registrant’s Annual Report on Form 10-KSB filed with the
Commission on June 29, 2004.


(11)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on September 3, 2004.


(12)  Incorporated
by reference to Registrant’s Definitive Proxy Statement on Schedule 14A filed
with the Commission on September 20, 2004.


(13)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on January 18, 2005.


(14)  Incorporated
by reference to Registrant’s Quarterly Report on Form 10-QSB filed with the
Commission on February 14, 2005.


(15)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on December 29, 2005.


(16)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on June 26, 2006.


(17)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on April 5, 2007.


(18)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on April 12, 2007.


(19)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on July 19, 2007.


(20)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on September 25, 2007.


(21)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on November 21, 2007.


(22)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on April 1, 2008.


(23)  Incorporated
by reference to Registrant’s Revised Definitive Proxy Statement on Schedule 14A
filed with the Commission on June 23, 2008.


(24)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on June 25, 2008.


(25)  Incorporated
by reference to Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on August 11, 2008.


(26)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on September 16, 2008.


(27)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on October 21, 2008.





86








(28)  Incorporated
by reference to Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on February 6, 2009.


(29)  Incorporated
by reference to Registrant’s Annual Report on Form 10-K filed with the
Commission on June 15, 2009.


(30)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on June 29, 2009.


(31)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on January 6, 2010.


(32)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on April 6, 2010.


(32)  Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with the
Commission on June 11, 2010.











SIGNATURES





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





BMB
      MUNAI, INC.Date:  June
      23, 2010
            
            By:
            /s/ Gamal
      KulumbetovGamal
      KulumbetovChief
      Executive Officer(Duly
      Authorized Representative)





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dated indicated.





Signatures
            
            Title
            
            Date/s/ Gamal
      Kulumbetov
            
            Chief
      Executive Officer
            
            June
      23, 2010Gamal
      Kulumbetov/s/ Evgeny
      Ler
            
            Chief
      Financial Officer
            
            June
      23, 2010Evgeny
      Ler/s/ Boris
      Cherdabayev
            
            Chairman
      of the Board of Directors
            
            June
      23, 2010Boris
      Cherdabayev/s/ Jason
      Kerr
            
            Director
            
            June
      23, 2010Jason
      Kerr/s/ Troy
      Nilson
            
            Director
            
            June
      23, 2010Troy
      Nilson/s/ Daymon
      Smith
            
            Director
            
            June
      23, 2010Daymon
      Smith/s/
      Leonard Stillman
            
            Director
            
            June 23, 2010Leonard
      Stillman/s/ Askar
      Tashtitov
            
            Director
            
            June
      23, 2010Askar
      Tashtitov/s/
      Valery
      Tolkachev
            
            Director
            
            June
      23, 2010Valery
      Tolkachev


























CONSOLIDATED
      FINANCIAL STATEMENTS


FOR
      THE YEARS ENDED MARCH 31, 2010, 2009 AND
2008




















Table
of Contents





PageReport
      of Independent Registered Public Accounting Firm – Hansen, Barnett &
      Maxwell P.C.
            F-1Consolidated
      Balance Sheets as of March 31, 2010 and 2009
            F-2Consolidated
      Statements of Operations for the years ended March 31, 2010, 2009 and
      2008
            F-3Consolidated
      Statements of Shareholders’ Equity for the years ended March 31, 2010,
      2009 and 2008
            F-4Consolidated
      Statements of Cash Flows for the years ended March 31, 2010, 2009 and
      2008
            F-5Notes
      to the Consolidated Financial Statements
            F-7Supplementary
      Financial Information on Oil and Natural Gas Exploration, Development, and
      Production Activities (unaudited)
            F-49







HANSEN,BARNETT& MAXWELL,
    P.C.A
      Professional CorporationCERTIFIED
      PUBLIC ACCOUNTANTS5
      Triad Center, Suite 750Salt
      Lake City, UT 84180-1128Phone:
      (801) 532-2200Fax:
      (801) 532-7944www.hbmcpas.com






REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and


Stockholders
of BMB Munai, Inc.





We have
audited the accompanying consolidated balance sheets of BMB Munai, Inc. and
subsidiary as of March 31, 2010 and 2009, and the related consolidated
statements of operations, shareholder’s equity, and cash flows for each of the
years in the three-year period ended March 31, 2010. BMB Munai, Inc.’s
management is responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BMB Munai, Inc. and
subsidiary as of March 31, 2010 and 2009, and the results of its operations and
its cash flows for each of the years in the three-year period ended March 31,
2010 in conformity with accounting principles generally accepted in the United
States of America.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), BMB Munai, Inc.’s internal control over
financial reporting as of March 31, 2010, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated June 23, 2010 expressed an
unqualified opinion.








/s/ Hansen, Barnett & Maxwell,
P.C.


HANSEN, BARNETT & MAXWELL,
P.C.





Salt Lake
City, Utah


June 23,
2010





F-1


BMB
MUNAI, INC.





CONSOLIDATED
BALANCE SHEETS





Notes
            March
      31, 2010
            
            March
      31, 2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            3
            $
      6,440,394
            
            $
      6,755,545Trade
      accounts receivable
            
            6,423,402
            
            3,081,573Prepaid
      expenses and other assets, net
            4
            4,083,917
            
            3,054,078Total
      current assets
            
            16,947,713
            
            12,891,196LONG
      TERM ASSETSOil
      and gas properties, full cost method, net
            5
            238,601,842
            
            238,728,413Gas
      utilization facility
            6
            13,569,738
            
            13,470,631Inventories
      for oil and gas projects
            7
            13,717,847
            
            14,002,146Prepayments
      for materials used in oil and gas projects
            
            141,312
            
            122,040Other
      fixed assets, net
            8
            3,815,422
            
            3,629,108Long
      term VAT recoverable
            9
            3,113,939
            
            2,423,940Convertible
      notes issue cost
            
            1,201,652
            
            2,490,370Restricted
      cash
            10
            770,553
            
            588,217Total
      long term assets
            
            274,932,305
            
            275,454,865TOTAL
      ASSETS
            
            $
      291,880,018
            
            $
      288,346,061LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
            
            $
      3,948,851
            
            $
      21,771,137Accrued
      coupon payment
            11
            641,667
            
            641,667Taxes
      Payable, Accrued liabilities and other payables
            
            4,802,361
            
            1,697,097Total
      current liabilities
            
            9,392,879
            
            24,109,901LONG
      TERM LIABILITIESConvertible
      notes issued, net
            11
            62,178,119
            
            61,331,521Liquidation
      fund
            12
            4,712,345
            
            4,263,994Deferred
      taxes
            13
            4,964,382
            
            6,516,444Capital
      lease liability
            14
            369,801
            
            -Total
      long term liabilities
            
            72,224,647
            
            72,111,959COMMITMENTS
      AND CONTINGENCIES
            23
            -
            
            -SHAREHOLDERS’
      EQUITYPreferred
      stock - $0.001 par value; 20,000,000 shares authorized; no shares issued
      or outstanding
            15
            -
            
            -Common
      stock - $0.001 par value; 500,000,000 shares authorized, 51,865,015 and
      47,378,420 shares outstanding, respectively
            15
            51,865
            
            47,378Additional
      paid in capital
            15
            160,653,969
            
            151,513,638Retained
      earnings
            
            49,556,658
            
            40,563,185Total
      shareholders’ equity
            
            210,262,492
            
            192,124,201TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
      291,880,018
            
            $
      288,346,061





The
accompanying notes are an integral part of these consolidated financial
statements.


F-2
 
 BMB
MUNAI, INC.
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS


Notes
            Year
      ended
              March
      31, 2010
            
            Year
      ended
              March
      31, 2009
            
            Year
      ended
              March
      31, 2008REVENUES
            16
            $
      57,274,526
            
            $
      69,616,875
            
            $
      60,196,626COSTS
      AND OPERATING EXPENSESRent
      export tax
            17
            10,032,857
            
            467,359
            
            -Export
      duty
            17
            -
            
            6,783,278
            
            -Oil
      and gas operating
            
            8,568,453
            
            7,530,653
            
            5,515,403General
      and administrative
            
            14,042,577
            
            22,262,248
            
            14,747,754Consulting
      expenses
            18
            -
            
            8,662,500
            
            -Depletion
            5
            11,075,590
            
            10,403,328
            
            9,419,655Interest
      expense
            11
            4,604,446
            
            1,138,874
            
            -Amortization
      and depreciation
            
            613,953
            
            324,028
            
            239,155Accretion
      expense
            12
            448,351
            
            449,025
            
            254,572Total
      costs and operating expenses
            
            49,386,227
            
            58,021,293
            
            30,176,539INCOME
      FROM OPERATIONS
            
            7,888,299
            
            11,595,582
            
            30,020,087OTHER
      INCOME / (EXPENSE)Foreign
      exchange (loss)/gain, net
            19
            (353,401)
            
            2,592,341
            
            47,362Disgorgement
      funds received
            20
            -
            
            1,650,293
            
            -Interest
      income
            
            275,136
            
            391,223
            
            1,257,666Other
      expense, net
            
            (368,623)
            
            (100,153)
            
            (118,133)Total
      other (expense)/income
            
            (446,888)
            
            4,533,704
            
            1,186,895INCOME
      BEFORE INCOME TAXES
            
            7,441,411
            
            16,129,286
            
            31,206,982INCOME
      TAX BENEFIT
            13
            1,552,062
            
            1,028,272
            
            103,582NET
      INCOME
            
            $
      8,993,473
            
            $
      17,157,558
            
            $
      31,310,564BASIC
      NET INCOME PER COMMON SHARE
            21
            $
      0.18
            
            $
      0.37
            
            $
      0.70DILUTED
      NET INCOME PER COMMON SHARE
            21
            $
      0.18
            
            $
      0.37
            
            $
      0.70





The
accompanying notes are an integral part of these consolidated financial
statements.


F-3
 
 BMB
MUNAI, INC.
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY




Notes
              Common
      Stock
              
              Additional
      paid-in capital
              
              (Accumulated
      deficit)/ Retained earnings
              
              TotalShares
              
              AmountAt
      March 31, 2007
              
              44,690,657
              
              $
      44,691
              
              $
      133,721,865
              
              $
      (7,904,937)
              
              $
      125,861,619Options
      and warrants exercised
              
              93,477
              
              93
              
              328,577
              
              -
              
              328,670Expense
      related to vesting stock - based compensation
              
              -
              
              -
              
              2,303,078
              
              -
              
              2,303,078Net
      income for the year
              
              -
              
              -
              
              -
              
              31,310,564
              
              31,310,564At
      March 31, 2008
              
              44,784,134
              
              44,784
              
              136,353,520
              
              23,405,627
              
              159,803,931Options
      and warrants exercised
              
              14,286
              
              14
              
              49,987
              
              -
              
              50,001Expense
      related to vesting stock-based compensation
              
              -
              
              -
              
              2,271,556
              
              -
              
              2,271,556Stock
      grants and stock options issued to employees
              
              1,330,000
              
              1,330
              
              5,177,325
              
              -
              
              5,178,655Stock
      grants and stock options       issued
      to non-employees
              
              1,250,000
              
              1,250
              
              7,661,250
              
              -
              
              7,662,500Net
      income for the year
              
              -
              
              -
              
              -
              
              17,157,558
              
              17,157,558At
      March 31, 2009
              
              47,378,420
              
              47,378
              
              151,513,638
              
              40,563,185
              
              192,124,201Expense
      related to vesting stock-based compensation
              15
              -
              
              -
              
              2,744,133
              
              -
              
              2,744,133Stock
      grants issued to employees
              15
              1,500,000
              
              1,500
              
              426,000
              
              -
              
              427,500Debt
      conversion
              22
              2,986,595
              
              2,987
              
              5,970,198
              
              -
              
              5,973,185Net
      income for the year
              
              -
              
              -
              
              -
              
              8,993,473
              
              8,993,473At
      March 31, 2010
              
              51,865,015
              
              $
      51,865
              
              $
      160,653,969
              
              $
      49,556,658
              
              $
      210,262,492




The
accompanying notes are an integral part of these consolidated financial
statements.


F-4
 
 BMB
MUNAI, INC.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS





Notes
            Year
      ended March 31, 2010
            
            Year
      ended March 31, 2009
            
            Year
      ended
              March
      31,
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
      8,993,473
            
            $
      17,157,558
            
            $
      31,310,564Adjustments
      to reconcile net income to net cash providedby
      operating activities:Depletion
            5
            11,075,590
            
            10,403,328
            
            9,419,655Depreciation
      and amortization
            8
            613,953
            
            324,028
            
            239,155Interest
      expense
            11
            4,604,446
            
            1,138,874
            
            -Accretion
      expense
            12
            448,351
            
            449,025
            
            254,572Stock
      based compensation expense
            
            3,171,633
            
            7,450,211
            
            2,303,078Stock
      issued for services
            18
            -
            
            7,662,500
            
            -(Recovery
      of provision)/provision expense for uncollectible advances and
      prepayments
            
            -
            
            (121,302)
            
            135,502Loss
      on disposal of fixed assets
            
            14,230
            
            113,666
            
            75,883Income
      tax benefit
            13
            (1,552,062)
            
            (1,028,272)
            
            (103,582)Changes
      in operating assets and liabilities(Increase)/decrease
      in trade accounts receivable
            
            (3,341,829)
            
            2,784,139
            
            (1,871,050)(Increase)/decrease
      in prepaid expenses and other assets
            
            (1,029,839)
            
            482,485
            
            (1,490,739)(Increase)/decrease
      in VAT recoverable
            
            (689,999)
            
            5,682,457
            
            (3,755,338)(Decrease)/increase
      in current liabilities
            
            (8,212,967)
            
            884,441
            
            13,463,494Net
      cash provided by operating activities
            
            14,094,980
            
            53,383,138
            
            49,981,194CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      and development of oil and gas properties
            5
            (7,296,163)
            
            (47,495,078)
            
            (68,331,668)Purchase
      of other fixed assets
            8
            (898,870)
            
            (5,369,509)
            
            (2,110,809)Cash
      paid for convertible notes coupon, capitalized as oil and gas
      properties
            
            -
            
            (3,000,000)
            
            (1,500,000)Increase
      in inventories and prepayments for materialsused
      in oil and gas projects
            
            (2,957,762)
            
            (8,086,324)
            
            (26,394,755)Increase
      in gas utilization facility/construction in progress
            6
            (75,000)
            
            -
            
            (2,798,498)(Increase)/decrease
      in restricted cash
            
            (182,336)
            
            34,480
            
            (319,000)Net
      cash used in investing activities
            
            (11,410,131)
            
            (63,916,431)
            
            (101,454,730)CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible debt
            
            -
            
            -
            
            56,210,763Proceeds
      from exercise of common stock options and warrants
            
            -
            
            50,001
            
            328,670Cash
      paid for convertible notes coupon
            
            (3,000,000)
            
            -
            
            -Net
      cash (used in)/provided by financing activities
            
            (3,000,000)
            
            50,001
            
            56,539,433NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            (315,151)
            
            (10,483,292)
            
            5,065,897CASH
      AND CASH EQUIVALENTS at beginning of year
            
            6,755,545
            
            17,238,837
            
            12,172,940CASH
      AND CASH EQUIVALENTS at end of year
            
            $
      6,440,394
            
            $
      6,755,545
            
            $
      17,238,837





The
accompanying notes are an integral part of these consolidated financial
statements.


F-5
 
 BMB
MUNAI, INC.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)


Year
      ended March 31, 2010
            
            Year
      ended March 31, 2009
            
            Year
      ended
              March
      31,
              2008Non-Cash
      Investing and Financing ActivitiesAsset
      retirement obligation incurred in property development, net of estimate
      revision
            
            $              -
            
            $
      86,438
            
            $
      1,308,130Transfers
      from oil and gas properties, construction in progress and other fixed
      assets to gas utilization facility
            6
            24,107
            
            13,470,631
            
            -Coupon
      payments on convertible notes, capitalized as part of oil and gas
      properties
            11
            -
            
            2,250,000
            
            2,141,667Accretion
      of discount on convertible notes, capitalized as part of oil and gas
      properties
            
            -
            
            596,654
            
            535,455Amortization
      of convertible notes issue costs, capitalized as part of oil and gas
      properties
            
            -
            
            568,386
            
            541,019Depreciation
      on other fixed assets capitalized as oil and gas
properties
            5
            454,174
            
            353,545
            
            180,804Addition
      of other fixed assets under capital  lease
    contract
            8
            369,801
            
            -
            
            -Issuance
      of common stock for the settlement of liabilities
            22
            5,973,185
            
            -
            
            -Transfer
      of inventory and prepayments for materials used in oil and gas projects to
      oil and gas properties
            5
            3,147,789
            
            16,284,487
            
            15,236,315Supplemental
      Cash Flow InformationCash
      paid for interest
            
            $
      3,000,000
            
            $
      3,000,000
            
            $
      1,500,000





The
accompanying notes are an integral part of these consolidated financial
statements.





F-6
 
 BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
      1 - DESCRIPTION OF BUSINESS





The
corporation now known as BMB Munai, Inc. (“BMB Munai” or the “Company”), a
Nevada corporation, was originally incorporated in Utah in July 1981. On
February 7, 1994, the corporation changed its name to InterUnion Financial
Corporation (“InterUnion”) and its domicile to Delaware. BMB Holding, Inc. (“BMB
Holding”) was incorporated on May 6, 2003 for the purpose of acquiring and
developing oil and gas fields in the Republic of Kazakhstan. On November 26,
2003, InterUnion executed an Agreement and Plan of Merger (the “Agreement”) with
BMB Holding. As a result of the merger, the shareholders of BMB Holding obtained
control of the corporation. BMB Holding was treated as the acquirer for
accounting purposes. A new board of directors was elected that was comprised
primarily of the former directors of BMB Holding and the name of the corporation
was changed to BMB Munai, Inc. BMB Munai changed its domicile from Delaware to
Nevada on December 21, 2004.





The
Company’s consolidated financial statements presented are a continuation of BMB
Holding, and not those of InterUnion Financial Corporation, and the capital
structure of the Company is now different from that appearing in the historical
financial statements of InterUnion Financial Corporation due to the effects of
the recapitalization.





The
Company has a representative office in Almaty, Republic of
Kazakhstan.





From
inception (May 6, 2003) through January 1, 2006 the Company had minimal
operations and was considered to be in the development stage. The Company began
generating significant revenues in January 2006 and is no longer in the
development stage.





Currently
the Company has completed twenty-four wells. As discussed in more detail in Note
2, the Company engages in exploration of its licensed territory pursuant to an
exploration license and has not yet applied for or been granted a commercial
production license.








NOTE
      2 - SIGNIFICANT ACCOUNTING POLICIES





Business
condition





As
further discussed in detail in Note 11, in July 2007 the Company issued 5.0%
Convertible Senior Notes due 2012 in the amount of $60,000,000.  Among
other terms of the Notes, the Noteholders had the right to require the Company
redeem all or a portion of the notes on three separate dates, including July 13,
2010.  The first two dates passed without the redemption right being
exercised.  The Company and the Noteholders are in the process of
negotiating a restructuring of the Notes and on June 7, 2010 entered into
Supplemental Indenture No. 1 dated June 1, 2010 that grants a fourth put date
that commenced June 13, 2010 and expires September 13, 2010.  The
intent of the fourth put date is to allow time to work out a debt restructuring
agreeable to all parties.













BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





If the
Company and Noteholders are not able to agree on a debt restructuring, and the
Noteholders exercise their redemption right, the Company will need to pursue
other financing options and there is no guarantee that they can be
obtained.





Prior to
entering into the Supplemental Indenture, the Company was in default under
certain covenants contained in Article 9 of the Indenture requiring the Company
to maintain a minimum net debt to equity ratio and to comply with certain
notice, delivery and other provisions.  In the context of the
Indenture, the equity portion of the ratio is determined by reference to the
market value of the Company’s common stock, not the Company’s book value. The
market value of the Company’s stock has declined since the Notes were
issued.  The Noteholders have separately agreed to contingently waive
these defaults until the earlier of: (i) September 1, 2010 or (ii) the fourth
put date (as contained in the Supplemental Indenture), with the understanding
that such waiver shall not constitute a waiver of any default under the
Indenture that remains ongoing as of September 1, 2010 or occurs after June 8,
2010.  The Company currently believes it will not be able to remedy
the net debt to equity ratio covenant by September 1, 2010 and, therefore,
anticipates it will be in default under the Indenture at that time unless a
future waiver is obtained from the Noteholders.  There is no assurance
the Noteholders will provide any future waiver or any further extension of their
redemption put rights under the Indenture.





Basis
of consolidation





The
Company’s consolidated financial statements present the consolidated results of
BMB Munai, Inc., and its wholly owned subsidiary, Emir Oil LLP (hereinafter
collectively referred to as the “Company”). All significant inter-company
balances and transactions have been eliminated from the Consolidated Financial
Statements.





Reclassifications





Certain
reclassifications have been made in the financial statements for the year
ended March 31, 2009 to conform to the March 31,
2010 presentation. The reclassifications had no effect on net
income.





Use
of estimates





The
preparation of Consolidated Financial Statements in conformity with US GAAP
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities at the date of the Consolidated Financial Statements and
revenues and expenses during the reporting period. Accordingly, actual results
could differ from those estimates and affect the results reported in these
Consolidated Financial Statements.













BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






Concentration
of credit risk and accounts receivable
  Financial
instruments that potentially subject the Company to a concentration of credit
risk consist principally of cash and accounts receivable. The Company places its
cash with high credit quality financial institutions. Substantially all of the
Company’s accounts receivable are from purchasers of oil and gas. Oil and gas
sales are generally unsecured. The Company has not had any significant credit
losses in the past and believes its accounts receivable are fully collectable.
Accordingly, no allowance for doubtful accounts has been
provided.





Licences
and contracts





Emir Oil
LLP is the operator of the Company’s oil and gas fields in Western Kazakhstan.
The Government of the Republic of Kazakhstan (the “Government”) initially issued
the license to Zhanaozen Repair and Mechanical Plant on April 30, 1999 to
explore the Aksaz, Dolinnoe and Emir oil and gas fields (the “ADE Block” or the
“ADE Fields”). On June 9, 2000, the contract for exploration of the Aksaz,
Dolinnoe and Emir oil and gas fields was entered into between the Agency of the
Republic of Kazakhstan on Investments and the Zhanaozen Repair and Mechanical
Plant. On September 23, 2002, the contract was assigned to Emir Oil LLP. On
September 10, 2004, the Government extended the term of the contract for
exploration and License from five years to seven years through July 9, 2007. On
February 27, 2007, the Ministry of Energy and Mineral Resources of the Republic
of Kazakhstan (the “MEMR”) granted a second extension of the Company’s
exploration contract. Under the terms of the contract extension, the exploration
period was extended to July 2009 over the entire exploration contract territory.
On December 7, 2004, the Government assigned to Emir Oil LLP exclusive right to
explore an additional 260 square kilometers of land adjacent to the ADE Block,
which is referred to as the “Southeast Block.” The Southeast Block includes the
Kariman field and the Yessen and Borly structures and is governed by the terms
of the Company’s original contract. On June 24, 2008, the MEMR agreed to extend
the exploration stage of the Company’s contract from July 2009 to January 2013
in order to permit the Company to conduct additional exploration drilling and
testing activities within the ADE Block and the Southeast Block.





On
October 15, 2008, the MEMR approved Addendum # 6 to Contract No. 482 with Emir
Oil LLP, dated June 09, 2000 extending Emir Oil LLP’s exploration territory from
460 square kilometers to a total of 850 square kilometers (approximately 210,114
acres). The additional territory is located to the north and west of the
Company’s current exploration territory, extending the exploration territory
toward the Caspian Sea and is referred to herein as the “Northwest
Block.”












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


To move
from the exploration stage to the commercial production stage, the Company must
apply for and be granted a commercial production contract. The Company is
legally entitled to apply for a commercial production contract and has an
exclusive right to negotiate this contract. The Government is obligated to
conduct these negotiations under the Law of Petroleum in Kazakhstan. If the
Company does not move from the exploration stage to the commercial production
stage, it has the right to produce and sell oil, including export oil, under the
Law of Petroleum for the term of its existing contract.





Major
customers





During
the years ended March 31, 2010, 2009 and 2008, sales to one customer represented
95%, 81% and 91% of total sales, respectively. At March 31, 2010, 2009 and 2008,
this customer made up 100%, 100% and 97% of accounts receivable, respectively.
While the loss of this foregoing customer could have a material adverse effect
on the Company in the short-term, the loss of this customer should not
materially adversely affect the Company in the long-term because of the
available market for the Company’s crude oil and natural gas production from
other purchasers.





Foreign
currency translation





Transactions
denominated in foreign currencies are reported at the rates of exchange
prevailing at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated to United States Dollars at the
rates of exchange prevailing at the balance sheet dates. Any gains or losses
arising from a change in exchange rates subsequent to the date of the
transaction are included as an exchange gain or loss in the Consolidated
Statements of Operations.





Share-based
compensation





The
Company accounts for options granted to non-employees at their fair value in
accordance with FASC Topic 718
– Stock Compensation. Share-based compensation is determined as the fair
value of the equity instruments issued. The measurement date for these issuances
is the earlier of the date at which a commitment for performance by the
recipient to earn the equity instruments is reached or the date at which the
recipient’s performance is complete. Stock options granted to the “selling
agents” in the private equity placement transactions have been offset to the
proceeds as a cost of capital. Stock options and stocks granted to other
non-employees are recognized in the Consolidated Statements of
Operations.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


The
Company has a stock option plan as described in Note 15. Compensation expense
for options and stock granted to employees is determined based on their fair
values at the time of grant, the cost of which is recognized in the Consolidated
Statements of Operations over the vesting periods of the respective
options.





Share-based
compensation incurred for the years ended March 31, 2010, 2009 and 2008 was
$3,171,633, $7,450,211 and $2,303,078, respectively.





Risks
and uncertainties





The
ability of the Company to realize the carrying value of its assets is dependent
on being able to develop, transport and market oil and gas. Currently exports
from the Republic of Kazakhstan are primarily dependent on transport routes
either via rail, barge or pipeline, through Russian territory. Domestic markets
in the Republic of Kazakhstan historically and currently do not permit world
market price to be obtained. Management believes that over the life of the
project, transportation options will improve as additional pipelines and
rail-related infrastructure are built that will increase transportation capacity
to the world markets; however, there is no assurance that this will happen in
the near future.





Recognition
of revenue and cost





Revenue
and associated costs from the sale of oil are charged to the period when
persuasive evidence of an arrangement exists, the price to the buyer is fixed or
determinable, collectability is reasonably assured, delivery of oil has occurred
or when ownership title transfers. Produced but unsold products are recorded as
inventory until sold.





During
the year ended March 31, 2010, the Company purchased light crude oil from a
third party for the purpose of blending the oil with the Company’s own
production. The cost of this purchased crude oil is recorded as part of oil and
gas operating expenses.





Export
duty





The
formula for determining the amount of the crude oil export duty is based on a
sliding scale that is tied to the world market price for oil. The amount of the
export duty can change with fluctuations in world oil prices. The export duty
fees are expensed as incurred and are classified as costs and operating
expenses.





In
December 2008 the Government of the Republic of Kazakhstan issued a resolution
that cancelled the export duty effective January 26, 2009 for companies
operating under the new tax code.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






Mineral
extraction tax
  The
mineral extraction tax replaced the royalty expense the Company had paid. The
rate of this tax depends on annual production output. The new code currently
provides for a 5% mineral extraction tax rate (6% starting from 2013 and 7%
starting from 2014) on production sold to the export market, and a 2.5% tax rate
(3% in 2013 and 3.5% starting from 2014) on production sold to the domestic
market. The mineral extraction tax expense is reported as part of oil and gas
operating expense.





Rent
export tax





This tax
is calculated based on the export sales price and ranges from as low as 0%, if
the price is less than $40 per barrel, to as high as 32%, if the price per
barrel exceeds $190. Rent export tax is expensed as incurred and is classified
as costs and  operating expenses.





Income
taxes





Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred taxes. Deferred taxes are provided on differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements, and tax carryforwards. Deferred tax assets and liabilities are
included in the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.





Fair
value of financial instruments





The
carrying values reported for cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their respective fair values in the
accompanying balance sheet due to the short-term maturity of these financial
instruments. In addition, the Company has long-term debt with financial
institutions. The carrying amount of the long-term debt approximates fair value
based on current rates for instruments with similar
characteristics.





Cash
and cash equivalents





The
Company considers all demand deposits, money market accounts and marketable
securities purchased with an original maturity of three months or less to be
cash and cash equivalents. The fair value of cash and cash equivalents
approximates their carrying amounts due to their short-term
maturity.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






Prepaid
expenses and other assets


Prepaid
expenses and other assets are stated at their net realizable values after
deducting provisions for uncollectible amounts. Such provisions reflect either
specific cases or estimates based on evidence of collectability. The fair value
of prepaid expense and other asset accounts approximates their carrying amounts
due to their short-term maturity.





Prepayments
for materials used in oil and gas projects





The
Company periodically makes prepayments for materials used in oil and gas
projects. These prepayments are presented as long term assets due to their
transfer to oil and gas properties after materials are supplied and the
prepayments are closed.





Inventories





Inventories
of equipment for development activities, tangible drilling materials required
for drilling operations, spare parts, diesel fuel, and various materials for use
in oil field operations are recorded at the lower of cost and net realizable
value. Under the full cost method, inventory is transferred to oil and gas
properties when used in exploration, drilling and development operations in
oilfields.





Inventories
of crude oil are recorded at the lower of cost or net realizable value. Cost
comprises direct materials and, where applicable, direct labor costs and
overhead, which has been incurred in bringing the inventories to their present
location and condition. Cost is calculated using the weighted average method.
Net realizable value represents the estimated selling price less all estimated
costs to completion and costs to be incurred in marketing, selling and
distribution.





The
Company periodically assesses its inventories for obsolete or slow moving stock
and records an appropriate provision, if there is any. The Company has assessed
inventory at March 31, 2010 and no provision for obsolete inventory has been
provided.





Oil
and gas properties





The
Company uses the full cost method of accounting for oil and gas properties.
Under this method, all costs associated with acquisition, exploration, and
development of oil and gas properties are capitalized. Costs capitalized include
acquisition costs, geological and geophysical expenditures, and costs of
drilling and equipping productive and non-productive wells. Drilling costs
include directly related overhead costs. These costs do not include any costs
related to production, general corporate overhead or similar activities. Under
this method of accounting, the cost of both successful and unsuccessful
exploration and development activities are capitalized as property and
equipment. Proceeds from the sale or disposition of oil and gas properties are
accounted for as a reduction to capitalized costs unless a significant portion
of the Company’s proved reserve are sold (greater than 25 percent), in which
case a gain or loss is recognized.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Capitalized
costs less accumulated depletion and related deferred income taxes shall not
exceed an amount (the full cost ceiling) equal to the sum of:




a) the
present value of estimated future net revenues computed by applying current
prices of oil and gas reserves to estimated future production of proved oil and
gas reserves, less estimated future expenditures (based on current costs) to be
incurred in developing and producing the proved reserves computed using a
discount factor of ten percent and assuming continuation of existing economic
conditions;


b) plus
the cost of properties not being amortized;


c) plus
the lower of cost or estimated fair value of unproven properties included in the
costs being amortized;


d) less
income tax effects related to differences between the book and tax basis of the
properties.





Given the
volatility of oil and gas prices, it is reasonably possible that the estimate of
discounted future net cash flows from proved oil and gas reserves could change.
If oil and gas prices decline, even if only for a short period of time, it is
possible that impairments of oil and gas properties could occur. In addition, it
is reasonably possible that impairments could occur if costs are incurred in
excess of any increases in the cost ceiling, revisions to proved oil and gas
reserves occur, or if properties are sold for proceeds less than the discounted
present value of the related proved oil and gas reserves.





All
geological and geophysical studies, with respect to the licensed territory, have
been capitalized as part of the oil and gas properties.





The
Company’s oil and gas properties primarily include the value of the license and
other capitalized costs.





All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves and estimated future costs to plug and abandon
wells and costs of site restoration, less the estimated salvage value of
equipment associated with the oil and gas properties, are amortized on the
unit-of-production method using estimates of proved reserves as determined by
independent engineers.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






Liquidation
fund





Liquidation
fund (site restoration and abandonment liability) is related primarily to the
conservation and liquidation of the Company’s wells and similar activities
related to its oil and gas properties, including site restoration. Management
assessed an obligation related to these costs with sufficient certainty based on
internally generated engineering estimates, current statutory requirements and
industry practices. The Company recognized the estimated fair value of this
liability. These estimated costs were recorded as an increase in the cost of oil
and gas assets with a corresponding increase in the liquidation fund which is
presented as a long-term liability. The oil and gas assets related to
liquidation fund are depreciated on the unit-of-production basis separately for
each field. An accretion expense, resulting from the changes in the liability
due to passage of time by applying an interest method of allocation to the
amount of the liability, is recorded as accretion expenses in the Consolidated
Statement of Operations.





The
adequacies of the liquidation fund are periodically reviewed in the light of
current laws and regulations, and adjustments made as necessary.





Other
fixed assets





Other
fixed assets are valued at historical cost adjusted for impairment loss less
accumulated depreciation. Historical cost includes all direct costs associated
with the acquisition of the fixed assets.





Depreciation
of other fixed assets is calculated using the straight-line method based upon
the following estimated useful lives:




Buildings
      and improvements
            7-10
      yearsMachinery
      and equipment
            6-10
      yearsVehicles
            3-5
      yearsOffice
      equipment
            3-5
      yearsSoftware
            3-4
      yearsFurniture
      and fixtures
            2-7
      years





Maintenance
and repairs are charged to expense as incurred. Renewals and betterments are
capitalized as leasehold improvements, which are amortized on a straight-line
basis over the shorter of their estimated useful lives or the term of the
lease.





Other
fixed assets of the Company are evaluated annually for impairment. If the sum of
expected undiscounted cash flows is less than net book value, unamortized costs
of other fixed assets will be reduced to a fair value. Based on the Company’s
analysis at March 31, 2010, no impairment of other assets is
necessary.





Convertible
notes payable issue costs





The
Company recognizes convertible notes payable issue costs on the balance sheet as
deferred charges, and amortizes the balance over the term of the related debt.
The Company classifies cash payments for bond issue costs as a financing
activity. The Company capitalized cash payments for bond issue costs as part of
oil and gas properties in periods of drilling activities.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Restricted
cash




Restricted
cash includes funds deposited in a Kazakhstan bank and is restricted to meet
possible environmental obligations according to the regulations of the Republic
of Kazakhstan.





Functional
currency





The
Company makes its principal investing and financing transactions in U.S. Dollars
and the U.S. Dollar is therefore its functional currency.




Income per common share
  Basic
income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
income per share reflects the potential dilution that could occur if all
contracts to issue common stock were converted into common stock, except for
those that are anti-dilutive.




New
accounting policies





In
May 2008, the FASB issued guidance on accounting for convertible debt
instruments that may be settled in cash upon conversion. The guidance clarifies
that convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement), which is not addressed by prior
guidance.  Additionally, the guidance specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. The Company adopted this
standard on April 1, 2009.  The adoption of this standard did not have
a material impact on consolidated financial position or results of
operations.





In June
2008, the FASB issued guidance on determining whether instruments granted in
share-based payment transactions are participating securities.  The
guidance applies to the calculation of earnings per share for share-based
payment awards with rights to dividends or dividend equivalents. It states that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of EPS pursuant to the
two-class method. The Company adopted this guidance on April 1, 2009 and has
included certain share-based payment awards in its calculation of basic weighted
average shares in the EPS calculation.  Accordingly, all prior-period
EPS data presented has been adjusted retrospectively to conform to the
provisions of this guidance. Management has determined that the adoption of this
guidance does not have a material impact on the Company’s financial position and
results of operations, although prior-period EPS data is affected.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






In June
2009, the FASB established the FASB Accounting Standards Codification
(Codification), which officially commenced July 1, 2009, to become the source of
authoritative US GAAP recognized by the FASB to be applied by nongovernmental
entities.  Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative US GAAP for SEC
registrants.  Generally, the Codification is not expected to change US
GAAP.  All other accounting literature excluded from the Codification
will be considered nonauthoritative.  The Codification is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009.  The Company adopted the new standards for its
quarter ending December 31, 2009.  All references to authoritative
accounting literature are now referenced in accordance with the
Codification.





In May
2009, the FASB issued new standards which establish the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued. In particular, the new standards set forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements (through the date that the
financial statements are issued or are available to be issued). The guidance
also sets forth the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its financial
statements; and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company adopted the
new standards as of June 30, 2009. The adoption of this guidance did not have a
material impact on the Company’s financial statements.





In
December 2008, the SEC announced that it had approved revisions to
modernize the oil and gas reserve reporting disclosures. The new disclosure
requirements include provisions that:





·
            Introduce
      a new definition of oil and gas producing activities. This new definition
      allows companies to include in their reserve base volumes from
      unconventional resources. Such unconventional resources include bitumen
      extracted from oil sands and oil and gas extracted from coal beds and
      shale formations.


·
            Report
      oil and gas reserves using an unweighted average price using the prior
      12-month period, based on the closing prices on the first day of each
      month, rather than year-end prices. The SEC indicated that they will
      continue to communicate with the FASB staff to align their accounting
      standards with these rules. The FASB currently requires a single-day,
      year-end price for accounting
purposes.























BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


·
            Permit
      companies to disclose their probable and possible reserves on a voluntary
      basis. In the past, proved reserves were the only reserves allowed in the
      disclosures. ·
              Requires
      companies to provide additional disclosure regarding the aging of proved
      undeveloped reserves.
 ·
              Permit
      the use of reliable technologies to determine proved reserves if those
      technologies have been demonstrated empirically to lead to reliable
      conclusions about reserves volumes.
 ·
              Replace
      the existing “certainty” test for areas beyond one offsetting drilling
      unit from a productive well with a “reasonable certainty”
      test.
 ·
              Require
      additional disclosures regarding the qualifications of the chief technical
      person who oversees the company’s overall reserve estimation process.
      Additionally, disclosures regarding internal controls over reserve
      estimation, as well as a report addressing the independence and
      qualifications of its reserves preparer or auditor will be
      mandatory.




The
Company adopted these disclosure requirements in this Annual Report on Form 10-K
for the fiscal year ended of March 31, 2010.





Recent
accounting pronouncements





Accounting for
Transfers of Financial Assets - In June 2009, the FASB issued accounting
guidance which will require more information about transfers of financial
assets, including securitization transactions, and where entities have
continuing exposure to the risks related to transferred financial assets. It
eliminates the concept of a “qualifying special-purpose entity”, changes the
requirements for derecognizing financial assets, and requires additional
disclosures.  This guidance will be effective at the beginning of the
first fiscal year beginning after November 15, 2009. Early application is not
permitted.  The Company is currently evaluating the new
requirements.





Disclosures about
Fair Value Measurements – In January 2010, the FASB issued guidance
which requires an entity to disclose the following:





·
            Separately
      disclose the amounts of significant transfers in and out of Level 1 and
      Level 2 fair value measurements and describe reasons for the
      transfers.





·
            Present
      separately information about purchases, sales, issuances and settlements,
      on a gross basis, rather than on one net number, in the reconciliation for
      fair value measurements using significant unobservable inputs (Level
      3).











BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


·
            Provide
      fair value measurement disclosures for each class of assets and
      liabilities.




·
            Provide
      disclosures about the valuation techniques and inputs used to measure fair
      value for both recurring and nonrecurring fair value measurements for fair
      value measurements that fall in either Level 2 or Level
  3.





This
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuance
and settlement on the forward of activity in Level 3 fair value
measurements.  Those disclosures are effective for fiscal years
beginning after December 15, 2010. The Company is currently evaluating the new
requirements.








NOTE
      3 - CASH AND CASH EQUIVALENTS





As of
March 31, 2010 and 2009 cash and cash equivalents included:





March
      31, 2010
            
            March
      31, 2009US
      Dollars
            $
      3,476,741
            
            $
      6,030,173Foreign
      currency
            2,963,653
            
            725,372$
      6,440,394
            
            $
      6,755,545





As of
March 31, 2010 and 2009, cash and cash equivalents included $1,321,774 and
$2,371,558 placed in money market funds having 30 day simple yields of 0.01% and
0.13%, respectively.








NOTE
      4 - PREPAID EXPENSES AND OTHER
ASSETS





Prepaid
expenses and other assets as of March 31, 2010 and 2009, were as
follows:








March
      31, 2010
            
            March
      31, 2009Advances
      for services
            $
      2,593,527
            
            $
      2,740,915Taxes
      prepaid
            920,066
            
            75,216Other
            570,324
            
            237,947$
      4,083,917
            
            $
      3,054,078











BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
      5 - OIL AND GAS PROPERTIES





Oil and
gas properties using the full cost method as of March 31, 2010 and 2009, were as
follows:





March
      31, 2010
            
            March
      31, 2009Cost
      of drilling wells
            $
      96,562,442
            
            $
      96,203,705Professional
      services received in exploration and
      developmentactivities
            62,967,506
            
            55,424,910Material
      and fuel used in exploration and development activities
            52,221,735
            
            51,273,747Subsoil
      use rights
            20,788,119
            
            20,788,119Deferred
      tax
            7,219,219
            
            7,219,219Geological
      and geophysical
            7,883,856
            
            7,870,516Capitalized
      interest, accreted discount and amortised bond
      issue  costson
      convertible notes issued
            6,633,181
            
            6,633,181Infrastructure
      development costs
            1,429,526
            
            1,245,298Other
      capitalized costs
            17,198,306
            
            15,296,176Accumulated
      depletion
            (34,302,048)
            
            (23,226,458)$
      238,601,842
            
            $
      238,728,413





The
purchase of Emir Oil LLP was accounted for as a non-taxable business
combination. Since goodwill was not recognized in this stock-based subsidiary
acquisition involving oil and gas properties, recognition of a deferred tax
liability related to the acquisition increases the financial reporting basis of
the oil and gas properties.








NOTE
      6 – GAS UTILIZATION FACILITY





The
Company has entered into an Agreement on Joint Business (the
“Agreement”) with Ecotechnic Chemicals AG incorporated in Switzerland, for
construction of a facility to utilize the associated gas from the Company’s
fields (the “Facility”).





The
Facility began operating in test mode on January 1, 2009. All costs associated
with the completion of the Facility, which includes amounts previously
classified as construction in progress, have been reported as Gas Utilization
Facility on the balance sheet.





During
the year ended March 31, 2010, the Company made an additional payment to
Ecotechnic Chemicals AG in the amount of $75,000, and contributed property
totalling $24,107 toward the completion of the Facility.















BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS







The
Company continued to operate the Facility in test mode, during the year ended
March 31, 2010, as the Facility was expanded in to handle additional capacity
and as the Company was negotiating a sales contract with a potential
customer.  Therefore, no depreciation expense was recognized for Gas
Utilization Facility during the year ended March 31, 2010.  Subsequent
to March 31, 2010, the Company entered into a gas sales contract. As a result of
this sales contract, the Gas Utilization Facility has been put into operation as
of May 1, 2010.






NOTE
      7 – INVENTORIES FOR OIL AND GAS
PROJECTS





As of
March 31, 2010 and 2009 inventories included:





March
      31, 2010
            
            March
      31, 2009Construction
      material
            $
      12,756,417
            
            $
      12,962,397Spare
      parts
            87,722
            
            84,524Crude
      oil produced
            2,895
            
            5,029Other
            870,813
            
            950,196$
      13,717,847
            
            $
      14,002,146








NOTE 8 - OTHER FIXED ASSETS





Buildings
      and improvements
            
            Machinery
      and equipment
            
            Vehicles
            
            Officeequipment
            
            Furniture
      and fixtures
            
            Software
            
            TotalCostat
      March 31, 2009
            $
      2,056,325
            
            $
      728,941
            
            $
      1,418,147
            
            $
      368,690
            
            $
      374,888
            
            $
      150,838
            
            $ 5,097,829Additions
            228,555
            
            102,608
            
            879,492
            
            40,994
            
            16,755
            
            267
            
            1,268,671Disposals
            -
            
            -
            
            64,919
            
            16,098
            
            10,609
            
            1,632
            
            93,258at
      March 31, 2010
            2,284,880
            
            831,549
            
            2,232,720
            
            393,586
            
            381,034
            
            149,473
            
            6,273,242Accumulated
      depreciationat
      March 31, 2009
            270,651
            
            198,146
            
            518,693
            
            225,521
            
            147,296
            
            108,414
            
            1,468,721Charge
      for the period
            438,459
            
            204,863
            
            280,420
            
            84,095
            
            30,627
            
            29,663
            
            1,068,127Disposals
            -
            
            16,984
            
            31,468
            
            15,884
            
            11,584
            
            3,108
            
            79,028at
      March 31, 2010
            709,110
            
            386,025
            
            767,645
            
            293,732
            
            166,339
            
            134,969
            
            2,457,820Net
      book value at March 31, 2009
            $
      1,785,674
            
            $
      530,795
            
            $
      899,454
            
            $
      143,169
            
            $
      227,592
            
            $
      42,424
            
            $
      3,629,108Net
      book value at March
      31, 2010
            $
      1,575,770
            
            $
      445,524
            
            $
      1,465,075
            
            $
      99,854
            
            $
      214,695
            
            $
      14,504
            
            $
      3,815,422









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


In
accordance with FASC
No 932-360-25, Financial
Accounting and Reporting by Oil and Gas Producing Companies, depreciation
related to support equipment and facilities used in exploration and development
activities in the amount of $454,174 was capitalized to oil and gas properties
for the year ended March 31, 2010 and $353,545 for the year ended March 31,
2009.








NOTE
      9 - LONG TERM VAT RECOVERABLE





As
      of March 31, 2010 and 2009 the Company had long term VAT recoverable in
      the amount of $3,113,939 and $2,423,940, respectively. The VAT recoverable
      is a Tenge denominated asset due from the Republic of Kazakhstan. The VAT
      recoverable consists of VAT paid on local expenditures and imported goods.
      VAT charged to the Company is recoverable in future periods as either cash
      refunds or offsets against the Company’s fiscal obligations, including
      future income tax liabilities. Management cannot estimate which part of
      this asset will be realized in the current year because in order to return
      funds or offset this tax with other taxes a tax examination must be
      performed by local Kazakhstan tax authorities. During the year ended March
      31, 2010 the Company received refunds of VAT in the amount of
      $910,057.








NOTE
      10 - RESTRICTED CASH





Under
      the laws of the Republic of Kazakhstan, the Company is obligated to set
      aside funds for required environmental remediation. As of March 31, 2010
      and 2009 the Company had restricted $770,553 and $588,217, respectively,
      for this purpose.








NOTE
      11 - CONVERTIBLE NOTES PAYABLE





On July
16, 2007 the Company completed the private placement of $60 million in principal
amount of 5.0% Convertible Senior Notes due 2012 (“Notes”) to non-U.S. persons
outside of the United States in accordance with Regulation S under the U.S.
Securities Act of 1933, as amended (the “Securities Act”) and in compliance with
the laws and regulations applicable in each country where the placement took
place.





The Notes
carry a 5% coupon and have a yield to maturity of 6.25%. Interest is paid at a
rate of 5.0% per annum on the principal amount, payable semiannually in arrears
on January 13 and July 13 of each year.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






The Notes
are convertible into the Company’s common shares. The initial conversion price
was set at $7.2094 per share, subject to customary adjustments in certain
circumstances, including but not limited to, changes of control and certain
future equity financings. If the conversion price is adjusted pursuant to the
conversion provisions, the conversion price shall not be adjusted below $6.95,
provided that if the conversion price is adjusted due to (1) the payment of a
dividend; (2) a bonus issue; (3) a consolidation or subdivision of the shares;
(4) the issuance of shares, share-related securities, rights in respect of
shares or rights in respect of share-related securities to all or substantially
all of the shareholders as a class; (5) the issuance of other securities to
substantially all shareholders as a class; or (6) other arrangements to acquire
securities, then the minimum conversion price will be adjusted at the same time
by the same proportion.


A change
of control event occurs if an offer in respect of the Company’s common shares,
for which the consideration is or can be received wholly or substantially in
cash, has become or been declared unconditional in all respects and the Company
becomes aware that the right to cast more than 50% of the votes which may
ordinarily be cast on a poll at a general meeting of the shareholders has or
will become unconditionally vested in the offeror and/or any associate(s) of the
offeror, or an event occurs which has a like or similar effect. If a change of
control event occurs, the conversion price in respect of a conversion date that
occurs after the date on which notice of such change in control event is given
by the Company, but on or prior to the 60th day following the date of such
notice, shall become the product of (1) the conversion price that would
otherwise apply on such conversion date in the absence of a change of control
event and (2) the percentage determined in accordance with the
following:





Conversion Date
            PercentageOn
      or before July 13, 2008
            81.6Thereafter,
      but on or before July 13, 2009
            86.2Thereafter,
      but on or before July 13, 2010
            90.9Thereafter,
      but on or before July 13, 2011
            95.5Thereafter,
      and until Maturity Date
            100.0





If a
holder of Notes shall convert its notes following the date on which notice of a
change in control event is given by the Company but on or prior to the 60th day
following the date of such notice, then the Company shall pay to such holder the
following U.S. Dollar amounts per U.S. Dollar of Notes held by the holder that
are to be so converted:





Conversion Date
            AmountOn
      or before July 13, 2008
            $
      0.12239Thereafter,
      but on or before July 13, 2009
            $
      0.07246Thereafter,
      but on or before July 13, 2010
            $
      0.02250Thereafter,
      but on or before July 13, 2011
            $
      -Thereafter,
      and until Maturity Date
            $
      -












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





The Notes
are callable after three years at a price equal to 104% of the principal amount
thereof plus any accrued and unpaid interest to the date fixed for redemption,
subject to the share price trading at least 30% above the conversion price.
Holders of the Notes will have the right to require the Company to redeem all or
a portion of their Notes on July 13, 2010 at a price equal to 104% of the
principal amount thereof plus any accrued and unpaid interest to the date fixed
for redemption. Unless previously redeemed, converted or purchased and
cancelled, the Notes will be redeemed by the Company at a price equal to 107.2%
of the principal amount thereof on July 13, 2012. The Notes constitute direct,
unsubordinated and unsecured, interest bearing obligations of the
Company.


The net
proceeds from the issuance of the Notes have been used for further exploration
of the Company’s oil and gas drilling and production activities in western
Kazakhstan.





The
Company granted a registration right to the Noteholders. The Company agreed to
file, pursue to effectiveness and maintain effective a registration statement in
respect of the Notes and the underlying shares of common stock issuable upon the
conversion of the Notes (collectively, the “Covered Securities”), until such
time as all Covered Securities:





·
            have
      been effectively registered under the Securities Act and disposed of in
      accordance with the registration statement relating
    thereto;





·
            may
      be resold without restriction pursuant to Rule 144 under the Securities
      Act or any successor provision
thereto;





·
            (A)
      are not subject to the restrictions imposed by Rule 903(b)(3)(iii) under
      the Securities Act or any successor provision thereto and (B) may be
      resold pursuant to Rule 144 under the Securities Act or any successor
      provision thereto without being subject to the restrictions imposed by
      paragraphs (e), (f) and (h) of Rule 144 under the Securities Act or any
      successor provisions thereto; provided that
      the requirements set forth in paragraph (c) of Rule 144 under the
      Securities Act or any successor provision thereto are met as of such date;
      or





·
            have
      been publicly sold pursuant to Rule 144 under the Securities Act or any
      successor provision thereto.





On
October 19, 2007 the Company filed with the U.S. Securities and Exchange
Commission (“SEC”) a registration statement on Form S-3, as amended on October
25, 2007 and January 23, 2008, (the “Shelf Registration Statement”) registering
the Covered Securities for resale. The Shelf Registration Statement was declared
effective by the SEC on January 25, 2008.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


As of
March 31, 2010 and March 31, 2009 the convertible notes payable amount is
presented as follows:





March
      31,  2010
            
            March
      31,  2009Convertible
      notes redemption value
            $
      64,323,785
            
            $
      64,323,785Unamortized
      discount
            (2,145,666)
            
            (2,992,264)$
      62,178,119
            
            $
      61,331,521





As of
March 31, 2010 and March 31, 2009 the Company has accrued interest of $641,667,
relating to the convertible notes outstanding. The Company has also amortized
the discount on the convertible notes (difference between the redemption amount
and the carrying amount as of the date of issue) in the amount of $2,178,119 and
$1,331,521 as of March 31, 2010 and March 31, 2009, respectively. The carrying
value of convertible notes will be accreted to the redemption value of
$64,323,785. During the years ended March 31, 2010 and 2009 the Company recorded
interest expense in the amount of $4,604,446 and $1,138,874, respectively. On June
7, 2010, the Company entered into a Supplemental Indenture No. 1, dated as of
June 1, 2010, between BMB Munai, Inc. and The Bank of New York Mellon, as
trustee (the “Supplemental Indenture.”)  The Supplemental Indenture
amends and supplements the indenture dated September 19, 2007, between BMB
Munai, Inc. and The Bank of New York Mellon, as trustee (the “Original
Indenture”).





The
Original Indenture provided for three put dates that allowed the holders of the
Notes to redeem the Notes prior to their 2012 maturity date.  The
first two put dates passed unexercised.  The third put date is July
13, 2010.  In connection with ongoing negotiations to restructure the
Notes, the Company entered into the Supplemental Indenture which grants the
Noteholders a fourth put date that commences on June 13, 2010 and expires on
September 13, 2010.  In exchange for the granting of the fourth put
date in the Supplemental Indenture, the Noteholders separately agreed they will
not exercise their put option for the third put date and they will not exercise
their put option for the fourth put date prior to September 1, 2010; provided,
however, the Noteholders may exercise such put options at any time upon the
occurrence of any of the following: (i) any default has occurred under the
Indenture, excluding certain defaults that occurred prior to June 7, 2010, (ii)
failure by the Company or any of its material subsidiaries to timely pay any
Indebtedness (as defined in the Indenture) or any guarantee of any Indebtedness
that exceeds U.S. $1,000,000, or any Indebtedness becomes due and payable prior
to its stated maturity other than at the option of the Company or any of its
material subsidiaries, or (iii) the Noteholders holding a majority in
outstanding principal amount of the Notes provide notice to the Company that
negotiations with respect to the restructuring have
terminated.  Therefore, it is possible the Noteholders could exercise
a put option with respect to the Notes prior to September 1, 2010 if any of the
foregoing events occur.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Prior to
entering into the Supplemental Indenture, the Company was in default under
certain covenants contained in Article 9 of the Indenture requiring the Company
to maintain a minimum net debt to equity ratio and to comply with certain
notice, delivery and other provisions.  The Noteholders separately
agreed to waive these defaults until the earlier of: (i) September 1, 2010 or
(ii) the fourth put date (as contained in the Supplemental Indenture), with the
understanding that such waiver shall not constitute a waiver of any default
under the Indenture that remains ongoing as of September 1, 2010 or occurs after
June 8, 2010.  At March 31, 2010, the Notes have been classified as a
long-term liability on the balance sheet as the defaults have been waived by the
Noteholders and the put-option was not in place.  The Company
currently believes it will not be able to remedy the net debt to equity ratio
covenant by September 1, 2010 and, therefore, anticipates it will be in default
under the Indenture at that time unless a future waiver is obtained from the
Noteholders.  There is no assurance the Noteholders will provide any
future waiver or any further extension of their redemption put rights under the
Indenture.  As such, the Company expects to reclassify the Notes as a
current liability at September 1, 2010, unless additional waivers are
obtained.








NOTE
      12 - LIQUIDATION FUND





A
reconciliation on the Liquidation Fund (Asset Retirement Obligation) at March
31, 2009 and 2010 is as follows:





TotalAt
      March 31, 2008
            $
      3,728,531Revision
      of estimate
            (757,047)Accrual
      of liability
            843,485Accretion
      expenses
            449,025At
      March 31, 2009
            $
      4,263,994Accrual
      of liability
            -Accretion
      expenses
            448,351At
      March 31, 2010
            $
      4,712,345





Management
believes that the liquidation fund should be accrued for future abandonment
costs of 24 wells located in the Dolinnoe, Aksaz, Emir and Kariman oil fields.
Management believes that these obligations are likely to be settled at the end
of the production phase at these oil fields.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


At
      March 31, 2010, undiscounted expected future cash flows that will be
      required to satisfy the Company’s obligation by 2013 for the Dolinnoe,
      Aksaz, Emir and Kariman fields, respectively, are $6,204,545. After
      application of a 10% discount rate, the present value of the Company’s
      liability at March 31, 2010 and 2009, was $4,712,345 and $4,263,994
      respectively.








NOTE
      13 - INCOME TAXES





The
Company’s consolidated pre-tax income is comprised primarily from operations in
the Republic of Kazakhstan. Pre-tax losses from United States operations of
$7,275,579, $12,937,563, and $1,827,168, for the years ended March 31, 2010,
2009 and 2008, respectively, are also included in consolidated pre-tax
income.





According
to the Exploration Contract in the Republic of Kazakhstan, for income tax
purposes the Company can capitalize the exploration and development costs and
deduct all revenues received during the exploration stage to calculate taxable
income. As long as the Company’s capital expenditures exceed generated revenues,
the Company will not be subject to Kazakhstan income tax.





As
discussed in Note 2, Licenses and contracts, the Company was granted an
Exploration contract extension.  According to the terms of the
Exploration contract, the Company will continue to operate in the exploration
phase until January 2013.





Undistributed
earnings of the Company’s foreign subsidiaries since acquisition amounted to
approximately $70,751,488 at March 31, 2010. Those earnings are considered to be
indefinitely reinvested and, accordingly, no U.S. federal and state income taxes
have been provided thereon. Upon distribution of those earnings, in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the Republic of Kazakhstan. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practical because of the complexities
associated with its hypothetical calculation; however, unrecognized foreign tax
credits may be available to reduce a portion of the U.S. tax
liability.





During
the year ended March 31, 2010 the Company changed the method of tax accounting
for the U.S. tax jurisdiction from a cash to accrual basis. The change in method
was made because the Company exceeded the gross receipt threshold to be eligible
for the cash method.





This
change in tax method mainly resulted in the Company recognizing interest income
from intercompany loans between the U.S. parent and its wholly owned foreign
subsidiary, which amounts were previously deferred for income tax purposes under
the cash method of accounting. The Company has calculated a Code Section 481
adjustment, to account for this change in method, in the amount of $25,116,879.
The Code Section 481 adjustment primarily provides for all accrued intercompany
interest amounts, previously deferred, to be recognized as taxable income, by
the U.S. parent, during fiscal years 2010 through 2014.  The yearly
amount to be recognized is $6,279,219, which represents 25% of the total Code
Section 481 adjustment.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Net
operating losses of the Company in its U.S. tax jurisdiction for the year ended
March 31, 2010 totalled $7,275,579. This loss has been offset with the
recognized portion of the Code Section 481 adjustment of $6,279,219 which
resulted in an adjusted net operating loss of $996,359.




Earnings
and (losses) before income taxes derived from United States and foreign
operations are as follows:





Year
      endedMarch 31, 2010
            
            Year
      ended
              March
      31, 2009
            
            Year
      ended
              March
      31, 2008United
      States
            $
      (7,275,579)
            
            $
      (12,937,563)
            
            $
      (1,827,168)Kazakhstan
            14,716,990
            
            29,066,849
            
            33,034,150$
      7,441,411
            
            $
      16,129,286
            
            $  31,206,982





The
income tax benefit in the Consolidated Statements of Operations is comprised
of:





Year
      ended
              March
      31, 2010
            
            Year
      ended
              March
      31, 2009
            
            Year
      ended
              March
      31, 2008
              (Restated)Current
      tax expense
            $                    -
            
            $                   -
            
            $                -Deferred
      tax benefit
            (1,552,062)
            
            (1,028,272)
            
            (103,582)$
      (1,552,062)
            
            $
      (1,028,272)
            
            $
      (103,582)





The
difference between the income tax expense/(benefit) reported and amounts
computed by applying the U.S. Federal rate to pretax income consisted of the
following:





Year
      ended
              March
      31, 2010
            
            Year
      ended March 31, 2009
            
            Year
      ended
              March
      31, 2008
              (Restated)Tax
      at federal statutory rate (34%)
            $
      2,530,505
            
            $
      5,483,957
            
            $
      10,610,374Effect
      of lower foreign tax rates
            (1,852,605)
            
            (1,601,126)
            
            (876,907)Tax
      benefit from exploration stage
            (3,577,975)
            
            (7,243,413)
            
            (10,301,168)Effect
      of change from cash to accrual   basis of
      accounting
            1,348,013
            
            -
            
            -Non-deductible
      expenses
            -
            
            2,332,310
            
            464,119$
      (1,552,062)
            
            $
      (1,028,272)
            
            $
      (103,582)









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Effective
January 1, 2009, the Republic of Kazakhstan adopted a new tax code, which
decreased the corporate income rate for legal entities to 20%.





Non-deductible
expenses are comprised of the non-deductible portion of interest expense on
intercompany loans accrued by subsidiary.





As of
March 31, 2010, the Company had net operating loss carry forwards for income tax
purposes of $13,547,692, which if unused, will expire in 2024, 2025, 2026, 2027,
2028, and 2029.





No
valuation allowance was recorded against the deferred tax assets resulting from
Net Operating Loss because the Company believes it will have sufficient future
taxable domestic income to be offset with, primarily from accrued interest
income related to loans to subsidiary.





Deferred
taxes reflect the estimated tax effect of temporary differences between assets
and liabilities for financial reporting purposes and those measured by tax laws
and regulations. The components of deferred tax assets and deferred tax
liabilities are as follows:





March
      31, 2010
            
            March
      31, 2009Deferred
      tax assets:Stock
      based compensation
            $                -
            
            $
      185,418Liquidation
      fund
            353,088
            
            236,505Tax
      losses carried forward
            4,606,215
            
            6,867,054Accrued
      interest expense
            5,905,599
            
            5,093,40510,864,902
            
            12,382,382Deferred
      tax liabilities:Oil
      and gas properties
            5,879,053
            
            6,972,564Accrued
      interest income
            9,950,231
            
            11,926,26215,829,284
            
            18,898,826Net
      deferred tax liability
            $  4,964,382
            
            $  6,516,444














BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Deferred
income taxes for US and Kazakhstan tax jurisdiction are as
follows:


March
      31, 2010
            
            March
      31, 2009US
      tax jurisdiction
            
            Kazakhstan
      tax jurisdiction
            
            US
      tax jurisdiction
            
            Kazakhstan
      tax jurisdictionDeferred
      tax assets:Stock
      based compensation
            $               -
            
            $               -
            
            $
      185,418
            
            $            -Liquidation
      fund
            
            
            353,088
            
            -
            
            236,505Tax
      losses carried forward
            4,606,215
            
            -
            
            6,867,054
            
            -Accrued
      interest expense
            -
            
            5,905,599
            
            -
            
            5,093,4054,606,215
            
            6,258,687
            
            7,052,472
            
            5,329,910Deferred
      tax liabilities:Oil
      and gas properties
            6,291,814
            
            (412,761)
            
            6,579,121
            
            393,443Accrued
      interest income
            9,950,231
            
            -
            
            11,926,262
            
            -16,242,045
            
            (412,761)
            
            18,505,383
            
            393,443Net
      deferred tax liability/(asset)
            $
      11,635,830
            
            $
      (6,671,448)
            
            $
      11,452,911
            
            $
      (4,936,467)





Accounting for Uncertainty in Income
Taxes - In accordance with generally accepted accounting
principles, the Company has analyzed its filing positions in all jurisdictions
where it is required to file income tax returns. The Company’s U.S. federal
income tax returns for the fiscal years ended March 31, 2006 through 2009
remain subject to examination. The Company currently believes that all
significant filing positions are highly certain and that all of its significant
income tax filing positions and deductions would be sustained upon an audit.
Therefore, the Company has no reserves for uncertain tax positions. No interest
or penalties have been levied against the Company and none are anticipated,
therefore no interest or penalties have been included in the provision for
income taxes.








NOTE
14 – CAPITAL LEASE





In
December 2009 the Company entered into a capital lease agreement with a vehicle
leasing company for the lease of oil trucks in the amount of $554,820. The
agreement is effective upon receiving oil trucks by the Company. The lease
schedule is the following:





Year
      ended March 31,
            
            
            Total
      Minimum Payments2011
            
            
            $
      185,0192012
            
            
            240,1492013
            
            
            129,652Net
      minimum lease payments
            
            
            554,820Less:
      Amount representing interest
            
            
            (137,010)Present
      value of net minimum lease payments
            
            
            $
      417,810





Current
portion of capital lease liability in amount of $185,019 as of March 31, 2010
was recognized as part of accounts payable. Non-current portion of Capital Lease
Liability as of March 31, 2010 totals to $369,801.










BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - SHARE AND ADDITIONAL PAID IN
CAPITAL





Share-Based
Compensation





On July
17, 2008 the shareholders of the Company approved the BMB Munai, Inc. 2009
Equity Incentive Plan (“2009 Plan”) to provide a means whereby the Company could
attract and retain employees, directors, officers and others upon whom the
responsibility for the successful operations of the Company rests through the
issuance of equity awards. 5,000,000 common shares are reserved for issuance
under the 2009 Plan. Under the terms of the 2009 Plan the board of directors
determines the terms of the awards made under the 2009 Plan, within the limits
set forth in the 2009 Plan guidelines.





Common
Stock Grants





On March
30, 2007, the Company granted common stock to officers, employees and outside
consultants of the Company under the Plan. The total number of restricted common
shares granted was 950,000. The restricted stock grants were valued at $5.38 per
share. The restricted stock grants were awarded on the same terms and subject to
the same vesting requirements. Previous vesting conditions stated that the
restricted stock grants will vest to the grantees at such time as either of the
following events occurs (the "Vesting Events"): i) the Company enters commercial
production and is granted a commercial production license from the Republic of
Kazakhstan; or ii) the occurrence of an Extraordinary Event. An “Extraordinary
Event” is defined in the restricted stock agreement as any consolidation or
merger of the Company or any of its subsidiaries with another person, or any
acquisition of the Company or any of its subsidiaries by any person or group of
persons, acting in concert, equal to thirty percent (30%) or more of the
outstanding stock of the Company or any of its subsidiaries, or the sale of all
or substantially all of the assets of the Company or any of its subsidiaries. In
the event of an Extraordinary Event, the grants shall be deemed full vested one
day prior to the effective date of the Extraordinary Event. The board of
directors shall determine conclusively whether or not an Extraordinary Event has
occurred and the grantees have agreed to be bound by the determination of the
board of directors. The grantees have the right to vote the shares, receive
dividends and enjoy all other rights of ownership over the entire grant amount
from the grant date, except for the right to transfer, assign, pledge, encumber,
dispose of or otherwise directly or indirectly profit or share in any profit
derived from a transaction in the shares prior to the occurrence of a Vesting
Event. Shares will only vest to the grantee if the grantee is employed by the
Company at the time a Vesting Event occurs. If a Vesting Event has not occurred
at the time a grantee's employment with the Company ceases, for any reason, the
entire grant amount shall be forfeited back to the Company. At the time the
grants were made, it was anticipated that the grants would vest no later than
July 9, 2009, the date the exploration stage of the Company’s exploration
contract was scheduled to terminate. At the recommendation of the Compensation
Committee, on September 11, 2008, the board of directors of the Company approved
a change to the vesting conditions of the stock grants. The grants vested as of
July 9, 2009.







BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Non-cash
compensation expense in the amount of $567,889 was recognized in the
Consolidated Statement of Operations and Consolidated Balance Sheet for the year
ended March 31, 2010.





As of
March 31, 2010, there was no unrecognized non-cash compensation expense related
to non-vested share-based compensation arrangements granted under the
Plan.





On June
24, 2008, the Company was granted an extension of its existing exploration
contract from July 2009 to January 2013. In connection therewith, the Company
became obligated to issue 1,750,000 common shares to a consultant as the success
fee for assisting the Company to obtain the extension. The shares are valued at
$6.13 per share, which was the closing market price of Company’s shares on June
24, 2008.





On
September 16, 2008 this consulting agreement between the Company and the
consultant discussed in the preceding paragraph was revised and parties agreed
to decrease number of shares issued for services provided by 500,000 shares. The
non-cash compensation expenses for consulting services were reversed in the
amount of $3,065,000 (500,000 shares valued at $6.13 per share which was the
closing market price of Company’s shares on June 24, 2008) for the three months
ended December 31, 2008.





On July
17, 2008 at the recommendation of the compensation committee of the board of
directors, the Company’s board of directors approved, subject to certain vesting
requirements, restricted stock awards to certain executive officers, directors,
employees and outside consultants of the Company pursuant to the BMB Munai, Inc.
2004 Stock Incentive Plan (the “2004 Plan”). The total number of shares granted
was 1,330,000. Grants were made to 14 people, 12 of whom are non-U.S. persons.
The restricted stock grants were made without registration pursuant to
Regulation S of the Securities Act Rules and/or Section 4(2) under the
Securities Act of 1933. The restricted stock grants will vest to the grantees at
such time as either of the following events occurs (the “Vesting Events”): i)
the one-year anniversary of the grant date; or ii) the occurrence of an
Extraordinary Event. An “Extraordinary Event” is defined in the restricted stock
agreement as any consolidation or merger of the Company or any of its
subsidiaries with another person, or any acquisition of the Company or any of
its subsidiaries by any person or group of persons, acting in concert, equal to
thirty percent (30%) or more of the outstanding stock of the Company or any of
its subsidiaries, or the sale of all or substantially all of the assets of the
Company or any of its subsidiaries. In the event of an Extraordinary Event, the
grants shall be deemed full vested one day prior to the effective date of the
Extraordinary Event. The board of directors shall determine conclusively whether
or not an Extraordinary Event has occurred and the grantees have agreed to be
bound by the determination of the board of directors. The shares representing
the restricted stock grants shall be issued as soon as practicable, will be
deemed outstanding from the date of grant, and will be held in escrow by the
Company subject to the occurrence of a Vesting Event. The grantees will have the
right to vote the shares, receive dividends and enjoy all other rights of
ownership over the entire grant amount from the grant date, except for the right
to transfer, assign, pledge, encumber, dispose of or otherwise directly or
indirectly profit or share in any profit derived from a transaction in the
shares prior to the occurrence of a Vesting Event. Shares will only vest to the
grantee if the grantee is employed by the Company at the time a Vesting Event
occurs. If a Vesting Event has not occurred at the time a grantee’s employment
with the Company ceases, for any reason, the entire grant amount shall be
forfeited back to the Company. The grants vested as of July 17,
2009.







BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Non-cash
compensation expense in the amount of $2,176,244 was recognized in the
Consolidated Statement of Operations and Consolidated Balance Sheet for the year
ended March 31, 2010.





As of
March 31, 2010, there was no unrecognized non-cash compensation expense related
to non-vested share-based compensation arrangements granted under the
Plan.





On
January 1, 2010 the Company entered into Restricted Stock Grant Agreements with
certain executive officers, directors, employees and outside consultants of the
Company. The stock grants were approved by the Company board of directors and
recommended by the compensation committee of the Company’s board of directors.
The total number of shares granted was 1,500,000.





All of
the restricted stock grants were awarded on the same terms and subject to the
same vesting requirements. The restricted stock grants will vest to the grantees
at such time as either of the following events occurs (the “Vesting Events”): i)
the one-year anniversary of the grant date; or ii) the occurrence of an
Extraordinary Event. An “Extraordinary Event” is defined in the restricted stock
agreement as any consolidation or merger of the Company or any of its
subsidiaries with another person, or any acquisition of the Company or any of
its subsidiaries by any person or group of persons, acting in concert, equal to
fifty percent (50%) or more of the outstanding stock of the Employer or any of
its subsidiaries, or the sale of forty percent (40%) or more of the assets of
the Employer or any of its subsidiaries, or one (1) person or more than one
person acting as a group, acquires fifty percent (50%) or more of the total
voting power of the stock of the Employer. In the event of an Extraordinary
Event, the grants shall be deemed fully vested one day prior to the effective
date of the Extraordinary Event. The board of directors shall determine
conclusively whether or not an Extraordinary Event has occurred and the grantees
have agreed to be bound by the determination of the board of
directors.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






The
shares representing the restricted stock grants (the “Restricted Shares”) shall
be issued as soon as practicable, will be deemed outstanding from the date of
grant, and will be held in escrow by the Company subject to the occurrence of a
Vesting Event. The time between the date of grant and the occurrence of a
Vesting Event is referred to as the “Restricted Period.” The grantees may not
sell, transfer, assign, pledge or otherwise encumber or dispose of the
Restricted Shares during the Restricted Period. During the Restricted Period,
the grantees will have the right to vote the Restricted Shares, receive
dividends paid or made with respect to the Restricted Shares, provided however,
that dividends paid on unvested Restricted Shares will be held in the custody of
the Company and shall be subject to the same restrictions that apply to the
Restricted Shares. The Restricted Shares will only vest to the grantee if the
grantee is employed by the Company at the time a Vesting Event occurs. If a
Vesting Event has not occurred at the time a grantee’s employment with the
Company ceases, for any reason, the entire grant amount shall be forfeited back
to the Company.


Non-cash
compensation expense in the amount of $427,500 was recognized in the
Consolidated Statement of Operations and Consolidated Balance Sheet for the year
ended March 31, 2010.





As of
March 31, 2010, there was $1,282,500 of total unrecognized non-cash compensation
expense related to non-vested share-based compensation arrangements granted
under the Plan. That cost is expected to be recognized over a weighted-average
period of 0.75 years.





Stock
Options





On June
20, 2006 the Company granted stock options to directors of the Company under the
Plan. The total number of options was 200,000. The options are exercisable at a
price of $7.00 per share. All of the options vested immediately upon grant.
Compensation expense for options granted is determined based on their fair value
at the time of grant, the cost of which in the amount of $545,346 was recognized
in the Consolidated Statements of Operations and Consolidated Balance Sheet for
the year ended March 31, 2007. These granted stock options expired unexercised
on June 20, 2009.







BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





On
November 12, 2004, the Company granted stock options to its former corporate
secretary for past services rendered. These options grant the employee the right
to purchase up to 60,000 shares of the Company’s common stock at an exercise
price of $4.00 per share. The options vested immediately and expire five years
from the date of grant. In April 2006, options to acquire 7,200 common shares
were exercised. In January 2008, options to acquire 3,000 common shares were
exercised. Remaining granted stock options expired unexercised on November 14,
2009.





Stock
options outstanding and exercisable as of March 31, 2010, were as
follows:





Number
      of Shares
            
            Weighted
      Average ExercisePriceAs
      of March 31, 2007
            1,173,583
            
            $
      5.33Granted
            -
            
            -Exercised
            (3,000)
            
            $
      4.00Expired
            -
            
            -As
      of March 31, 2008
            1,170,583
            
            $
      5.33Granted
            -
            
            -Exercised
            -
            
            -Expired
            -
            
            -As
      of March 31, 2009
            1,170,583
            
            $
      5.33Granted
            -
            
            -Exercised
            -
            
            -Expired
            (249,800)
            
            $
      6.40As
      of March 31, 2010
            920,783
            
            $
      5.04





Additional
information regarding outstanding options as of March 31, 2010, was as
follows:





Options
      Outstanding
            
            Options
      ExercisableRange
      of
              Exercise
      Price
            
            Options
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Contractual Life (years)
            
            Options
            
            Weighted
      Average Exercise Price$
      4.75 – $ 7.40
            
            920,783
            
            $
      5.04
            
            5.00
            
            920,783
            
            $
      5.04












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
      16 - REVENUES





The
Company exports oil for sale to the world markets via the Aktau sea port. Sales
prices at the port locations are based on the average quoted Brent crude oil
price from Platt’s Crude Oil Marketwire for the three days following the bill of
lading date less discount for transportation expenses, freight charges and other
expenses borne by the customer.





The
Company recognized revenue from sales as follows:





Year
      ended March 31, 2010
            
            Year  ended
      March 31, 2009
            
            Year
      ended March 31, 2008Export
      sales
            $
      56,135,006
            
            $
      65,721,241
            
            $
      57,626,429Domestic
      sales
            1,139,520
            
            3,895,634
            
            2,570,197$
      57,274,526
            
            $
      69,616,875
            
            $
      60,196,626








NOTE
      17 – RENT EXPORT TAX AND EXPORT
DUTY





On April
18, 2008 the government of the Republic of Kazakhstan introduced an export duty
on several products (including crude oil). The Company became subject to the
duty beginning in June 2008. The formula for determining the amount of the crude
oil export duty was based on a sliding scale that is tied to several factors,
including the world market price for oil. As discussed in Note 2, in December
2008 the government of the Republic of Kazakhstan issued a resolution that
cancelled the export duty effective January 26, 2009 for companies operating
under the new tax code. As a result, the export duty for the year ended March
31, 2010 and 2009 was $0 and $6,783,278, respectively.





On
January 1, 2009, the Company became subject to the new tax code of the Republic
of Kazakhstan.  Under the new tax code, the rent export tax replaced
the export duty.  The rent export tax is calculated based on the
export sales price and ranges from as low as 0% if the export sales price is
less than $40 per barrel to as high as 32% if the price per barrel exceeds
$190.  Rent export tax expense for the year ended March 31, 2010 and
2009 was $10,032,857 and $476,359 respectively.








NOTE
      18 - CONSULTING EXPENSES





On
November 19, 2007 the Company entered into a consulting agreement with Caspian
Energy Consulting Ltd (“Consultant”). Upon the execution of the consulting
agreement, the Company paid the Consultant $1,000,000. The consulting agreement
also provided that in the event the Consultant was successful in negotiating an
extension of the term of the Company’s existing exploration contract beyond July
2009, the Company would issue 500,000 common shares for each additional year of
exploration status extension granted beyond July 2009.














BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





On June
24, 2008, the Company was granted an extension of its existing exploration
contract from July 2009 to January 2013. The compensation expenses for
consulting services were recorded in the amount of $11,727,500, which represents
$1,000,000 paid upon the execution of consulting agreement and non-cash
share-based compensation in the amount of $10,727,500 as the successful fee for
extension of time period for exploration. The share-based compensation
represents 1,750,000 (500,000 shares for each additional year of exploration
status extension) valued at $6.13 per share which was the closing market price
of Company’s shares on June 24, 2008.




On
September 16, 2008 this consulting agreement was revised and the parties agreed
to decrease the number of shares issued for services provided by 500,000 shares
to 1,250,000 shares. Non-cash compensation expenses for consulting services were
reversed in the amount of $3,065,000 (500,000 shares valued at $6.13 per share
which was the closing market price of Company’s shares on June 24, 2008) for the
three months ended September 30, 2008.





The
agreement also has a provision for the Consultant to pursue new exploration
contracts for new territories, which is described in Note 23.








NOTE
      19 – FOREIGN CURRENCY GAIN





On
      February 3, 2009, the National Bank of Kazakhstan enacted a devaluation of
      Kazakh Tenge to US Dollar of approximately 25%. As a result of this
      devaluation, the Company realized a foreign currency gain of $2,592,341
      for the year ended March 31, 2009, resulting from the revaluation of
      assets and liabilities denominated in Kazakh
  Tenge.








NOTE
      20 – DISGORGEMENT FUNDS RECEIVED





In June
2008 the Company received a letter from a shareholder of the Company stating
that the shareholder was returning realized profits from their trades of shares
of the Company’s common stock during the nine month period preceding May 22,
2008 (the “Timeframe”). The shareholder also stated in the letter that during
this Timeframe the shareholder was subject to Section 16 of the United States
Security Exchange Act of 1934 (the “Exchange Act”) because it owned more than
10% of the shares of Company common stock. As such, the shareholder decided to
voluntarily comply with Section 16(b) of the Exchange Act by returning the
realized profits to the Company in the amount of $1,650,293, (the “Disgorgement
Amount”) which is net of amounts paid for brokerage commissions on each of the
executed trades during the Timeframe. The Company had received the Disgorgement
Amount in full before June 30, 2008.










BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






NOTE
      21 - EARNINGS PER SHARE INFORMATION





The
calculation of the basic and diluted earnings per share is based on the
following data:





Year
      endedMarch 31, 2010
            
            Year
      ended
              March
      31, 2009
            
            Year
      ended March 31, 2008Net
      income
            $
      8,993,473
            
            $
      17,157,558
            
            $
      31,310,564Basic
      weighted-average common
      shares   outstanding
            50,018,895
            
            46,797,351
            
            44,697,364Effect
      of dilutive securitiesWarrants
            -
            
            1,860
            
            55,008Stock
      options
            -
            
            -
            
            200,559Non-vesting
      share grants
            -
            
            -
            
            -Dilutive
      weighted average common
      shares   outstanding
            50,018,895
            
            46,799,211
            
            44,952,931Basic
      income per common share
            $
      0.18
            
            $
      0.37
            
            $
      0.70Diluted
      income per common share
            $
      0.18
            
            $
      0.37
            
            $
      0.70





The
Company has adopted guidance from FASC Topic 260, relating to determining
whether instruments granted in share-based payment transactions are
participating securities, on April 1, 2009. Accordingly the Company included
certain unvested share grants defined as “participating” in the basic weighted
average common shares outstanding for the years ended March 31, 2010 and 2009,
respectively. Prior period comparative data has been retrospectively presented
to reflect the adoption of this standard.





The
diluted weighted average common shares outstanding for the years ended March 31,
2010 and 2009 does not include the effect of potential conversion of certain
warrants and stock options as their effects are anti-dilutive.





The
dilutive weighted average common shares outstanding for the years ended March
31, 2010 and 2009, respectively, does not include the effect of the potential
conversion of the Notes because the average market share price the years ended
March 31, 2010 and 2009 was lower than potential conversion price of the
convertible notes for this period.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


The
diluted weighted average common shares outstanding for the year ended March 31,
2008 does not include the effect of the potential conversion of the Notes
because conversion of the Notes is not contingent upon any market event. Rather,
the Notes are convertible to common stock upon the first to occur of (a) the
tenth New York business day following the Shelf Registration Statement Effective
Date and (b) 13 July 2008.








NOTE
      22 - RELATED PARTY TRANSACTIONS





The
Company leases ground fuel tanks and other oil fuel storage facilities and
warehouses from Term Oil LLC. The lease expenses for the years ended March 31,
2010, 2009 and 2008, totaled $96,541, $221,903 and $254,427, respectively. Also
the Company had advances paid to Term Oil LLC in the amount of $101,048 and
$15,006 as of March 31, 2010 and 2009, respectively. Toleush Tolmakov, the
General Director of Emir Oil, LLP, a wholly-owned subsidiary of the Company
(“Emir”), is an owner of Term Oil LLC.





On June
26, 2009 the Company entered into a Debt Purchase Agreement (the “Agreement”)
with Simage Limited, a British Virgin Islands international business corporation
(“Simage”). Simage is a company owned by Toleush Tolmakov.





Prior to
the date of the Agreement, Simage had acquired by assignment, certain accounts
receivable owed by Emir to third-party creditors of Emir in the amount of
$5,973,185 (the “Obligations”). Pursuant to the terms of the Agreement, Simage
assigned to the Company all rights, title and interests in and to the
Obligations in exchange for the issuance of 2,986,595 shares of common stock of
the Company.  The market value of the shares of common stock issued to
Simage, at the agreement date, was $3,076,193.  The market value was
based on $1.03 per share, which was the closing market price of the Company’s
shares on June 26, 2009.





As a
result of this Agreement, the Company has effectively been released of accounts
payable obligations amounting to $5,973,185. The Company has treated this
Agreement as a related party transaction, due to the fact that Simage is owned
by a Company shareholder. Therefore, the difference between the settled amount
of accounts payable and the value of the common stock issued, which amounts to
$2,896,997, has been treated as a capital contribution by the shareholder and
recognized as an addition to additional-paid-in-capital rather than a gain on
settlement of debt.











BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
      23 - COMMITMENTS AND CONTINGENCIES





Consulting
Agreement





On
October 15, 2008 the MEMR increased Emir Oil LLP’s contract territory from 460
square kilometers to 850 square kilometers. In connection with this extension,
and any other territory extensions or acquisitions, the Consultant will be paid
a share payment in restricted common stock for resources and reserves associated
with any acquisition. The value of any acquisition property will be determined
by reference to a 3D seismic study and a resource/reserve report by a qualified
independent petroleum engineer acceptable to the Company. The acquisition value
(“Acquisition Value”) will be equal to the total barrels of resources and
reserves, as defined and determined by the engineering report multiplied by the
following values:





Resources
at $.50 per barrel;


Probable
reserves at $1.00 per barrel; and


Proved
reserve at $2.00 per barrel.





The
number of shares to be issued to the Consultant shall be the Acquisition Value
divided by the higher of $6.50 or the average closing price of the Company’s
trading shares for the five trading days prior to the issuance of the
reserve/resource report, provided that in no event shall the total number of
shares issuable to the Consultant exceed more than a total of 4,000,000
shares.





Historical
Investments by the Government of the Republic of Kazakhstan





The
Government of the Republic of Kazakhstan made historical investments in the ADE
Block, the Southeast Block and the Northwest Block of $5,994,200, $5,350,680 and
$5,372,076, respectively. When and if, the Company applies for and, when and if,
it is granted commercial production rights for the ADE Block and Southeast
Block, the Company will be required to begin repaying these historical
investments to the Government. The terms of repayment will be negotiated at the
time the Company is granted commercial production rights.





Capital
Commitments





Prior to
the extension of the exploration period granted to Emir Oil LLP in June 2008,
the terms of its subsurface exploration contract required Emir Oil to spend a
total of $48.8 million in exploration activities on the ADE Block and Southeast
Block through July 2009.





In
connection with the extensions granted in June and October 2008, the Company’s
capital expenditure requirements have been revised. To retain its rights under
the contract, the Company must spend $12.8 million between January 10, 2010 and
January 9, 2011, $27.3 million between January 10, 2011 and January 9, 2012 and
$14.9 million between January 10, 2012 and January 9, 2013.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Through
March 31, 2010 the Company had spent a total of $289.4 million in exploration
activity.





In
addition to the minimum capital expenditure requirement, the Company must also
comply with the other terms of the work program associated with the contract,
which includes the drilling of at least ten new wells by January 9, 2013. The
failure to meet the minimum capital expenditures or to comply with the terms of
the work program could result in the loss of the subsurface exploration
contract. The recent addenda to the exploration contract which granted the
Company an extension of the exploration period and rights to the Northwest Block
also require the Company to:





·
            make
      additional payments to the liquidation fund, stipulated by the
      Contract;


·
            make
      a one-time payment in the amount of $200,000 to the Astana Fund by the end
      of 2010; and


·
            make
      annual payments to social projects of the Mangistau Oblast in the amounts
      of $100,000 from 2010 to 2012.





Capital
Lease Agreement





In
December 2009 the Company entered into a capital lease agreement with an oil
tanks leasing company for the lease of oil tanks in the amount of $493,000. The
agreement is effective upon receiving oil tanks by the Company. As of March 31,
2010 the Company had not received the oil tanks. The Company expects to receive
the oil tanks in April 2010, at which time the capital lease will be recorded.
The agreement calls for average monthly payments of $12,056 during the first
year and average monthly payments of $15,010 during the second and third
year.





Executive
Contracts





On
December 31, 2009, the Company entered into new employment agreements with the
following executive officers of the Company, Gamal Kulumbetov, Askar Tashtitov,
Evgeniy Ler and Anuarbek Baimoldin. Each of these individuals was serving in
such capacity prior to entering the employment agreements.





Except
for annual salary, and as otherwise specifically addressed herein, the terms and
conditions of the employment agreement of each of the executive and
non-executive level officers are the same in all material respects. The
employment agreements provide for an initial term of one year with three
consecutive one-year renewals unless terminated by either party prior to the
beginning of the renewal term. A form of the Employment Agreement was filed as
an exhibit to the current report on Form 8-K filed on January 6,
2010.













BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






Under the
agreements, salary is reviewable no less frequently than annually and may be
adjusted up or down by the compensation committee in its sole discretion, but
may not be adjusted below the initial annual salary amount listed in the
agreement.  The agreements provide that each of the officers is
entitled to participate in such pension, profit sharing, bonus, life insurance,
hospitalization, major medical and other employee benefit plans of the Company
that may be in effect from time to time, to the extent the individual is
eligible under the terms of those plans.  The agreements provide that
each officer is eligible at the discretion of the compensation committee and the
board of directors to receive performance bonuses.  Each officer is
entitled to 28 days vacation in accordance with the vacation policies of the
Company, as well as paid holidays and other paid leave set forth in the
Company’s policies.  There is no accrual of vacation days and
holidays.


The
agreements and all obligations thereunder may be terminated upon the occurrence
of the following events: i) death, ii) disability; iii) for cause immediately
upon notice from the Company or at such time as indicated by the Company in said
notice; iv) for good reason upon not less than 30 days notice from an officer to
the Company; v) an extraordinary event, unless otherwise agreed in
writing.





Under the
agreements the named executive officer may be deemed disabled if for physical or
mental reasons he is unable to perform his duties for 120 consecutive days or
180 days during any 12 month period. Such disability will be determined by a
jointly agreed upon medical doctor.





The
agreements provide that any of the following will constitute “cause”: i) breach
of the employment agreement; ii) failure to adhere to the written policies of
the Company; iii) appropriation by the officer of a material business
opportunity; iv) misappropriation of funds or property of the Company; v)
conviction, indictment or the entering of a guilty plea or a plea of no contest
to a felony.





“Good
reason” under the agreements may mean any of the following: i) a material breach
of the employment agreement; ii) assignment of the officer without his consent
to a position of lesser status or degree of responsibility.; iii) relocation of
the Company’s principal executive offices outside the Republic of Kazakhstan;
iv) if the Company requires the officer to be based somewhere other than
principal executive offices of the Company without the officer’s
consent.





Each of
the employment agreements, provides that an “extraordinary event” is defined as
any consolidation or merger of the Company or any of its subsidiaries with
another person, or any acquisition of the Company or any of its subsidiaries by
any person or group of persons, acting in concert, equal to fifty percent (50%)
or more of the outstanding stock of the Company or any of its subsidiaries, or
the sale of forty percent (40%) or more of the assets of the Company or any of
its subsidiaries, or if one or more persons, acting alone or as a group,
acquires fifty percent (50%) or more of the total voting power of the Company.
In addition to these provisions, the employment agreement of Mr. Tashtitov
provides that the following events also constitute an extraordinary event: i)
that a disposition by the Chairman of the Company’s board of directors of by the
General Director of the Company’s subsidiary, of seventy five (75%) or more of
the shares either individual currently owns, including stock attributed to
either of them by Internal Revenue Code Section 318; or ii) should the Company
terminate the registration of any of its securities under Section 12 of the
Exchange Act of 1934, voluntarily ceases, or shall terminate its obligation to
file reports with United States Securities Commission pursuant to Section 13 of
the Exchange Act of 1934.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Upon termination of an employment agreement, the
Company will make a termination payment to the officer in lieu of all other
amounts and in settlement and complete release of all claims employee may have
against the Company. In the event of termination for good reason by the officer,
the Company will pay theofficer the remainder of his salary for the calendar
month in which the termination is effective and for six consecutive calendar
months thereafter. The officer shall also be entitled to any portion of
incentive compensation for the year, prorated to the date of termination.
Notwithstanding the foregoing, if the officer obtains other employment prior to
the end of the six month period, salary payments by the Company after he begins
employment with a new employer shall be reduced by the amount of the cash
compensation received from the new employer. If the officer is terminated for
cause, he will receive salary only through the date of termination and will not
be entitled to any incentive compensation for the year in which his employment
is terminated. If the termination is the result of a disability, the Company
will pay salary for the rest of the month during which termination is effective
and for the shorter of six consecutive months thereafter or until disability
insurance benefits commence. If employment is terminated as a result of the
death of the officer, his heirs shall be entitled to salary through the month in
which his death occurs and to incentive compensation prorated through the month
of his death. The employment agreements of Mr. Kulumbetov, Mr. Ler and Mr.
Baimoldin provide that if the employment agreement is terminated as a result of
an extraordinary event, the officer shall be entitled to severance pay depending
on the completed years of employment: i) 10% of Basic Compensation Salary if
executive completed less than 1 year of employment; ii) 150% of Basic
Compensation Salary if executive completed at least 1 year but not less than 2
years of employment; iii) 299% of Basic Compensation Salary if executive
completed more than 2 years of employment.


The
employment agreement of Mr. Tashtitov provides that in the event his employment
agreement is terminated due to an extraordinary event, he will be entitled to
receive a severance payment from the Company of $3,000,000.





All
benefits terminate on the date of termination. The officer shall be entitled to
accrued benefits, but is not entitled to compensation for unused vacation,
holiday, sick leave or other leave.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






The
employment agreements also contain confidentiality, non-competition and
non-interference provisions.





All
benefits terminate on the date of termination. The officer shall be entitled to
accrued benefits, but is not entitled to compensation for unused vacation,
holiday, sick leave or other leave.





The
employment agreements also contain confidentiality, non-competition and
non-interference provisions and provide for certain of the Company’s executive
officers to potentially receive payments upon termination or change in
control.





Consulting
Agreement with Boris Cherdabayev





On
December 31, 2009 the Company entered into a Consulting Agreement with Boris
Cherdabayev, the Chairman of the Company’s board of directors. The Consulting
Agreement became effective on January 1, 2010. Pursuant to the Consulting
Agreement, in addition to his services as Chairman of the board of directors,
Mr. Cherdabayev will provide such consulting and other services as may
reasonably be requested by Company management.





The
initial term of the Consulting Agreement is five years unless earlier terminated
as provided in the Consulting Agreement. The initial term will automatically
renew for additional one-year terms unless and until terminated. The Consulting
Agreement may be terminated for Mr. Cherdabayev’s death or disability and by the
Company for cause. The Company may also terminate the Consulting Agreement other
than for cause, but will be required to pay the full fee required under the
Consulting Agreement.





Pursuant
to the Consulting Agreement, Mr. Cherdabayev will be paid $192,000 per year.
This base consulting fee will be net of Social Tax and Social Insurance Tax in
the Republic of Kazakhstan, which shall be paid by the Company. Mr. Cherdabayev
will be responsible for Personal Income Tax and Pension Fund Tax. The success of
projects involving Mr. Cherdabayev shall be reviewed on an annual basis to
determine whether the initial base consulting should be increased.





The
Consulting Agreement provides for an extraordinary event payment equal to the
greater of $5,000,000 or the base compensation fee for the remaining initial
term of the Consulting Agreement. The Consulting Agreement defines an
extraordinary event as any consolidation or merger of the Company or any of its
subsidiaries with another person, or any acquisition of the Company or any of
its subsidiaries by any person or group of persons, acting in concert, equal to
fifty percent (50%) or more of the outstanding stock of the Company or any of
its subsidiaries, or the sale of forty percent (40%) or more of the assets of
the Company or any of its subsidiaries, or if one or more persons, acting alone
or as a group, acquires fifty percent (50%) or more of the total voting power of
the Company.


















BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS






Litigation




In
December 2003, a complaint was filed in the 15th Judicial Court in and for Palm
Beach County, Florida, naming, among others, the Company and former directors,
Georges Benarroch and Alexandre Agaian, as defendants.  The
plaintiffs, Brian Savage, Thomas Sinclair and Sokol Holdings, Inc. allege claims
of breach of contract, unjust enrichment, breach of fiduciary duty, conversion
and violation of a Florida trade secret statute in connection with a business
plan for the development of the Aksaz, Dolinnoe and Emir oil and gas fields
owned by Emir Oil, LLP. The parties mutually agreed to dismiss this lawsuit
without prejudice.





In April
2005, Sokol Holdings, Inc., also filed a complaint in United States District
Court, Southern District of New York alleging that BMB Munai, Inc., Boris
Cherdabayev, and former BMB directors Alexandre Agaian, Bakhytbek Baiseitov,
Mirgali Kunayev and Georges Benarroch wrongfully induced Toleush Tolmakov to
breach a contract under which Mr. Tolmakov had agreed to sell to Sokol 70% of
his 90% interest in Emir Oil LLP.





In
October and November 2005, Sokol Holdings filed amendments to its complaint in
the U.S. District Court in New York to add Brian Savage and Thomas Sinclair as
plaintiffs and to add Credifinance Capital, Inc., and Credifinance Securities,
Ltd. (collectively “Credifinance”) as defendants in the matter. The amended
complaints alleged: i) tortious interference with contract, specific
performance, breach of contract, unjust enrichment, unfair
competition-misappropriation of labors and expenditures against all defendants;
ii) breach of fiduciary duty, tortious interference with fiduciary duty and
aiding and abetting breach of fiduciary duty by Mr. Agaian, Mr. Benarroch and
Credifinance; and iii) breach of fiduciary duty by Mr. Cherdabayev, Mr. Kunayev
and Mr. Baiseitov, in connection with a business plan for the development of the
Aksaz, Dolinnoe and Emir oil and gas fields owned by Emir Oil,
LLP.  The plaintiffs have not named Toleush Tolmakov as a defendant in
the action nor have the plaintiffs ever brought claims against Mr. Tolmakov to
establish the existence or breach of any legally binding agreement between the
plaintiffs and Mr. Tolmakov.  The plaintiffs seek damages in an amount
to be determined at trial, punitive damages, specific performance and such other
relief as the Court finds just and reasonable.









BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


The
Company moved for dismissal of the amended complaint or for a stay pending
arbitration in Kazakhstan. That motion was denied, without prejudice to renewing
it, to enable defendants to produce documents to plaintiffs relating to the
issues raised in the motion. Following completion of document production, the
motion was renewed. Briefing on the motion was completed on August 24, 2006. On
June 14, 2007, the court ruled on the Company’s motion. The court (a) denied the
motion to dismiss on the ground that Kazakhstan is a more convenient forum; (b)
denied the motion to dismiss in favor of litigation in New York state court; (c)
denied the motion to stay pending arbitration in Kazakhstan; and (d) denied the
motion to dismiss on the ground that Mr. Tolmakov is an indispensable party. The
court also (a) denied the motion (by defendants other than the Company) to
dismiss for lack of personal jurisdiction and (b) granted the motion (by
defendants other than the Company) to dismiss several claims for relief alleging
breach of fiduciary duty, tortious interference with fiduciary duty and aiding
and abetting breach of fiduciary duty. The court dismissed as moot the Company’s
cross-motion to stay discovery and instructed the parties to comply with the
Magistrate Judge’s discovery schedule.





The
Company appealed the court’s refusal to stay the litigation pending arbitration
in Kazakhstan. On September 28, 2008, the Court of Appeals issued a decision in
which it (a) reversed the district court's refusal to stay the claim for
specific performance pending arbitration and (b) affirmed the balance of the
district court's order.





At the
end of 2008, the Company changed legal counsel to represent all defendants in
the lawsuit from Bracewell & Giuliani LLP in New York, New York to Manning,
Curtis, Bradshaw & Bednar LLC in Salt Lake City, Utah.





On
December 12, 2008, plaintiffs sought leave to file a Third Amended Complaint to
add claims for (a) breach of fiduciary duty against defendants Cherdabayev,
Kunayev, Baiseitov, Agaian, Benarroch and Credifinance based on these
defendants’ alleged role as promoters of Sokol, (b) fraud against all
defendants; and (c) promissory estoppel against defendants Cherdabayev, Kunayev
and Baiseitov. Defendants opposed the Motion for Leave to Amend and leave to
amend was denied.  Fact and expert discovery has been
completed.  Plaintiffs have submitted an expert report on damages that
claims damages of between $6.7 million and $10.9 million, plus
interest.  The Company disputes the plaintiffs’ damage claim, in
addition to disputing liability.  In November 2009, all defendants
sought leave to file a Motion for Summary Judgment seeking judgment in favor of
defendants on all claims.  Briefing on defendants’ summary judgment
motion was completed on January 27, 2010.  The Court has not yet ruled
on the summary judgment motion or set it for oral argument.  No trial
date has been established.





Other
than the foregoing, to the knowledge of management, there is no other material
litigation or governmental agency proceeding pending or threatened against the
Company or its management.













BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Economic Environment





In recent
years, Kazakhstan has undergone substantial political and economic change. As an
emerging market, Kazakhstan does not possess a well-developed business
infrastructure, which generally exists in a more mature free market economy. As
a result, operations carried out in Kazakhstan can involve significant risks,
which are not typically associated with those in developed markets. Instability
in the market reform process could subject the Company to unpredictable changes
in the basic business infrastructure in which it currently operates.
Uncertainties regarding the political, legal, tax or regulatory environment,
including the potential for adverse changes in any of these factors could affect
the Company’s ability to operate commercially. Management is unable to estimate
what changes may occur or the resulting effect of such changes on the Company’s
financial condition or future results of operations.





Legislation
and regulations regarding taxation, foreign currency translation, and licensing
of foreign currency loans in the Republic of Kazakhstan continue to evolve as
the central government manages the transformation from a command to a
market-oriented economy. The various legislation and regulations are not always
clearly written and their interpretation is subject to the opinions of the local
tax inspectors. Instances of inconsistent opinions between local, regional and
national tax authorities are not unusual.





Operating Lease





The
Company leases its office spaces in Almaty from a third party. The lease term
for the office spaces extend through December 31, 2010. The Company plans to
continue leasing this office space for the next year. The Company incurred lease
expense of $212,651, $308,325 and $291,672 for the years ended March 31, 2010,
2009 and 2008, respectively.





As
described in Note 22, the Company leases oil storage facilities, an office
building and a warehouse from a related party. Currently, this lease term is
month-to-month, with monthly payments of $8,000, or $96,000 per
year.  The Company expects to continue to lease these facilities for
the upcoming year, as well as the foreseeable future.








NOTE 24 - FINANCIAL INSTRUMENTS





As of
March 31, 2010 and 2009 cash and cash equivalents included deposits in
Kazakhstan banks in the amount $3,721,701 and $2,606,004, respectively and
deposits in U.S. banks in the amount of $2,718,693 and $4,149,541, respectively.
Kazakhstan banks are not covered by FDIC insurance, nor does the Republic of
Kazakhstan have an insurance program similar to FDIC. Therefore, the full amount
of our deposits in Kazakhstan banks was uninsured as of March 31, 2010 and 2009.
The Company’s deposits in U.S. banks are also in non-FDIC insured accounts which
means they too are not insured to the $250,000 FDIC insurance limit. To mitigate
this risk, the Company has placed all of its U.S. deposits in a money market
account that invests in U.S. government backed securities. As of March 31, 2010
and 2009 the Company made advance payments to Kazakhstan companies and
government bodies in the amount $7,219,431 and $5,432,972, respectively. As of
March 31, 2010 and 2009 restricted cash reflected in the long-term assets
consisted of $770,553 and $588,217, respectively, deposited in a Kazakhstan bank
and restricted to meet possible environmental obligations according to the
regulations of Kazakhstan. Furthermore, the primary asset of the Company is Emir
Oil LLP; an entity formed under the laws of the Republic
Kazakhstan.












BMB
MUNAI, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      25 - QUARTERLY FINANCIAL DATA
(unaudited)





Quarterly
      financial information is presented in the following
    summary:





Fiscal
      year ended March 31, 2010June
      30,
              2009
            
            September
      30, 2009
            
            December
      31, 2009
            
            March
      31,
              2010Revenues
            $
      11,766,806
            
            $
      16,074,217
            
            $
      13,894,712
            
            $
      15,538,791Income
      from operations
            192,432
            
            4,026,811
            
            887,650
            
            2,781,406Net
      income
            30,782
            
            4,040,009
            
            607,081
            
            4,315,601Basic
      net income per share
            -
            
            0.08
            
            0.01
            
            0.09Diluted
      net income per share
            $
      -
            
            $
      0.08
            
            $
      0.01
            
            $
      0.09








Year
      ended March 31, 2009June
      30,
              2008
            
            September
      30, 2008
            
            December
      31, 2008
            
            March
      31,
              2009Revenues
            $
      34,827,224
            
            $
      22,758,160
            
            $
      4,883,790
            
            $
      7,147,701Income/(loss)
      from operations
            11,575,417
            
            9,636,121
            
            (8,382,895)
            
            (1,233,061)Net
      income/(loss)
            13,321,323
            
            9,830,026
            
            (8,292,982)
            
            2,299,191Basic
      net income/(loss) per share
            0.30
            
            0.21
            
            (0.18)
            
            0.04Diluted
      net income/(loss) per share
            $
      0.30
            
            $
      0.21
            
            $
      (0.18)
            
            $
      0.04








Fiscal
      year ended March 31, 2008June
      30,
              2007
            
            September
      30, 2007
            
            December
      31, 2007
            
            March
      31,
              2008Revenues
            $
      11,580,958
            
            $
      12,764,397
            
            $
      16,832,612
            
            $
      19,018,659Income
      from operations
            5,899,591
            
            6,606,045
            
            9,456,235
            
            8,058,216Net
      income
            5,409,688
            
            7,480,413
            
            9,856,062
            
            8,564,401Basic
      net income per share
            0.12
            
            0.17
            
            0.22
            
            0.19Diluted
      net income per share
            $
      0.12
            
            $
      0.17
            
            $
      0.22
            
            $
      0.19





F-48
 
 BMB
MUNAI, INC.
 
 SUPPLEMENTARY
FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION DEVELOPMENT AND
PRODUCTION ACTIVITIES (unaudited)


This
footnote provides unaudited information required by FASC No 932-325-55,
“Disclosures about Oil and
Natural Gas Producing Activities.” The Company’s oil and natural gas
properties are located in the Republic of Kazakhstan, which constitutes one cost
centre.





Capitalized
Costs -
Capitalized costs and accumulated depletion, depreciation and amortization
relating to oil and natural gas producing activities, all of which are conducted
in the Republic of Kazakhstan, are summarized below:





March
      31, 2010
            
            March
      31, 2009Developed
      oil and natural gas properties
            $
      246,979,803
            
            $
      221,374,856Unevaluated
      oil and natural gas properties
            25,924,087
            
            40,580,015Accumulated
      depletion, depreciation andamortization
            (34,302,048)
            
            (23,226,458)Net
      capitalized cost
            $
      238,601,842
            
            $
      238,728,413





Costs Incurred
- Costs incurred in oil and natural gas property acquisition, exploration
and development activities are summarized below:





For
      the year ended March 31, 2010
            
            For
      the year ended March 31, 2009
            
            For
      the year ended
              March
      31, 2008Acquisition
      costs:Unproved
      properties
            
            $                    -
            
            $                   -
            
            $                    -Proved
      properties
            
            -
            
            -
            
            -Exploration
      costs
            
            -
            
            2,275,021
            
            3,024,386Development
      costs
            
            10,949,019
            
            63,727,311
            
            83,950,096Subtotal
            
            10,949,019
            
            66,002,332
            
            86,974,482Asset
      retirement costs
            
            -
            
            86,438
            
            1,300,576Total
      costs incurred
            
            $
      10,949,019
            
            $
      66,088,770
            
            $
      88,275,058





Results of
Operations –Results of operations for the Company’s oil and natural gas
producing activities are summarized below:





For
      the year ended
              March
      31, 2010
            
            For
      the year ended
              March
      31, 2009
            
            For
      the year ended
              March
      31, 2008Oil
      and natural gas revenues
            
            $
      57,274,526
            
            $
      69,616,875
            
            $
      60,196,626Operating
      expenses:Rent
      export tax
            
            10,032,857
            
            467,359
            
            -Export
      duty
            
            -
            
            6,783,278
            
            -Oil
      and natural gas operating expenses and ad valorem taxes
            
            8,568,453
            
            7,530,653
            
            5,515,403Accretion
      expense
            
            448,351
            
            449,025
            
            254,572Depletion
      expense
            
            11,075,590
            
            10,403,328
            
            9,419,655Results
      of operations from oil and gas producing activities
            
            $
      27,149,275
            
            $
      43,983,232
            
            $
      45,006,996











BMB
MUNAI, INC.
 
 SUPPLEMENTARY
FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION DEVELOPMENT AND
PRODUCTION ACTIVITIES (unaudited)


Reserves –Proved reserves are estimated quantities of oil and natural gas, which
geological and engineering data demonstrate with reasonable certainty to be,
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can
reasonably be expected to be recovered through existing wells with existing
equipment and operating methods. Proved oil and natural gas reserve quantities
and the related discounted future net cash flows before income taxes (see
Standardized Measure) for the periods presented are based on estimates prepared
by Chapman Petroleum Engineering Ltd., independent petroleum engineers. Such
estimates have been prepared in accordance with guidelines established by the
SEC.





The
Company’s net ownership in estimated quantities of proved oil reserves, and
changes in net proved reserves, all of which are located in the Republic of
Kazakhstan, is summarized below:





Oil,
      Condensate and Natural Gas Liquids
              (Bbls)For
      the year ended
              March
      31, 2010
            
            For
      the year ended
              March
      31, 2009
            
            For
      the year ended
              March
      31, 2008Proved
      developed and undevelopedreservesBeginning
      of the year
            
            $
      23,641,000
            
            $
      20,911,000
            
            $
      15,280,000Revisions
      of previous estimates
            
            101,221
            
            (3,505,105)
            
            (2,964,177)Purchase
      of oil and gas properties
            
            -
            
            -
            
            -Extensions
      and discoveries
            
            -
            
            7,316,000(1)
            
            9,503,000(2)Sales
      of properties
            
            -
            
            -
            
            -Production
            
            (1,016,221)
            
            (1,080,895)
            
            (907,823)End
      of year
            
            22,726,000
            
            23,641,000
            
            20,911,000Proved
      developed reserves at year end
            
            $
      20,155,000
            
            $
      21,070,000
            
            $
      10,784,000





(1)
            During
      the year ended March 31, 2009 four wells were drilled (gross and net) on
      the Kariman structure, one well (gross and net) on the Dolinnoe structure,
      one well (gross and net) on the Aksaz structure and one well (gross and
      net) on the Emir structure. These additions to the Kariman, Dolinnoe,
      Aksaz and Emir structures during the year ended March 31, 2009 resulted in
      an increase in estimated proved developed reserves of approximately 7.3
      million BOE. These were the only extensions and discoveries made during
      the year ended March 31, 2009.















BMB
MUNAI, INC.
 
 SUPPLEMENTARY
FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION DEVELOPMENT AND
PRODUCTION ACTIVITIES (unaudited)






(2)
            During
      the year ended March 31, 2008 four wells were drilled (gross and net) on
      the Kariman structure, one well (gross and net) on the Dolinnoe structure
      and one well (gross and net) on the Aksaz structure. These additions to
      the Kariman, Dolinnoe and Aksaz structures during the year ended March 31,
      2008 resulted in an increase in our estimated proved developed reserves of
      approximately 4.5 million BOE and an increase in proved undeveloped
      reserves of approximately 4.9 million BOE. These were the only extensions
      and discoveries made during the year ended March 31,
  2008. (3)
              During
      the year ended March 31, 2007 we drilled one well was drilled (gross and
      net) on the Kariman structure. The addition of the Kariman structure
      during the year ended March 31, 2007 resulted in an increase in estimated
      proved developed reserves of approximately 2.7 million BOE (barrels of oil
      equivalent) and no increase in proved undeveloped reserves. These were the
      only extensions or discoveries made during the year ended March 31,
      2007.
 Standardized
Measure – The Standardized Measure of Discounted Future Net Cash Flows
relating to the Company’s ownership interests in proved oil reserves for the
year ended March 31, 2010, 2009 and 2008 is shown below:





For
      the year ended
              March
      31, 2010
            
            For
      the year ended
              March
      31, 2009
            
            For
      the year ended
              March
      31, 2008Future
      cash inflows
            $
      931,885,000
            
            $
      652,739,000
            
            $ 1,107,109,000Future
      oil and natural gas operatingexpenses
            157,667,000
            
            144,661,000
            
            83,380,000Future
      development costs
            30,890,000
            
            33,403,000
            
            89,350,000Future
      income tax expense
            279,763,000
            
            41,520,000
            
            249,884,000Future
      net cash flows
            463,565,000
            
            433,155,000
            
            684,495,00010%
      discount factor
            195,243,000
            
            179,803,000
            
            331,516,000Standardized
      measure of discounted future net cash flows
            $
      268,322,000
            
            $
      253,352,000
            
            $
      352,979,000





The
Company’s standardized measure of discounted future net cash flows relating to
proved oil reserves was prepared in accordance with the provisions of FASC No 932-325-55.
Future cash inflows are computed by applying year end prices of oil and natural
gas to year end quantities of proved oil and natural gas reserves. During the
fiscal years ended March 31, 2010, 2009 and 2008 revenue from export sales
accounted for 95%, 81% and 91%, respectively, of total revenue. To take into
account the price differential for oil and natural gas exported versus sold
domestically, the Company applies year end prices for export sales to 90% of the
quantity of proved oil and natural gas reserves and the year end prices for
domestic sales to 10% of the quantity of proved oil and natural gas reserves.
Future oil and natural gas production and development costs are computed by
estimating the expenditures to be incurred in producing and developing the
proved oil and natural gas reserves at year end, based on year end costs and
assuming continuation of existing economic condition.











BMB
MUNAI, INC.
 
 SUPPLEMENTARY
FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION DEVELOPMENT AND
PRODUCTION ACTIVITIES (unaudited)


Future
income tax expenses are calculated by applying appropriate year end tax rates to
future pre-tax net cash flows relating to proved oil and natural gas reserves,
less the tax basis of properties involved. Future income tax expenses give
effect to permanent differences, tax credits and loss carryforwards relating to
the proved oil and natural gas reserves. Future net cash flows are discounted at
a rate of 10% annually to derive the standardized measure of discounted future
net cash flows. The Standardized Measure of Discounted Future Net Cash Flows is
not intended to represent the replacement cost or fair market value of the
Company’s oil and natural gas properties.





Changes in
Standardized Measure – Changes in Standardized Measure of Discounted
Future Net Cash Flows relating to proved oil reserves are summarized
below:




For
      the year ended
              March
      31, 2010
            
            For
      the year ended
              March
      31, 2009
            
            For
      the year ended
              March
      31, 2008Changes
      due to current year operations:Sales
      of oil and natural gas, net of oiland
      natural gas      operating
      expenses
            $
      (38,673,216)
            
            $
      (54,835,585)
            
            $
      (54,681,223)Sales
      of oil and natural gas properties
            -
            
            -
            
            -Purchase
      of oil and gas properties
            -
            
            -
            
            -Extensions
      and discoveries
            -
            
            85,153,000
            
            189,557,166Net
      change in sales and transfer prices, net of production
    costs
            163,113,547
            
            (305,001,925)
            
            154,594,264Changes
      due to revisions of standardizedvariables
            -
            
            -
            
            -Prices
      and operating expenses
            -
            
            -
            
            -Revisions
      to previous quantity estimates
            1,776,460
            
            (21,739,505)
            
            (77,465,492)Estimated
      future development costs
            1,426,515
            
            30,020,093
            
            (34,976,338)Income
      taxes
            (123,077,000)
            
            104,421,000
            
            (26,797,000)Accretion
      of discount
            25,335,200
            
            35,297,900
            
            17,126,500Production
      rates (timing)
            10,405,096
            
            64,073,697
            
            (26,973,812)Other
            (25,336,602)
            
            (37,015,675)
            
            41,329,935Net
      Change
            14,970,000
            
            (99,627,000)
            
            181,714,000Beginning
      of year
            253,352,000
            
            352,979,000
            
            171,265,000End
      of year
            $
      268,322,000
            
            $
      253,352,000
            
            $
      352,979,000





Sales of
oil and natural gas, net of oil and natural gas operating expenses are based on
historical pre-tax results. Sales of oil and natural gas properties, extensions
and discoveries, purchases of minerals in place and the changes due to revisions
in standardized variables are reported on a pre-tax discounted basis, while the
accretion of discount is presented on an after tax basis.


F-52


EXHIBIT
INDEX








Exhibit
      No.
            
            
            Exhibit
      Description12.1
            
            
            Computation
      of Earnings to Fixed Charges21.1
            
            
            Subsidiaries23.1
            
            
            Consent
      of Chapman Petroleum Engineering Ltd., Independent Petroleum
      Engineers23.2
            
            
            Consent
      of Hansen, Barnett & Maxwell, P.C., Independent Registered Public
      Accounting Firm31.1
            
            
            Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            
            Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            
            
            Certification
      of Principal Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            
            
            Certification
      of Principal Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200299.1
            
            
            Chapman
      Petroleum Engineering Ltd. Letter on its estimation of proved oil and gas
      reserves at March 31, 2010