**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-K/A-2**

 

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

**                           For the fiscal year ended****March 31,            2007**

 

| o | 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. Employer    |
| incorporation or organization)           |   | Identification No.) |
|                                     |   |                |
| **202 Dostyk Ave, 4th Floor**            |   |                |
| **Almaty, Kazakhstan**                   |   | **050051**          |
| (Address of principal executive offices) |   | (Zip Code)          |

 

**+7 (3272) 375-125**

(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                            Registered** |
|-------------------------|--------|---------------------------------------------------------------------|
|                    |   |                                                                |
| Common - $0.001         |   | American Stock Exchange                                             |

 

Indicate by check mark if the registrant is a well-known seasoned            issuer, as defined in Rule 405 of the Securities            Act. 

|   | oYesxNo |
|--------|---------|

 

Indicate by check mark if the registrant is not required to file reports            pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations            under those Sections. 

|   | oYesxNo |
|--------|---------|

 

Indicate 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 the registrant was            required to file such reports), and (2) has been subject to such filing requirements            for the past 90 days.

|   | xYesoNo |
|--------|---------|

 

Indicate by check mark if disclosure of delinquent filers pursuant to            Item 405 of Regulation S-K 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.       o

 

| Indicate by check mark whether the registrant is a large                            accelerated filed, an accelerated filer, or non-accelerated                            filer. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Large            accelerated Filero Accelerated FilerxNon-accelerated Filero

 

| Indicate by check mark whether the registrant is a shell                            company (as defined in Rule 12b-2 of the Exchange Act.) |
|---------------------------------------------------------------------------------------------------------------------------------------------|

|   | oYesxNo |
|--------|---------|

As            of September 30, 2006 the aggregate market value of the common voting stock held by            non-affiliates of the issuer based upon the closing stock price of $5.15 per share was            approximately $193,199,345.

 

As            of June 7, 2007, the registrant had 44,690,657 shares of common stock, par value            $0.001, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

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|     | **PART I**                                                                                                                          | Page   |
|----------|-------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                                |   |
|     | EXPLANATORY                            NOTE                                                                                         | 3      |
|     |                                                                                                                                |   |
| Item 1.  | Business                                                                                                                            | 4      |
|     |                                                                                                                                |   |
| Item 1A. | Risk                            Factors                                                                                             | 10     |
|     |                                                                                                                                |   |
| Item 1B. | Unresolved Staff                            Comments                                                                                | 16     |
|     |                                                                                                                                |   |
| Item 2.  | Properties                                                                                                                          | 17     |
|     |                                                                                                                                |   |
| Item 3.  | Legal                            Proceedings                                                                                        | 28     |
|     |                                                                                                                                |   |
| Item 4.  | Submission of                            Matters to a Vote of Security Holders                                                      | 28     |
|     |                                                                                                                                |   |
|     | **PART                            II**                                                                                              |   |
|     |                                                                                                                                |   |
| Item 5.  | Market for                            Registrant’s Common Equity, Related Stockholders Matters                            and |   |
|     | Issuer Purchases of                            Equity Securities                                                                    | 29     |
|     |                                                                                                                                |   |
| Item 6.  | Selected Financial                            Data                                                                                  | 32     |
|     |                                                                                                                                |   |
| Item 7.  | Management’s                            Discussion and Analysis of Financial Condition and                                    |   |
|     | Results of                            Operations                                                                                    | 33     |
|     |                                                                                                                                |   |
| Item 7A. | Quantitative and                            Qualitative Disclosures About Market Risk                                               | 48     |
|     |                                                                                                                                |   |
| Item 8.  | Financial                            Statements and Supplementary Data                                                              | 49     |
|     |                                                                                                                                |   |
| Item 9.  | Changes in and                            Disagreements with Accountants on Accounting and                                          |   |
|     | Financial                            Disclosure                                                                                     | 49     |
|     |                                                                                                                                |   |
| Item 9A. | Controls and                            Procedures                                                                                  | 50     |
|     |                                                                                                                                |   |
| Item 9B. | Other                            Information                                                                                        | 53     |
|     |                                                                                                                                |   |
|     | **PART                            III**                                                                                             |   |
|     |                                                                                                                                |   |
| Item 10. | Directors,                            Executive Officers and Corporate Governance                                                   | 53     |
|     |                                                                                                                                |   |
| Item 11. | Executive                            Compensation                                                                                   | 58     |
|     |                                                                                                                                |   |
| Item 12. | Security Ownership                            of Certain Beneficial Owners and Management                                           |   |
|     | and Related                            Stockholder Matters                                                                          | 66     |
|     |                                                                                                                                |   |
| Item 13. | Certain                            Relationships and Related Transactions, and Director                            Independence     | 68     |
|     |                                                                                                                                |   |
| Item 14. | Principal                            Accounting Fees and Services                                                                   | 68     |
|     |                                                                                                                                |   |
| Item 15. | Exhibits, Financial                            Statement Schedules                                                                  | 69     |
|     |                                                                                                                                |   |
|     | **PART                            IV**                                                                                              |   |
|     |                                                                                                                                |   |
|     | SIGNATURES                                                                                                                          | 70     |

 

2

 

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**Explanatory Note to Amendment No. 2 to Annual Report on Form            10-K**

 

BMB Munai, Inc. (the “Company”) is filing this Amendment No.            2 on Form 10-K/A-2 (the “Second Amendment”) to its Annual Report for the            fiscal year ended March 31, 2007, which was filed with the Securities and Exchange            Commission (“SEC”) on June 14, 2007 (the “Original Annual            Report”) and subsequently amended on July 10, 2007 (the “First            Amendment”) in response to certain comments raised by the staff of the            SEC.

 

Item 1            “*Business*” of the            Original Annual Report is hereby amended to provide additional information to our table            disclosing proved developed and proved undeveloped reserve volumes that we have            scheduled to recover before and after the expiration of our current exploration            license.

 

Item 2            “*Properties*” of the            Original Annual Report is hereby amended to clarify the reasons for the discrepancies            between the amount of expenditures reflected in the table on page 20 of the Original            Annual Report and the amounts disclosed in the            “*Capitalized*Costs” and            “*Exploration, Development and Acquisition Capital            Expenditures*” tables included in Item 2 and in Note            21*“SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND            NATURAL GAS EXPLORATION DEVELOPMENT AND PRODUCTION ACTIVITIES            (unaudited)*” of the Notes to the Consolidated Financial            Statements. Item 2 is also hereby amended to revising the            “*Drilling            Operations*”table on page 22 to disclose our drilling            activity on a year-by-year basis rather than cumulatively.

 

Disclosure regarding fluctuations in            “*Other Income*” inItem 7            “*Management’s Discussion and Analysis of Financial            Condition and Results of Operations*” of the Original            Annual Report is hereby amended to reflect certain reclassifications that were made in            the financial statements for the year ended March 31, 2006 to conform to the March 31,            2007 presentation. The reclassifications had no effect on net income.

 

As noted in the preceding paragraph, Item 8            “*Financial Statements and Supplementary            Data*” is hereby amended to include changes to Note 21            of the Notes to the Consolidated Financial Statements, including a change to the            “*Costs Incurred*” table            included in Note 21. In the Original Annual Report we presented            “*Costs Incurred*” on a            cumulative basis. In this Second Amendment the table has been revised to present            “*Costs Incurred*” on a            yearly basis consistent with Financial Accounting Standard 69. As a result of this            change, “*Total Costs            Incurred*” during the years ended March 31, 2006 and            2005 decreased from $107,591,043 and $68,079,938, respectively to $39,511,105 and            $18,678,228, respectively. Other footnote disclosures were also revised in response to            the SEC comments.

 

In accordance with Rule 12b-15 under the Securities Exchange Act of            1934, this Second Amendment also includes currently dated certifications from the            Company’s Chief Executive Officer and Chief Financial Officer as required by            Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certification exhibits and            Item 15 have been revised accordingly. Item 15 has also been revised to include the            consents of Hansen, Barnett & Maxwell, P.C. and BDO Kazakhstanaudit, LLP to the            incorporation by reference of this Amended Annual Report in the Registration Statement            of the Company on Form S-3, as amended, currently on file with the Securities and            Exchange Commission.

 

This Second Amendment speaks only to the original filing dates of the            Original Annual Report and the First Amendment, and except for those Items discussed in            this explanatory note, is unchanged from the Original Annual Report, as amended by the            First Amendment. This Second Amendment does not reflect events after the filing of the            Original Annual Report or modify or update those disclosures affected by subsequent            events. Therefore, you should read this Second Amendment together with the other            reports of the Company that update and supersede the information contained in this            Second Amendment.

 

3

 

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**BMB MUNAI, INC.**

 

*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.*

 

**Forward Looking Information**

 

Certain of the statements contained in all parts of this document            including, but not limited to, those relating to our drilling plans, future expenses,            changes in wells operated and reserves, future growth and expansion, future            exploration, future seismic data, expansion of operations, our ability to generate new            prospects, our ability to obtain a production license, review of outside generated            prospects and acquisitions, additional reserves and reserve increases, managing our            asset base, expansion and improvement of capabilities, integration of new technology            into operations, credit facilities, new prospects and drilling locations, future            capital expenditures and working capital, sufficiency of future working capital,            borrowings and capital resources and liquidity, projected cash flows from operations,            future commodity price environment, expectations of timing, the outcome of legal            proceedings, satisfaction of contingencies, the impact of any change in accounting            policies on our financial statements, the number, timing or results of any wells, the            plans for timing, interpretation and results of new or existing seismic surveys or            seismic data, future production or reserves, future acquisitions of leases, lease            options or other land rights, management’s assessment of internal control over            financial reporting, financial results, opportunities, growth, business plans and            strategy and other statements that are not historical facts contained in this report            are forward-looking statements. When used in this document, words like            “*expect*,”            “*project*,”            “*estimate*,”            “*believe*,”            “*anticipate*,”            “*intend*,”            “*budget*,”            “*plan*,”            “*forecast*,”            “*predict*,”            “*may*,”            “*should*,”            “*could*,”            “*will*” and similar            expressions are also intended to identify forward-looking statements. Such statements            involve risks and uncertainties, including, but 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 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. 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 annual report all references to dollar amounts ($)            refers to U.S. dollars unless otherwise indicated.

 

**PART I**

 

**Item 1. Business**

 

**Overview**

 

BMB Munai, Inc. is an independent oil and natural gas company engaged in            the exploration, development, acquisition and production of crude oil and natural gas            properties in the Republic of Kazakhstan (sometimes also referred to herein as the            “ROK” or “Kazakhstan”). We hold a contract that allows us to            explore and develop approximately 460 square kilometers in western Kazakhstan located            onshore in the Mangistau Oblast, approximately 50 kilometers from the Kazakhstan city            of Aktau, a seaport on the Caspian Sea.

 

4

 

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We generate revenue, income and cash flow by producing and selling crude            oil from production from our properties. We make significant capital expenditures in            our exploration and development activities that we anticipate will allow us to increase            and improve our ability to generate revenue. Our focus is toward enhancing cash flows            and increasing proved developed reserves by drilling developmental wells within a            proximity of existing wells, (which we believe decreases our likelihood of drilling a            dry hole), while at the same time increasing our current production and cash flow. As            cash flow justifies, we will drill exploratory wells to confirm potential reservoirs            identified by the 3D seismic studies or extend known reservoirs. We believe this            strategy will result in growth of proved developed reserves, production and financial            strength.

             

To date, we have relied primarily on funds raised through the sale of            our equity securities to fund operations. We currently use more cash in operations than            we generate. Although presently the revenues derived from our properties are sufficient            to meet our operating needs, exclusive of our drilling program, we will need additional            financing to continue exploration activities on our properties.

 

**Industry and Economic Factors**

 

In managing our business, we must deal with many factors inherent in our            industry. First and foremost is the fluctuation of oil and gas prices. Historically,            oil and gas markets have been cyclical and volatile, with future price movements that            are difficult to predict. While our revenues are a function of both production and            prices, wide swings in commodity prices will likely have the greatest impact on our            results of operations. We have no way of predicting those prices or of controlling them            without losing an advantage from a potential upswing. The oil and gas industry has            continued to experience high commodity prices in 2006 and 2007, which has positively            impacted the entire industry as well as our Company.

 

Our operations entail significant complexities. 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 nor the rate at which they may be produced. Despite our            best efforts to limit risk, exploration is a high-risk activity, often times resulting            in no discovery of commercially productive reserves. Moreover, operating costs in our            industry are substantial.

 

Our business, as with other extractive industries, is a depleting one in            which each oil and gas equivalent produced must be replaced or our business, and a            critical source of future liquidity, will shrink.

 

**Strategy**

 

Our goal is to increase stockholder value by investing in oil and            natural gas projects with attractive rates of return on capital employed. We plan to            achieve this goal by exploiting and developing our existing oil and gas properties and            pursuing the acquisition of additional properties. We have and will continue to focus            on the following:

 

*Increasing our Production and Cash Flow*. To            sustain our operations we need capital. To date most of our operating capital has come            from the sale of our securities. We believe that to increase shareholder value and            economic stability, we must increase our revenues through increased production. For            this reason, we have focused our efforts on drilling developmental

 

5

 

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wells            strategically located within proved areas with the intent to drill wells with a high            probability of success. We believe this strategy will allow us to increase our current            production and correspondingly our cash flows.

 

*Developing and Exploiting Existing            Properties*. We believe that there is significant value to be            created by drilling the identified undeveloped opportunities on our properties. We own            interest in 720 gross (720 net) developed acres, plus 160 gross (160 net) acres of            proved undeveloped reserves. We also own interest in approximately 49,150 gross (49,150            net) unproved, undeveloped acres. We plan to continue exploration, development,            production and further infrastructure development during the 2008 fiscal year. We            expect to fund our expenditures with future production revenues and a combination of            commercial debt and the issuance of corporate debt and/or equity securities.

 

*Pursuing Profitable Acquisitions*. While our            emphasis in fiscal 2008 is anticipated to focus on the further development of our            existing properties, we will continue to look for properties with both existing cash            flow from production and future development potential. We intend to pursue acquisitions            of properties that we believe will provide attractive rates of return on capital            invested. We have an experienced team of management professionals who we rely on to            identify and evaluate acquisition opportunities.

 

**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, 2007. 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, 2007. 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 twelve months. In estimating the            reserve quantities that are economically recoverable, Chapman used oil and natural gas            prices in effect as of March 31, 2007 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. 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.

 

6

 

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|                                                                                                                  | **Proved reserves to be recovered by June 30,                            2009(1)** |   | **Proved reserves to be recovered after June 30,                            2009(1)** |   |  

                              |
|-----------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|--------------------------------------------|
|                                                                                                                  | **Developed(2)**                                                                   |   | **Undeveloped(3)**                                                                    |   | **Developed(2)**                           |   | **Undeveloped(3)** |   | **Total** |
| Oil and condensate (MBbls)(4)                                                                                         |  

2,275                                                                      |   |  

242                                                                           |   |  

9,579                              |   |  

3,185 |   |  

15,281 |
| Natural gas (MMcf)                                                                                                    | -                                                                                  |   | -                                                                                     |   | -                                          |   | - |   | - |
| Total BOE (MBbls)                                                                                                     | 2,275                                                                              |   | 242                                                                                   |   | 9,579                                      |   | 3,185 |   | 15,281 |
|                                                                                                                  |                                                                               |   |                                                                                  |   |                                       |   |   |   |   |
| Standardized Measure of discounted future net cash                            flows(5) (in thousands of U.S. Dollars) |                                                                               |   |                                                                                  |   |                                       |   |   |   |  

                             

                             

$171,265 |

 

| (1) | Under our license with the Republic of Kazakhstan 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                            “Description of Properties” we have the right to engage in                            exploration stage activities until June 30, 2009. 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 June                            30, 2009. If we are not granted commercial production rights by that                            time, we would expect to lose our rights to the licensed territory and                            would expect to be unable to produce reserves after June 30,                            2009. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

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 from one another. 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 not be 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 prices in effect at March 31, 2007. 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, 2007. 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.

 

7

 

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**Sales to Major Customers**

 

We are now exporting all of our test production for sale in the world            market. Currently, all of our production is being sold to one client, Euro-Asian Oil            AG. We anticipate that once we move to commercial production we will market our            production to third parties consistent with industry practices.

             

Our crude oil is transported via the Aktau sea port to world markets.            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 of $14.15 for transportation expenses, freight charges and            other expenses borne by Euro-Asian Oil AG.

             

In the exploration, development and production business, production is            normally sold to relatively few customers. Our customers are concentrated in the oil            and gas industry, and revenue can be materially affected by current economic conditions            and the price of certain commodities such as natural gas and crude oil the cost of            which is passed through to the customer. However, based on the current demand for            natural gas and crude oil and the fact that alternate purchasers are readily available,            we believe that the loss of Euro-Asian Oil AG would not have a long–term material            adverse effect on our operations.

             

**Marketing**

 

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

             

**Competition**

 

Hydrocarbons exploration is highly competitive. 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            may have greater financial resources and larger technical staff than we do.

 

We believe we have an advantage over our competitor: our executive            management and our board of directors have domestic and international experience and            have been working in Kazakhstan and Russia for up to 30 years. They have developed            relationships with the Kazakhstan government, its departments and ministries at many            levels. We also employ experienced national and foreign specialists at senior levels in            our operating subsidiary, Emir Oil, LLP.

 

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.

 

8

 

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**Government Regulation**

 

Our operations are subject to various levels of government controls and            regulations at various levels in both the United States and in Kazakhstan. We attempt            to comply 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 on the industry by            increasing the cost of doing business and, consequentially, can adversely affect our            profitability. 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.

 

**Employees**

 

As of May 15, 2007 we had 261 full-time employees. We believe that our            relationships with our employees are good. None of our employees are covered by a            collective bargaining agreement. 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.

 

**Executive Offices**

 

Our principal executive and corporate offices are located in an office            building located at 202 Dostyk Avenue, in Almaty, Kakzakhstan. 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 250, Salt Lake City, Utah 84101, USA.

 

**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 atwww.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 sitewww.sec.gov, which            contains reports, proxy and information statements and other information regarding            issuers like BMB Munai.

 

9

 

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| **Item 1A. Risk                            Factors** |
|------------------------------------------------------|

 

*A substantial or extended decline in oil prices may adversely affect            our business, financial condition, cash flow, liquidity or results of operations,            ourability to meet our capital expenditure obligations and financial commitments or to            implement our business strategy.*

             

Our business isheavily dependent upon the price of and demand for oil            production and the level of such production will be subject to wide fluctuations and            depend on numerous factors beyond our control, including the following:

 

|   | • | the domestic and foreign supply of oil; |
|--------|--------|-----------------------------------------|

|   | • | the price and quantity of imports of crude                            oil; |
|--------|--------|----------------------------------------------------------------------------|

•      political conditions and events in            other oil-producing countries, including embargoes, continued hostilities in the Middle            East, Iran, Nigeria and other sustained military campaigns, and acts of terrorism or            sabotage;

|   | • | the actions of the Organization of Petroleum Exporting                            Countries, or OPEC; |
|--------|--------|-------------------------------------------------------------------------------------------------------|

|   | • | domestic government regulation, legislation and                            policies; |
|--------|--------|--------------------------------------------------------------------------------------|

|   | • | the level of global oil inventories; |
|--------|--------|--------------------------------------|

|   | • | weather conditions; |
|--------|--------|---------------------|

|   | • | technological advances affecting energy                            consumption; |
|--------|--------|---------------------------------------------------------------------------------|

|   | • | the price availability of alternative fuels;                            and |
|--------|--------|-----------------------------------------------------------------------------|

|   | • | overall economic conditions. |
|--------|--------|------------------------------|

 

Any continued or extended decline in the price of crude oil or natural            gas will adversely affect:

 

|   | • | our revenues, profitability and cash flow from                            operations; |
|--------|--------|---------------------------------------------------------------------------------------|

|   | • | the value of our proved oil reserves; |
|--------|--------|---------------------------------------|

|   | • | the economic viability of certain of our drilling                            prospects; |
|--------|--------|-----------------------------------------------------------------------------------------|

|   | • | our borrowing capacity; and |
|--------|--------|-----------------------------|

|   | • | our ability to obtain additional capital. |
|--------|--------|-------------------------------------------|

 

In December 2005 we were granted our first export quota from the            Ministry of Energy and Mineral Resources of the Republic of Kazakhstan            (“MEMR”), which allowed us to begin exporting oil for sale in the world            market in January 2006. We have applied for and been granted an export quota each month            since, with the exception of February 2006, when we did not apply for a quota. Prior to            January 2006, we were limited to selling our test production to the domestic market in            Kazakhstan. The price of oil in the domestic market in Kazakhstan is materially lower            than the price in the world market. There is no guarantee that the Republic of            Kazakhstan will continue to grant us export quotas in the future. In the event we are            not granted an export quota in the future, we will be limited to selling our production            to the domestic Kazakhstan market, which likely will result in us realizing lower            revenue per barrel of oil sold than we would realize in the world market.

             

We have not entered into crude oil hedging arrangements on any of our            anticipated sales. However, we may in the future enter into such arrangements in order            to reduce our exposure to price risks. Such arrangements may limit our ability to            benefit from increases in oil prices.

             

10

 

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*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 quantities 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.

             

*Twenty two percent of our proven properties are undeveloped;            therefore the risk associated with our success is greater than would be the case if all            of our properties were categorized as “proved developed            producing.”*

             

Because a portion of our proved reserves (approximately 22%) are            “Proved Undeveloped” additional capital for the drilling and completion of            an additional well will be required before these reserves become productive. Further,            because of the inherent uncertainties associated with drilling for oil and gas, this            well may never be developed to the extent that it develops into positive cash flow.            Even if we are successful in our development efforts, it could take several years to            achieve positive cash flow from our proved undeveloped reserves.

 

11

 

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*We will be unable to produce up to 84% of our proved            reserves if we are not able to extend our current contract or obtain a new contract            from the Republic of Kazakhstan, which would likely require us to terminate our            operations.*

             

Under our current contract for exploration of hydrocarbons on our            properties we have the right to produce oil and gas only until July 2009, yet 84% of            our proved reserves are scheduled to be produced after July 2009. We have the exclusive            right to negotiate a commercial production contract as per the terms of our exploration            contract. The MEMR does not make public its determinations on the granting of            commercial production rights. Based on discussions with the MEMR, we have learned that            the primary factors used by the MEMR in determining whether to grant commercial            production rights were whether the contract holder’s fulfillment of 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 MEMR. Our efforts are focused toward meeting            our minimum work program requirements and making and substantiating commercial            discoveries in each of identified structures 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.

 

*Prospects 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.*

 

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 /or producing fields may not be useful in predicting the            characteristics and potential reserves associated with our drilling prospects. If we            drill additional unsuccessful wells, our drilling success rate may decline 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:

             

12

 

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|         | • | environmental hazards, such as uncontrollable flows of                            oil, natural gas, brine, well fluids, toxic gas or other pollution into                            the environment, including groundwater and shoreline                            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. We may elect not to obtain insurance if we            believe that the cost of available insurance is excessive relative to the risks            presented. 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 federal, state, local and international regulation. We may be            required to make large expenditures to comply with governmental regulations. Matters            subject to regulation include:

 

|   | • | discharge permits for drilling operations; |
|--------|--------|--------------------------------------------|
|   | • | drilling bonds;                            |
|   | • | 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 operations and 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 may incur substantial liabilities to comply with environmental            laws and regulations.*

             

Our oil and natural gas operations are subject to stringent federal,            state and local 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, limit or prohibit            drilling activities on certain lands lying within wilderness, wetlands and other            protected areas, 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

             

13

 

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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.

 

*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 or acquire properties containing proved reserves, 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 on 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.

             

*Our activities, and correspondingly our ability to generate revenue            to support operations, could be adversely affected because of inadequate infrastructure            in the region where our properties are located.*

 

Our exploration and development activities could suffer due to            inadequate infrastructure in the region. We are working to improve the infrastructure            on our properties. Any problem or adverse change affecting our operational            infrastructure, or infrastructure provided by third parties, could have a material            adverse effect on our financial condition and results of operations. Similarly, if we            are unsuccessful in developing the infrastructure on our properties it could have a            material adverse effect on our financial conditions and results of            operations.

             

*The unavailability or high cost of drilling rigs, equipment,            supplies, personnel and oil field services could adversely affect our ability to            execute on a timely basis our exploration and development plans within our            budget.*

             

Shortages or the high cost of drilling rigs, equipment, supplies or            personnel could delay or adversely affect our development and exploration operations.            As the price of oil and natural gas has remained high, demand for production equipment            and personnel has also remained high, resulting, in some cases in shortages of            equipment and skilled personnel. In addition, larger producers may be able to secure            access to such equipment by offering drilling companies more lucrative terms. As demand            for services and personnel increases, the cost also increases, which can delay our            ability to convert our reserves into cash flow as well as significantly increasing the            cost of producing those reserves, thereby having a negative impact on anticipated net            income.

 

14

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*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 remain at            acceptable levels. 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.

             

*Competition in the oil and natural gas industry is intense, which may            adversely affect our ability to compete.*

             

We operate in a highly competitive environment for acquiring properties,            marketing oil and natural gas and securing trained personnel. Many of our competitors            possess and employ financial, technical and personnel resources that are substantially            greater than ours. Those companies may be able both to pay more for productive oil and            natural gas properties and exploratory prospects and to evaluate, bid for and purchase            a greater number of properties and prospects than our financial or personnel resources            permit. Our ability to acquire additional prospects and to find and develop reserves in            the future will depend on our ability to evaluate and select suitable properties and to            consummate transactions in a highly competitive environment. There is substantial            competition for capital available for investment in the oil and natural gas industry.            We may not be able to compete successfully in the future in acquiring prospective            reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality            personnel or raising additional capital.

 

**Risks Relating to Our Business**

 

*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.*

             

We believe that the present policies of the government of the Republic            of Kazakhstan are favorable to foreign investment and to exploration and production and            we are not aware of any impending changes. While there is a certain amount of            bureaucratic “red tape” we have significant experience working in            Kazakhstan, and good relationships with government agencies at many levels.

 

We, however, 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.

 

15

 

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If we are successful in establishing commercially producible reserves on            our properties, an application will be made for a commercial production contract. We            have the exclusive right to negotiate this contract for the ADE Block and Extended            Territory, and the government is required to conduct these negotiations under the            “Law of Petroleum.”  The terms of the commercial production contract            will establish the royalty 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 and the Extended Territory. Our obligation            associated with the ADE Block is approximately $6 million. Our obligation associated            with the Extended Territory is approximately $5.3 million. If satisfactory terms for            commercial production rights cannot be negotiated, it could have a material adverse            effect on our financial position.

             

**Item 1B. Unresolved Staff Comments**

 

|   | None. |
|--------|-------|

 

16

 

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**Item 2. Properties**

 

17

 

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We currently own a 100% interest in 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            “contract”). The original 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 as the “Extended            Territory.” The Extended Territory is governed by the terms of the original            contract. The ADE Block and the Extended Territory are sometimes collectively referred            to herein as “our properties.”

             

When initially granted, the exploration and development stage of the            contract had a five year term. The time for exploration and development was extended to            July 9, 2007, with the right to seek an additional two-year extension. In February 2007            the MEMR granted our request for an extension of our exploration contract. Under the            terms of the contract extension, the exploration period will extend to July 2009 over            the entire exploration contract territory.

             

Under the terms of our contract we have the right to gather and sell all            oil and natural gas we produce in test production until the expiration of our            exploration contract, as extended, with the revenue from such sales belonging to            BMB.

             

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, such as BMB, 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 production contract with the government.

             

In order to be assured that adequate exploration activities are            undertaken by the contractor, the MEMR 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 on the contract territory that may include geophysical studies,            construction of field infrastructure or drilling activities. During the exploration            stage, the contractor is also required to drill sufficient wells to establish the            existence of commercially producible reserves in any structure for which it seeks a            commercial production license. Failure to complete the minimum work program during the            term of an exploration contract could preclude a contractor from receiving a            longer-term production contract, regardless the success of the contractor in proving            commercial reserves during the partial fulfillment of the minimum work program.            Therefore, completion of the exploration contract’s minimum work program is            essential to the success of any oil company working in Kazakhstan.

             

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. Under our            exploration license our work program year ends on July 9 each year, whereas our fiscal            year ends on March 31 each year. As a result of these timing differences, the amounts            reflected in this table as “Actually Made” may differ from amounts            disclosed elsewhere in our*Management’s Discussion and            Analysis*or*Consolidated            Financial*Statements, which present figures based on our            fiscal year end rather than our work program year end.

 

18

 

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| Amount of

Expenditure | Prior to

July 2005 | July 2005 to July 2006 | July 2006 to                            July 2007 | July 2007 to                            July 2008                                                                          | July 2008 to                            July 2009                                      | Total               |
|------------------------|---------------------|------------------------|---------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|---------------------|
| Mandated by

Contract  |  

$21,500,000 |  

$6,000,000     |  

$12,700,000                               |  

$ 8,480,000                                                                                                        |  

$70,000                                                                        |  

$48,750,000 |
|  

Actually Made  |  

$38,400,000 |  

$12,700,000    |  

$38,410,000*                              |  

$                                          - |  

$                                    - |  

$88,510,000 |

             

* Investment as of March 31, 2007.

             

Under the rules of the MEMR there is an option for our expenditures            above the minimum requirements in one period to be carried over to meet minimum            obligations in future periods. As the above chart shows we have exceeded the minimum            expenditure requirement in each period of the contract. In connection with the recent            extension grant, the MEMR required an additional capital expenditures of $16,750,000            through the end of the extension period. We expect our planned drilling activities            through 2009 to exceed the new amounts added to our minimum work program.

             

As noted above, from June 2006 through March 31, 2007 we invested            approximately $38.4 million in the exploration and development of our properties.            During the year ended March 31, 2007, we incurred and capitalized expenses of            approximately $18.4 million attributable to drilling activities at the Kariman-1,            Kariman-2, Dolinnoe-6 and Emir-6 wells during the year, as discussed in more detail            below. We also incurred and capitalized approximately $6.2 million in well workover            expenses, almost $1.3 million in geological and geophysical works and $9.5 million in            materials used in exploration and development activities. Such capitalized costs are            recorded as oil and gas properties on our balance sheet as at March 31, 2007. See Note            6 to Consolidated Financial Statements.

 

The second aspect of the mandatory minimum work program is the            requirement that we drill a sufficient number of wells on any structure for which we            seek commercial production rights to support our claim of a commercial discovery within            the structure. Typically, one exploratory well and two appraisal wells are sufficient            to support such a claim, although in some cases, commercial reserves have been            demonstrated with fewer wells. The number of wells to be drilled is generally            determined by the number of structures identified by the seismic studies done on a            territory. The 3D seismic studies of our contract territory, as extended, have            identified six potential structures. Therefore, we anticipate the need to drill up to            18 wells during the exploration phase of our contract as reflected on the top half of            the following chart:

 

| Structures                         | Aksaz  | Dolinnoe | Emir   | Kariman | Borly  | Yessen |
|------------------------------------|--------|----------|--------|---------|--------|--------|
| Exploratory Wells                  | 1      | 1        | 1      | 1       | 1      | 1      |
| Appraisal Wells                    | 2      | 2        | 2      | 2       | 2      | 2      |
|                               |   |     |   |    |   |   |
| Existing Wells                     | 2      | 4        | 1      | 2       | 0      | 0      |
| Wells in

Progress                 | 0      | 0        | 1      | 2       | 0      | 0      |
| Remaining Wells to

Drill by

2009 | 1      | 0        | 1      | 0       | 3      | 3      |

 

 

19

 

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The bottom half of the above chart shows our current progress on            drilling of exploratory and appraisal wells, the second aspect of our mandatory minimum            work program. As the chart shows, for purposes of meeting the minimum work program            requirements, we have nine wells completed and three wells currently in            progress.

 

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. We have verified the presence of oil and gas in all our            wells thus far. We have expended substantial time and money to study our wells very            closely.

 

It is important to remember that the purpose of the exploration stage is            to study the geology and geophysical characteristics of each field and individual            wells, 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 a well and to gain insight into the further development of the            entire field. During this stage of exploration, oil production is subject to wide            fluctuations caused by varying pressures commonly experienced by new wells and by            significant periods of well closure to accommodate various 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.

 

In addition to the wells currently in progress, we anticipate the need            to complete up to eight additional wells by the end of the term of our exploration            contract in order to qualify for a commercial production license on each of our            structures. This will require that we continue to accelerate our drilling activities            during the next two years if we wish to obtain commercial production rights for each of            the structures within our properties.

             

Under our 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 MEMR, the primary factors used by the MEMR 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. We have not yet applied for commercial            production rights because we enjoy certain economic advantages during exploration and            development.

             

The terms of our commercial production rights and royalty rates will be            negotiated at the time we apply to move to commercial production. During exploration            and development stage, we have the right to produce and sell oil and natural gas at a            royalty rate of 2%. When we move to commercial production, the negotiated royalty rates            may change depending on reserves and production rates. Royalty rates are established by            the taxing authorities of the ROK and are based on production rates; the rate increases            on a sliding scale. Current royalty rates range for 2% to 6%. We also anticipate that            we will be required to pay rent export tax when we move to commercial production. The            current rent export tax rate is tied to the Brent oil price; the rate increases on a            sliding scale, at the present time it is 33%. Under our contract during exploration            stage we are not required to pay rent export tax on the oil we sell to the world            markets. We

 

20

 

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anticipate that at the time we move to commercial production, the            government will impose the rent export tax on all oil and natural gas we sell outside            the domestic market in Kazakhstan.

 

**Drilling Operations**

 

The following table sets forth our drilling activity for the years ended            March 31, 2005, March 31, 2006 and March 31, 2007. In the table, “Gross”            refers to the total wells in which we have a working interest or back-in working            interest after payout and “Net” refers to gross wells multiplied by our            working interest therein.

 

|             | **March 31, 2007** |   | **March 31, 2006** |   | **March 31, 2005** |
|------------------|--------------------|--------|--------------------|--------|--------------------|
|             |               | Gross  |               | Net    |               | Gross |   | Net |   | Gross |   | Net |
| **Exploratory:** |               |   |               |   |               |   |   |   |   |   |   |   |
| Productive       |               | -      |               | -      |               | - |   | - |   | - |   | - |
| Non-productive   |               | -      |               | -      |               | - |   | - |   | - |   | - |
| Total            |               | -      |               | -      |               | - |   | - |   | - |   | - |
|             |               |   |               |   |               |   |   |   |   |   |   |   |
| **Development:** |               |   |               |   |               |   |   |   |   |   |   |   |
| Productive       |               | 3      |               | 3      |               | 2 |   | 2 |   | 4 |   | 4 |
| Non-productive   |               | -      |               | -      |               | - |   | - |   | - |   | - |
| Total            |               | -      |               | -      |               | - |   | - |   | - |   | - |
| **Grand Total**  |               | 3      |               | 3      |               | 2 |   | 2 |   | 4 |   | 4 |

 

During the fourth quarter of fiscal 2006 we took steps to secure            drilling rigs to allow us to accelerate our drilling activities over previous years. In            January 2006 we signed one-year contracts with Great Wall, a Chinese drilling company,            and Oil and Gas Exploration Krakow, a Polish drilling company, to furnish heavy rigs of            sufficient size to drill wells to the depth of 4,000 meters, which is generally our            target depth in Triassic carbonate structures. We also signed a turnkey contract with            KandyagashBurService, LLP, a Kazakhstani drilling company, for drilling of new wells on            the Emir oil field. In addition, we hired Great Wall to provide a lighter rig we use            for completion, workover and testing activities on completed wells. Fiscal 2007 was the            first year when we engaged in drilling several wells simultaneously compared to our            drilling strategy in the past when we drilled wells serially.

             

During the fiscal year ended March 31, 2007, we drilled to deepen the            Kariman–1 well, completed drilling of Dolinnoe-6 and Kariman-2 well and continued            drilling of Emir-6 well. We also continued testing and development works on the            Dolinnoe-1, Dolinnoe- 2, Dolinnoe- 3, Emir -1 and Aksaz -1 and Aksaz-4            wells.

 

In February 2006 we commenced drilling in the Extended Territory. Our            initial project was increasing the depth of an existing non-producing well, which is            designated as the Kariman-1 well. Drilling operations were conducted by Oil and Gas            Exploration Kracow, Poland. The Kariman-1 well was cased to a depth of 1,661 meters and            drilled to a total depth of 3,069 meters in 1967 by the Soviet government. Drilling was            suspended at that depth because it was believed that the oil-bearing formations would            not be found deeper than the lower Jurassic formations.

             

Our study of more recent advanced geological and geophysical information            indicated that oil-bearing formations in the Kariman field are expected at a depth of            3,600 to 3,800 meters, through the Triassic formation. During reaming of the existing            wellbore we discovered that the technical condition of the well had deteriorated            significantly from the condition described in the original drilling logs. Because of            the poor conditions within the wellbore, we began a sidetrack at 1,660 meters and            essentially drilled a new bore from that depth.

             

21

 

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Upon penetration the Middle Triassic formation between 3,356 and 3,361            meters we encountered very high formation pressure, additional intensive oil shows and            a substantial increase in the gas content in drilling fluid. Therefore, as a safety            precaution, we compensated by increasing drilling fluid weight. The increased weight of            the required drilling fluid allowed us to determine that the Middle Triassic formation            is characterized by abnormally high pressure of approximately 600            atmospheres.

             

Due to the high weight of the drilling fluid, beginning at 3,361 meters            there was a loss circulation within the wellbore. Analysis of electric logging data            determined that the loss circulation area was located at a depth of 1,660-1,860 meters.            Therefore, we separated the loss circulation from the inflow by installing a cement            plug and running casing to the depth of 3,100 meters.

             

Due to high pressure and strong degassing of drilling fluid in the            penetrated portion of the Middle Triassic formations, our operations managers stopped            drilling at a depth of 3,361 meters and retained Kezbie, a Kazakhstani company to            commence well completion operations. Completion operations were followed by limited            testing of a portion of the Kariman-1 well. The tests have been conducted in the open            wellbore without perforation of the Upper Triassic formation, despite the fact that the            flows from this horizon were partially locked by drilling fluid preliminary testing            conducted during the first three days of testing yielded results ranging from 380 to            570 barrels per day.

             

Despite encouraging preliminary results of testing in the open wellbore,            we decided to shut the well until arrival of a liner, smaller-diameter casing. The            equipment has been procured and the casing was run-in during February-March of 2007. We            intend to commence completion operations followed by extensive testing of the Upper            Triassic sandstone formations during the first quarter of the 2008 fiscal            year.

             

During the summer of 2007 we commenced drilling operations on three            wells simultaneously, Kariman-2, Dolinnoe-6 and Borly-2.

             

Kariman-2, the first well drilled by us from surface, was spudded on            August 15, 2006, by company contractor, Oil and Gas Exploration Krakow. The well is            located 500 meters to the south of the Kariman-1 well. Drilling of the Kariman-2 was            finished on December 25, 2006, with the final depth of 3,535 meters upon reaching the            end of the targeted Middle Triassic horizons. Completion operations were completed by            Burgylau LLP, a local contractor, during January 2007. We commenced testing of the well            in February 2007. Since then the well has been steadily test producing with the range            between 1,400 and 1,700 bpd on a 6mm choke.

             

Dolinnoe-6 well was spudded by our drilling contractor, Great Wall            (China), on August 8, 2006. The well is located 800 meters to the southeast of the            Dolinnoe-3 well drilled by the Company in 2005. Drilling operations were completed on            January 23, 2007, with the final depth of 3,883 meters. Completion operations were            subcontracted to Burgylau LLP and were carried out during March and April 2007.            Completion operations were commenced at the end of March-beginning of April. We expect            to continue intensive testing activities during the first quarter and to announce            results of such testing upon receiving detailed information.

             

On July 5, 2006, our drilling contractor, Great Wall, has placed a            150-ton rig on Borly-2, well drilled to a depth of 2,382 meters during 1995 by            MangyshlakMunaiGas, a subsidiary of the Kazakhstani National Oil and Gas Company. The            well was previously cased to a depth of 1,900 meters. During the process we made a            decision to cease and postpone re-entry operations on the well until a heavier rig            becomes available.

 

22

 

----

             

On October 2, 2006, our third drilling contractor, KanyagashBurService            LLP (KBS), completed mobilization of a 175-ton drilling rig and spudded a new well,            designated Emir-6, on the Emir oil field. We signed a turnkey contract with the KBS for            drilling of this well with a target depth of 3,100 meters. We expect drilling,            completion and testing operations to be completed in the first quarter of fiscal year            2008.

             

**Production**

 

The following table sets forth the number of productive oil and natural            gas wells in which we owned an interest as of March 31, 2007.

 

|        | **Company-operated** |   | **Non-operated** |   | **Total** |
|-------------|----------------------|--------|------------------|--------|-----------|
|        | **Gross**            |   | **Net**          |   | **Gross** |   | **Net** |   | **Gross** |   | **Net** |
|        |                 |   |             |   |      |   |   |   |   |   |   |
| Oil         | 9                    |   | 9                |   | -         |   | - |   | 9 |   | 9 |
| Natural Gas | -                    |   | -                |   | -         |   | - |   | - |   | - |
| Total       | 9                    |   | 9                |   | -         |   | - |   | 9 |   | 9 |

 

As of the end of the 2007 fiscal year we had nine wells in workover,            testing or test production. According to the laws of the Republic of Kazakhstan, we are            required to test every prospective object 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 object to object            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.

 

Our production figures for the month of March 2007 covering production            from the ADE block and Kariman field in the extended license territory were as            following: daily total high production was 2,693 bpd; daily total low production was            1,946 bpd with an average daily total production for the 31 days of March of 2,337 bpd.            Because this only accounts for one zone per well, this may not be representative of the            cumulative total production rate from all of the tested intervals in each of the            wells.

 

Following is a brief description of the current production status of            each of our nine wells and the Emir-6 well, which is nearing completion of            drilling.

 

Aksaz            -1

 

This well is currently not producing. Prior to workover, four producing            intervals were tested. The single interval test production rates in Aksaz-1 using a 10            mm diameter choke was 140 bpd. We expect to undertake workover operations on this well,            consisting primary of fishing works, once the workover rig will become available            following testing of the Dolinnoe-6, Kariman-1 and Emir-6 wells.

 

Aksaz            – 4

 

Drilling of this well was completed in August 2005. Two producing            intervals have been tested. Current production rates from single interval testing using            a 6 mm diameter choke ranges from 76 to 107 bpd.

 

23

 

----

 

Dolinnoe – 1

 

During the third quarter of fiscal 2007 we conducted workover operations            on this well and it is currently producing. Production rates from single interval            testing using a 6 mm diameter choke ranges from 221 to 438 bpd.

 

Dolinnoe – 2

 

This well is also producing. Current production rates from single            interval testing using a 8 mm diameter choke ranges from 32 to 290 bpd.

 

Dolinnoe – 3

 

This well was initially completed to a depth of 3,800 meters in            September 2005. During initial testing, we were able to perforate only 17 of 24 meters            of the producing interval because of intensive oil and gas shows. Subsequent            perforation of the remaining 7 meters of the interval was disrupted when tubing was            impacted by the heavy drilling mud components, and the blowout preventer was damaged,            which required the forced killing of the well. Although we were able to restore limited            oil production from the well, the production was substantially lower than the            well’s initial test production performance. We have conducted numerous tests            during the past six months in an effort to increase daily production rates to levels            consistent with management expectations. In August 2006 we completed the acid treatment            of the Dolinnoe-3 well. During the ten days following completion of the acid treatment            the well produced between 460 and 630 bpd while being tested using chokes between 6mm            and 10mm in size.We believe these initial test results indicate            that we have developed a suitable hydrochloric acid formula to conduct effective acid            treatment of the carbonate formations with temperature and pressure conditions            characterized by the Dolinnoe field. Current production rates from single interval            testing using an 8 mm diameter choke range from 170 to 347 bpd. We plan to continue            application of acid treatment to Dolinnoe field wells to stimulate production from such            wells.

 

Dolinnoe - 6

 

Drilling of the Dolinnoe-6 well was completed on January 23, 2007. This            well was drilled through the full Middle Triassic layer to a depth of 3,883 meters.            Completion activities have been performed and testing of the well commenced in the            third week of March. Stable production estimates will not be available until conclusion            of the testing period.

 

Emir            – 1

 

This well currently is not producing. Single interval production from            this well prior to workover was 1.3 to 9.5 bpd.

 

Emir -            6

 

Drilling of the Emir-6 well has been completed on June 2, 2007. This            well was drilled to a depth of 3,197 meters. Completion activities have been performed            and we anticipate perforating the well within the next two weeks. Following perforation            of the well, we will begin the testing.

 

24

 

----

Kariman            - 1

 

Re-entry of the Kariman-1 well was completed on June 30, 2006 and well            completion to the upper Triassic formation was completed by July 17, 2006. Despite the            fact that the flows from this horizon are partially blocked by drilling fluid,            preliminary testing conducted during the first month of testing using chokes ranging            from 20 mm to 30 mm yielded results ranging from 380 to 570 barrels per day. The well            was then put into a pressure-build up test to better understand the source of the high            pressures encountered during earlier re-entry operations at the upper four meters of            Middle Triassic formation. We have obtained and run down a specialized low diameter            casing in the well. Perforation and subsequent testing of Upper Triassic sandstone            formations are scheduled for the first quarter of fiscal 2008.

 

Kariman            – 2

 

This well was spudded on August 15, 2006, and is the first well we have            drilled from the surface in the Kariman oil field. Drilling of the Kariman-2 well was            finished on December 25, 2006. Drilling operations were concluded at the depth of 3,535            meters, upon reaching the end of the targeted Middle Triassic horizons.

             

Well completion activities were conducted utilizing a drilling rig            specifically employed for workover and completion operations. Subsequent testing of the            well during the months of February and March yielded test production ranging from 996            to 1,859 bpd with steady production in the range of 1,400 to 1,700 bpd. We plan to            continue test production from this well.

 

**Cost            Information**

 

|   | *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, 2007** |   | **As of March 31, 2006** |
|-----------------------------------------------------|--------------------------|--------|--------------------------|
|                                                |                     |   |                     |
| Developed oil and natural gas properties            | $ 82,311,230        |   | $ 68,079,938   |
| Unevaluated oil and natural gas properties          | 25,279,813          |   | -              |
| Accumulated depletion, depreciation andamortization |  

(3,403,475)      |   |  

(1,396,641)      |
| Net capitalized cost                                | $ 104,187,568       |   | $ 66,683,297   |

             

**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.

 

26

 

----

|                   |   | **For the year ended March 31, 2007** |   | **For the year ended March 31, 2006** |   | **For the year ended**

**March 31, 2005** |
|------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|--------------------------------------------|
|                   |   |                                  |   |                                  |   |                                       |
| Acquisition costs:     |   |                                  |   |                                  |   |                                       |
| Unproved properties    |   | $ -                                   |   | $ -                                   |   | $ -                                        |
| Proved properties      |   | -                                     |   | -                                     |   | 19,075,000                                 |
| Exploration costs      |   | 1,370,797                             |   | 3,453,603                             |   | 713,220                                    |
| Development costs      |   | 37,063,321                            |   | 14,368,323                            |   | 16,687,432                                 |
| Subtotal               |   | 38,434,118                            |   | 17,821,926                            |   | 36,475,652                                 |
| Asset retirement costs |   | 1,076,987                             |   | 856,302                               |   | 60,973                                     |
| Total costs incurred   |   | $ 39,511,105                          |   | $ 18,678,228                          |   | $ 36,536,625                               |

 

**Oil and Natural Gas Volumes, Prices and Operating            Expense**

 

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

 

 

|                                                                                                                                                                       | **For the Year Ended**

**March 31, 2007**                                     |   | **For the Year Ended**

**March 31, 2006**                                     |   | **For the Year Ended**

**March 31, 2005**                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|
| **Production:**                                                                                                                                                            |                                                                           |   |                                                                           |   |                                                                           |
| Oil and condensate (Bbls)                                                                                                                                                  | 321,993                                                                        |   | 242,522                                                                        |   | 68,755                                                                         |
| Natural gas liquids (Bbls)                                                                                                                                                 | -                                                                              |   | -                                                                              |   | -                                                                              |
| Natural gas (Mcf)                                                                                                                                                          | -                                                                              |   | -                                                                              |   | -                                                                              |
| Barrels of oil equivalent (BOE)                                                                                                                                            | 321,993                                                                        |   | 242,522                                                                        |   | 68,755                                                                         |
|                                                                                                                                                                       |                                                                           |   |                                                                           |   |                                                                           |
| **Sales(1)(3):**                                                                                                                                                           |                                                                           |   |                                                                           |   |                                                                           |
| Oil and condensate (Bbls)                                                                                                                                                  | 315,540                                                                        |   | 227,976                                                                        |   | 64,084                                                                         |
| Natural gas liquids (Bbls)                                                                                                                                                 | -                                                                              |   | -                                                                              |   | -                                                                              |
| Natural gas (Mcf)                                                                                                                                                          | -                                                                              |   | -                                                                              |   | -                                                                              |
| Barrels of oil equivalent (BOE)                                                                                                                                            | 315,540                                                                        |   | 227,976                                                                        |   | 64,084                                                                         |
|                                                                                                                                                                       |                                                                           |   |                                                                           |   |                                                                           |
| **Average Sales Price(1):**                                                                                                                                                |                                                                           |   |                                                                           |   |                                                                           |
| Oil and condensate ($ per Bbl)                                                                                                                                             | $ 50.03                                                                        |   | $ 26.13                                                                        |   | $ 15.19                                                                        |
| Natural gas liquids ($ per Bbl)                                                                                                                                            | $                                    - |   | $                                    - |   | $                                    - |
| Natural gas ($ per Mcf)                                                                                                                                                    | $                                    - |   | $                                    - |   | $                                    - |
| Barrels of Oil equivalent ($ per BOE)                                                                                                                                      | $ 50.03                                                                        |   | $ 26.13                                                                        |   | $ 15.19                                                                        |
|                                                                                                                                                                       |                                                                           |   |                                                                           |   |                                                                           |
| **Average oil and natural gas operating                            expenses****including production and ad valorem                            taxes****($ per BOE)(2)(3)** |  

                             

$ 7.20                             |   |  

                             

$ 3.84                             |   |  

                             

$ 6.34                             |

 

(1) During the years ended March 31, 2007, 2006 and 2005, the Company            has not engaged in any hedging activities, including derivatives.

(2) Includes transportation cost, production cost and ad valorem            taxes.

(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.

 

27

 

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| **Item 3.** | **Legal Proceedings** |
|-------------|-----------------------|

 

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 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 2005, Sokol Holdings amended 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 complaint alleges            tortious interference with contract, specific performance, breach of contract, unjust            enrichment and breach of fiduciary duty by Georges Benarroch, Alexandre Agaian and            Credifinance, conversion, breach of fiduciary duty by Boris Cherdabayev, Mirgali            Kunayev and Bakhytbek Baiseitov, misappropriation of trade secrets and tortuous            interference with fiduciary duty by Mr. Agaian, Mr. Benarroch and            Credifinance and aiding and abetting breach of fiduciary duty by Mr. Benarroch,            Mr. Agaian and Credifinance 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 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.

             

We have retained the law firm of Bracewell & Giuliani LLP in New            York, New York to represent us in the lawsuit. We 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 has been renewed. Briefing on the motion was completed            on August 24, 2006, and the motion is awaiting decision. There are also pending            discovery-related motions before the court awaiting decision.

             

In the opinion of management, the resolution of this lawsuit will not            have a material adverse effect on our financial condition, results of operations or            cash flows.

             

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 our management.

 

| **Item 4.** | **Submission of Matters to a Vote of Security                            Holders** |
|-------------|------------------------------------------------------------------------------------|

 

No matters were submitted to a vote of security holders and there were            no changes in our board of directors during the quarter ended March 31,            2007. 

 

28

 

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**PART II**

 

| **Item 5.** | **Market for Registrant’s Common Equity, Related                            Stockholder Matters and Issuer Purchases of Equity Market for our                            Common Stock** |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Our common stock began trading on the American Stock Exchange under the            symbol “KAZ” on September 21, 2006. Prior to that time, our common stock            traded on the OTC Bulletin Board under the symbol “BMBM.” 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 third            and fourth quarters of the fiscal year ended March 31, 2007, as reported by the            American Stock Exchange, and the high and low bid prices for the first and second            quarters of the fiscal year ended March 31, 2007 and the fiscal year ended March 31,            2006. The published high and low bid quotations from the first quarter 2006 through            second quarter 2007, were furnished to us by Pink Sheets, LLC. These quotations            represent prices between dealers and do not include retail markup, markdown or            commissions and may not represent actual transactions.

             

|                             |   | High    |   | Low    |
|----------------------------------|--------|---------|--------|--------|
|                             |   |    |   |   |
| Fiscal year ended March 31, 2007 |   |    |   |   |
|                             |   |    |   |   |
| Fourth quarter                   |   | $ 5.49  |   | $ 4.51 |
| Third quarter                    |   | $ 6.03  |   | $ 4.56 |
| Second quarter                   |   | $ 8.80  |   | $ 5.80 |
| First quarter                    |   | $ 10.65 |   | $ 7.85 |
|                             |   |    |   |   |
| Fiscal year ended March 31, 2006 |   |    |   |   |
|                             |   |    |   |   |
| Fourth quarter                   |   | $ 9.70  |   | $ 6.70 |
| Third quarter                    |   | $ 7.50  |   | $ 6.00 |
| Second quarter                   |   | $ 8.15  |   | $ 4.65 |
| First quarter                    |   | $ 5.30  |   | $ 4.01 |

             

**Record Holders**

 

As of June 7, 2007, we had approximately 428 shareholders of record            holding 44,690,657 shares of our common stock. The number of record holders was            determined from the records of our 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.

 

**Dividend Policy**

 

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, expansion and development of our business.

 

29

 

----

**Securities for Issuance Under Equity Compensation            Plans**

 

As of June 7, 2007, 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     |  

                             

1,173,583                                                                                                                        |  

                             

$5.33                                                                                                            |  

                             

1,855,000                                                                                                                                                                                          |
| Equity compensation plans not approved by security                            holders |  

                             

142,857                                                                                                                          |  

                             

$3.50                                                                                                            |  

                             

-0-                                                                                                                                                                                                |
|  

Total                                                                         |  

1,316,440                                                                                                                                                            |  

$5.13                                                                                                                                                |  

1,855,000                                                                                                                                                                                                                              |

 

On November 19, 2003 we granted an option to Credifinance Securities            Limited for services rendered by Credifinance as our agent in connection with private            placements made by us in November 2003. The option grants Credifinance the right to            purchase up to 142,857 shares of our common stock at an exercise price of $3.50 per            share. The option expires on November 26, 2008. The option provides for adjustments to            the number of shares and/or the price per share to protect the holder against dilution            and in the event of mergers, reorganizations and similar events. The option also            requires that in the event we determine to make a registered public offering during the            term of the option, we shall use our best efforts to include the common shares            underlying the options in the registration statement.

 

In November 2004 we agreed to grant stock options under our 2004 Stock            Incentive Plan to Gary Lerner, our former corporate secretary, to purchase 60,000            shares of our common stock. The options have an exercise price of $4.00 per share and            expire in October 2009. In April 2006, Mr. Lerner exercised options to purchase            7,200 shares of our common stock.

 

On July 18, 2005 our Board of Directors approved stock option grants and            restricted stock awards under our 2004 Stock Incentive Plan. The total number of            options and restricted stock grants was 820,783 and 469,217, respectively. 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 will expire five years from the grant date. Of the            restricted stock grants, 389,217 vested immediately. The remaining shares will vest to            the three individuals to whom they were granted in equal amounts upon the one year, two            year and three year anniversaries of their employment with the Company. Among the            parties receiving stock options and restricted stock grants were the following            executive officers and directors:

 

30

 

----

 

| **Name**            |   | **Positions with Company** |   | **Options                            Granted** |   | **Restricted Stock Granted** |
|---------------------|--------|----------------------------|--------|------------------------------------------------|--------|------------------------------|
|                |   |                       |   |                                           |   |                         |
| Boris Cherdabayev   |   | CEO and Director           |   | 410,256                                        |   | 189,744                      |
| Anuar Kulmagambetov |   | Former CFO                 |   | 232,632                                        |   | 107,368                      |
| Georges Benarroch   |   | Director                   |   | 68,421                                         |   | 31,579                       |
| Valery Tolkachev    |   | Director                   |   | 68,421                                         |   | 31,579                       |

 

In January 2006, we entered into a separation agreement with our former            CFO, Anuar Kulmagambetov, to issue Mr. Kulmagambetov 50,000 restricted common            shares and 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.

 

On June 20, 2006 our Board of Directors approved stock option grants and            restricted stock awards to our officers and directors and certain employees and            consultants of the Company under our 2004 Stock Incentive Plan. The total number of            options and restricted stock grants was 200,000 and 495,000 respectively. The options            are exercisable at a price of $7.00 per share, which was the closing price of our            common stock on the OTCBB on June 20, 2006. The restricted stock grants were also            valued at $7.00 per share. The options will expire three years from the grant date. All            of the options and restricted stock grants have vested. Among the parties receiving            restricted stock grants were the following executive officers and directors:

 

| **Name**          |   | **Positions with Company** |   | **Options                            Granted** |   | **Restricted Stock Granted** |
|-------------------|--------|----------------------------|--------|------------------------------------------------|--------|------------------------------|
|              |   |                       |   |                                           |   |                         |
| Boris Cherdabayev |   | CEO and Director           |   | 150,000                                        |   | 80,000                       |
| Askar Tashtitov   |   | President                  |   | -                                              |   | 40,000                       |
| Sanat Kasymov     |   | CFO                        |   | -                                              |   | 40,000                       |
| Gamal Kulumbetov  |   | COO                        |   | -                                              |   | 40,000                       |
| Georges Benarroch |   | Former Director            |   | -                                              |   | 10,000                       |
| Troy Nilson       |   | Director                   |   | -                                              |   | 10,000                       |
| Stephen Smoot     |   | Director                   |   | -                                              |   | 10,000                       |
| Valery Tolkachev  |   | Director                   |   | 50,000                                         |   | 40,000                       |

 

On March 30, 2007 we made restricted stock grants under the Plan to            certain officers, employees and outside consultants 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 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 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

 

31

 

----

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.            Among the parties receiving restricted stock grants were the following executive            officers and directors:

 

| **Name**          |   | **Positions with Company** |   | **Restricted Stock Granted** |
|-------------------|--------|----------------------------|--------|------------------------------|
|              |   |                       |   |                         |
| Boris Cherdabayev |   | CEO and Director           |   | 150,000                      |
| Askar Tashtitov   |   | President                  |   | 100,000                      |
| Sanat Kasymov     |   | CFO                        |   | 100,000                      |
| Gamal Kulumbetov  |   | COO                        |   | 100,000                      |

 

**Recent Sales of Unregistered Securities.**

 

During and subsequent to the quarter ended March 31, 2007 the following            equity securities, which were not registered under the Securities Act of 1933, were            issued.

 

As discussed above, on March 30, 2007 we granted common stock to certain            of our officers, employees and outside consultants under the Plan. The total number of            restricted common shares granted was 950,000. For more details regarding the vesting of            the restricted stock grants, please see the last paragraph of            “*Securities for Issuance Under Equity Compensation            Plans*” above. Among the parties receiving restricted            stock grants were the following executive officers and directors:

 

| **Name**                                     |   | **Position with                            Company** |   | **Restricted Stock Granted** |
|----------------------------------------------|--------|------------------------------------------------------|--------|------------------------------|
|                                         |   |                                                 |   |                         |
| Boris                            Cherdabayev |   | CEO and                            Director          |   | 150,000                      |
| Gamal                            Kulumbetov  |   | COO                                                  |   | 100,000                      |
| Sanat Kasymov                                |   | CFO                                                  |   | 100,000                      |
| Askar                            Tashtitov   |   | President                                            |   | 100,000                      |

 

Grants were made to 11 people, eight 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 Section 4(2) under the Securities Act of 1933.

             

As discussed above, the stock grants vest only upon the occurrence of a            Vesting Event.

             

**Issuer Repurchases**

 

We did not make any repurchases of our equity securities during the year            ended March 31, 2007.

             

**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, 2007, 2006 and 2005 and for the period from inception (May 6,            2003) through March 31, 2004. The data set forth below should be read in conjunction            with “Management’s Discussion and Analysis of Financial Condition and            Results of Operations” and the consolidated financial statements and related            notes thereto included in this Annual Report.

 

 

32

 

----

 

|                                                                       |  

                             

                             

                             

**For the year ended March 31,** |   | **For the period from**

**Inception****(May 6, 2003)**

**through****March 31, 2004** |
|----------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|
|                                                                       | **2007**                                                                                                                                             |   | **2006**                                                                               |   | **2005** |   |
| **Consolidated Statements of Operations                            Data:** |                                                                                                                                                 |   |                                                                                   |   |   |   |   |
|                                                                       |                                                                                                                                                 |   |                                                                                   |   |   |   |   |
| Revenues                                                                   | $ 15,785,784                                                                                                                                         |   | $ 5,956,731                                                                       |   | $ 973,646  |   | $ -  |
| Oil and gas operating expenses                                             | 2,272,251                                                                                                                                            |   | 875,319                                                                           |   | 406,361  |   | -  |
| General and administrative expenses                                        | 10,757,727                                                                                                                                           |   | 9,724,597                                                                         |   | 4,060,962  |   | 781,757  |
| Depletion                                                                  | 2,006,834                                                                                                                                            |   | 1,167,235                                                                         |   | 229,406  |   | -  |
| Income/(loss) from operations                                              | 404,843                                                                                                                                              |   | (5,949,170)                                                                            |   | (3,789,534) |   | (786,515) |
| Net income/(loss)                                                          | 1,039,491                                                                                                                                            |   | (5,344,333)                                                                            |   | (3,286,312) |   | (613,782) |
| Basic income/(loss) per common share                                       | 0.02                                                                                                                                                 |   | (0.15)                                                                                 |   | (0.12) |   | (0.08) |
| Diluted income/(loss) per common share                                     | 0.02                                                                                                                                                 |   | (0.15)                                                                                 |   | (0.12) |   | (0.08) |
|                                                                       |                                                                                                                                                 |   |                                                                                   |   |   |   |   |
|                                                                       | **As of March 31,**                                                                                                                                  |   | **As of March 31,**                                                                    |
|                                                                       | **2007**                                                                                                                                             |   | **2006**                                                                               |   | **2005** |   | **2004** |
| **Balance Sheet Data:**                                                    |                                                                                                                                                 |   |                                                                                   |   |   |   |   |
|                                                                       |                                                                                                                                                 |   |                                                                                   |   |   |   |   |
| Current assets                                                             | $ 29,971,535                                                                                                                                         |   | $ 57,336,327                                                                           |   | $18,310,655 |   | $ 5,711,523 |
| Oil and gas properties, full cost method, net                              | 104,187,568                                                                                                                                          |   | 66,683,297                                                                             |   | 49,172,304 |   | 6,495,186 |
| Total assets                                                               | 144,796,045                                                                                                                                          |   | 126,582,656                                                                            |   | 68,241,826 |   | 12,512,945 |
| Total current liabilities                                                  | 9,120,299                                                                                                                                            |   | 4,623,975                                                                              |   | 6,997,671 |   | 666,719 |
| Total long term liabilities                                                | 10,114,126                                                                                                                                           |   | 7,329,877                                                                              |   | 6,653,215 |   | 242,000 |
| Total Shareholders’ equity                                           | $125,561,620                                                                                                                                         |   | $114,628,804                                                                           |   | $54,590,940 |   | $11,522,242 |

 

 

| **Item 7.** | **Management’s Discussion and Analysis of 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, 2007, 2006 and 2005. This discussion should be            read in conjunction with the consolidated financial statements and footnotes to the            consolidated financial statements included in this annual report.

 

**Results of Operations**

 

This section includes a discussion of our results of operations for the            fiscal years ended March 31, 2007, 2006 and 2005. The following table sets forth            selected operating data for the fiscal years indicated:

 

33

 

----

|                            |   | **For the year ended**

**March 31, 2007** |   | **For the year ended**

**March 31, 2006** |   | **For the year ended**

**March 31, 2005** |
|---------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|
| Revenues:                       |   |                                       |   |                                       |   |                                       |
| Oil and gas sales               |   | $ 15,785,784                               |   | $ 5,956,731                                |   | $ 973,646                                  |
|                            |   |                                       |   |                                       |   |                                       |
| Expenses:                       |   |                                       |   |                                       |   |                                       |
| Oil and gas operating(1)        |   | 2,272,251                                  |   | 875,319                                    |   | 406,361                                    |
| Depletion                       |   | 2,006,834                                  |   | 1,167,235                                  |   | 229,406                                    |
| Depreciation and amortization   |   | 170,610                                    |   | 133,148                                    |   | 66,451                                     |
| Accretion                       |   | 173,519                                    |   | 5,602                                      |   | -                                          |
| General and administrative      |   | 10,757,727                                 |   | 9,724,597                                  |   | 4,060,962                                  |
|                            |   |                                       |   |                                       |   |                                       |
| Net Production Data:            |   |                                       |   |                                       |   |                                       |
| Oil (Bbls)                      |   | 321,933                                    |   | 242,522                                    |   | 68,755                                     |
| Natural gas (Mcf)               |   | -                                          |   | -                                          |   | -                                          |
| Barrels of Oil equivalent (BOE) |   | 321,993                                    |   | 242,522                                    |   | 68,755                                     |
|                            |   |                                       |   |                                       |   |                                       |
| Net Sales Data(3):              |   |                                       |   |                                       |   |                                       |
| Oil (per Bbl)                   |   | 315,540                                    |   | 227,976                                    |   | 64,084                                     |
| Natural gas (Mcf)               |   |                                       |   | -                                          |   | -                                          |
| Barrels of Oil equivalent       |   | 315,540                                    |   | 227,976                                    |   | 64,084                                     |
|                            |   |                                       |   |                                       |   |                                       |
| Average Sales Price:            |   |                                       |   |                                       |   |                                       |
| Oil (per Bbl)                   |   | 50.03                                      |   | 26.13                                      |   | 15.19                                      |
| Natural gas (per Mcf)           |   | -                                          |   | -                                          |   | -                                          |
| Equivalent price (per BOE)      |   | 50.03                                      |   | 26.13                                      |   | 15.19                                      |
|                            |   |                                       |   |                                       |   |                                       |
| Expenses ($ per BOE) (3):       |   |                                       |   |                                       |   |                                       |
| Oil and gas operating(1)        |   | 7.20                                       |   | 3.84                                       |   | 6.34                                       |
| Depreciation, depletion and     |   |                                       |   |                                       |   |                                       |
| amortization(2)                 |   | 6.36                                       |   | 5.12                                       |   | 3.58                                       |
|                            |   |                                       |   |                                       |   |                                       |

|   | (1) | Includes transportation cost, production cost and ad                            valorem taxes. |
|--------|-----|------------------------------------------------------------------------------------------------|

|   | (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 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. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*Year ended March 31, 2007, compared to the year ended March 31,            2006.*

 

**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, 2007 and the year ended March 31, 2006.

 

34

 

----

|                                   |   | **Year ended****March 31, 2007**

**to the year ended**

**March 31, 2006** |
|----------------------------------------|--------|-----------------------------------------------------------------------------|
|                                   |   | **For the year**                                                            |   | **For the year** | **     $** |   | **%** |
|                                   |   | **ended**                                                                   |   | **ended** | **                                   Increase** |   | **Increase** |
|                                   |   | **March 31,**

**2007**                                                     |   | **March 31, 2006** |   | **(Decrease)** |   | **(Decrease)** |
|                                   |   |                                                                        |   |   |   |   |   |
| **Production volumes:**                |   |                                                                        |   |   |   |   |   |
| Natural gas (Mcf)                      |   | -                                                                           |   | - | - |   | - |
| Natural gas liquids (Bbls)             |   | -                                                                           |   | - | - |   | - |
| Oil and condensate (Bbls)              |   | 321,993                                                                     |   | 242,522 | 79,471 |   | 33% |
| Barrels of Oil equivalent (BOE)        |   | 321,993                                                                     |   | 242,522 | 79,471 |   | 33% |
|                                   |   |                                                                        |   |   |   |   |   |
| **Sales volumes:**                     |   |                                                                        |   |   |   |   |   |
| Natural gas (Mcf)                      |   | -                                                                           |   | - | - |   | - |
| Natural gas liquids (Bbls)             |   | -                                                                           |   | - | - |   | - |
| Oil and condensate (Bbls)              |   | 315,540                                                                     |   | 227,976 | 87,564 |   | 38% |
| Barrels of Oil equivalent (BOE)        |   | 315,540                                                                     |   | 227,976 | 87,564 |   | 38% |
|                                   |   |                                                                        |   |   |   |   |   |
| **Average Sales Price**(1)             |   |                                                                        |   |   |   |   |   |
| Natural gas ($ per Mcf)                |   | -                                                                           |   | - | - |   | - |
| Natural gas liquids ($ per Bbl)        |   | -                                                                           |   | - | - |   | - |
| Oil and condensate ($ per Bbl)         |   | $ 50.03                                                                     |   | $ 26.13 | $ 23.90 |   | 91% |
| Barrels of Oil equivalent

($ per BOE) |   |  

$ 50.03                                                             |   |  

$ 26.13 |  

$ 23.90 |   |  

91% |
|                                   |   |                                                                        |   |   |   |   |   |
| **Operating Revenue:**                 |   |                                                                        |   |   |   |   |   |
| Natural gas                            |   | -                                                                           |   | - | - |   | - |
| Natural gas liquids                    |   | -                                                                           |   | - | - |   | - |
| Oil and condensate                     |   | $ 15,785,784                                                                |   | $ 5,956,731 | $ 9,829,053 |   | 165% |
| 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, 2007, or the year ended March 31, 2006.

 

*Revenues*. We generate revenue under our            contract from the sale of oil recovered during test production. During the year ended            March 31, 2007 our oil production increased 33% compared to the year ended March 31,            2006. This significant increase in production is primarily attributable the fact that            we had two additional wells in testing or test production during the current fiscal            year compared to prior fiscal year.

 

During the year ended March 31, 2007 we realized revenue from oil sales            of $15,785,784 compared to $5,956,731 during the year ended March 31, 2006. The largest            contributing factor to the 165% increase in revenue was a 91% increase in the price per            barrel we received for oil sales and a 33% increase in production during the year ended            March 31, 2007 compared to the fiscal year ended March 31, 2006. During the fiscal year            ended March 31, 2007 we exported our oil to the world markets and realized the world            market price for those sales. By comparison, during the fiscal year ended March 31,            2006 73% of oil sales were to the domestic market in Kazakhstan, where the price per            barrel of oil is significantly lower than the world market price. We anticipate            production to increase in upcoming years as we complete more wells. We plan to continue            our drilling activities. We also hope to continue to be granted export quotas, which            allow us to realize world market prices. This should continue to lead to increased            revenue from oil sales.

 

35

 

----

As discussed above, our revenue is sensitive to changes in prices            received for our oil. 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            prices we receive for our production. Similarly, if we were denied an export quota and            were forced to sell our production to the domestic market in Kazakhstan, we anticipate            the price we would receive per barrel of oil would be much lower than the price we            currently realize. Political instability, the economy, weather and other factors            outside our control could have an impact on both supply and demand.

 

**Costs and Operating Expenses**

 

The following table presents details of our expenses for the year ended            March 31, 2007 and 2006:

 

|                          |   | **For the year ended**

**March 31, 2007** |   | **For the year ended**

**March 31, 2006** |
|-------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|
| Expenses:                     |   |                                       |   |                                       |
| Oil and gas operating(1)      |   | $ 2,272,251                                |   | $ 875,319                                  |
| General and administrative    |   | 10,757,727                                 |   | 9,724,597                                  |
| Depletion                     |   | 2,006,834                                  |   | 1,167,235                                  |
| Accretion expenses            |   | 173,519                                    |   | 5,602                                      |
| Amortization and depreciation |   | 170,610                                    |   | 133,148                                    |
| **Total**                     |   | $ 15,380,941                               |   | $ 11,905,901                               |
| Expenses ($ per BOE):         |   |                                       |   |                                       |
| Oil and gas operating(1)      |   | 7.20                                       |   | 3.84                                       |
| Depletion (2)                 |   | 6.36                                       |   | 5.12                                       |
|                          |   |                                       |   |                                       |

(1) Includes transportation cost, production cost and ad valorem            taxes.

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

             

*Oil and Gas Operating Expenses*. During the            year ended March 31, 2007 we incurred $2,272,251 in oil and gas operating expenses            compared to $875,319 during the year ended March 31, 2006. This significant increase is            primarily the result of several factors, including increased royalty, salary and            transportation expenses and increased repair costs.

             

During the year ended March 31, 2007 royalty paid to Government            increased by $192,133 or 127% compared to the year ended March 31, 2006. The primary            reason for the increase in royalty is two-fold. During the 2007 fiscal year, oil            production increased 33% and our average sales price per barrel increased 91% as a            result of exporting all of our oil to the world markets during fiscal 2007. While            royalty expenses increased significantly, as a percentage of total revenue royalty            expense remained nearly unchanged. We anticipate that royalty expenses will continue to            fluctuate in proportion to production volume and realized sales price.

             

While oil and gas operating expenses increased 160% during the 2007            fiscal year, expense per BOE increased only 88%. 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.          

 

Oil and gas operating expense per BOE increased at a smaller rate            because our sales volume increased fiscal 2007. In fiscal 2007, we sold 315,540 barrels            of oil, while oil and gas operating expenses were $2,272,251. In

             

36

 

----

fiscal            2006, we sold 227,976 barrels of oil, while oil and gas operating expenses were            $875,319. As expense per BOE is a function of total expense divided by the number of            barrels of oil sold, the 38% increase in sales volume helped to offset the increase in            gas and oil operating expenses per BOE.

             

Salary expenses increased by 306,406 or 152% in fiscal 2007 compared to            fiscal 2006. Salary expenses increased as a result of increased payroll for Emir Oil            employees, the hiring of more production and (well) maintenance personnel resulting            from the two additional wells we had in testing or test production during fiscal 2007.            We anticipate that salary expenses will increase consistently with the increase in            number of wells.

             

Transportation expenses increased $775,505 or 162%. Transportation            increased because of the increased production volume and as a result of production at            the Kariman-1 and Kariman-2 wells, which are located farther away from the oil base            than our other existing wells. We anticipate transportation expenses will increase as            production increases.

             

During fiscal 2007, we incurred $168,693 in repair expenses at the oil            storage facility. By comparison, during fiscal 2006 we incurred $45,805 in repairs. We            do not expect the repair expenses will increase significantly in the future

 

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 160% during fiscal 2007            compared to fiscal 2006, expense per BOE increased only 88% from $3.84 per BOE in            fiscal year 2006 to $7.20 in fiscal year 2007. The reason expense per BOE increased at            a lower rate than total operating expenses is due to the fact that we increased our            sales volume in fiscal 2007. In fiscal 2006, we sold 227,976 barrels of oil in fiscal            2007 we sold 315,540 barrels of oil. As expense per BOE is a function of total expense            divided by the number of barrels of oil sold, the 38% increase in sales volume            partially offset the 160% increase in expenses resulting in the 88% increase in oil and            gas operating expense per BOE.

 

*General and Administrative Expenses*.            General and administrative expenses during the year ended March 31, 2007 were            $10,757,727 compared to $9,724,597 during the year ended March 31, 2006. This            represents an 11% increase in general and administrative expenses. Factors contributing            to the increase in general and administrative expense were a 44% increase in payroll            and related costs as we hired additional administrative personnel to fulfill business            needs, a 13% increase in rent expense, a 64% increase in taxes resulting from increased            environmental payments and other obligatory payments and a 130% increase in travel and            related expenses resulting from increased business travel. We do not expect general and            administrative expenses to increase at such a significant rate in upcoming            years.

 

Also, during the year ended March 31, 2007 we granted restricted stock            and stock options to our directors, officers and key employees. The fair value of these            restricted stock and stock option grants was recognized in our consolidated financial            statements as compensation expense. The total amount of compensation expense recognized            as a result of the stock and option grants was $4,134,823. During the year ended March            31, 2006 we also granted restricted stock and stock options to our directors, officers            and key employees. The total amount of compensation expense recognized as a result of            the restricted stock and option grants was $4,800,954.

 

37

 

----

*Depletion*. Depletion expense for the year            ended March 31, 2007 increased by $839,599 compared to depletion expenses for the year            ended March 31, 2006. The major reason for this increase in depletion expense is a 38%            increase in sales volume in fiscal 2007 compared to fiscal 2006. The increase in            depletion expense is also attributable to the fact that we drilled additional wells,            continued workover on existing wells and developed additional infrastructure during            fiscal 2007.

             

*Depreciation and Amortization.*Depreciation            and amortization expense for the year ended March 31, 2007 increased 28% compared to            the year ended March 31, 2006. The increase resulted from purchases of fixed assets            during the year.

 

*Income from Operations*. During the year            ended March 31, 2007 we realized income from operations of $404,843 compared to a loss            from operations of $5,949,170 during the year ended March 31, 2006. This change to            income from operations during fiscal 2007 is the result of the 165% increase in revenue            during fiscal 2007, which increase was only partially offset by by a 29% increase in            total expenses.

 

*Other Income*. During the fiscal year ended            March 31, 2007 we realized total other income of $1,487,928 compared to $639,880 during            the fiscal year ended March 31, 2006. This 133% increase is largely attributable to            $1,055,722 increase in interest income we realized from funds we received from a            private placement we completed in December 2005 and a $126,705 increase in exchange            gain resulting from fluctuations of foreign currency rates against the U.S. Dollar.            This income is partially offset by a $236,878 decrease in realized gain on marketable            securities and $97,501 increase in other expenses. We anticipate the funds held in            deposits and marketable securities will be used to fund our operations and therefore            expect interest income and gains from marketable securities, both realized and            unrealized, to decrease significantly in upcoming quarters.

             

*Net Income*. For all of the foregoing            reasons, during the year ended March 31, 2007 we realized net income of $1,039,491 or            $0.02 per share compared to a net loss of $5,344,333 or $0.15 for the year ended March            31, 2006.

             

*Year ended March 31, 2006 compared to the ended March 31,            2005.*

             

**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, 2006 and the year ended March 31, 2005.

 

38

 

----

 

|                                                  |   | **Fiscal Year ended****March 31, 2006 compared to the Fiscal Year                            ended****March 31, 2005** |
|-------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
|                                                  |   |  

**For the Fiscal**                                                                                             |   |  

**For the Fiscal** | **      $****                                    Increase** |   | **%                             Increase** |
|                                                  |   | **Year ended**                                                                                                         |   | **Year ended** | **                                     (Decrease)** |   | **(Decrease)** |
|                                                  |   | **March 31, 2006**                                                                                                     |   | **March 31, 2005** |   |   |   |   |
|                                                  |   |                                                                                                                   |   |   |   |   |   |
| **Production volumes:**                               |   |                                                                                                                   |   |   |   |   |   |
| Natural gas (Mcf)                                     |   | -                                                                                                                      |   | - | - |   | - |
| Natural gas liquids (Bbls)                            |   | -                                                                                                                      |   | - | - |   | - |
| Oil and condensate (Bbls)                             |   | 242,522                                                                                                                |   | 68,755 | 173,767 |   | 253% |
| Barrels of Oil equivalent (BOE)                       |   | 242,522                                                                                                                |   | 68,755 | 173,767 |   | 253% |
|                                                  |   |                                                                                                                   |   |   |   |   |   |
| **Sales volumes:**                                    |   |                                                                                                                   |   |   |   |   |   |
| Natural gas (Mcf)                                     |   | -                                                                                                                      |   | - | - |   | - |
| Natural gas liquids (Bbls)                            |   | -                                                                                                                      |   | - | - |   | - |
| Oil and condensate (Bbls)                             |   | 227,976                                                                                                                |   | 64,084 | 163,892 |   | 256% |
| Barrels of Oil equivalent (BOE)                       |   | 227,976                                                                                                                |   | 64,084 | 163,892 |   | 256% |
|                                                  |   |                                                                                                                   |   |   |   |   |   |
| **Average Sales                            Price**(1) |   |                                                                                                                   |   |   |   |   |   |
| Natural gas ($ per Mcf)                               |   | $ -                                                                                                                    |   | $ - | $ - |   | - |
| Natural gas liquids ($ per Bbl)                       |   | $ -                                                                                                                    |   | $ - | $ - |   | - |
| Oil and condensate ($ per Bbl)                        |   | $ 26.13                                                                                                                |   | $ 15.19 | $ 10.94 |   | 72% |
| Barrels of Oil equivalent

($ per BOE)                |   |  

$ 26.13                                                                                                        |   |  

$ 15.19 |  

$ 10.94 |   |  

72% |
|                                                  |   |                                                                                                                   |   |   |   |   |   |
| **Operating Revenue:**                                |   |                                                                                                                   |   |   |   |   |   |
| Natural gas                                           |   | $ -                                                                                                                    |   | $ - | $ - |   | - |
| Natural gas liquids                                   |   | $ -                                                                                                                    |   | $ - | $ - |   | - |
| Oil and condensate                                    |   | $ 5,956,731                                                                                                            |   | $ 973,646 | $ 4,983,085 |   | 512% |
| 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 fiscal years ended March 31, 2006 and                            2005. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*Revenues*. During the year ended March 31,            2006, we realized revenue from oil sales of $5,956,731 compared to $973,646 during the            year ended March 31, 2005. This increase in revenues is primarily the result of several            factors. During the 2006 fiscal year we performed workover of re-entered wells and            drilled one additional well, which led to increased test production. We performed works            to perforate a productive stratum, which led to a significant flow of oil at the            Dolinnoe-3 well. As a result, during the fiscal year ended March 31, 2006 the            Dolinnoe-3 well accounted for 63% of our total oil production. Additionally, the price            per barrel we received for oil sold increased 72% during the fiscal year ended March            31, 2006 compared to the fiscal year ended March 31, 2005. Throughout the 2006 fiscal            year domestic market price increased significantly, consistent with world market            prices. Additionally during fourth fiscal quarter of our 2006 fiscal year we started            exporting our oil to the world markets and realized the world market price for those            sales, which is considerably higher than the domestic market price in            Kazakhstan.

 

39

 

----

**Costs and Operating Expenses**

 

The following table presents details of our expenses for the year ended            March 31, 2006 and 2005:

 

|                          |   | **For the year ended**

**March 31, 2006** |   | **For the year ended**

**March 31, 2005** |
|-------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|
| Expenses:                     |   |                                       |   |                                       |
| Oil and gas operating(1)      |   | $ 875,319                                  |   | $ 406,361                                  |
| General and administrative    |   | 9,724,597                                  |   | 4,060,962                                  |
| Depletion                     |   | 1,167,235                                  |   | 229,406                                    |
| Accretion expenses            |   | 5,602                                      |   | -                                          |
| Amortization and depreciation |   | 133,148                                    |   | 66,451                                     |
| **Total**                     |   | $ 11,905,901                               |   | $ 4,763,180                                |
| Expenses ($ per BOE):         |   |                                       |   |                                       |
| Oil and gas operating(1)      |   | 3.84                                       |   | 6.34                                       |
| Depletion (2)                 |   | 5.12                                       |   | 3.58                                       |
|                          |   |                                       |   |                                       |

|   | (1) | Includes transportation cost, production cost and ad                            valorem taxes. |
|--------|-----|------------------------------------------------------------------------------------------------|

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

             

*Oil and Gas Operating Expenses*. During the            fiscal year ended March 31, 2006, we incurred $875,319 in oil and gas operating            expenses compared to $406,361 during the year ended March 31, 2005. Oil and gas            operatingexpenses increased due to increased production. During the year ended March            31, 2006 production volume increased by 173,767 barrels or 253% compared to the year            ended March 31, 2005. Such increase led to hiring more production and maintenance            personnel and a corresponding payroll increase during the year ended March 31, 2006 of            34% compared to the year ended March 31, 2005. Increased production also led to an            increase in the royalty paid to the Government of 217% during the year ended March 31,            2006 compared to the year ended March 31, 2005. As discussed above, another result of            increased production was a $314,406 or 151% increase in transportation expenses during            the year ended March 31, 2006 compared to the year ended March 31, 2005.

 

Despite an overall increase in oil and gas operating expense of 115%            during the 2006 fiscal year, expense per BOE declined from $6.34 per BOE in fiscal 2005            to $3.84 per BOE in 2006. 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.     

             

This decrease in expense per BOE produced is due to the fact that we            significantly increased our sales volume in fiscal year 2006. In fiscal 2005, we sold            64,084 barrels of oil, while oil and gas operating expenses were $406,361. By contrast,            in fiscal 2006, we sold 227,976 barrels of oil, while oil and gas operating expenses            were $875,319. As expense per BOE is a function of total expense divided by the number            of barrels of oil sold, the 256% increase in sales volume more than offset the 115%            increase in expenses resulting in the 39% decrease in oil and gas operating expense per            BOE.

 

40

 

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*General and Administrative Expenses*.            General and administrative expenses during the fiscal year ended March 31, 2006 were            $9,724,597 compared to $4,060,962 during the year ended March 31, 2005. This represents            a 139% increase in general and administrative expenses. This significant increase is            attributable to a 463% increase in payroll and other compensation, a 24% increase in            rent expenses and a 26% increase in professional services fees. During the year ended            March 31, 2006 we granted restricted stock and stock options to our directors, officers            and key employees. Fair value of stock and stock options was recognized in our            consolidated financial statements as compensation expense. The total amount of            compensation expense recognized as a result of the stock and option grants was            $4,800,954. Additionally, during the year ended March 31, 2006 we hired more            administrative personnel to operate our business, using services of technicians,            engineers, accountants and lawyers, as well as incurring other general corporate            expenses.

             

*Depletion*. Depletion expenses for the year            ended March 31, 2006 increased by $937,829 compared to depletion expenses for the year            ended March 31, 2005. The major reason for this increase in depletion expense is a 256%            increase in sales volume in fiscal 2006 compared to fiscal 2005. The increase in            depletion expense is also attributable to the fact that we drilled additional wells,            continued workover on existing wells and developed additional infrastructure during            fiscal 2006.

             

*Depreciation and Amortization*. Depreciation            and amortization expenses for the year ended March 31, 2006 increased 100% compared to            previous year. The increase resulted from purchases of fixed assets during the            year.

 

*Loss from Operations*. As a result of            significantly increasing expenses, which were only partially offset by revenue from oil            sales, during the fiscal year ended March 31, 2006 we realized a loss from operations            of $5,949,170 compared to a loss from operations of$3,789,534during the fiscal year ended March 31,            2005. While we realized a 512% increase in revenue during the year ended March 31, 2006            compared to the comparable period 2005, this increase was offset by a 115% increase in            oil and gas operating expenses, a 409% increase in depletion expenses and a 139%            increase in general and administrative expenses. This resulted in a 57% increase in            loss from operations during the fiscal year ended March 31, 2006 compared to the fiscal            year ended March 31, 2005.

 

*Other Income*. During the fiscal year ended            March 31, 2006 we realized total other income of $639,880 compared to $503,565 during            the fiscal year ended March 31, 2005. This 27% increase in other income is largely            attributable to $416,860 increase in interest income, $51,811 increase in realized gain            on marketable securities and $252,767 decrease in unrealized loss on marketable            securities. During the year ended March 31, 2006 we received approximately $55 million            for securities sold during a private placement transaction completed in December 2005.            Therefore, at times during the year, we had funds that were not being used in            operations that we invested in deposits and marketable securities. This income is            partially offset by a $513,068 increase in exchange loss resulting from fluctuations of            foreign currency rates against the U.S. Dollar and a $72,055 increase in other            expenses.

 

*Net Loss*. During the fiscal year ended            March 31, 2006 we realized a net loss of $5,344,333 compared to a net loss of            $3,286,312 during the fiscal year ended March 31, 2005. Notwithstanding the significant            increase in revenue resulting from increased oil production during the year ended March            31, 2006 net loss increased significantly. This significant increase in net loss is            largely attributable to 139% increase in general and administrative            expenses.

 

41

 

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During            the year ended March 31, 2006 our general and administrative expenses increased by            $5,663,635 compared to the year ended March 31, 2005.

 

**Liquidity and Capital Resources**

 

Funding for our activities has historically been provided by funds            raised through the sale of our common stock. From inception on May 6, 2003 through            March 31, 2007 we have raised $94,626,926 through the sale of our common stock. As of            March 31, 2007 we had cash and cash equivalents on hand of $12,172,940.

 

Our need for capital is primarily to fund our ongoing operations to meet            the drilling requirements of our minimum work program. For the period from inception on            May 6, 2003 through March 31, 2007, we have incurred capital expenditures of            $104,187,568 for exploration, development and acquisition activities.

 

We continually evaluate our capital needs and compare them to our            capital resources. We project we will need up to an additional $125 million to complete            exploration of our properties in order to secure a commercial production contract over            our entire exploration contract territory. We anticipate that required financial            resources will be derived from our current and future production revenues and a            combination of commercial debt and the issuance of corporate debt and/or equity            securities.

             

In the event we are unable to obtain sufficient funding to fully explore            our entire exploration contract territory, we will forego exploration of one or more of            the potential structures within the Extended Territory. The failure to explore a            structure by the end of our exploration contract would terminate our rights to explore            the structure in the future and would preclude us from making application for a            commercial production contract for the structure.

             

One of the challenging tasks we have faced is how to make accurate            production forecasts during the exploration stage. There are many factors that            contribute to the complexity of reliable forecasting by an exploration stage company.            Our first challenge has been to secure qualified drilling subcontractors and to obtain            timely performance. The current energy boom in Kazakhstan has created considerable            competition for good rigs and qualified labor. This has led to delays in rig delivery            and increased cost and demand for qualified labor.

 

Second, we are in continuous test production on each well. We are            required by law to test each interval using different choke sizes. The minimum testing            periods usually extend over a period of months. There is considerable down time while            equipment is being put in place and removed during this process. In addition, we have            experimented with various reworking methodologies attempting to determine the best            methods to suit the characteristics of the oil, gas and pressure variations encountered            in each structure.

 

Our monthly production figures have remained steadily within a range of            our expectations, and at our current levels of oil production we are operating above            the break-even point, exclusive of our drilling program expenditures. If our operations            are to generate a material portion of the future capital needed to complete our            exploration contract, then our monthly production will have to increase significantly.            In addition to our efforts to increase revenue from oil sales to help fund our drilling            program expenditures, we are also negotiating with interested banks to secure a credit            facility that will allow us to continue our exploration contract drilling obligations            without delay.

             

42

 

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*Cash Flows*

 

During the year ended March 31, 2007 cash was primarily used to fund            exploration and development expenditures. See below for additional discussion and            analysis of cash flow.

             

|                                               | **Year endedMarch 31,2007** |   | **Year endedMarch 31,2006**                       |   | **Year endedMarch 31,2005**                      |
|----------------------------------------------------|-----------------------------|--------|---------------------------------------------------|--------|--------------------------------------------------|
|                                               |                        |   |                                              |   |                                             |
| Net cash used in operating activities              | $ (1,877,144)               |   | $ (1,623,829)                                     |   | $ (3,505,219)                                    |
| Net cash used in investing activities              | $ (42,850,150)              |   | $ (18,421,553)                                    |   | $ (18,001,879)                                   |
| Net cash provided by financing activities          | $ 5,758,502            |   | $ 60,408,561                                 |   | $ 27,280,160                                |
|                                               |                        |   |                                              |   |                                             |
| NET CHANGE IN CASH AND  CASH EQUIVALENTS | **$ (38,968,792)**          |   | **$                            40,363,179**  |   | **$                            5,773,062**  |
|                                               |                        |   |                                              |   |                                             |

             

Our principal source of liquidity during the year ended March 31, 2007            was cash and cash equivalents. At March 31, 2006 cash and cash equivalents totaled            approximately $51 million. At March 31, 2007 cash and cash equivalents had decreased            approximately $38.9 million as we used cash to fund operations. As discussed above,            during the year ended March 31, 2007 we spent approximately $37 million to fund the            most active period of drilling and development activities in our history.

             

While we anticipate revenue to increase in upcoming quarters as new            wells are completed and put into test production, at this time we cannot predict how            much our production, and correspondingly, our revenue might increase. At current            production rates, we expect to be able to secure additional financing through debt            financing or a combination of debt and equity financing. These funds will be used to            drill the additional wells we need to support our claims of commercially producible            reserves by the end of the term of our exploration contract. At this time, we are            negotiating with one of the financial institution to provide us additional financing.            We expect that we finalize our negotiations within the first quarter of fiscal 2008 and            will be able to secure additional funding on acceptable terms. If we are unable to            secure financing within that time frame, we will likely be forced to significantly            curtail our exploration, drilling and development activities until such time as            additional funding can be obtained. We currently have no firm commitment from any party            to provide us with financing. Moreover, even if we are able to finalize the            aforementioned negotiations and obtain financing within the first fiscal quarter of            2008, we expect the amount of the financing will be insufficient to fund our operations            to the end of exploration stage and we therefore may need to seek additional financing            in the future to fund further exploration stage activities.

             

Certain operating cash flows are denominated in Kazakh tenge 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, 2007,            excluding current liabilities as listed on our consolidated balance sheet:

             

43

 

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|                                                                             |   | **Payments Due By Period** |
|----------------------------------------------------------------------------------|--------|----------------------------|
| **Contractual                            obligations**                           |   | **Total**                  |   | **Less than 1 year** |   | **1-3 years** |   | **4-5 years** |   | **After 5 years** |
| Capital                            ExpenditureCommitment(1)                      |   | $ 21,250,000               |   | $12,700,000 |   | $ 8,550,000 |   | - |   | - |
| Due to the Government                            ofthe Republic of Kazakhstan(2) |   | $ 11,344,880               |   | - |   | $11,344,880 |   | - |   | - |
| Liquidation                            Fund                                      |   | $ 2,165,829                |   | - |   | $ 2,165,829 |   | - |   | - |
| **Total**                                                                        |   | $ 34,760,709               |   | $12,700,000 |   | $22,060,709 |   | - |   | - |

             

(1)   Under the terms of its subsurface exploration contract,            Emir Oil LLP is required to spend a total of $48.7 million in exploration and            development activities on the ADE Block. To retain its rights under the contract, the            Company must spend a minimum of $12.7 million in 2007, $8.5 million in 2008 and $70            thousand in 2009. If we fail to do so, we may be subject to the loss of our exploration            license.

(2)   In connection with our acquisition of the oil and gas            contract covering the ADE Block and the Extended Territory, we are required to repay            the ROK for historical costs incurred by it in undertaking geological and geophysical            studies and infrastructure improvements. The repayment terms of this obligation will            not be determined until such time as we apply for and are granted commercial production            rights by the ROK. Under our contract, if we wish to commence commercial production, we            must apply for such right prior to the expiration of our exploration and development            rights in July 2009. The ROK is required to conduct the negotiations under the Law of            Petroleum in Kazakhstan. Although we can apply for commercial production rights at any            time, we enjoy certain benefits under our contract that currently make it more            economically advantageous for us to continue exploration and development activities at            this time. Should we decide not to pursue a commercial production contract, we can            relinquish the ADE Block and Extended Territory to the ROK in satisfaction of this            obligation. Our repayment obligation for the ADE Block is $5,994,200. Our repayment            obligation for the Extended Territory is $5,350,680.

 

**Off-Balance Sheet Financing Arrangements**

 

As of March 31, 2007, 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 the understanding of our financial statements. The impact of            these policies and associated risks are discussed throughout Management’s            Discussion and Analysis and Plan of Operations 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 U.S. dollar 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 SFAS No. 123R, Share Based Payment and EITF Abstracts Issue            96-18,*Accounting for Equity Instruments That Are Issued to            Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or            Services*. Under

             

44

 

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SFAS            No. 123R, 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.

             

The Company has a stock option plan as described in Note 13.            Compensation expense for options and stocks 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.

             

*Full Cost Method of Accounting*

             

We follow the full cost method of accounting for our costs of            acquisition, exploration and development of oil and gas properties.

             

Under full cost accounting rules, the net capitalized costs of evaluated            oil and gas properties shall not exceed an amount equal to the present value of future            net cash flows from estimated production of proved oil and gas reserves, based on            current economic and operating conditions, including the use of oil and gas prices as            of the end of the period.

             

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 our 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.

             

Depletion of producing properties is computed using the            unit-of-production method based on estimated proved reserves.

 

*Ceiling test*

 

The capitalized oil and gas properties are subject to a “ceiling            test.” The full cost ceiling test is an impairment test prescribed by SEC            Regulation S-X Rule 4-10. 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 give the Company a significant loss for a particular            period; however, future depletion expense would be reduced.

 

45

 

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**Recently Issued Accounting Pronouncements**

             

In June 2006, the FASB issued FASB Interpretation No. 48            “*Accounting for Uncertainty in Income Taxes, an            interpretation of FASB Statement No. 109*”. This            interpretation clarifies the accounting for uncertainty in income taxes recognized in            an enterprise’s financial statements in accordance with FASB No. 109            “Accounting for Income taxes”. This interpretation is effective for the            fiscal years beginning after December 15, 2006. Management does not anticipate this            Statement will impact our consolidated financial position or consolidated results of            operations and cash flows.

 

In September 2006, the FASB issued Statement No. 157,            “*Fair Value            Measurements*” This Statement defines fair value,            establishes a framework for measuring fair value in generally accepted accounting            principles (GAAP), and expands disclosures about fair value measurements. This            Statement applies under other accounting pronouncements that require or permit fair            value measurements, the Board having previously concluded in those accounting            pronouncements that fair value is the relevant measurement attribute. This Statement is            effective for financial statements issued for the fiscal years beginning after November            15, 2007. Management does not anticipate this Statement will impact our consolidated            financial position or consolidated results of operations and cash flows.

 

In September 2006, the FASB issued Statement No. 158,            “*Employers’ Accounting for Defined Benefit Pension            and Other Postretirement Plans*”, an amendment of FASB            Statements No. 87, 88, 106, and 132(R). This Statement improves financial reporting by            requiring an employer to recognize the overfunded or underfunded status of a defined            benefit postretirement plan (other than a multiemployer plan) as an asset or liability            in its statement of financial position and to recognize changes in that funded status            in the year in which the changes occur through comprehensive income of a business            entity or changes in unrestricted net assets of a not-for-profit organization. This            Statement is effective for employers with publicly traded equity securities is required            to initially recognize the funded status of a defined benefit postretirement plan and            to provide the required disclosures as of the end of the fiscal year ending after            December 15, 2006. Management belives this Statement has no material impact the            Company’s consolidated financial position or consolidated results of operations            and cash flows.

 

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB)            Topic 1N, “*Financial Statements - Considering the            Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year            Financial Statements*” ( SAB 108). The SEC staff is            providing guidance on how prior year misstatements should be taken into consideration            when quantifying misstatements in current year financial statements for purposes of            determining whether the current year’s financial statements are materially            misstated and should be restated. SAB 108 is effective for fiscal years ending after            November 15, 2006. We do not believe SAB 108 has a material impact on its results of            operations, financial condition and cash flows.

 

In September 2006, the EITF issued EITF Abstracts Issue No. 06-3 (EITF            06-3). The EITF is providing guidance on how taxes collected from customers and            remitted to Governmental Authorities should be presented in the income statements. EITF            06-3 is effective for interim and annual periods beginning after December 15, 2006. We            do not anticipate EITF 06-3 will have a material impact on its results of operations,            financial condition and cash flows.

             

47

 

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In February 2007, the FASB issued Statement No. 159,            “*The Fair Value Option for Financial Assets and            Financial Liabilities—Including an amendment of FASB Statement No.            115*”. This Statement permits entities to choose to            measure many financial instruments and certain other items at fair value. The objective            is to improve financial reporting by providing entities with the opportunity to            mitigate volatility in reported earnings caused by measuring related assets and            liabilities differently without having to apply complex hedge accounting provisions.            This Statement is expected to expand the use of fair value measurement, which is            consistent with the Board’s long-term measurement objectives for accounting for            financial instruments. This Statement is effective for financial statements issued for            the fiscal years beginning after November 15, 2007. Management does not anticipate this            Statement will impact our consolidated financial position or consolidated results of            operations and cash flows.

 

**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 the current revenue            stream, estimates of future reserves, borrowing base calculations of bank loans and            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. While we do not currently expect business costs to            materially increase, continued high prices for oil and natural gas could result in            increases in the cost of material, services and 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 2007 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.

 

48

 

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**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.

 

**Item 8. Financial Statements and Supplementary Data**

 

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

 

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

 

As previously reported in the Current Report on Form 8-K we filed on            February 21, 2007, the audit committee of our board of directors terminated the            engagement of BDO Kazakhstanaudit as the Company’s independent registered public            accounting firm as of February 21, 2007. BDO Kazakhstanaudit had served as our            independent registered public accounting firm since February 2004.

 

The audit report of BDO Kazakhstanaudit for the fiscal years ended March            31, 2006 and March 31, 2005 did not contain an adverse opinion, disclaimer of opinion            or qualification or modification as to uncertainty, audit scope or accounting            principles.

 

In connection with its audits for the past two fiscal years and review            of unaudited financial statements through December 31, 2006 and through the date of            dismissal there were no disagreements with BDO Kazakhstanaudit, on any matters of            accounting principles or practices, financial statement disclosure, or auditing scope            or procedures, which if not resolved to the satisfaction of BDO Kazakhstanaudit, would            have caused them to make reference thereto in its reports on the financial statements            for such years.

 

During the two most recent fiscal years and through February 21, 2007,            there have been no reportable events (as defined in Regulation S-K, Item            304(a)(1)(v)).

 

On February 21, 2007, we engaged Hansen, Barnett & Maxwell,            Certified Public Accountants to serve as our independent registered public accounting            firm. During the two most recent fiscal years and through February 21, 2007, we had not            consulted with Hansen, Barnett & Maxwell, P.C. regarding (i) the application of            accounting principles to a specified transaction, either completed or proposed, or the            type of audit opinion that might be rendered on our financial statements, and no            written report or oral advice was provided to us by Hansen, Barnett and Maxwell, P.C.            that was an important factor considered by our audit committee in reaching a decision            as to an accounting, auditing or financial reporting issue; or (ii) any matter that was            either the subject of a disagreement (within the meaning of Instruction 4 of Item 304            of Regulations S-K), or a reportable event (as that term is defined in Item            304(a)(1)(v) of Regulation S-K.)

 

49

 

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**Item 9A. Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

             

We maintain disclosure controls and procedures, as such term is defined            in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as            amended (the “Exchange Act”), that are designed to provide reasonable            assurance that information required to be disclosed by us in the reports that we file            or submit under the Exchange Act is recorded, processed, summarized and reported within            the time periods specified in the SEC rules and forms, and that such information            is accumulated and communicated to our management, including our principal executive            officer and principal financial officer, as appropriate, to allow timely decisions            regarding required financial disclosures. Because of inherent limitations, our            disclosure controls and procedures, no matter how well designed and operated, can            provide only reasonable, and not absolute, assurance that the objectives of such            disclosure controls and procedures are met.

             

As of the end of the period covered by this Report we conducted an            evaluation, under the supervision and with the participation of our management,            including our principal executive officer and principal financial officer, of the            effectiveness of the design and operation of our disclosure controls and procedures            pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this            evaluation, our principal executive officer and principal financial officer concluded            that our disclosure controls and procedures were effective as of March 31,            2007.

             

*Management’s Report on Internal Control Over Financial            Reporting*

             

Our management is responsible for establishing and maintaining adequate            internal control over financial reporting, as such term is defined in Exchange Act            Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting            is a process designed to provide reasonable assurance regarding the reliability of            financial reporting and the preparation of the financial statements for external            purposes in accordance with generally accepted accounting principles. 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 internal controls may become inadequate because of            changes in conditions, or that the degree of compliance with policies and procedures            may deteriorate.

             

Under the supervision and with the participation of our management,            including our principal executive officer and principal financial officer, we conducted            an evaluation of the effectiveness of our internal control over financial reporting            based on the framework set forth in*Internal            Control—Integrated Framework*issued by the Committee of            Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the            framework in*Internal Control — Integrated            Framework*, our management concluded that our internal control            over financial reporting was effective as of March 31, 2007.

             

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, 2007, 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, 2007 that materially affected, or are reasonably            likely to materially affect, our internal control over financial reporting.

 

50

 

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**HANSEN, BARNETT & MAXWELL, P.C.**

 

|   | **Registered with the Public Company** |
|--------|----------------------------------------|

|   | **Accounting Oversight Board** |
|--------|--------------------------------|

 

|   |  |
|--------|--|

 

 

 

             

|   | A Professional Corporation |
|--------|----------------------------|

|   | CERTIFIED PUBLIC ACCOUNTANTS |
|--------|------------------------------|

|   | AND |
|--------|-----|

|   | BUSINESS CONSULTANTS |
|--------|----------------------|

|   | 5 Triad Center, Suite 750 |
|--------|---------------------------|

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|--------|-------------------------------|

|   | Phone: (801) 532-2200 |
|--------|-----------------------|

|   | Fax: (801) 532-7944 |
|--------|---------------------|

|   | www.hbmcpas.com |
|--------|-----------------|

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

To the            Board of Directors and Stockholders

BMB            Munai, Inc.

 

We            have audited management’s assessment, included in the accompanying*Management’s Annual Report on Internal Control Over Financial            Reporting,*that BMB Munai, Inc. and subsidiary maintained            effective internal control over financial reporting as of March 31, 2007, based on            criteria established in*Internal Control—Integrated            Framework*issued by the Committee of Sponsoring Organizations            of the Treadway Commission (the COSO criteria). 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. Our            responsibility is to express an opinion on management’s assessment and an opinion            on the effectiveness of 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 included            obtaining an understanding of internal control over financial reporting, evaluating            management’s assessment, testing and evaluating the design and operating            effectiveness of internal control, and 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.

 

51

 

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In            our opinion, management’s assessment that BMB Munai, Inc. and subsidiary            maintained effective internal control over financial reporting as of March 31,            2007 is fairly stated, in all material respects, based on the COSO criteria. Also, in            our opinion, BMB Munai, Inc. and subsidiary maintained, in all material respects,            effective internal control over financial reporting as of March 31, 2007, based on            the COSO criteria.

 

We            have also audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the consolidated balance sheets of BMB Munai, Inc. as            of March 31, 2007 and the related consolidated statements of operations,            shareholders’ equity and cash flows for the period ended March 31, 2007 of            BMB Munai, Inc. and our report dated June 13, 2007 expressed an unqualified            opinion thereon.

 

             

**/s/ HANSEN, BARNETT & MAXWELL, P.C.**

Salt            Lake City, Utah

June            13, 2007

 

52

 

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**Item            9B. Other Information**

 

|   | None. |
|--------|-------|

 

**PART III**

 

**Item            10. Directors, Executive Officers and Corporate Governance**

 

The following table sets forth certain information as of June 7, 2007            regarding the members of our board of directors and executive officers, including their            ages, and all offices and positions held within the Company. Directors are elected for            a period of three years 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 | Age | Positions with BMB | Director Since |
|------|-----|--------------------|----------------|

 

| Boris Cherdabayev | 52 | Chairman of the Board of Directors | November 2003 |
|-------------------|----|------------------------------------|---------------|

|   | and Chief Executive Officer |
|--------|-----------------------------|

| Askar Tashtitov | 27 | President |
|-----------------|----|-----------|

| Sanat Kasymov | 30 | Chief Financial Officer |
|---------------|----|-------------------------|

| Gamal Kulumbetov | 31 | Chief Operating Officer |
|------------------|----|-------------------------|

| Troy Nilson | 40 | Director | December 2004 |
|-------------|----|----------|---------------|

| Stephen Smoot | 50 | Director | January 2005 |
|---------------|----|----------|--------------|

| Valery Tolkachev | 37 | Director | December 2003 |
|------------------|----|----------|---------------|

| Leonard M. Stillman Jr. | 64 | Director | October 2006 |
|-------------------------|----|----------|--------------|

 

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

 

**Boris Cherdabayev**. Mr. Cherdabayev            joined BMB Holding, Inc., and assumed his current positions in May 2003. From May 2000            to May 2003, Mr. Cherdabayev served as Director at LLP TengizChevroil, LLP a            multinational 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 CHAMP 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 a director or nominee of any other reporting            company.

 

53

 

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**Askar Tashtitov**. Mr. Tashtitov has            been with the Company since 2004, serving in the capacity of financial analyst. 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 a director or nominee of any reporting company.

             

**Sanat Kasymov**. Mr. Kasymov graduated            from Istanbul University of Istanbul, Turkey in 1998 where he was awarded a Bachelors            degree in Economics with an emphasis in International Relations. In 2003,            Mr. Kasymov passed the AICPA Uniform CPA Examination. From April 1999 through            December 2001 Mr. Kasymov was employed as the Chief Specialist of the Corporate            Relations Department of Demir Kazakhstan Bank. From December of 2001 through 2004            Mr. Kasymov was employed at Deloitte & Touche as a Senior Auditor where he            became proficient in the application of both international and national accounting            (IAS/ US GAAP) and auditing standards (ISA/ US GAAS). From February 2005 to January            2006, when he was appointed as the Company’s Chief Financial Officer,            Mr. Kasymov served as the Financial Manager of BMB Munai, Inc. Mr. Kasymov is            not a director or nominee of any reporting company.

 

**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. Mr. Kulumbetov is not a director or            nominee of any reporting company.

 

**Troy F. Nilson, CPA**. Since February 2001,            Mr. Nilson has served as an Audit Partner with Chisholm, Bierwolf & Nilson,            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 is not            a director or nominee of any other reporting company.

 

54

 

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**Stephen Smoot**. During the past five years            Mr. Smoot has been self-employed as a consultant in the area of foreign technology            development and transfer. Mr. Smoot assisted in forming Caspian Service Group            Limited, a wholly-owned subsidiary of Caspian Services, Inc., formerly EMPS            Corporation, in December 1999, and served as President of Caspian Services from            inception until February 2002. Mr. Smoot served as the Interim President of EMPS            Corporation from June 2004 until December 2004. Mr. Smoot is not a director or            nominee of any other reporting company.

             

**Valery Tolkachev**. Since 1999,            Mr. Tolkachev has been employed with Aton Investment Company in Moscow, Russia,            where he currently serves as the Managing Director, Capital Markets. From 1991 to 1999,            Mr. Tolkachev served in various positions with various employers including, 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 also serves as a            director of Caspian Services, Inc., and Bekem Metals, Inc. Both are U.S. reporting            companies.

             

**Leonard M. Stillman Jr.**Mr. Stillman            received his Bachelor of Science 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 the 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 is a Co-Founder of Stillman George, Inc., where he is            primarily responsible for managing information, technical development and financial            analysis projects and development as well as involved in general company management and            consulting activities. The company 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 a director or nominee of any other reporting            company.

             

**Family Relationships**

             

There are no family relationships among our directors and/or executive            officers.

             

**Involvement in Certain Legal Proceedings**

             

During the past five 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:

 

55

 

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(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, barring, suspending or otherwise limiting his involvement in any            type of business, securities or banking activities; and

(4) Being found by a court of competent jurisdiction (in a civil            action), the Securities and Exchange Commission or the Commodity Futures Trading            Commission to have violated a federal or state securities or commodities law, which            judgment has not subsequently been reversed, suspended, or vacated.

             

**Committees of the Board of Directors**

 

*Audit Committee*

 

Our board of directors has 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, the approval of all audit, review            and attest services provided by the independent registered public accounting firm, the            integrity of our reporting practices and the evaluation of our internal controls and            accounting procedures and to 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 its independent auditors. Non-audit            services are only provided by our independent accountants to the extent permitted by            law. The audit committee is comprised of three independent directors, Troy Nilson,            Stephen Smoot and Leonard Stillman, with Mr. Nilson acting as chairman. 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. Our board of directors has also determined that            Mr. Nilson, Mr. Smoot and Mr. Stillman each qualify as            “independent” in accordance with the applicable regulations adopted by the            SEC and American Stock Exchange.

 

Our board of directors has also established a compensation committee.            The principal functions of the compensation committee are to: make recommendations            regarding compensation of the Company’s officers. (i) provide oversight and            guidance for compensation and benefit programs for all employees of the Company; (ii)            review and recommend compensation plans, policies, benefit programs and incentive plans            to the full board of directors; (iii) approve individual executive officers’            compensation; (iv) prepare the report on executive compensation required to be included            in our annual proxy statement. Our compensation committee is comprised of three            directors consisting of Troy Nilson, Valery Tolkachev and Stephen Smoot. Our board of            directors has also determined that Mr. Tolkachev qualifies as            “independent” in accordance with the applicable regulations adopted by the            SEC and the American Stock Exchange. Compensation for all other officers is also            recommended to the board for determination, by the compensation committee.

 

56

 

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While we have adopted a corporate governance and nominating committee            charter, we currently do not have a standing nominating committee. Instead, our            independent directors fulfill the role of a nominating committee. In general, when the            board determines that expansion of the board or replacement of a director is necessary            or appropriate, the independent directors will review, through candidate interviews            with members of the other members of the board and management, consult with the            candidate’s associates and through other means determine a candidate’s            honesty, integrity, reputation in and commitment to the community, judgment,            personality and thinking style, residence, willingness to devote the necessary time,            potential conflicts of interest, independence, understanding of financial statements            and issues, and the willingness and ability to engage in meaningful and constructive            discussion regarding Company issues. The independent directors review any special            expertise, for example, that qualifies a person as an audit committee financial expert,            membership or influence in a particular geographic or business target market, or other            relevant business experience. To date we have not paid any fee to any third party to            identify or evaluate, or to assist it in identifying or evaluating, potential director            candidates.

 

The independent directors will consider director candidates nominated by            shareholders during such times as the Company is actively considering obtaining new            directors. Candidates recommended by shareholders will be evaluated based on the same            criteria described above. Shareholders desiring to suggest a candidate for            consideration should send a letter to the Company’s Secretary and include: (a) a            statement that the writer is a shareholder (providing evidence if the person’s            shares are held in street name) and is proposing a candidate for consideration; (b) the            name and contact information for the candidate; (c) a statement of the            candidate’s business and educational experience; (d) information regarding the            candidate’s qualifications to be director, including but not limited to an            evaluation of the factors discussed above which the board would consider in evaluating            a candidate; (e) information regarding any relationship or understanding between the            proposing shareholder and the candidate; (f) information regarding potential conflicts            of interest; and (g) a statement that the candidate is willing to be considered and            willing to serve as director if nominated and elected. Because of the small size of the            Company and the limited need to seek additional directors, there is no assurance that            all shareholder proposed candidates will be fully considered, that all candidates will            be considered equally, or that the proponent of any candidate or the proposed candidate            will be contacted by the Company or the board, and no undertaking to do so is implied            by the willingness to consider candidates proposed by shareholders.

 

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

 

**Compliance with Section 16(a) of the Exchange Act**

 

Based solely on a review of Forms 3, 4 and 5 and amendments thereto            furnished to us during its most recent fiscal year, it appears that Askar Tashtitov and            Len Stillman inadvertently failed to timely file Form 3s at the time they respectively            became an executive officer and a director of the Company. Sanat Kasymov inadvertently            failed to timely file Form 4s in June 2006 when he received a restricted stock grant            and in February 2007 when part of a previously granted restricted stock grant vested.            Askar Tashtitov inadvertently failed to timely file Form 4s in June 2006 when he            received a restricted stock grant and in December 2006 when part of a previously            granted restricted stock grant vested. These delinquencies are being resolved by the            filing of Form 5s by Mr. Kasymov and Mr. Tashtitov simultaneously with the            filing of this annual report. Gamal Kulumbetov inadvertently failed to timely file a            Form 4 in June 2006 when he received a restricted stock grant. We anticipate this will            be remedied by the filing of a Form 5 in the near future.

 

57

 

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**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 atwww.bmbmunai.com. A            copy of the Code of Ethics will be provided to any person without charge upon written            request to our Assistant Secretary at our U.S. offices, 324 South 400 West, Suite 250,            Salt Lake City, Utah 84101.

             

**Item 11. Executive Compensation**

 

**Compensation Discussion and Analysis**

 

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 and other benchmarking 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-                            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.                                                                                                                                                                                                    |

             

To achieve these objectives, our compensation committee evaluates our            executive compensation program with the objective of setting compensation at levels the            committee believes to be competitive with those of other companies in our industry. In            addition, our executive compensation program ties a portion of each executive’s            overall compensation to key strategic, financial and operational goals set by our board            of directors, such as satisfying our annual minimum work program. We also provide a            portion of our executive compensation in the form of equity awards that vest over time,            which we believe will help to retain our executives and to 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:

 

 

58

 

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|   | • |   | base salaries;                                              |
|--------|--------|--------|-------------------------------------------------------------|
|   | • |   | cash 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 have            determined 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 executives. Base            salaries for our executives typically have been set in our offer letter to the            executive at the outset of employment. In April 2007 we entered into employment            agreements with our executive officers and certain of our non-executive level officers.            Under the terms of these 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.

 

*Cash            bonuses*

             

We have not relied on cash bonuses in recent years as a form of            executive compensation. We last awarded cash bonuses to executive officers in fiscal            2004. While he have not awarded cash bonuses recently, and we have no current            commitment to award cash bonuses during fiscal 2008, our compensation committee has the            discretion to award cash bonuses based on our financial performance and individual            objectives. The corporate financial performance measures, which have typically been            developed by our board of directors, are given the greatest weight in this bonus            analysis.

 

*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 have considered comparative share            ownership of executives in our compensation peer group, our company-level 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.

             

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Grants of equity awards, including those to executives, are all approved            by our compensation committee and the board of directors and generally are granted            based on the fair market value of our common stock. In the past, vesting of equity            awards has varied from immediate vesting to vesting of periods ranging from three to            five years depending on the purpose of the award. When we made equity awards that            vested immediately, they were typically in recognition of services already rendered or            goals already accomplished. During fiscal 2007, the compensation committee moved to tie            the vesting of equity awards to the realization of certain company goals, such as            reaching certain levels of stable production or reaching commercial production            stage.

             

Typically in the fourth quarter of each year, at the discretion of our            compensation committee and consistent with our executive compensation program            objectives, our compensation committee and our board of directors approves new equity            awards to reestablish or bolster incentives to retain employees, including executives.            In determining the equity awards for each of the executives set forth on the table            Grants of Plan-Based Awards in 2007 below, our board of directors took into account            company-level performance, the applicable executive’s performance and informal            benchmarking by executive position against companies in our industry and related            industries.

             

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.

 

*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 benefits plans as may be            in effect with the Company from time to time to the extent the executive is eligible            under the terms of those plans.

             

Under the employment agreements with our named executive officer, 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.

 

|   | Social tax |
|--------|------------|

 

We make payments of mandatory social tax in the amount from 10% to 13%            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 during 2006 we were required to pay into an employee pension fund an amount            equivalent to 10% of each employee’s monthly wages, (but not more than $600).            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.

 

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**Summary Compensation Table for Fiscal Year 2007**

 

The table below summarized 2007 compensation paid to or earned by our            Chief Executive Officer, our Chief Financial Officer and our other most highly            compensated executive officers, who we refer to collectively as our “named            executive officers.”

 

|  

**Name and**

**Principal Position** |  

                             

**Year** |  

**Salary**

**($)** | **Stock**

**Awards (1)**

**($)** | **Option**

**Awards(2)**

**($)** | **All Other**

**Compensation**(3)

**($)** |  

**Total**

**($)** |
|----------------------------------------------|------------------------------------------------------|-----------------------------|------------------------------------|------------------------------------|---------------------------------------------|----------------------------|
|                                         |                                                 |                        |                               |                               |                                        |                       |
| *Boris Cherdabayev*                          | 2007                                                 | 284,960                     | 560,000                            | 409,010                            | 109,433                                     | 1,363,403                  |
| CEO                                          |                                                 |                        |                               |                               |                                        |                       |
|                                         |                                                 |                        |                               |                               |                                        |                       |
| *Sanat Kasymov*                              | 2007                                                 | 118,560                     | 327,500                            | -0-                                | 48,256                                      | 494,316                    |
| CFO                                          |                                                 |                        |                               |                               |                                        |                       |
|                                         |                                                 |                        |                               |                               |                                        |                       |
| *Gamal Kulumbetov*                           | 2007                                                 | 72,500                      | 280,000                            | -0-                                | 32,969                                      | 385,469                    |
| COO                                          |                                                 |                        |                               |                               |                                        |                       |
|                                         |                                                 |                        |                               |                               |                                        |                       |
| *Askar Tashtitov*                            | 2007                                                 | 77,099                      | 327,500                            | -0-                                | 33,244                                      | 437,843                    |
| President                                    |                                                 |                        |                               |                               |                                        |                       |

 

|   | (1) | Represents the dollar amount recognized for financial                            statement reporting purposes during the year ended March 31, 2007 in                            accordance with FAS 123(R) with respect to restricted stock grants                            awarded on June 20, 2006. The restricted stock grants were valued at                            $7.00 per share, which represented the closing market price for our                            common stock on the date of grant. All shares vested upon grant.                            Mr. Cherdabayev was granted 80,000 shares, Mr. Kasymov,                            Mr. Kulumbetov and Mr. Tashtitov were each granted 40,000                            shares. Also 10,000 shares valued at $4.75 per share vested during                            current fiscal year for each Mr. Kasymov and Mr. Tashtitov.                            These shares were issued on June 18, 2005 and vest in three tranches at                            each employment anniversary for these officers. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Represents the dollar amount recognized for financial                            statement reporting purposes during the year ended March 31, 2007 in                            accordance with FAS 123(R) with respect to stock options awarded on                            June 20, 2006. The options are exercisable at a price of $7.00 per                            share, which was the closing price of our common stock on the OTCBB on                            June 20, 2006. The options will expire three years from the grant date.                            All of the options vested immediately upon grant. Mr. Cherdabayev                            was granted 150,000 options. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Represents the following amounts: Mr. Cherdabayev,                            pension fund payment $6,833, income tax expense $68,920, social tax                            expense $28,974, other compensation $4,706; Mr. Kasymov, pension                            fund payment $6,833, income tax expense $26,321, social tax expense                            $12,645, other compensation $2,457; Mr. Kulumbetov, pension fund                            payment $6,699, income tax expense $14,609, social tax expense $9,391,                            other compensation $2,270; Mr. Tashtitov, pension fund payment                            $6,685, income tax expense $15,077, social tax expense $9,221, other                            compensation $2,262. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

*Employment Agreements*

             

As discussed above, on April 6, 2007 we entered into employment            agreements with our named executive officers.

             

The following table discloses the corporate office and annual salary set            forth in the employment agreement of each officer. Each of these individuals was            serving in such capacity prior to entering the employment agreements.

 

| Name                                         |   | Corporate                            Office        |   | Annual Salary |
|----------------------------------------------|--------|----------------------------------------------------|--------|---------------|
|                                         |   |                                               |   |          |
| Boris                            Cherdabayev |   | Chief Executive                            Officer |   | $240,000(1)   |
| Sanat Kasymov                                |   | Chief Financial                            Officer |   | $120,000(1)   |
| Gamal                            Kulumbetov  |   | Chief Operating                            Officer |   | $120,000(1)   |
| Askar                            Tashtitov   |   | President                                          |   | $120,000(1)   |

 

(1)Annual salary is net of all taxes            and dues required under applicable laws of the Republic of Kazakhstan, which shall be            the responsibility of the Company.

 

61

 

----

             

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. A form of the            Employment Agreement was filed as an exhibit to the Current Report on Form 8-K we filed            on April 12, 2007.

             

The employment agreements provide for an initial term of one year with            two consecutive one-year renewals unless terminated by either party prior to the            beginning of the renewal term.

 

The employment agreements of all of the above listed individuals require            these individuals to devote their entire business time, attention, skill and energy            exclusively to our business.

 

As discussed above, the employment agreements provide for an annual            salary. 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 he 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, as detailed below, 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 les than 30 days notice from the            officer to the Company; v) an extraordinary event, unless otherwise agreed in            writing.

 

Under the agreements the 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 agreement 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.

 

Under the employment agreements, “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 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.

 

62

 

----

 

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

 

| Completed Years of Employment                                                |                              |
|------------------------------------------------------------------------------|-----------------------------------|
| Service 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 |

             

All benefits terminate on the date of termination. The officer shall be            entitled to accrued benefits. In accordance with local Kazakh legislation, a            Kazakhstan-based officer would also be entitled to compensation for unused vacation,            holiday, sick leave or other leave.

 

**Grants of Plan-Based Awards Table for Fiscal Year 2007**

 

| **Name**          | **Grant date** | **All Other**

**Stock Awards: Number of Shares (#)** | **All Other Option Awards: Number of Securities                            Underlying Options (#)** | **Exercise or Base Price of Option Awards                            ($/Sh)** | **Grant Date Fair Value of Stock and Option                            Awards** |
|-------------------|----------------|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|              |           |                                                  |                                                                                                |                                                                          |                                                                            |
| Boris Cherdabayev | June 20, 2006  | 80,000                                                | 150,000                                                                                             | 7.00                                                                          | 969,010**(1)**                                                                  |
| Sanat Kasymov     | June 20, 2006  | 50,000                                                | -0-                                                                                                 | -                                                                             | 327,500**(1)**                                                                  |
| Gamal Kulumbetov  | June 20, 2006  | 40,000                                                | -0-                                                                                                 | -                                                                             | 280,000**(1)**                                                                  |
| Askar Tashtitov   | June 20, 2006  | 50,000                                                | -0-                                                                                                 | -                                                                             | 327,500**(1)**                                                                  |
|              |           |                                                  |                                                                                                |                                                                          |                                                                            |
| Boris Cherdabayev | March 30, 2007 | 150,000                                               | -0-                                                                                                 | -                                                                             | 807,000**(2)**                                                                  |
| Sanat Kasymov     | March 30, 2007 | 100,000                                               | -0-                                                                                                 | -                                                                             | 538,000**(2)**                                                                  |
| Gamal Kulumbetov  | March 30, 2007 | 100,000                                               | -0-                                                                                                 | -                                                                             | 538,000**(2)**                                                                  |
| Askar Tashtitov   | March 30, 2007 | 100,000                                               | -0-                                                                                                 | -                                                                             | 538,000**(2)**                                                                  |
|              |           |                                                  |                                                                                                |                                                                          |                                                                            |

 

 

63

 

----

 

(1) See            discussion of assumptions made in valuing these awards in the notes to the            company’s consolidated financial statements.

(2) See            discussion of assumptions made in valuing these awards in the notes to the            company’s consolidated financial statements. None of the grant date fair value of            these stock awards was recorded for the financial reporting purposes as compensation            expense in the year ended March 31, 2007 because the grants were outstanding for only            one day during fiscal 2007.

 

**Outstanding Equity Awards at Fiscal Year End Table for Fiscal Year            End 2007**

 

The following table sets forth information regarding the outstanding            stock options held by our named executive officers as of March 31, 2007.

 

|              | **Option                            awards**                                                                                  | **Stock                            awards**          |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|
| **Name**          | **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) | $                            807,000 |
| Boris Cherdabayev | 150,000                            (1)                                                                                        | 7.00                                                 | 06/20/2009 | - | - |
| Sanat Kasymov     | -0-                                                                                                                           | -0-                                                  | - | 100,000                            (2) | 538,000 |
| Sanat Kasymov     | -0-                                                                                                                           | -0-                                                  | - | 10,000                            (3) | 47,500 |
| Gamal Kulumbetov  | -0-                                                                                                                           | -0-                                                  | - | 100,000                            (2) | 538,000 |
| Askar Tashtitov   | -0-                                                                                                                           | -0-                                                  | - | 100,000                            (2) | 538,000 |
| Askar Tashtitov   | -0-                                                                                                                           | -0-                                                  | - | 10,000                            (4) | 47,500 |

 

|   | (1) | Option awards vested at the date they were                            granted. |
|--------|-----|--------------------------------------------------------------------------------|

|   | (2) | These 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. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | These stock grants will vest on February 14,                            2008. |
|--------|-----|-------------------------------------------------------------------------------|

|   | (4) | These stock grants will vest on December 1,                            2007. |
|--------|-----|------------------------------------------------------------------------------|

 

**Option Exercises and Stock Vested for Fiscal Year 2007**

 

The following table sets forth the number of shares acquired pursuant to            the exercise of stock options by, and the number of restricted stock awards that vested            for, our named executive officers during fiscal 2007 and the aggregate dollar amount            realized by our named executive officers upon exercise of options.

 

|              | **Option                            awards** | **Stock                            awards**                                       |
|-------------------|----------------------------------------------|-----------------------------------------------------------------------------------|
| **Name**          |                                         | **Number                            of****Shares Acquired****on Exercise****(#)** | **Value****Realized on****Exercise****($)** | **Number                            of Shares****Acquired on****Vesting****(#)** | **Value                            Realized****on Vesting****($)** |
|              |                                         |                                                                              |   |   |   |
| Boris Cherdabayev |                                         | -0-                                                                               | -0- | 80,000 | $                            560,000 |
| Sanat Kasymov     |                                         | -0-                                                                               | -0- | 50,000 | 327,500 |
| Gamal Kulumbetov  |                                         | -0-                                                                               | -0- | 40,000 | 280,000 |
| Askar Tashtitov   |                                         | -0-                                                                               | -0- | 50,000 | 327,500 |

 

 

64

 

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**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 do not compensate            directors who are also our employees for their service on our board of directors.            Therefore, Mr. Cherdabayev did not receive any compensation for his service on our            board of directors.

             

*Meeting Fees*

 

Members of the board of directors who are not employees of the Company            are paid a $25,000 stipend per year, plus $1,000 for each directors 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 non-employee            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. We anticipate that the vesting, exercise date and expiration            date of future grants will vary.

             

**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 2007 fiscal            year.

 

|  

                             

                             

                             

**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**

**($)** |
|------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|----------------------------------------------------------------------------|-----------------------------------------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------------------|---------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                         |                                     |                                                                       |                                                                        |                                                        |                                                                    |                                              |                                                                                               |
| Troy Nilson                                                                                                                  | 25,000                                   | 70,000                                                                     | -0-                                                                         | -0-                                                         | -0-                                                                     | -0-                                               | $95,000                                                                                            |
| Stephen Smoot                                                                                                                | 25,000                                   | 70,000                                                                     | -0-                                                                         | -0-                                                         | -0-                                                                     | 1,000                                             | 96,000                                                                                             |
| Valery Tolkachev                                                                                                             | 25,000                                   | 280,000                                                                    | 136,337                                                                     | -0-                                                         | -0-                                                                     | 1,000                                             | 442,337                                                                                            |
| Leonard Stillman                                                                                                             | 12,500                                   | -0-                                                                        | -0-                                                                         | -0-                                                         | -0-                                                                     | -0-                                               | 12,500                                                                                             |

 

**Compensation Committee Interlocks and Insider            Participation**

 

Mr. Nilson, Mr. Smoot and Mr. Tolkachev have served on            our compensation committee during the entire 2007 fiscal year. No member of our            compensation committee during fiscal 2007 is or was formerly an officer or employee of            the Company or any of its subsidiaries. No interlocking relationship exists between any            member of our compensation committee and the compensation committee of any other            company, nor has any such interlocking relationship existed in the past.

 

65

 

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**Compensation Committee Report**

             

The compensation committee of the board of directors has reviewed and            discussed the Compensation Discussion and Analysis required by Item 402(b) of            Regulation S-K with management and, based on such review and discussions, the            compensation committee recommended to the board of directors that the Compensation            Discussion and Analysis be included in this Annual Report on Form 10-K.

|                                                                        |
|-----------------------------------------------------------------------------|
| COMPENSATION COMMITTEE OF                            THE BOARD OF DIRECTORS |
|                                                                        |
| Troy Nilson, Chairman

Stephen Smoot

Valery Tolkachev                      |

 

| **Item 12.** | **Security Ownership of Certain Beneficial Owners and                            Management** |
|--------------|-----------------------------------------------------------------------------------------------|

 

The term “beneficial owner” refers to both the power of            investment and the right to buy and sell our shares. It also refers to rights of            ownership or the right to receive distributions from the Company and proceeds from the            sale of Company shares. Since these rights may be held or shared by more than one            person, each person who has a beneficial ownership interest in shares is deemed to be            the beneficial owners of the same shares because there is shared power of investment or            shared rights of ownership.

 

The following table sets forth as of June 7, 2007, 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, or was known by us to own beneficially,            more than 5% of the 44,690,657 outstanding shares of our common stock, and the name and            shareholdings of each director and of all executive officers and directors as a            group.

 

| **Type of Security** | **Name and Address**      | **Amount & Nature of Beneficial                            Ownership** | **% of Class** |
|----------------------|---------------------------|----------------------------------------------------------------------------|----------------|
|                 |                      |                                                                       |           |
| Common               | Bakhytbek Baiseitov       | 4,267,177(1)                                                               | 10%(9)         |
|                 | 100 Shevchenko Street     |                                                                       |           |
|                 | Almaty, Kazakhstan 480072 |                                                                       |           |
|                 |                      |                                                                       |           |
| Common               | Boris Cherdabayev         | 6,674,983(2)                                                               | 15%(9)         |
|                 | 202 Dostyk Ave, 4th Floor |                                                                       |           |
|                 | Almaty, Kazakhstan 050051 |                                                                       |           |
|                 |                      |                                                                       |           |
| Common               | Sanat Kasymov             | 170,000(3)                                                                 | *              |
|                 | 202 Dostyk Ave, 4th Floor |                                                                       |           |
|                 | Almaty, Kazakhstan 050051 |                                                                       |           |
|                 |                      |                                                                       |           |
| Common               | Gamal Kulumbetov          | 140,000(4)                                                                 | *              |
|                 | 202 Dostyk Ave, 4th Floor |                                                                       |           |
|                 | Almaty, Kazakhstan 050051 |                                                                       |           |
|                 |                      |                                                                       |           |
| Common               | Troy Nilson               | 10,000                                                                     | *              |
|                 | 533 West 2600 South #250  |                                                                       |           |
|                 | Bountiful, Utah 84010     |                                                                       |           |

 

66

 

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|                             |                              |         |   |
|----------------------------------|-----------------------------------|--------------|--------|
| Common                           | Stephen Smoot                     | 10,000       | *      |
|                             | 875 Donner Way, Suite 705         |         |   |
|                             | Salt Lake City, Utah 84108        |         |   |
|                             |                              |         |   |
| Common                           | Leonard Stillman                  | 0            | *      |
|                             | 5794 West Poll                    |         |   |
|                             | Mountain Green, Utah 84050        |         |   |
|                             |                              |         |   |
| Common                           | Askar Tashtitov                   | 170,000(5)   | *      |
|                             | 202 Dostyk Ave, 4th Floor         |         |   |
|                             | Almaty, Kazakhstan 050051         |         |   |
|                             |                              |         |   |
| Common                           | Valery Tolkachev                  | 190,000(6)   | *(9)   |
|                             | 27/6 Pokrovka St., Building 6     |         |   |
|                             | Moscow, Russia 105062             |         |   |
|                             |                              |         |   |
| Common                           | Toleush Tolmakov                  | 2,900,365(7) | 6%     |
|                             | Daulet village, oil storage depot |         |   |
|                             | Aktau, Kazakhstan 466200          |         |   |
|                             |                              |         |   |
| Common                           | Touradji Capital Management, LP   | 2,266,365    | 5%     |
|                             | 101 Park Avenue, 47th Floor       |         |   |
|                             | New York, New York 10178          |         |   |
|                             |                              |         |   |
| Officers, Directors and Nominees | 7,364,983                         | 16%(9)       |
| as a Group: (8 persons)          |                              |         |

 

* Less            than 1%.

(1) Mr. Baiseitov holds 1,714,286 shares in his own name            and 2,552,891 shares in the name of MB-Invest LLC, a Kazakhstan limited company, in            which Mr. Baiseitov holds a 100% interest and therefore may be deemed to have            voting and investment power over the shares held by MB-Invest LLC.

(2) The shares attributed to Mr. Cherdabayev include            2,552,126 shares held of record by Westfall Group Limited FBO Boris Cherdabayev,            immediately exercisable options held by Mr. Cherdabayev to acquire 560,256 shares            of our common stock and 3,562,601 shares held of record by Mr. Cherdabayev. The            investment power and pecuniary interest in 150,000 of the shares held of record by            Mr. Cherdabayev, have not yet vested to Mr. Cherdabayev and will not vest            until the Company moves to commercial production or upon the occurrence of a vesting            event, as discussed in Item 5 above. Mr. Cherdabayev does, however, currently hold            the voting rights over these shares.

(3) The shares attributable to Mr. Kasymov include            100,000 shares over which he currently holds voting rights, but the investment power            and pecuniary interest in these shares have not yet vested to Mr. Kasymov and will            not vest until the Company moves to commercial production or upon the occurrence of a            vesting event, as discussed in Item 5 above. The shares attributable to            Mr. Kasymov also includes 10,000 shares that will not vest to Mr. Kasymov            until February 14, 2008. Until such time as these shares vest, Mr. Kasymov does            not have voting or investment control over the shares, nor does he have a pecuniary            interest in the shares.

(4) The shares attributable to Mr. Kulumbetov include            100,000 shares over which he currently holds voting rights, but the investment power            and pecuniary interest in these shares have not yet vested to Mr. Kulumbetov and            will not vest until the Company moves to commercial production or upon the occurrence            of a vesting event, as discussed in Item 5 above.

(5) The shares attributable to Mr. Tashtitov include            100,000 shares over which he currently holds voting rights, but the investment power            and pecuniary interest in these shares have not yet vested to Mr. Tashtitov and            will not vest until the Company moves to commercial production or upon the occurrence            of a vesting event, as discussed in Item 5 above. The shares attributable to            Mr. Tashtitov also includes 10,000 shares that will not vest to Mr. Tashtitov            until December 1, 2007. Until such time as these shares vest, Mr. Tashtitov does            not have voting or investment control over the shares, nor does he have a pecuniary            interest in the shares.

(6) The shares attributed to Mr. Tolkachev include            71,579 shares of common stock held of record by Mr. Tolkachev and immediately            exercisable options to acquire 118,421 shares of our common stock.

(7) The shares attributable to Mr. Tolmakov include            100,000 shares over which he currently holds voting rights, but the investment power            and pecuniary interest in these shares have not yet vested to Mr. Tolmakov and            will not vest until the Company moves to commercial production or upon the occurrence            of a vesting event, as discussed in Item 5 above.

(8)Mr. Paul Touradji is the General Partner of Touradji            Capital Management.

(9) The percentages reflect the increase in the number of            common shares that would be issued in connection with the exercise of outstanding            options.

 

67

 

----

Messers. Cherdabayev, Kasymov, Kulumbetov and Tashtitov are officers of            the Company. Mr. Tolmakov is an officer of the Company’s wholly-owned            subsidiary, Emir Oil, LLP. Messers. Cherdabayev, Nilson, Smoot, Stillman and Tolkachev            are directors of the Company.

 

**Item            13. Certain Relationships and Related Transactions and Director            Independence**

 

During 2007, 2006 and 2005 we have leased land, oil storage facilities            and office and warehouse space in Aktau, Kazakhstan from Term Oil LLC. Last year we            negotiated a five-year extension of this lease. The basic terms of the new lease are            unchanged, including the initial monthly rental payment, which did not increase. We            expect to continue to lease these facilities for the full term of our agreement with            Term Oil LLC, which now expires on December 31, 2009. During the fiscal years ended            March 31, 2007, 2006 and 2005 we paid Term Oil $203,686, $276,055 and $218,428,            respectively for the use of these facilities. Toleush Tolmakov, a BMB shareholder and            director of Emir Oil is the owner of Term Oil.

 

In accordance with the written policy adopted by our board of directors            and the 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 required 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.

             

**Director Independence**

 

The board of directors has determined that, with the exception of Boris            Cherdabayev the Chairman of our board of directors and our Chief Executive Officer, all            of the members of our board are “independent directors” as that term is            defined in the listing standards of the American Stock Exchange. 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 the American Stock Exchange 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 Accounting Fees and Services**

             

On February 21, 2007, the audit committee of the board of directors of            BMB Munai, Inc. (the “Company”) terminated the engagement of BDO            Kazakhstanaudit, who had served as the Company’s independent registered public            accounting firm since February 2004. On February 21, 2007, the Company engaged Hansen,            Barnett & Maxwell, Certified Public Accountants to serve as the Company’s            independent registered public accounting firm.

             

Principal accounting fees for professional services rendered for us by            Hansen, Barnett & Maxwell P.C. and BDO Kazakhstanaudit for the years ended March            31, 2007 and 2006 were:

 

68

 

----

 

|               |   | Fiscal 2007 |   | Fiscal 2006 |
|---------------|--------|-------------|--------|-------------|
|          |   |        |   |        |
| Audit         |   | $226,465    |   | $168,645    |
| Audit related |   | -           |   | -           |
| Tax           |   | 2,508       |   | -           |
| All other     |   | -           |   | -           |
| Total         |   | $228,973    |   | $168,645    |

             

*Audit Fees*. Audit fees were for            professional services rendered in connection with the audit of the financial statement            included in our annual report on Form 10-K and review of the financial statements            included in our quarterly reports of Form 10-Q. or 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            billed us an aggregate of $2,508 for professional services rendered for tax compliance,            tax advice and tax planning within the United States for the fiscal year ended March            31, 2007.

 

*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 audit or            permissible non-audit services performed by our independent auditors. Instead, the            Audit Committee as a whole has pre-approved all such services. In the future, our Audit            Committee may approve the services of our independent auditors pursuant to pre-approval            policies and procedures adopted by the Audit Committee, 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 described above are compatible with maintaining Hansen,            Barnett & Maxwell’s independence at our independent registered public            accounting firm.

 

**Item 15. Exhibits, Financial Statement Schedules**

 

|   | The following exhibits are included as part of this                            report: |
|--------|----------------------------------------------------------------------------------------|

 

|   | Exhibit 21.1 | Subsidiaries |
|--------|--------------|--------------|

|   | Exhibit 23.1 | Consent of Chapman Petroleum Engineering Ltd. |
|--------|--------------|-----------------------------------------------|

|   | Independent Petroleum Engineers |
|--------|---------------------------------|

|   | Exhibit 23.2 | Consent of Hansen, Barnett & Maxwell,                            P.C. |
|--------|--------------|---------------------------------------------------------------------------|

|   | Independent Registered Public Accounting Firm |
|--------|-----------------------------------------------|

|   | Exhibit 23.3 | Consent of BDO Kazakhstanaudit, LLP |
|--------|--------------|-------------------------------------|

|   | Independent Registered Public Accounting Firm |
|--------|-----------------------------------------------|

|   | Exhibit 31.1 | Certification of Principal Executive Officer Pursuant                            to |
|--------|--------------|-------------------------------------------------------------------------------------|

|   | Section 302 of the Sarbanes-Oxley Act of 2002 |
|--------|-----------------------------------------------|

|   | Exhibit 31.2 | Certification of Principal Financial Officer                            Pursuant |
|--------|--------------|----------------------------------------------------------------------------------|

|   | to Section 302 of the Sarbanes-Oxley Act of                            2002 |
|--------|-----------------------------------------------------------------------------|

|   | Exhibit 32.1 | Certification of Principal Executive Officer Pursuant to                            Section |
|--------|--------------|---------------------------------------------------------------------------------------------|

906 of the Sarbanes-Oxley Act of 2002

|   | Exhibit 32.2 | Certification of Principal Financial Officer Pursuant to                            Section 906 |
|--------|--------------|-------------------------------------------------------------------------------------------------|

of the Sarbanes-Oxley Act of 2002

 

69

 

----

             

|   | **SIGNATURES** |
|--------|----------------|

 

In accordance with Section 12 of the Securities Exchange Act of 1934,            the registrant caused this report to be signed on its behalf, thereunto duly            authorized.

 

**BMB MUNAI, INC.**

             

| Date: January 4, 2008 | /s/ Gamal Kulumbetov   |
|-----------------------|-----------------------------|

Gamal Kulumbetov

Chief Executive Officer

             

70

             

             

 

----

             

             

             

             

             

             

             

**CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005**

             

             

 

 

----

**Table of contents**

             

|                                                                                                                                                                             | Page         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|
|                                                                                                                                                                             |         |
| Report of Independent Registered Public Accounting Firm                            – Hansen, Barnett & Maxwell P.C.                                                    |  

F-1  |
|                                                                                                                                                                             |         |
| Report of Independent Registered Public Accounting Firm                            – BDO Kazakhstanaudit                                                                   |  

F-2  |
|                                                                                                                                                                             |         |
| Consolidated Balance Sheets as of March 31, 2007 and                            2006                                                                                             | F-3          |
|                                                                                                                                                                             |         |
| Consolidated Statements of Operations for the years                            ended March 31, 2007, 2006 and 2005                                                               |  

F-4  |
|                                                                                                                                                                             |         |
| Consolidated Statements of Shareholders’ Equity                            for the years ended March 31, 2007, 2006 and 2005                                               |  

F-5  |
|                                                                                                                                                                             |         |
| Consolidated Statements of Cash Flows for the years                            ended March 31, 2007, 2006 and 2005                                                               |  

F-6  |
|                                                                                                                                                                             |         |
| Notes to the Consolidated Financial                            Statements                                                                                                        | F-8          |
|                                                                                                                                                                             |         |
| Supplementary Financial Information on Oil and Natural                            Gas Exploration, Development, and Production Activities                            (unaudited) |  

F-32 |
|                                                                                                                                                                             |         |
|                                                                                                                                                                             |         |

----

|   | **HANSEN, BARNETT & MAXWELL, P.C.** |
|--------|-----------------------------------------|

 

 

|   | **Registered with the Public Company** |
|--------|----------------------------------------|

|   | **Accounting Oversight Board** |
|--------|--------------------------------|

 

|   |  |
|--------|--|

 

 

 

             

|   | A Professional Corporation |
|--------|----------------------------|

|   | CERTIFIED PUBLIC ACCOUNTANTS |
|--------|------------------------------|

|   | AND |
|--------|-----|

|   | BUSINESS CONSULTANTS |
|--------|----------------------|

|   | 5 Triad Center, Suite 750 |
|--------|---------------------------|

|   | Salt Lake City, UT 84180-1128 |
|--------|-------------------------------|

|   | Phone: (801) 532-2200 |
|--------|-----------------------|

|   | Fax: (801) 532-7944 |
|--------|---------------------|

|   | www.hbmcpas.com |
|--------|-----------------|

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

To the            Board of Directors and Stockholders

BMB            Munai, Inc.

 

We            have audited the accompanying consolidated balance sheet of BMB Munai, Inc. and            subsidiary as of March 31, 2007, and the related consolidated statements of operations,            shareholders’ equity, and cash flows for the year then ended. These financial            statements are the responsibility of the Company’s management. Our responsibility            is to express an opinion on these financial statements based on our audit.

 

We            conducted our audit in accordance with 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, assessing the            accounting principles used and significant estimates made by management, as well as            evaluating the overall financial statement presentation. We believe our audit provides            a reasonable basis for our opinion.

 

In            our opinion, the financial statements referred to above present fairly, in all material            respects, the consolidated financial position of BMB Munai, Inc. and subsidiary as of            March 31, 2007, and the consolidated results of their operations and their cash flows            for the period ended March 31, 2007 in conformity with accounting principles generally            accepted in the United States of America.

 

As            discussed in Note 1 to the consolidated financial statements, the Company adopted            Statement of Financial Accounting Standards No. 123R,*Share-Based Payment*, effective April 1,            2006.

 

We            also have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the effectiveness of BMB Munai, Inc.’s internal            control over financial reporting as of March 31, 2007, based on criteria established            in*Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway            Commission and our report dated June 13, 2007 expressed an unqualified opinion            thereon.

 

             

**HANSEN, BARNETT & MAXWELL, P.C.**

Salt            Lake City, Utah

June            13, 2007

 

F-1

 

 

----

Report of Independent Registered Public Accounting Firm

             

The Board of Directors

BMB Munai, Inc.

             

We have audited the accompanying consolidated balance sheets of BMB            Munai, Inc. as of March 31, 2006 and March 31, 2005, and the related consolidated            statements of loss, shareholders’ equity, and cash flows for the years ended            March 31, 2006 and March 31, 2005. These financial statements are the responsibility of            the Company’s management. Our responsibility is to express an opinion on these            financial statements based on our audits.

             

We conducted our audits in accordance with 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 misstatements. The Company is not required to have, nor            were we engaged to perform, an audit of its internal control over financial reporting.            Our audits included consideration of internal control over financial reporting as a            basis for designing audit procedures that are appropriate in the circumstances, but not            for purposes of expressing an opinion on the effectiveness of the Company’s            internal control over financial reporting. Accordingly, we express no such opinion. An            audit also includes examining, on a test basis, evidence supporting the amounts and            disclosures in the financial statements, assessing the accounting principles used and            significant estimates made by management, as well as evaluating the overall financial            statement presentation. We believe that our audits provide a reasonable basis for our            opinion.

             

In our opinion, the financial statements referred to above present            fairly, in all material respects, the consolidated financial position of BMB Munai,            Inc. at March 31, 2006 and at March 31, 2005 and the consolidated results of its            operations and its cash flow for the years ended March 31, 2006 and March 31, 2005 in            conformity with accounting principles generally accepted in the United States of            America.

             

/s/ BDO Kazakhstanaudit, LLP

             

June 26, 2006

Almaty, Kazakhstan

 

F-2

 

 

----

**BMB MUNAI, INC.**

 

**CONSOLIDATEDBALANCESHEETS**

             

 

|                                                                                                                                                                                                           | **Notes**                                      |                                                     | **March 31, 2007** |                                                     | **March 31, 2006** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|----------------------------------------------------------|--------------------|----------------------------------------------------------|--------------------|
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| **ASSETS**

                                                                                                                                                                                              |                                           |                                                     |               |                                                     |
| CURRENT ASSETS                                                                                                                                                                                                 |                                           |                                                     |               |                                                     |
| Cash and cash equivalents                                                                                                                                                                                      | 3                                              | $ 12,172,940                                        |               | $ 51,141,732                                        |
| Trade accounts receivable                                                                                                                                                                                      |                                           | 3,994,662                                           |               | 1,675,202                                           |
| Inventories                                                                                                                                                                                                    | 4                                              | 10,334,696                                          |               | 3,239,947                                           |
| Prepayments for materials                                                                                                                                                                                      |                                           | 1,409,213                                           |               | 712,526                                             |
| Prepaid expenses and other assets, net                                                                                                                                                                         | 5                                              | 2,060,024                                           |               | 566,920                                             |
| Total current assets                                                                                                                                                                                           |                                           | 29,971,535                                          |               | 57,336,327                                          |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| LONG TERM ASSETS                                                                                                                                                                                               |                                           |                                                     |               |                                                     |
| Oil and gas properties, full cost method, net                                                                                                                                                                  | 6                                              | 104,187,568                                         |               | 66,683,297                                          |
| Other fixed assets, net                                                                                                                                                                                        | 7                                              | 1,519,123                                           |               | 1,070,607                                           |
| Construction in progress                                                                                                                                                                                       | 8                                              | 4,463,063                                           |               | -                                                   |
| Long term VAT recoverable                                                                                                                                                                                      | 9                                              | 4,351,059                                           |               | 1,335,971                                           |
| Restricted cash                                                                                                                                                                                                | 10                                             | 303,697                                             |               | 156,454                                             |
| Total long term assets                                                                                                                                                                                         |                                           | 114,824,510                                         |               | 69,246,329                                               |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| **TOTAL ASSETS**                                                                                                                                                                                               |                                           | **$                            144,796,045**        |               | **$                            126,582,656**        |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| **LIABILITIES AND SHAREHOLDERS’                            EQUITY**                                                                                                                                      |                                           |                                                     |               |                                                     |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| CURRENT LIABILITIES                                                                                                                                                                                            |                                           |                                                     |               |                                                     |
| Accounts payable                                                                                                                                                                                               |                                           | $ 8,542,052                                         |               | $ 3,629,338                                         |
| Due to reservoir consultants                                                                                                                                                                                   |                                           | -                                                   |               | 500,000                                             |
| Taxes payable                                                                                                                                                                                                  |                                           | 324,053                                             |               | 145,406                                             |
| Accrued liabilities and other payables                                                                                                                                                                         |                                           | 254,194                                             |               | 349,231                                             |
| Total current liabilities                                                                                                                                                                                      |                                           | 9,120,299                                                |               | 4,623,975                                                |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| LONG TERM LIABILITIES                                                                                                                                                                                          |                                           |                                                     |               |                                                     |
| Liquidation fund                                                                                                                                                                                               | 11                                             | 2,165,829                                           |               | 924,592                                             |
| Deferred taxes                                                                                                                                                                                                 | 12                                             | 7,948,297                                           |               | 6,405,285                                           |
| Total long term liabilities                                                                                                                                                                                    |                                           | 10,114,126                                          |               | 7,329,877                                                |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                  | 17                                             | -                                                   |               | -                                                   |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| SHAREHOLDERS’ EQUITY                                                                                                                                                                                     |                                           |                                                     |               |                                                     |
| Preferred stock - $0.001 par value; 20,000,000 shares                            authorized; no shares issued or outstanding                                                                                   |  

13                                     |  

-                                           |               |  

-                                           |
| Common stock - $0.001 par value; 500,000,000 and                            100,000,000 shares authorized, respectively; 44,690,657 and 42,223,685                            shares outstanding, respectively |  

                             

13 |  

                             

44,691  |               |  

                             

42,224  |
| Additional paid in capital                                                                                                                                                                                     | 13                                             | 133,721,865                                         |               | 123,831,007                                         |
| Accumulated deficit                                                                                                                                                                                            |                                           | (8,204,936)                                              |               | (9,244,427)                                              |
| Total shareholders’ equity                                                                                                                                                                               |                                           | 125,561,620                                         |               | 114,628,804                                         |
|                                                                                                                                                                                                           |                                           |                                                     |               |                                                     |
| **TOTAL LIABILITIES AND SHAREHOLDERS’                            EQUITY**                                                                                                                                |                                           | **$                            144,796,045**        |               | **$                            126,582,656**        |

 

 

See            notes to the consolidated financial statements.

 

F-3

 

 

----

**BMB MUNAI, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

             

 

 

|                                                                           |  

**Notes** | **Year ended**

**March 31, 2007** |   | **Year ended**

**March 31, 2006** |   | **Year ended**

**March 31, 2005** |   |
|--------------------------------------------------------------------------------|-------------------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                                                                           |              |                               |   |                               |   |                               |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| REVENUES                                                                       | 14                | $ 15,785,784                  |   | $ 5,956,731                   |   | $ 973,646                     |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| COSTS AND OPERATING EXPENSES                                                   |              |                               |   |                               |   |                               |   |
| Oil and gas operating                                                          |              | 2,272,251                     |   | 875,319                       |   | 406,361                       |   |
| General and administrative                                                     |              | 10,757,727                    |   | 9,724,597                     |   | 4,060,962                     |   |
| Depletion                                                                      |              | 2,006,834                     |   | 1,167,235                     |   | 229,406                       |   |
| Amortization and depreciation                                                  |              | 170,610                       |   | 133,148                       |   | 66,451                        |   |
| Accretion expense                                                              |              | 173,519                       |   | 5,602                         |   | -                             |   |
| Total costs and operating expenses                                             |              | 15,380,941                    |   | 11,905,901                    |   | 4,763,180                     |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| INCOME/(LOSS) FROM OPERATIONS                                                  |              | 404,843                       |   | (5,949,170)                        |   | (3,789,534)                        |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| OTHER INCOME (EXPENSE)                                                         |              |                               |   |                               |   |                               |   |
| Realized gain on marketable securities                                         |              | -                   |   | 236,878                  |   | 185,067                  |   |
| Unrealized loss on marketable securities                                       |              | -                             |   | -                             |   | (252,767)                          |   |
| Interest income, net                                                           |              | 1,490,381                     |   | 434,659                       |   | 17,799                        |   |
| Other (expense)/income, net                                                    |              | (115,611)                          |   | (18,110)                           |   | 53,945                        |   |
| Total other income                                                             |              | 1,487,928                     |   | 639,880                       |   | 503,565                       |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| INCOME/(LOSS) BEFORE INCOME TAXES                                              |              | 1,892,771                     |   | (5,309,290)                        |   | (3,285,969)                        |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| INCOME TAX EXPENSE                                                             | 12                | (853,280)                          |   | (35,043)                      |   | (343)                         |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| NET INCOME/(LOSS)                                                              |              | $ 1,039,491                        |   | $ (5,344,333)                      |   | $ (3,286,312)                      |   |
|                                                                           |              |                               |   |                               |   |                               |   |
| BASIC NET INCOME / (LOSS) PER COMMON SHARE                                     | 15                | $ 0.02                             |   | $ (0.15)                           |   | $ (0.12)                           |   |
| –DILUTED NET INCOME / (LOSS) PER COMMON                            SHARE | 15                | $ 0.02                             |   | $ (0.15)                           |   | $ (0.12)                           |   |
|                                                                           |              |                               |   |                               |   |                               |   |

 

See            notes to the consolidated financial statements.

 

F-4

 

 

----

**BMB MUNAI, INC**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

             

 

 

|                                                        |                                           | **Common stock**                                            |       | **Additional paid-in**                                  |       | **Accumulated**                                              |        |                                                |
|-------------------------------------------------------------|------------------------------------------------|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------|-------------|-----------------------------------------------------|
|                                                        | **Notes**                                      |                                                        | **Shares** |                                                    | **Amount** |                                                         | **capital** |                                                | **deficit**     |   | **Total**     |
|                                                        |                                           |                                                        |       |                                                    |       |                                                         |        |                                                |   |   |
| **At March 31, 2004**                                       |                                           | **20,429,421**                                              |       | **20,429**                                         |       | **12,115,445**                                          |        | **(613,782)**                                       |   | **11,522,092**  |
|                                                        |                                           |                                                        |       |                                                    |       |                                                         |        |                                                |   |   |
| Common stock issued inexchange of 30% shares ofEmir Oil LLP |  

                             

13 |  

                             

3,500,000  |       |  

                             

3,500  |       |  

                             

19,071,500  |        |  

                             

-  |   |  

                             

19,075,000  |
| Common stock issued inprivate placements                    |  

13                                     |  

6,584,340                                      |       |  

6,585                                      |       |  

27,273,575                                      |        |  

-                                      |   |  

27,280,160  |
| Common stock issued forsubscription                         |  

13                                     |  

1,101,000                                      |       |  

1,101                                      |       |  

5,503,899                                       |        |  

-                                      |   |  

5,505,000  |
| Subscription receivable                                     | 13                                             | (1,101,000)                                                 |       | (1,101)                                                 |       | (5,503,899)                                                  |        | -                                              |   | (5,505,000) |
| Net loss for the year                                       |                                           | -                                                      |       | -                                                  |       | -                                                       |        | (3,286,312)                                         |   | (3,286,312) |
|                                                        |                                           |                                                        |       |                                                    |       |                                                         |        |                                                |   |   |
| **At March 31, 2005**                                       |                                           | **30,513,761**                                         |       | **$ 30,514**                                       |       | **$                            58,460,520**             |        | **$ (3,900,094)**                                   |   | **$                            54,590,940**  |
|                                                        |                                           |                                                        |       |                                                    |       |                                                         |        |                                                |   |   |
| Common stock issued inprivate placements                    |  

13                                     |  

10,267,667                                     |       |  

10,268                                     |       |  

57,400,624                                      |        |  

-                                 |   |  

57,410,892  |
| Options and warrants exercised                              | 13                                             | 902,514                                                |       | 902                                                |       | 2,996,767                                               |        | -                                         |   | 2,997,669  |
| Stock grants and stock options issued                       |  

13                                     |  

539,743                                        |       |  

540                                        |       |  

4,973,096                                       |        |  

-                                 |   |  

4,973,636  |
| Net loss for the year                                       |                                           | -                                                      |       | -                                                  |       | -                                             |        | (5,344,333)                                         |   | (5,344,333) |
|                                                        |                                           |                                                        |       |                                                    |       |                                                         |        |                                                |   |   |
| **At March 31, 2006**                                       |                                           | **42,223,685**                                         |       | **$ 42,224**                                       |       | **$                            123,831,007**            |        | **$ (9,244,427)**                                   |   | **$                            114,628,804**  |
|                                                        |                                           |                                                        |       |                                                    |       |                                                         |        |                                                |   |   |
| Stock grants and stock options issued                       |  

13                                     |  

1,495,000                                      |       |  

1,495                                      |       |  

4,133,328                                       |        |  

-                            |   |  

4,134,823  |
| Options and warrants exercised                              | 13                                             | 971,972                                                |       | 972                                                |       | 5,757,530                                               |        | -                                    |   | 5,758,502  |
| Net income for the year                                     |                                           | -                                                      |       | -                                                  |       | -                                             |        | 1,039,491                                      |   | 1,039,491  |
|                                                        |                                           |                                                        |       |                                                    |       |                                                         |        |                                                |   |   |
| **At March 31, 2007**                                       |                                           | **44,690,657**                                         |       | **$ 44,691**                                       |       | **$                            133,721,865**            |        | **$ (8,204,936)**                                   |   | **$                            125,561,620**  |
|                                                             |                                                |                                                             |            |                                                         |            |                                                              |             |                                                     |  |  |  |  |

 

 

See            notes to the consolidated financial statements.

 

F-5

 

 

----

**BMB MUNAI, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

|                                                                                                      |  

                             

**Notes** | **Year ended March 31, 2007**                     |   | **Year ended March 31, 2006**                     |   | **Year ended**

**March 31,**

**2005**          |
|-----------------------------------------------------------------------------------------------------------|-------------------------------------------------------|---------------------------------------------------|--------|---------------------------------------------------|--------|--------------------------------------------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                 |                                                  |                                              |   |                                              |   |                                             |
| Net income / (loss)                                                                                       |                                                  | $ 1,039,491                                  |   | $ (5,344,333)                                     |   | $ (3,286,312)                                    |
| Adjustments to reconcile net loss to net cash                            providedby operating activities: |                                                  |                                              |   |                                              |   |                                             |
| Depletion                                                                                                 | 6                                                     | 2,006,834                                    |   | 1,167,235                                    |   | 229,406                                     |
| Depreciation and amortization                                                                             | 7                                                     | 170,610                                      |   | 133,148                                      |   | 66,451                                      |
| Accretion expenses                                                                                        | 11                                                    | 173,519                                      |   | 5,602                                        |   | -                                           |
| Stock based compensation expense                                                                          | 13                                                    | 3,679,823                                    |   | 4,800,954                                    |   | -                                           |
| Stock issued for services                                                                                 | 13                                                    | 455,000                                      |   | 172,682                                      |   | -                                           |
| Provision expense for uncollectible advances and                            prepayments                   |                                                  | -                                            |   | 66,401                                       |   | 129,051                                     |
| Minority interest in operations of subsidiary                                                             |                                                  | -                                            |   | -                                            |   | (82,134)                                         |
| Gain on disposal of fixed assets                                                                          |                                                  | (8,735)                                           |   | -                                            |   | -                                           |
| Income taxes                                                                                              | 12                                                    | 853,280                                      |   | 35,043                                       |   | 343                                         |
| Unrealized loss on marketable securities                                                                  |                                                  | -                                            |   | -                                            |   | 252,767                                     |
| Changes in operating assets and liabilities                                                               |                                                  |                                              |   |                                              |   |                                             |
| Decrease in marketable securities                                                                         |                                                  | -                                            |   | 788,921                                      |   | 1,837,448                                   |
| Increase in trade accounts receivable                                                                     |                                                  | (2,319,460)                                       |   | (1,542,802)                                       |   | (132,400)                                   |
| Increase in inventories                                                                                   |                                                  | (7,094,749)                                       |   | (12,536)                                          |   | (3,043,527)                                 |
| (Increase) / decrease in prepaid expenses and other                            assets                     |                                                  | (2,189,791)                                       |   | 1,608,673                                    |   | (2,540,271)                                 |
| Increase in VAT recoverable                                                                               |                                                  | (3,015,088)                                       |   | (118,200)                                         |   | (1,217,751)                                 |
| Increase /(decrease) in current liabilities                                                               |                                                  | 4,372,122                                    |   | (2,595,696)                                       |   | 6,371,925                              |
|                                                                                                      |                                                  |                                              |   |                                              |   |                                             |
| Net cash used in operating activities                                                                     |                                                  | (1,877,144)                                       |   | (834,908)                                         |   | (1,415,004)                                      |
|                                                                                                      |                                                  |                                              |   |                                              |   |                                             |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                 |                                                  |                                              |   |                                              |   |                                             |
| Acquisition of oil and gas properties                                                                     | 6                                                     | (37,483,825)                                      |   | (17,759,232)                                      |   | (17,411,861)                                     |
| Acquisition of other fixed assets                                                                         | 7                                                     | (824,974)                                         |   | (566,840)                                         |   | (549,045)                                        |
| Proceeds from sale of fixed assets                                                                        |                                                  | 68,955                                       |   |                                              |   |                                             |
| Increase in construction in progress                                                                      | 8                                                     | (4,463,063)                                       |   | -                                            |   | -                                           |
| Increase in restricted cash                                                                               |                                                  | (147,243)                                         |   | (95,481)                                          |   | (40,973)                                         |
|                                                                                                      |                                                  |                                              |   |                                              |   |                                             |
| Net cash used in investing activities                                                                     |                                                  | (42,850,150)                                      |   | (18,421,553)                                      |   | (18,001,879)                                     |
|                                                                                                      |                                                  |                                              |   |                                              |   |                                             |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                 |                                                  |                                              |   |                                              |   |                                             |
| Proceeds from sale of common stock                                                                        |                                                  | -                                            |   | 57,410,892                                   |   | 27,280,160                                  |
| Proceeds from exercise of common stock options and                            warrants                    |  

13                                            | 5,758,502                                    |   | 2,997,669                                    |   | -                                           |
|                                                                                                      |                                                  |                                              |   |                                              |   |                                             |
| Net cash provided by financing activities                                                                 |                                                  | 5,758,502                                    |   | 60,408,561                                   |   | 27,280,160                                  |
|                                                                                                      |                                                  |                                              |   |                                              |   |                                             |
| **NET CHANGE IN CASH AND CASH                            EQUIVALENTS**                                    |                                                  | **(38,968,792)**                                  |   | **41,152,100**                               |   | **7,863,277**                               |
| **CASH AND CASH EQUIVALENTS at beginning of                            year**                             |                                                  | **51,141,732**                               |   | **10,778,553**                               |   | **2,126,355**                               |
| **CASH AND CASH EQUIVALENTS at end of                            year**                                   |                                                  | **$                            12,172,940**  |   | **$                            51,141,732**  |   | **$                            9,989,632**  |
|                                                                                                      |                                                  |                                              |   |                                              |   |                                             |

 

See            notes to the consolidated financial statements.

 

F-6

 

----

**BMB MUNAI, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)**

 

 

|                                                                                                         |  

                             

                              | **Year ended March 31, 2007** |   | **Year ended March 31, 2006** |   | **Year ended**

**March 31,**

**2005**                                                                                                    |
|--------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|-------------------------------|--------|-------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|  

**Non-Cash Investing and Financing                            Activities**                           |                                                                           |                          |   |                          |   |                                                                                                                                       |
| Asset retirement obligation incurred in property                            development                      |                                                                           | $ 1,067,718              |   | $ 858,017                |   | $                                             -  |
| Common stock issued for ownership percentage in                            subsidiary                        |                                                                           | -                        |   | -                        |   | 19,075,000                                                                                                                            |
| Deferred tax liability incurred in non-taxable business                            combination of subsidiary |                                                                           | 813,934                  |   | -                        |   | 6,405,285                                                                                                                             |
|                                                                                                         |                                                                           |                          |   |                          |   |                                                                                                                                       |

 

 

See            notes to the consolidated financial statements.

 

F-7

 

----

 

**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”) 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 acquiror 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.

             

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. From January 1,            2006 the Company started to generate significant revenues and is no longer in the            development stage.

             

If the Company is unable to drill and complete a sufficient number of            wells in each of its identified structures to support its claim of commercially            producible reserves before the end of the term of its exploration contract, as            extended, the Company may not be granted a commercial production contract for each of            its structures.

 

In order to obtain a commercial production license for the structures            contained within the Company’s licensed territory, it must engage in sufficient            exploration, drilling and testing activities to gather adequate data to support its            claims that it has discovered commercial producible reserves within its contract            territory. These activities must be completed during the term of the exploration            license. It is generally accepted that one exploratory and two appraisal wells are            sufficient to determine whether a license holder has discovered a commercially            producible reserve, although in some instances, license holders are able to establish            commercially producible reserves with fewer than three wells. Currently the Company has            completed nine wells with an additional three wells in progress. As discussed in more            details in Note 2, at March 31, 2007, the Company has not yet applied for or been            granted a commercial production license.

 

F-8

 

 

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

             

             

**NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES**

             

*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.

             

*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.

             

*Licenses and contracts*

             

Emir Oil LLP is the operator of the Aksaz, Dolinnoe and Emir oil and gas            fields in western Kazakhstan (the “ADE Block”, the “ADE            Fields”). The Government of the Republic of Kazakhstan (the            “Government”) initially issued the license to Zhanaozen Repair and            Mechanical Plant on April 30, 1999. 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 (MEMR) granted a second            extension of Company’s exploration contract. Under the terms of the contract            extension, the exploration period will extend to July 2009 over entire exploration            contract territory. On December 7, 2004 the Government assigned to Emir Oil LLP            exclusive right to explore the additional territory during the remaining term of the            License. To move from the exploration and development stage to the commercial            production stage, the Company must apply for and be granted a commercial production            contract. The Company is legally entitled to receive this commercial production            contract and has an exclusive right to negotiate this Contract and the Government is            obligated to conduct these negotiations under the Law of Petroleum in Kazakhstan. If            the Company does not move from the exploration and development 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.

             

F-9

----

**BMB MUNAI, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL            STATEMENTS **

             

*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 U.S. 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 SFAS No. 123R,*Share Based Payment            and EITF Abstracts Issue 96-18, Accounting for Equity Instruments That Are Issued to            Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or            Services*. Under SFAS No. 123R, 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.

             

The Company has a stock option plan as described in Note 13.            Compensation expense for options and stocks 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.

             

*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. However, management believes that over the life of the project,            transportation options will improve as additional pipelines and rail-related            infrastructure is built that will increase transportation capacity to the world            markets.

             

*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, collectibility is reasonably assured, delivery of oil has            occurred or when ownership title transferred. Produced but unsold            products are recorded as inventory until sold.

             

F-10

 

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

*Income taxes*

             

The Company accounts for income taxes using the liability method. Under            the liability method, deferred tax assets and liabilities are recognized for the future            tax consequences attributable to differences between financial statement carrying            amounts of existing assets and liabilities and their respective tax bases. Deferred tax            assets and liabilities are measured using enacted tax rates expected to apply to            taxable income in the years in which those temporary differences are expected to be            recovered or settled. Under the liability method, the effect on previously recorded            deferred tax assets and liabilities resulting from a change in tax rates is recognized            in earnings in the period in which the change is enacted.

             

*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.

             

*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 collectibility. The fair value            of prepaid expense and other asset accounts approximates their carrying amounts due to            their short-term maturity.

             

*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.

             

F-11

 

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

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 its inventory at March 31, 2007.

             

No provision for obsolete inventory has been provided.

             

*Oil and gas properties*

             

The Company follows the full cost method of accounting for its costs of            acquisition, exploration and development of oil and gas properties.

             

Under full cost accounting rules, the net capitalized costs of evaluated            oil and gas properties shall not exceed an amount equal to the present value of future            net cash flows from estimated production of proved oil and gas reserves, based on            current economic and operating conditions, including the use of oil and gas prices as            of the end of the period.

             

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.

             

Depletion of producing properties is computed using the            unit-of-production method based on estimated proved reserves.

             

*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. The oil and gas assets related            to

             

F-12

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

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 years |
| Machinery and equipment    | 6-10 years |
| Vehicles                   | 3-5 years  |
| Office equipment           | 3-5 years  |
| Software                   | 3-4 years  |
| Furniture and fixtures     | 2-7 years  |

             

Maintenance and repairs are charged to expense as incurred. Renewals and            betterments are capitalized.

             

Other fixed assets of the Company are evaluated 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.

             

*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            United States Dollars and the United States Dollar is therefore its functional            currency.

             

F-13

 

 

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

*Reclassifications*

             

Certain reclassifications have been made in the financial statements for            the year ended March 31, 2006 to conform to the March 31, 2007 presentation. The            reclassifications had no effect on net income.

             

*Concentrations of Credit Risk and Accounts Receivable*

             

The Company exports all of its test production for sale in the world            market. Currently, all of production is being sold to one client, Euro-Asian Oil AG. In            the exploration, development and production business, production is normally sold to            relatively few customers. Our customers are concentrated in the oil and gas industry,            and revenue can be materially affected by current economic conditions and the price of            certain commodities such as natural gas and crude oil the cost of which is passed            through to the customer. All of the Company’s accounts receivable are from            Euro-Asian Oil AG. Oil sales are unsecured, however, the Company has not had any credit            losses in the past and believes its accounts receivable are fully collectible.            Accordingly, no allowance for doubtful accounts has been provided.

             

*Recent accounting pronouncements*

             

In June 2006, the FASB issued FASB Interpretation No. 48            “*Accounting for Uncertainty in Income Taxes, an            interpretation of FASB Statement No. 109*”. This            interpretation clarifies the accounting for uncertainty in income taxes recognized in            an enterprise’s financial statements in accordance with FASB No. 109            “Accounting for Income taxes”. This interpretation is effective for the            fiscal years beginning after December 15, 2006. Management does not anticipate this            Statement will impact the Company’s consolidated financial position or            consolidated results of operations and cash flows.

             

In September 2006, the FASB issued Statement No. 157,            “*Fair Value            Measurements*” This Statement defines fair value,            establishes a framework for measuring fair value in generally accepted accounting            principles (GAAP), and expands disclosures about fair value measurements. This            Statement applies under other accounting pronouncements that require or permit fair            value measurements, the Board having previously concluded in those accounting            pronouncements that fair value is the relevant measurement attribute. This Statement is            effective for financial statements issued for the fiscal years beginning after November            15, 2007. Management does not anticipate this Statement will impact the Company’s            consolidated financial position or consolidated results of operations and cash            flows.

             

In September 2006, the FASB issued Statement No. 158,            “*Employers’ Accounting for Defined Benefit Pension            and Other Postretirement Plans*”, an amendment of FASB            Statements No. 87, 88, 106, and 132(R). This Statement improves financial reporting by            requiring an employer to recognize the overfunded or underfunded status of a defined            benefit postretirement plan (other than a multiemployer plan) as

             

F-14

 

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

an asset or liability in its statement of financial position and to            recognize changes in that funded status in the year in which the changes occur through            comprehensive income of a business entity or changes in unrestricted net assets of a            not-for-profit organization. This Statement is effective for employers with publicly            traded equity securities is required to initially recognize the funded status of a            defined benefit postretirement plan and to provide the required disclosures as of the            end of the fiscal year ending after December 15, 2006. Management belives this            Statement has no material impact the Company’s consolidated financial position or            consolidated results of operations and cash flows.

             

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB)            Topic 1N, “*Financial Statements - Considering the            Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year            Financial Statements*” ( SAB 108). The SEC staff is            providing guidance on how prior year misstatements should be taken into consideration            when quantifying misstatements in current year financial statements for purposes of            determining whether the current year’s financial statements are materially            misstated and should be restated. SAB 108 is effective for fiscal years ending after            November 15, 2006. The company does not believe SAB 108 has a material impact on its            results of operations, financial condition and cash flows.

             

In September 2006, the EITF issued EITF Abstracts Issue No. 06-3 (EITF            06-3). The EITF is providing guidance on how taxes collected from customers and            remitted to Governmental Authorities should be presented in the income statements. EITF            06-3 is effective for interim and annual periods beginning after December 15, 2006. The            company does not anticipate EITF 06-3 will have a material impact on its results of            operations, financial condition and cash flows.

             

In February 2007, the FASB issued Statement No. 159,            “*The Fair Value Option for Financial Assets and            Financial Liabilities—Including an amendment of FASB Statement No.            115*”. This Statement permits entities to choose to            measure many financial instruments and certain other items at fair value. The objective            is to improve financial reporting by providing entities with the opportunity to            mitigate volatility in reported earnings caused by measuring related assets and            liabilities differently without having to apply complex hedge accounting provisions.            This Statement is expected to expand the use of fair value measurement, which is            consistent with the Board’s long-term measurement objectives for accounting for            financial instruments. This Statement is effective for financial statements issued for            the fiscal years beginning after November 15, 2007. Management does not anticipate this            Statement will impact the Company’s consolidated financial position or            consolidated results of operations and cash flows.

             

F-15

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

 

**NOTE 3 - CASH AND CASH EQUIVALENTS**

             

As of March 31, 2007 and 2006 cash and cash equivalents            included:

             

|             | **March 31, 2007** |   | **March 31, 2006** |
|------------------|--------------------|--------|--------------------|
|             |               |   |               |
| US Dollars       | $ 8,577,949        |   | $ 50,959,064       |
| Foreign currency | 3,594,991          |   | 182,668            |
|             | **$ 12,172,940**   |   | **$ 51,141,732**   |

             

As of March 31, 2007, cash and cash equivalents included $7,702,483            placed in money market funds having a 30 day simple yield of 4.99%.

             

As of March 31, 2006, cash and cash equivalents included $11,100,262            placed in money market funds having a 30 day simple yield of 4.28%.

             

As of March 31, 2006, cash and cash equivalents included short-term debt            securities in the amount of $33,095,609. The short-term debt securities consisted of            discount bonds issued by General Electric Corporation and discount notes issued by            Fannie Mae.

             

As of March 31, 2007 and 2006 cash and cash equivalents included            $292,679 and $324,621, respectively, of letters of credit opened for the purpose of            purchasing production equipment.

             

             

**NOTE 4 - INVENTORIES**

             

As of March 31, 2007 and 2006 inventories included:

             

|                  | **March 31, 2007** |   | **March 31, 2006** |
|-----------------------|--------------------|--------|--------------------|
|                  |               |   |               |
| Construction material | $ 10,051,888       |   | $ 3,069,144        |
| Spare parts           | 31,804             |   | 13,486             |
| Crude oil produced    | 4,810              |   | 8,840              |
| Other                 | 246,194            |   | 148,477            |
|                  | **$ 10,334,696**   |   | **$ 3,239,947**    |

             

             

F-16

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

 

**NOTE 5 - PREPAID EXPENSES AND OTHER ASSETS**

             

Prepaid expenses and other assets as of March 31, 2007 and 2006, were as            follows:

             

|                                                                               | **March 31, 2007**                               |   | **March 31, 2006** |
|------------------------------------------------------------------------------------|--------------------------------------------------|--------|--------------------|
|                                                                               |                                             |   |               |
| Advances for services                                                              | $ 2,016,177                                 |   | $ 452,839     |
| Other                                                                              | 255,322                                     |   | 309,533       |
|                                                                               |                                             |   |               |
| Reserves against uncollectible advances and                            prepayments | (211,475)                                        |   | (195,452)          |
|                                                                               | **$                            2,060,024**  |   | **$566,920**  |

             

             

**NOTE 6 - OIL AND GAS PROPERTIES**

             

Oil and gas properties using the full cost method as of March 31, 2007            and 2006, were as follows:

             

|                                                                                               | **March 31, 2007**                                 |   | **March 31, 2006**                                |
|----------------------------------------------------------------------------------------------------|----------------------------------------------------|--------|---------------------------------------------------|
|                                                                                               |                                               |   |                                              |
| Cost of drilling wells                                                                             | $ 33,263,035                                  |   | $ 14,895,604                                 |
| Subsoil use rights                                                                                 | 20,788,119                                    |   | 20,788,119                                   |
| Material and fuel used in exploration and development                            activities        | 16,417,280                                    |   | 6,840,976                                    |
| Professional services received in exploration and                            developmentactivities |  

16,179,937                            |   |  

10,600,327                           |
| Deferred tax                                                                                       | 7,219,219                                     |   | 6,405,285                                    |
| Geological and geophysical                                                                         | 2,803,215                                     |   | 1,432,418                                    |
| Infrastructure development costs                                                                   | 1,753,222                                     |   | 1,412,999                                    |
| Other capitalized costs                                                                            | 9,167,016                                     |   | 5,704,210                                    |
|                                                                                               |                                               |   |                                              |
| Accumulated depletion                                                                              | (3,403,475)                                        |   | (1,396,641)                                       |
|                                                                                               | **$                            104,187,568**  |   | **$                            66,683,297**  |

             

The purchase of Emir Oil LLP (see Note 13) has been accounted for as a            non-taxable business combination. Since goodwill was not recognized in this stock based            subsidiary acquisition involving oil and gas properties, a recognition of a deferred            tax liability related to the acquisition increases the financial reporting basis of the            oil and gas properties.

             

F-17

----

 

**BMB MUNAI, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

**NOTE 7 - OTHER FIXED ASSETS**

             

|                                      | **Buildings and improvements** |   | **Machinery and equipment** |   | **Vehicles**                |   | **Office equipment**        |   | **Furniture and fixtures**  |   | **Software**       |   | **Total**                                                |
|-------------------------------------------|--------------------------------|--------|-----------------------------|--------|-----------------------------|--------|-----------------------------|--------|-----------------------------|--------|--------------------|--------|----------------------------------------------------------|
| **Cost**                                  |                           |   |                        |   |                        |   |                        |   |                        |   |               |   |                                                     |
| at March 31, 2006                         | $ 149,272                      |   | $ 372,427                   |   | $ 432,121              |   | $ 206,890              |   | $ 148,645              |   | 76,257             |   | $ 1,385,612                                         |
| Additions                                 | 176,979                        |   | 178,939                     |   | 319,981                |   | 74,263                 |   | 70,149                 |   | 4,663              |   | 824,974                                             |
| Disposals                                 | -                              |   | -                           |   | (72,909)                    |   | (3,356)                     |   | (16,961)                    |   | -                  |   | (93,226)                                                 |
| at March 31, 2007                         | 326,251                        |   | 551,366                     |   | 679,193                |   | 277,797                |   | 201,833                |   | 80,920             |   | 2,117,360                                           |
|                                      |                           |   |                        |   |                        |   |                        |   |                        |   |               |   |                                                     |
| **Accumulated depreciation**              |                           |   |                        |   |                        |   |                        |   |                        |   |               |   |                                                     |
| at March 31, 2006                         | 24,922                         |   | 26,187                      |   | 152,719                |   | 51,650                 |   | 32,926                 |   | 26,601             |   | 315,005                                             |
| Charge for the period                     | 25,224                         |   | 34,140                      |   | 134,255                |   | 66,469                 |   | 30,157                 |   | 25,992             |   | 316,237                                             |
| Disposals                                 | -                              |   | -                           |   | (27,166)                    |   | (1,302)                     |   | (4,537)                     |   | -                  |   | (33,005)                                                 |
| at March 31, 2007                         | 50,146                         |   | 60,327                      |   | 259,808                |   | 116,817                |   | 58,546                 |   | 52,593             |   | 598,237                                             |
|                                      |                           |   |                        |   |                        |   |                        |   |                        |   |               |   |                                                     |
| **Net book value at March 31, 2006**      |  

**$ 124,350**          |   |  

**$ 346,240**       |   |  

**$ 279,402**  |   |  

**$ 155,240**  |   |  

**$ 115,719**  |   |  

**49,656** |   |  

**$                            1,070,607**  |
|                                      |                           |   |                        |   |                        |   |                        |   |                        |   |               |   |                                                     |
| **Net book value at**

**March 31, 2007** |  

**$ 276,105**          |   |  

**$ 491,039**       |   |  

**$ 419,385**  |   |  

**$ 160,980**  |   |  

**$ 143,287**  |   |  

**28,327** |   |  

**$                            1,519,123**  |

             

In accordance with SFAS No. 19,*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 $145,627 was capitalized to oil and gas            properties for the year ended March 31, 2007.

             

             

**NOTE 8 - CONSTRUCTION IN PROGRESS**

             

On April 13, 2006 the Company entered into the Agreement on Joint            Business

(the “Agreement”) with Ecotechnic Chemicals AG incorporated            in Switzerland, ( “Ecotechnic”) for construction of facility on utilization            of associated gas on the Company’s fields (the “Facility”). After            completion of the Facility construction, the Company and Ecotechnic will sign the            agreement on the formation of a joint venture company, which will operate the            Facility.

             

In accordance with terms of the Agreement, the Company has made payments            of

USD $4,463,063 for development of project documentation, purchase of            equipment, transportation and customs, and construction of a gas pipe-line.

             

             

**NOTE 9 - LONG TERM VAT RECOVERABLE**

             

As of March 31, 2007 and 2006 the Company had long term VAT recoverable            in the amount of $4,351,059 and $1,335,971, respectively. The VAT recoverable is a            Tenge denominated asset due from the Republic of Kazakhstan. The VAT

             

F-18

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

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 believes that this asset will not 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. This examination is            not expected to be completed in the following year.

             

             

**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, 2007 and            2006 the Company has amounts of $303,697 and $156,454, respectively, restricted for            this purpose.

             

             

**NOTE 11 - LIQUIDATION FUND**

             

A reconciliation on the Liquidation Fund (Asset Retirement Obligation)            at March 31, 2007, 2006 and 2005 is as follows:

             

|                   | **Total**   |
|------------------------|-------------|
|                   |        |
| At March 31, 2005      | $ 60,973    |
|                   |        |
| Revision of estimation | 699,174     |
| Accrual of liability   | 158,843     |
| Accretion expense      | 5,602       |
|                   |        |
| At March 31, 2006      | 924,592     |
|                   |        |
| Accrual of liability   | 1,067,718   |
| Accretion expenses     | 173,519     |
|                   |        |
| At March 31, 2007      | $ 2,165,829 |

             

Management believes that the liquidation fund should be accrued for            future abandonment costs of 10 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.

             

At March 31, 2007, undiscounted expected future cash flows that will be            required to satisfy the Company’s obligation by 2007 for the Dolinnoe, Aksaz and            Emir fields, respectively, are $2,355,006. After application of a 10% discount rate,            the present value of the Company’s liability at March 31, 2007 and 2006, is            $2,165,829 and $924,592, respectively.

 

F-19

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

 

**NOTE 12 - INCOME TAXES**

             

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

             

|                 | **Year ended March 31, 2007** |   | **Year ended**

**March 31, 2006**                                                                     |   | **Year ended March 31, 2005**                                                        |   |
|----------------------|-------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|
|                 |                          |   |                                                                                                   |   |                                                                                 |   |
| Current tax expense  | $ 124,202                     |   | $                                        - |   | $                                 -     |   |
| Deferred tax expense | 729,078                       |   | 35,043                                                                                                 |   | 343                                                                                  |   |
|                 | **$ 853,280**                 |   | **$ 35,043**                                                                                           |   | **$ 343**                                                                            |   |

             

The relationship between tax expenses and accounting income for the            years ended March 31, 2007, 2006 and 2005 is explained as follows:

             

|                                | **Year ended March 31, 2007** |   | **Year ended**

**March 31, 2006** |   | **Year ended**

**March 31, 2005** |   |
|-------------------------------------|-------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                                |                          |   |                               |   |                               |   |
| Income / (loss) before income taxes |  

$ 1,892,771           |   |  

$ (5,309,290)              |   |  

$ (3,285,969)              |   |
|                                |                          |   |                               |   |                               |   |
| Expected tax provision              | 643,542                       |   | (1,592,787)                        |   | (985,791)                          |   |
|                                |                          |   |                               |   |                               |   |
| Local tax, current                  | 124,202                       |   | -                             |   | -                             |   |
| Non-deductible expenses             | 32,322                        |   | 2,077,723                     |   | 976,961                       |   |
| Other                               | 53,214                        |   | (449,893)                          |   | 9,173                         |   |
|                                | **$ 853,280**                 |   | **$ 35,043**                  |   | **$ 343**                     |   |

             

As of March 31, 2007, the Company had net operating loss carry forwards            for income tax purposes of $8,866,813, which if unused, will expire in 2024, 2025, 2026            and 2027.

             

F-20

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

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, 2007**                |   | **March 31, 2006**                                                                                                              |
|----------------------------|-----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|                       |                              |   |                                                                                                                            |
| Deferred tax assets:       |                              |   |                                                                                                                            |
| Stock based compensation   |    $ 185,418            |   | $                                             - |
| Liquidation fund           |    100,673              |   |   -                                                                                                                        |
| Tax losses carried forward |    3,014,716            |   |    593,122                                                                                                            |
|                       |    3,300,807            |   |    593,122                                                                                                            |
| Deferred tax liabilities:  |                              |   |                                                                                                                            |
| Oil and gas properties     | 10,361,091                   |   | 6,636,522                                                                                                                  |
| Accrued interest income    | 888,013                      |   | 361,885                                                                                                                    |
|                       |     11,249,104     |   |    6,998,407                                                                                                          |
| Net deferred tax liability | **   $ 7,948,297** |   | ** $ 6,405,285**                                                                                                           |

             

Deferred income taxes for US and Kazakhstan tax jurisdiction are as            follows:

             

|                       | **March 31, 2007**                            |   | **March 31, 2006**                                                                                                             |
|----------------------------|-----------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|                       | **US tax jurisdiction**                       |   | **Kazakhstan tax jurisdiction**                                                                                                |   | **US tax jurisdiction** |   | **Kazakhstan tax jurisdiction** |
|                       |                                          |   |                                                                                                                           |   |   |   |   |
| Deferred tax assets:       |                                          |   |                                                                                                                           |   |   |   |   |
| Stock based compensation   | $       185,418 |   | $                                            - |   | $                                            - |   | $                                          - |
| Liquidation fund           | -                                             |   | 100,673                                                                                                                        |   | - |   | - |
| Tax losses carried forward | 3,014,716                                     |   | -                                                                                                                              |   | 583,329 |   | 9,793 |
|                       | 3,200,134                                     |   | 100,673                                                                                                                        |   | 583,329 |   | 9,793 |
| Deferred tax liabilities:  |                                          |   |                                                                                                                           |   |   |   |   |
| Oil and gas properties     | 6,990,851                                     |   | 3,370,240                                                                                                                      |   | 6,369,899 |   | 266,623 |
| Accrued interest income    | 888,013                                       |   | -                                                                                                                              |   | 361,885 |   | - |
|                       | 7,878,864                                     |   | 3,370,240                                                                                                                      |   | 6,731,784 |   | 266,623 |
|                       |                                          |   |                                                                                                                           |   |   |   |   |
| Net deferred tax liability | **$ 4,678,730**                               |   | **$ 3,269,567**                                                                                                                |   | **$ 6,148,455** |   | **$ 256,830** |

             

Adeferred tax liability from oil and gas            properties for the US tax jurisdiction was also recorded during this year. This            liability resulted from a temporary difference related to the oil and gas basis from            the non-taxable business combination with Emir Oil LLP (see Note 6).

             

F-21

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

 

**NOTE 13 - SHARE AND ADDITIONAL PAID IN CAPITAL**

             

Common and preferred stock as of March 31, 2007 and 2006 were as            follows:

             

|                                  | **March 31, 2007** |   | **March 31, 2006** |
|---------------------------------------|--------------------|--------|--------------------|
| **Preferred stock, $0.001 par value** |               |   |               |
| Authorized                            | 20,000,000         |   | 20,000,000         |
| Issued and outstanding                | -                  |   | -                  |
|                                  |               |   |               |
| **Common stock, $0.001 par value**    |               |   |               |
| Authorized                            | 500,000,000        |   | 100,000,000        |
| Issued and outstanding                | 44,690,657         |   | 42,223,685         |

             

On June 21, 2006, the Company filed a Certificate of Amendment to the            BMB Munai, Inc. Articles of Incorporation with the Nevada Secretary of State to            increase the Company’s authorized common stock from 100,000,000 to 500,000,000            shares. Authorized preferred stock remained unchanged.

             

*Acquisition*

             

On May 24, 2004, the Company agreed to purchase the remaining 30%            interest of its minority interest partner in Emir Oil LLP in exchange for 3,500,000            shares of restricted Company common stock. On August 6, 2004, the Company issued the            3,500,000 shares to its minority partner in Emir Oil LLP. The aggregate purchase price            was determined to be $19,075,000 using a price of the Company’s common shares on            OTCBB on August 6, 2004 of $5.45 per share. The entire purchase price has been            allocated to oil and gas properties in the accompanying Consolidated Balance            Sheets.

             

*Private placements*

             

On July 2, 2004, the Company sold an aggregate of 4,584,340 common            shares of the Company at $4.00 per share in a private placement offering. The Company            received $17,311,906, net of the agent fees and out of pocket expenses.

             

On March 9, 2005, the Company sold an aggregate of 2,000,000 common            shares of the Company at $5.00 per share in a private placement offering. The Company            received $9,968,254, net of the agent fees and out of pocket expenses.

             

On March 31, 2005, the Company sold an aggregate of 1,101,000 common            shares of the Company at $5.00 per share in a private placement offering. On April 12,            2005, the Company received $5,221,685, net of the agent fees and out of pocket            expenses.

             

On December 23, 2005, the Company sold an aggregate of 9,166,667 common            shares of the Company at $6.00 per share in a private placement offering. On December            29, 2005, the Company received $52,189,207, net of the agent fees and out of pocket            expenses.

 

F-22

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

             

Common stock sold in private placements as of March 31, 2007 is as            follows:

             

|                     | **Number of shares sold** |   | **Share price** |   | **Gross amount raised** |   | **Net amount received** |
|--------------------------|---------------------------|--------|-----------------|--------|-------------------------|--------|-------------------------|
|                     |                      |   |            |   |                    |   |                    |
| First private placement  | 4,830,494                 |   | $ 2.15-$ 2.50   |   | $ 11,113,562            |   | $ 9,935,874             |
| Second private placement | 4,584,340                 |   | $ 4.00          |   | 18,337,360              |   | 17,311,906              |
| Third private placement  | 3,101,000                 |   | $ 5.00          |   | 15,505,000              |   | 15,189,939              |
| Fourth private placement | 9,166,667                 |   | $ 6.00          |   | 55,000,002              |   | 52,189,207              |
|                     | **21,682,501**            |   |            |   | **$ 99,955,924**        |   | **$ 94,626,926**        |

             

The offerings were made only to accredited investors in the United            States of America under Regulation D and pursuant to Regulation S to non-U.S.            Persons.

             

*Share-Based Compensation*

             

During the fiscal year ended March 31, 2005 the shareholders of the            Company approved an incentive stock option plan (the “Plan”) under which            directors, officers and key personnel may be granted options to purchase common shares            of the Company, as well as other stock based awards. 5,000,000 common shares were            reserved for issuance under the Plan. The Board determines the terms of options and            other awards made under the Plan. Under the terms of the Plan, no incentive stock            options shall be granted with an exercise price at a discount to the market.

             

**Common Stock**

             

On July 18, 2005, the Company granted 90,000 restricted common shares to            three Company employees. Each employee’s stock grants vest in three equal            tranches of 10,000 shares on the first, second and third anniversaries of their            employment with the Company. We record the fluctuations in the fair value of certain            unvested stock grants as a deferred compensation asset (reported as a reduction of            shareholders’ equity on the balance sheet). This asset is amortized upon vesting            of related stock grants as non-cash compensation expense. Compensation expense for            vested stock grants in the amount of $124,477 has been recognized in the Consolidated            Statement of Operations and Consolidated Balance Sheet for the year ended March 31,            2007.

             

As of March 31, 2007, there was $31,523 of total unrecognized            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 0.6 years.

             

On July 18, 2005, the Company granted common shares to Company’s            directors and officers for past services rendered. The number of shares granted was            360,270. The shares were valued at $4.75 per share. This stock grant vested            immediately. Compensation expense in the amount of $1,711,283 was recognized in            the

             

F-23

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

Consolidated Statements of Operations and Consolidated Balance Sheet for            the year ended March 31, 2006.

             

On July 18, 2005, the Company also granted common shares to legal            counsel, for the legal services rendered. The number of such stock grants has been set            at 18,947 shares at the price of $4.75 per share. Stock grants vest immediately.            Expense in the amount of $89,998 was recognized in the Consolidated Statements of            Operations and Consolidated Balance Sheet for the year ended March 31, 2006.

             

During the quarter ended September 30, 2005, the Company granted            restricted common shares to the Company’s former co-chief executive officer and            president for services rendered. He was granted 70,526 shares. The shares were valued            at $5.02 per share. The stock grants vested immediately. Compensation expense in the            amount of $354,041 was recognized in the Consolidated Statements of Operations and            Consolidated Balance Sheet for the year ended March 31, 2006.

             

On February 1, 2006, the Company also granted common shares to the            Company’s former chief finance officer for the services rendered. He was granted            50,000 shares. The shares were valued at $7.4 per share. The stock grants vested            immediately. Compensation expense in the amount of $370,000 was recognized in the            Consolidated Statement of Operations and Consolidated Balance Sheet for the year ended            March 31, 2006.

             

On June 20, 2006, the Company granted common stock to officers and            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. All of the restricted stock grants vested            immediately upon grant. Compensation expense in the amount of $3,465,000 was recognized            in the Consolidated Statements of Operations and Consolidated Balance Sheet.

             

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 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 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

             

F-24

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

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.

             

As of March 31, 2007, there was $5,111,000 of total unrecognized            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 2.25 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. The options will expire three years from the            grant date. All of the options vested immediately upon grant. Compensation expense for            options granted is determined based on their fair values 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.

             

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.

             

F-25

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

Stock options outstanding and exercisable as of March 31, 2007, were as            follows:

             

|                     |  

**Number of Shares** |   | **Weighted Average Exercise**

**Price** |
|--------------------------|------------------------------|--------|------------------------------------------|
|                     |                         |   |                                     |
| **As of March 31, 2006** | **980,783**             |   | **$ 4.97**                               |
|                     |                         |   |                                     |
| Granted                  | 200,000                 |   | 7.00                                     |
| Exercised                | (7,200)                      |   | 4.00                                     |
| Expired                  | -                       |   | -                                        |
|                     |                         |   |                                     |
| **As of March 31, 2007** | **1,173,583**           |   | **$ 5.33**                               |

             

Additional information regarding outstanding options as of March 31,            2007, was as follows:

             

| **Options Outstanding**           |   | **Options Exercisable** |
|-----------------------------------|--------|-------------------------|
| **Range of****Exercise****Price** |   | **Options**             |   | **Weighted****Average****Exercise Price** |   | **Weighted****Average****Contractual****Life (years)** |   | **Options** |   | **Weighted****Average****Exercise****Price** |
|                              |   |                    |   |   |   |   |   |   |   |   |
| $ 4.00 – $ 7.40              |   | 1,173,583               |   | $ 5.33 |   | 4.15 |   | 1,173,583 |   | $ 5.33 |

             

The estimated fair value of the stock options issued were determined            using Black-Scholes option pricing model with the following assumptions:

             

|                                                                                             | **Year ended March 31, 2007** |   | **Year ended March 31, 2006** |
|--------------------------------------------------------------------------------------------------|-------------------------------|--------|-------------------------------|
|                                                                                             |                          |   |                          |
| Risk-free interest rate                                                                          | 5.19%                         |   | 4.01% - 4.51%                 |
| Expected option life                                                                             | 2 years                       |   | 2 – 4 year              |
| Expected volatility in the price of the Company’s                            common shares | 65%                           |   | 65% - 74%                     |
| Expected dividends                                                                               | 0%                            |   | 0%                            |
|                                                                                             |                          |   |                          |
| Weighted average fair value of options and warrants                            granted           |                          |   |                          |
| during the period                                                                                | $2.73                         |   | $2.01 - $3.92                 |

             

**Warrants**

             

On April 12, 2005, the Company granted warrants to placement agents in            connection with funds raised on the Company’s behalf. These warrants granted the            placement agents the right to purchase up to 110,100 shares of the Company’s            common stock at an exercise price of $5.00 per share. These warrants have been offset            to the proceeds as a cost of capital. In October 2005, warrants to purchase 60,000            shares were exercised. In April 2006, the remaining warrants to purchase 50,100 shares            were exercised.

             

F-26

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

On December 31, 2005, the Company granted warrants to placement agents            in connection with funds raised on the Company’s behalf. These warrants granted            the placement agents the right to purchase up to 916,667 shares of the Company’s            common stock at an exercise price of $6.00 per share. These warrants have been offset            to the proceeds as a cost of capital. On May 13, 2006, these warrants were            exercised.

             

Warrants outstanding and exercisable as of March 31, 2007 were as            follows:

             

|                     |  

**Number of Shares** |   | **Weighted Average Exercise**

**Price** |
|--------------------------|------------------------------|--------|------------------------------------------|
|                     |                         |   |                                     |
| **As of March 31, 2006** | **1,109,624**           |   | **$ 5.63**                               |
|                     |                         |   |                                     |
| Granted                  | -                       |   | -                                        |
| Exercised                | (966,767)                    |   | 5.95                                     |
| Expired                  | -                       |   | -                                        |
|                     |                         |   |                                     |
| **As of March 31, 2007** | **142,857**             |   | **$ 3.50**                               |

             

Additional information regarding warrants outstanding as of March 31,            2007 is as follows:

             

| **Warrants Outstanding**       |   | **Warrants Exercisable** |
|--------------------------------|--------|--------------------------|
| **Range of****Exercise Price** |   | **Warrants**             |   | **Weighted****Average****Exercise****Price** |   | **Weighted****Average Contractual****Life (years)** |   | **Warrants** |   | **Weighted****Average****Exercise****Price** |
|                           |   |                     |   |   |   |   |   |   |   |   |
| $ 3.50                         |   | 142,857                  |   | $3.50 |   | 5.01 |   | 142,857 |   | $3.50 |

             

             

**NOTE 14 - REVENUES**

             

|           |   | **Year ended                            March 31, 2007** |   | **Year ended                            March 31, 2006** |   | **Year ended                            March 31, 2005**                                                                       |
|----------------|--------|----------------------------------------------------------|--------|----------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|           |   |                                                     |   |                                                     |   |                                                                                                                           |
| Export sales   |   | $   15,785,784                       |   | $   1,592,315                        |   | $                                          -   |
| Domestic sales |   | -                                              |   | 4,364,416                                      |   | 973,646                                                                                                              |
|           |   | **$                            15,785,784**    |   | **$                            5,956,731**     |   | **$                            973,646**                                                                             |

             

F-27

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

 

**NOTE 15 - EARNINGS PER SHARE INFORMATION**

             

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

             

|          |                                                                                       | **Year ended March 31,                            2007** |   | **Year ended March 31, 2006** |   | **Year ended March 31, 2005** |
|---------------|--------------------------------------------------------------------------------------------|----------------------------------------------------------|--------|-------------------------------|--------|-------------------------------|
|          |                                                                                       |                                                     |   |                          |   |                          |
|          | Net income / (loss)                                                                        | $ 1,039,491                                              |   | $(5,344,333)                  |   | $(3,286,312)                  |
|          |                                                                                       |                                                     |   |                          |   |                          |
|          | Basic weighted-average common shares                              outstanding    |  

43,523,907                                       |   |  

34,867,642       |   |  

26,948,437       |
|          |                                                                                       |                                                     |   |                          |   |                          |
|          | Effect of dilutive securities                                                              |                                                     |   |                          |   |                          |
| Warrants      | 63,492                                                                                     |                                                     | -      |                          | -      |
| Stock options | 240,409                                                                                    |                                                     | -      |                          | -      |
|          |                                                                                       |                                                     |   |                          |   |                          |
|          | Dilutive weighted average common shares                              outstanding |  

43,827,808                                       |   |  

34,867,642       |   |  

26,948,437       |
|          |                                                                                       |                                                     |   |                          |   |                          |
|          | Basic income / (loss) per common share                                                     | 0.02                                                     |   | (0.15)                        |   | (0.12)                        |
|          |                                                                                       |                                                     |   |                          |   |                          |
|          | Dilutive income / (loss) per common share                                                  | 0.02                                                     |   | (0.15)                        |   | (0.12)                        |
|          |                                                                                       |                                                     |   |                          |   |                          |
|               |                                                                                            |                                                          |        |                               |        |                               |  |  |

             

             

**NOTE 16 - 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, 2007, 2006 and 2005, totaled $203,686, $276,055 and $218,428, respectively.            Also the Company had accounts payable to Term Oil LLC in the amount of $29,885 and            $76,004 as of March 31, 2007 and 2006, respectively. One of our shareholders is an            owner of Term Oil LLC.

             

The future minimum rental payments required under this operating lease            are as follows:

             

| March 31, 2008 | $   239,076 |
|----------------|-----------------------|
| March 31, 2009 | 239,076               |
| March 31, 2010 | 179,307               |
| **Total**      | **$ 657,459**         |

             

During fiscal 2007, 2006 and 2005 the Company and Subsidiary both            maintained bank accounts with Bank CenterCredit. During the fiscal years ended March            31, 2007, 2006 and 2005 expenses for banking services rendered by Bank CenterCredit            totaled $36,167, $47,185 and $19,777 respectively. One of our shareholders is a            Chairman of the Board of Directors of Bank CenterCredit.

             

F-28

----

 

**BMB MUNAI, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

             

**NOTE 17 - COMMITMENTS AND CONTINGENCIES**

             

*Historical investments by the Government of the Republic of            Kazakhstan*

             

The Government of the Republic of Kazakhstan made historical investments            in the ADE Block in total amount of $5,994,200 in relation to ADE Block and $5,350,680            in relation to the Extended Territory. When the Company applies for and is granted            commercial production rights for the ADE Block and Extended Territory, the Company will            be required to begin repaying these historical investments to the Government of the            Republic of Kazakhstan. The terms of repayment will be negotiated at the time the            Company applies for commercial production rights.

             

*Capital Commitments*

             

Under the terms of its subsurface exploration contract, Emir Oil LLP is            required to spend a total of $48.7 million in exploration and development activities on            the ADE Block and the Extended Territory. To retain its rights under the contract, the            Company must spend a minimum of $12.7 million in 2007, $8.5 million in 2008 and $70            thousand in 2009. The Company must also comply with the terms of the work program            associated with the contract, which includes the drilling of at least nine additional            new wells by July 9, 2009. The Company received approval to extend the subsurface            exploration contract to July 2009. 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.

             

*Litigation*

             

In December 2003, Brian Savage, Thomas Sinclair and Sokol Holdings,            Inc., filed a lawsuit in Florida naming the Company and some of its former officers and            directors as defendants. The plaintiffs in the case alleged 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 plaintiffs seek            unspecified compensatory and exemplary damages. The parties have mutually agreed to            dismiss this lawsuit without prejudice.

             

In April 2005, Sokol Holdings, Inc., filed a complaint in United States            District Court, Southern District of New York alleging that the Company, and others,            wrongfully induced Mr. Tolmakov, Director of Emir Oil, to breach a contract under            which Mr. Tolmakov had agreed to sell to Sokol 70% of his 90% interest in Emir Oil            LLP. Sokol Holdings, Inc. seeks damages in an unspecified amount exceeding $75,000 to            be determined at trial, punitive damages, specific performance in the form of an order            compelling BMB to relinquish its interest in Emir and the underlying interest in the            ADE fields to Sokol Holdings, Inc. and such other relief as the court finds just and            reasonable.

 

F-29

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

             

In October 2005, Sokol Holdings amended its complaint in New York to add            Brian Savage and Thomas Sinclair as plaintiffs and adding Credifinance Capital, Inc.,            and Credifinance Securities, Ltd., (collectively “Credifinance”) as            defendants in the matter. The amended complaint alleges tortious interference with            contract, specific performance, breach of contract, unjust enrichment, breach of            fiduciary duty, conversion, misappropriation of trade secrets, tortuous interference            with fiduciary duty and aiding and abetting breach of fiduciary duty 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 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.

             

The Company is confident that the matters shall be resolved in the            Company’s favor. The Company has retained legal counsel to protect its interests.            In the opinion of the Company’s management and legal counsel, the resolution of            those lawsuits will not have a material adverse effect on Company’s financial            condition, results of operations or cash flows.

             

             

**NOTE 18 - FINANCIAL INSTRUMENTS**

             

As of March 31, 2007 and 2006 cash and cash equivalents included            deposits in Kazakhstan banks in the amount $4,181,698 and $3,881,255, respectively and            deposits in U.S. banks in the amount of $7,991,242 and $14,164,868, respectively. As of            March 31, 2007 and 2006 cash and cash equivalents also included the marketable            securities of $0 and $33,095,609, respectively, consisted of discount bonds issued by            General Electric Corporation and discount notes issued by Fannie Mae. 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, 2007 and 2006. Our deposits in the U.S.            banks are also in non-FDIC insured accounts which means they too are not insured to the            $100,000 FDIC insurance limit. To mitigate this risk, we have placed all of our U.S.            deposits in a money market account that invests in U.S. government backed securities.            As of March 31, 2007 and 2006 the Company made advance payments to Kazakhstan companies            and government bodies in the amount $7,115,297 and $2,473,985, respectively. As of            March 31, 2007 and 2006 restricted cash reflected in the long-term assets consisted of            $303,697 and $156,454, 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.

             

             

**NOTE 19 - QUARTERLY FINANCIAL DATA (unaudited)**

             

Quarterly financial information is presented in the following            summary:

 

F-30

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

             

|                                          | **Year ended March 31, 2007** |
|-----------------------------------------------|-------------------------------|
|                                          | **June 30,**

**2006**        |   | **September 30, 2006** |   | **December 31, 2006** |   | **March 31,**

**2007** |
|                                          |                          |   |   |   |   |   |   |
| Revenues                                      | $ 2,345,972              |   | $ 4,016,972 |   | $ 2,214,382  |   | $ 7,208,458 |
| Income/(loss) from   operations     |  

(3,751,840)           |   |  

992,732 |   |  

(275,654) |   |  

3,439,605 |
| Net income/(loss)                             | (3,140,761)                   |   | 1,016,352 |   | (90,861) |   | 3,254,761 |
| Basic net income/(loss) per   share |  

(0.08)                |   |  

0.02 |   |  

0.00  |   |  

0.07 |
| Diluted net income per share                  | $ (0.08)                      |   | $ 0.02 |   | $ 0.00  |   | $ 0.07 |

             

|                                          | **Year ended March 31, 2006** |
|-----------------------------------------------|-------------------------------|
|                                          | **June 30,**

**2005**        |   | **September 30, 2005** |   | **December 31, 2005** |   | **March 31,**

**2006** |
|                                          |                          |   |   |   |   |   |   |
| Revenues                                      | $ 662,637                |   | $ 1,385,336  |   | $ 2,058,792  |   | $ 1,849,966  |
| Income/(loss) from   operations     |  

(639,090)             |   |  

(4,029,892) |   |  

(167,650) |   |  

(1,112,538) |
| Net income/(loss)                             | (697,651)                     |   | (3,885,457) |   | (52,942) |   | (708,283) |
| Basic net income/(loss) per   share |  

(0.02)                |   |  

(0.12) |   |  

0.00  |   |  

(0.02) |
| Diluted net income per share                  | $ (0.02)                      |   | $ (0.12) |   | $ 0.00  |   | $ (0.02) |

             

|                                          | **Year ended March 31, 2005** |
|-----------------------------------------------|-------------------------------|
|                                          | **June 30,**

**2004**        |   | **September 30, 2004** |   | **December 31, 2004** |   | **March 31,**

**2005** |
|                                          |                          |   |   |   |   |   |   |
| Revenues                                      | $ 118,949                |   | $ 173,038  |   | $ 55,904  |   | $ 625,755  |
| Income/(loss) from   operations     |  

(473,884)             |   |  

(740,844) |   |  

(1,288,996) |   |  

(1,285,810) |
| Net income/(loss)                             | (602,206)                     |   | (607,527) |   | (844,413) |   | (1,232,166) |
| Basic net income/(loss) per   share |  

(0.03)                |   |  

(0.02) |   |  

(0.03) |   |  

(0.04) |
| Diluted net income per share                  | $ (0.03)                      |   | $ (0.02) |   | $ (0.03) |   | $ (0.04) |

             

             

**NOTE 20 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS**

             

There were no material fourth quarter adjustments or accounting            changes.

 

F-31

 

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

 

**NOTE 21 - SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND NATURAL GAS            EXPLORATION DEVELOPMENT AND PRODUCTION ACTIVITIES (unaudited)**

             

This footnote provides unaudited information required by SFAS No. 69,            “*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            center.

             

***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:

             

|                                                            | **March 31, 2007**  |   | **March 31, 2006**  |
|-----------------------------------------------------------------|---------------------|--------|---------------------|
|                                                            |                |   |                |
| Developed oil and natural gas properties                        | $ 82,311,230   |   | $ 68,079,938   |
| Unevaluated oil and natural gas properties                      | 25,279,813     |   | -              |
| Accumulated depletion, depreciation and  amortization |  

(3,403,475) |   |  

(1,396,641) |
| Net capitalized cost                                            | $ 104,187,568  |   | $ 66,683,297   |

             

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

             

|                   |   | **For the year ended March 31, 2007**                                                                                          |   | **For the year ended March 31, 2006**                                                                                          |   | **For the year ended**

**March 31, 2005**                                                                                     |
|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                                           |   |                                                                                                                           |   |                                                                                                                           |
| Acquisition costs:     |   |                                                                                                                           |   |                                                                                                                           |   |                                                                                                                           |
| Unproved properties    |   | $                                            - |   | $                                            - |   | $                                            - |
| Proved properties      |   | -                                                                                                                              |   | -                                                                                                                              |   | 19,075,000                                                                                                                     |
| Exploration costs      |   | 1,370,797                                                                                                                      |   | 3,453,603                                                                                                                      |   | 713,220                                                                                                                        |
| Development costs      |   | 37,063,321                                                                                                                     |   | 14,368,323                                                                                                                     |   | 16,687,432                                                                                                                     |
| Subtotal               |   | 38,434,118                                                                                                                     |   | 17,821,926                                                                                                                     |   | 36,475,652                                                                                                                     |
| Asset retirement costs |   | 1,076,987                                                                                                                      |   | 856,302                                                                                                                        |   | 60,973                                                                                                                         |
| Total costs incurred   |   | $ 39,511,105                                                                                                                   |   | $ 18,678,228                                                                                                                   |   | $ 36,536,625                                                                                                                   |

 

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

 

F-32

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

|                                                                                   |   | **For the year ended**

**March 31, 2007**                                                   |   | **For the year ended**

**March 31, 2006**                                                  |   | **For the year ended**

**March 31, 2005**                                                |
|----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|
|                                                                                   |   |                                                                                         |   |                                                                                        |   |                                                                                      |
| Oil and natural gas revenues                                                           |   |  

$ 15,785,784                                                                         |   |  

$ 5,956,731                                                                         |   |  

$ 973,646                                                                         |
|                                                                                   |   |                                                                                         |   |                                                                                        |   |                                                                                      |
| Operating expenses:                                                                    |   |                                                                                         |   |                                                                                        |   |                                                                                      |
| Oil and natural gas operating expenses and ad valorem                            taxes |   |  

                             

2,272,251                                        |   |  

                             

875,319                                         |   |  

                             

406,361                                       |
| Accretion expense                                                                      |   |  

173,519                                                                              |   |  

5,602                                                                               |   |  

-                                                                                 |
| Depletion expense                                                                      |   |  

2,006,834                                                                            |   |  

1,167,235                                                                           |   |  

229,406                                                                           |
| Results of operations from oil and gas producing                            activities |   |  

                             

                             

$ 11,333,180 |   |  

                             

                             

$ 3,908,575 |   |  

                             

                             

$ 337,879 |

             

***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, are summarized below:

             

|                                                                                                                |   | **Oil, Condensate and Natural Gas                            Liquids**

**(MBbls)** |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|
|                                                                                                                |   | **For the year ended**

**March 31,                            2007**               |   | **For the year ended**

**March 31,                            2006** |   | **For the year ended**

**March 31, 2005** |
| Proved developed and   undevelopedreserves                                                                |   |                                                                                |   |   |   |   |
| Beginning of the year                                                                                               |   | 13,748,000                                                                     |   | 13,160,000  |   | -  |
| Revisions of previous                                     estimates    |   |  

(916,007)                                                                   |   |  

830,522  |   |  

-  |
| Purchase of oil and gas                                     properties |   | -                                                                              |   | -  |   | -  |
| Extensions and discoveries(1)                                                                                       |   | 2,770,000                                                                      |   | -  |   | 13,228,755  |
| Sales of properties                                                                                                 |   | -                                                                              |   | -  |   | -  |
| Production                                                                                                          |   | (321,993)                                                                           |   | (242,522) |   | (68,755) |
|                                                                                                                |   |                                                                                |   |   |   |   |
| End of year                                                                                                         |   | 15,280,000                                                                     |   | 13,748,000  |   | 13,160,000  |
|  

Proved developed reserves at year                              end                                |   |  

                             

11,852,000                         |   |  

                             

11,168,000  |   |  

                             

10,580,000  |

             

 

F-33

----

****BMB MUNAI, INC.****

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS **

 

 

|   | (1) | During the year ended March 31, 2007 we drilled one well                            (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 our estimated proved developed reserves of approximately 2.7 million                            BOE (barrels of oil equivalent) and no increase in our 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,            2007, 2006 and 2005 is shown below:

             

|                                                                                |   | **For the year ended**

**March 31, 2007**                |   | **For the year ended**

**March 31, 2006**                |   | **For the year ended**

**March 31, 2005**               |
|-------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------------------------------------------------------|
|                                                                                |   |                                                      |   |                                                      |   |                                                     |
| Future cash inflows                                                                 |   | $ 573,808,000                                             |   | $ 493,223,000                                             |   | $ 274,607,000                                            |
| Future oil and natural gas   operatingexpenses                            |   |  

72,650,000                                        |   |  

52,092,000                                        |   |  

46,442,000                                       |
| Future development costs                                                            |   | 18,200,000                                                |   | 6,800,000                                                 |   | 7,750,000                                                |
| Future income tax expense                                                           |   | 166,470,000                                               |   | 199,113,000                                               |   | 134,848,000                                              |
| Future net cash flows                                                               |   | 316,488,000                                               |   | 235,218,000                                               |   | 85,567,000                                               |
| 10% discount factor                                                                 |   | 145,223,000                                               |   | 132,573,000                                               |   | 58,046,000                                               |
| Standardized measure of discounted future net cash                            flows |   |  

                             

$ 171,265,000 |   |  

                             

$ 102,645,000 |   |  

                             

$ 27,521,000 |

             

Our standardized measure of discounted future net cash flows relating to            proved oil reserves was prepared in accordance with the provisions of SFAS 69. 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. 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.

             

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, 2007** |   | **For the year                            ended**

**March 31, 2006** |   | **For the year ended**

**March 31, 2005** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------------------------------------------|
|                                                                                                                                                                                         |   |                                       |   |                                                                  |   |                                       |
| Changes due to current year                              operations:                                                                                                               |   |                                       |   |                                                                  |   |                                       |
| Sales of oil and natural gas, net of                                 oiland natural gas                            operating      expenses |   |  

$ (13,513,533)                     |   |  

$ (5,127,217)                                                 |   |  

$ (569,020)                        |
| Sales of oil and natural gas                                 properties                                                                                             |   | -                                          |   | -                                                                |   | -                                     |
| Purchase of oil and gas properties                                                                                                                                                           |   | -                                     |   | -                                                                |   | -                                     |
| Extensions and discoveries(1)                                                                                                                                                                |   | 75,090,000                            |   | -                                                                |   | 77,847,020                            |
| Net change in sales and transfer prices, net of                            production costs                                                                                                  |   | (5,992,120)                                |   | 67,650,993                                                       |   | -                                     |
| Changes due to revisions of                              standardizedvariables                                                                                                     |   | -                                     |   | -                                                                |   | -                                     |
| Prices and operating expenses                                                                                                                                                                |   | -                                     |   | -                                                                |   | -                                     |
| Revisions to previous quantity                                 estimates                                                                                            |   | (11,949,945)                               |   | 9,199,160                                                        |   | -                                     |
| Estimated future development                                 costs                                                                                                  |   | (5,419,716)                                |   | 409,194                                                          |   | -                                     |
| Income taxes                                                                                                                                                                                 |   | 5,206,000                             |   | (34,678,000)                                                          |   | (49,757,000)                               |
| Accretion of discount                                                                                                                                                                        |   | 10,264,500                            |   | 2,752,100                                                        |   | -                                     |
| Production rates (timing)                                                                                                                                                                    |   | 2,268,615                             |   | 25,929,078                                                       |   | -                                     |
| Other                                                                                                                                                                                        |   | 12,666,199                            |   | 8,988,692                                                        |   | -                                     |
| Net Change                                                                                                                                                                                   |   | 68,620,000                            |   | 75,124,000                                                       |   | 27,521,000                            |
| Beginning of year                                                                                                                                                                            |   | 102,645,000                           |   | 27,521,000                                                       |   | -                                     |
| End of year                                                                                                                                                                                  |   | $ 171,265,000                         |   | $ 102,645,000                                                    |   | $ 27,521,000                          |

             

|   | (1) | The addition of the Kariman structure during the year                            ended March 31, 2007 resulted in an increase in our estimated proved                            reserves pre-tax PV-10 of approximately $75 million (present value of                            future net revenues before income taxes discounted at 10%). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

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-34