**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

| **For Annual and Transition Reports pursuant to  Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|---------------------------------------------------------------------------------------------------------------------|
|                                                                                                                |
| **(Mark  One)**                                                                                                     |
|                                                                                                                |
| **ý****  Annual  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**    |
|                                                                                                                |
| **For the fiscal year ended**                                                                                       |
| **December 31, 2003**                                                                                          |
|                                                                                                                |
| **o****  Transition  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**     |
|                                                                                                                |
| **Commission File Number: 333-60960**                                                                               |

 

**TransmeridianExploration, Inc.**

(Exact name of Registrant as specified inits charter)

 

| **Delaware**                                             |   | **76-0644935**                          |
|----------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of  incorporation)          |   | (I.R.S. Employer Identification Number) |
|                                                     |   |                                    |
| **397 N. Sam Houston Pkwy E, Suite 300  Houston, Texas** |   | **77060**                               |
| (Address of principal executive office)                  |   | (Zip Code)                              |

 

Registrant’s telephone number, including areacode:  **(281)999-9091**

 

Securities registered pursuant toSection 12(b) of the Exchange Act: **None.**

 

Securities registered pursuant toSection 12(g) of the Exchange Act: **None.**

 

Check whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90days.              Yes  ý        No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form10-K.           ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of theAct).  Yes  o   No  ý

 

The aggregate market value of the common stock heldby non-affiliates of the Registrant was approximately $12,754,554 on June 30,2003 based upon the closing sale price of common stock on such date of $0.29per share on the OTC Bulletin Board.  Asof March 22, 2004, the Registrant had 78,132,084 shares of common stockissued and outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

 

Portions of the Proxy Statement for the 2004Annual Meeting of Shareholders to be held in May 2004 are incorporated byreference, with respect to Part II and III of this Form 10-K.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**     |                                                                                        |   |
|----------------|---------------------------------------------------------------------------------------------|--------|
|           |                                                                                        |   |
| Item 1.        | Description of  Business                                                                    |   |
|           |                                                                                        |   |
| Item 2.        | Description of Properties                                                                   |   |
|           |                                                                                        |   |
| Item 3.        | Legal Proceedings                                                                           |   |
|           |                                                                                        |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                        |   |
|           |                                                                                        |   |
| **PART II**    |                                                                                        |   |
|           |                                                                                        |   |
| Item  5.       | Market  for Registrant’s Common Equity and Related Stockholder Matters                 |   |
|           |                                                                                        |   |
| Item 6.        | Selected Financial  Data                                                                    |   |
|           |                                                                                        |   |
| Item  7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|           |                                                                                        |   |
| Item  7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|           |                                                                                        |   |
| Item  8.       | Financial  Statements and Supplementary Data                                                |   |
|           |                                                                                        |   |
| Item  9.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |   |
|           |                                                                                        |   |
| Item  9A.      | Controls  and Procedures                                                                    |   |
|           |                                                                                        |   |
| **PART III**   |                                                                                        |   |
|           |                                                                                        |   |
| Item  10.      | Directors,  Executive Officers, Promoters and Control Persons                               |   |
|           |                                                                                        |   |
| Item  11.      | Executive  Compensation                                                                     |   |
|           |                                                                                        |   |
| Item  12.      | Security  Ownership of Certain Beneficial Owners and Management                             |   |
|           |                                                                                        |   |
| Item  13.      | Certain  Relationships and Related Transactions                                             |   |
|           |                                                                                        |   |
| Item  14.      | Principal  Accountant Fees and Services                                                     |   |
|           |                                                                                        |   |
| **PART IV**    |                                                                                        |   |
|           |                                                                                        |   |
| Item  15.      | Exhibits  and Reports on Form 8-K                                                           |   |
|           |                                                                                        |   |
| **SIGNATURES** |                                                                                        |   |
|           |                                                                                        |   |
| Certifications |                                                                                        |   |

 

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**PART I**

 

**Item 1.  Description of Business**

 

Transmeridian Exploration, Inc. (the “Company” or“Transmeridian”) was incorporated in the State of Delaware inApril 2000.  We are engaged in thebusiness of development and production of oil and gas properties.  Our activities are primarily focused on theCaspian Sea region of the former Soviet Union and our primary oil and gasproperty is License 1557 and the related Exploration Contract for thedevelopment of the South Alibek Field (“South Alibek” or the “Field”) in theRepublic of Kazakhstan.  We conduct ouroperations in Kazakhstan through a wholly-owned subsidiary, Caspi Neft TME(“Caspi Neft”).  Caspi Neft is an OpenJoint Stock Company (“OJSC”) organized under the laws of Kazakhstan.

 

At December 31, 2003, our estimated provedreserves were 45,744,788 barrels of oil (“Bbls”).  All of these reserves are attributable to the South AlibekField.  The present value of pre-taxfuture net revenues discounted at 10% per annum, based on prices being receivedat the end of the year, with assumptions held constant throughout the producinglife of the reserves (“10% Present Value”) was $241,351,419.  After deducting estimated future taxes, thenet present value of such reserves was $180,443,372.  These reserve estimates have been prepared by Ryder ScottCompany, an independent petroleum engineering company, in accordance with SEC guidelines.

 

We are in the early stages of developing the SouthAlibek Field.  As of December 31,2003, 7,815,681 Bbls, or 17%, of our estimated proved reserves were classifiedas proved developed reserves.  Thebalance of our estimated reserves are classified as proved undeveloped and willrequire the drilling of future wells to produce these reserves.  We have an active development program in thefield, including plans to drill wells which are not currently included withinthe boundaries of our proved reserves. If these future wells are successful, they would be expected to resultin an increase in our proved reserves. See Item 2, “Properties: Proved Reserves” and Note 13 of the Notes tothe Consolidated Financial Statements for further information about ourestimated proved reserves.

 

The reserve quantities and values discussed aboverepresent our 100% ownership of the reserves in the field, reduced by estimatedgovernment royalties and a 10% carried working interest after payout which isowned by a third party.  Subsequent toDecember 31, 2003, as discussed in “Item 2. Properties: Subsequent EventsAffecting Net Proved Reserves”, our equity ownership of Caspi Neft was reducedto 50%, which reduces our effective net interest in the proved reserves of the Field.

 

**Availabilityof Reports**

 

Transmeridian makes available free of charge on itsinternet website, www.tmei.com, its Annual Report on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K and amendments to thosereports filed or furnished pursuant to Section 13 (a) or 15 (d) of theSecurities Act of 1934 as soon as reasonably practicable after itelectronically files or furnishes them to the Securities and ExchangeCommission.  Such filings and reportsare also available from the Securities and Exchange Commission at its websiteat www.sec.gov.

 

**Strategy**

 

Our business strategy is focused on buildingreserves, production and cash flow through (a) the acquisition and developmentof oil and gas reserves, (b) exploring for new reserves, and (c) optimizingproduction and value from the existing reserve base.  We prefer to target oil and gas properties with proved orprobable reserves and avoid significant exploration risk.  Through the contacts, technical knowledgeand experience of our management team, we believe we can successfully identifyand acquire additional properties in Kazakhstan and the Caspian Searegion.  The execution of our businessstrategy is largely dependent on the successful development of the South AlibekField, which is intended to provide a base of production, operations and cashflow to exploit future opportunities.

 

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**DrillingActivity**

 

In 2003 the Company completed the drilling of theSouth Alibek #1 (SA-1) and began drilling operations on two new wells, theSouth Alibek #2 (SA-2) and the South Alibek #4 (SA-4).  These are the second and third wells of aninitial seven well drilling program in the South Alibek Field.  The SA-2 well is 1.5 miles northwest of SA-1and the SA-4 is located 1 mile southeast of SA-1.  Both wells are planned to drill the same KT1 and KT2 carbonatereservoirs encountered in SA-1.  As ofDecember 31, 2003, SA-4 had been drilled to its total depth and logged andwe were in the process of running production casing in the well, while SA-2 waswithin 1,300 feet of its programmed depth. In January 2004, the SA-2 reached total depth.  Analysis of the log data indicated significantapparent oil pay in multiple zones on both wells.  Production casing has been set on both wells in preparation forthe well testing program, which began in late February.  Both wells will be placed on an extendedproduction testing program.

 

**Customers**

 

We began selling oil from our first well, the SA-1,during the second quarter of 2003.  Allsales during 2003 were to one customer. However, we have signed agreements with two additional customers forsales of crude oil in 2004.  Until ourcentral production facility, pipeline transfer connections and handlingfacilities are completed, we are shipping our oil by truck from the field to anoil storage facility, where it is temporarily stored until being transferred tothe buyer.  See Item 2: “Properties:Transportation and Marketing” for further discussion of our current marketing arrangementsand future plans.

 

**Competition**

 

The oil and gas industry is highly competitive, andour future business plans could be jeopardized by competition from larger andbetter-financed companies.  We competefor reserve acquisitions, exploration leases, licenses, concessions andmarketing agreements against companies with financial and other resourcessubstantially greater than ours.  Manyof our competitors have more established positions and stronger governmentalrelationships, which may make it more difficult for us to compete effectivelywith them.

 

**GovernmentRegulation**

 

Our operations are subject to various levels ofgovernment controls and regulations in the United States and in the Republic ofKazakhstan.  We attempt to comply withall legal requirements in the conduct of our operations and employ businesspractices which we consider to be prudent under the circumstances in which weoperate.  It is not possible for us toseparately calculate the costs of compliance with environmental and other governmentalregulations as such costs are an integral part of our operations.

 

In the Republic of Kazakhstan, legislationaffecting the oil and gas industry is under constant review for amendment orexpansion.  Pursuant to suchlegislation, various governmental departments and agencies have issuedextensive rules and regulations which affect the oil and gas industry, some ofwhich carry substantial penalties for failure to comply.  These laws and regulations can have asignificant impact on the industry by increasing the cost of doing businessand, consequentially, can adversely affect our profitability.  Inasmuch as new legislation affecting theindustry is commonplace and existing laws and regulations are frequently amendedor reinterpreted, we are unable to predict the future cost or impact ofcomplying with such laws and regulations.

 

**Officesand Employees**

 

Our corporate headquarters office is in Houston,Texas, where we lease 6,725 square feet of office space.  As of December 31, 2003, we had 8full-time employees in Houston.  We alsomaintain two offices in Kazakhstan, operated by Caspi Neft.  Caspi Neft’s administrative offices are inAktobe where it leases approximately 9,020 square feet of office space and has60 full-time employees.  Caspi Neft’sfield operations for the South Alibek Field have approximately 61employees.  Caspi Neft maintains a smalladministrative office in Almaty, Kazakhstan with five employees.

 

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**RiskFactors**

 

***Limited CapitalResources and Liquidity***

 

We are a development stage company and are in theearly stages of establishing production and revenues from the development ofour primary property in Kazakhstan.  Wehave accumulated significant operating losses and our current liabilitiesexceed our current assets by a substantial amount.  Furthermore, the development of our primary asset, the SouthAlibek Field, will require additional funding before we can achieve significantproduction and revenues from operations. These factors raise substantial doubt about our ability to continue as agoing concern.  Our plans regarding theoperations and financing of the Company are discussed in Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andNote 2 of the Notes to Consolidated Financial Statements.  However, there can be no assurance that wewill be successful in executing these plans.

 

***Exploration andDevelopment Risks***

 

Our success is dependent on finding, developing andproducing economic quantities of oil and gas. We make use of the best information available to us and employ currenttechnologies and consultants to attempt to mitigate risks.  However, despite these efforts, our drillingoperations may not be successful in finding and producing economicreserves.  We are also subject tooperating risks normally associated with the exploration, development andproduction of oil and gas.  These risksinclude high pressure or irregularities in geological formations, blowouts,cratering, fires, shortages or delays in obtaining equipment and qualifiedpersonnel, equipment failure or accidents, and adverse weather conditions, suchas winter snowstorms.  These risks canresult in catastrophic events, or they may result in higher costs and operatingdelays.  We maintain very limitedinsurance coverage and such coverage may not be effective to fully compensatefor these risks.  In many cases, suchcoverage is either not available or is not cost-effective.

 

***Oil and GasReserve Risks***

 

There are numerous uncertainties inherent inestimating quantities of proved oil and gas reserves and projecting futurerates of production and timing of development expenditures.  These uncertainties are greater forproperties which are undeveloped or have a limited production history, such asthe South Alibek Field.  Changes inprices and cost levels, as well as the timing of future development costs, maycause actual results to vary significantly from the data presented.  The oil and gas reserve data shown hereinrepresent estimates only and are not intended to be a forecast or fair marketvalue of our assets.  The economicsuccess of the Field is dependent on finding and developing sufficient reservesand rates of production to generate positive cash flow and provide an economicrate of return on our investments in the Field.

 

***Risks ofInternational Operations***

 

We are subject to risks inherent in internationaloperations, including adverse governmental actions, political risks,expropriation of assets, loss of revenues and the risk of civil unrest orwar.  Our primary oil and gas propertyis located in Kazakhstan, which until 1990 was part of the Soviet Union.  Kazakhstan retains many of the laws andcustoms from the former Soviet Union, but has developed and is continuing to developits own legal, regulatory and financial systems.  As the political and regulatory environment changes, we may faceuncertainty about the interpretation of our agreements and in the event ofdispute, may have limited recourse within the legal and political system.

 

If we are successful in establishing commercialproduction from the Field, an application will be made for an exploration andproduction contract.  The Company hasthe exclusive right to negotiate this contract for the Field, and the governmentis required to conduct these negotiations under Kazakhstan’s “Law ofPetroleum.”  Such contracts arecustomarily awarded upon determination that the field is capable of commercialrates of production and that the applicant has complied with the other terms ofits license and exploration contract. However, the Company is not guaranteed the right to a productioncontract.  The terms of the explorationand production contract establish the royalty and other payments due to thegovernment in connection with commercial production.  While we believe that we can successfully

 

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negotiate an exploration and production contract,we cannot be assured that we will be able to do so or that the terms of suchcontract will be acceptable.  Ifsatisfactory terms cannot be negotiated, it could have a material adverseeffect on our financial position.

 

***Marketing andOil Prices***

 

Our future success is dependent on being able totransport and market our production either within Kazakhstan or preferablythrough export to international markets. The exportation of oil from Kazakhstan depends on access totransportation routes, primarily pipeline systems, which can have limitedavailable capacity and are subject to other restrictions.  We do not have a long-term contract for thetransportation or sale of our crude oil. We currently ship our oil by truck to an oil storage facility where itis temporarily stored pending delivery to the buyer.  After the buyer takes possession of the oil, it is generallyshipped by rail from the oil storage facility. Our revenues could be adversely affected by issues which are outside ourcontrol relating to the crude oil transportation infrastructure both within andoutside Kazakhstan.  Our longer-termplans include the shipment of oil by pipeline. We would expect the implementation of these plans to result in higherrealized prices than our current marketing arrangements, but we cannot beassured that we will be successful in implementing these plans.

 

The prices we receive for our oil production willhave a significant impact on our future financial position and results ofoperations.  Prices of oil and gas aresubject to significant volatility in response to changes in supply, marketuncertainty and a variety of other factors beyond our control.  There are currently no economic markets fornatural gas production and our gas reserves have been given no value in thefuture net cash flow data presented herein.

 

***EnvironmentalRisks***

 

As an owner and operator of oil and gas properties,we are subject to various laws and regulations relating to discharge ofmaterials into, and protection of, the environment.  These laws and regulations may impose liability on us for thecost of pollution cleanup resulting from operations and could subject us toliability for pollution damages.

 

***Transferabilityof Our Common Shares***

 

Our stock has limited trading volume and is notlisted on a national exchange.  Becauseour stock price is less than $5.00 and is not listed on a national exchange,broker-dealers face additional restrictions on transactions in our stock.  Such restrictions include the requirement todeliver to purchasers a standardized risk disclosure document prepared by theSEC, which specifies information about low-priced stocks and the risks involvedwith such investments.  Additionally,these rules require that broker-dealers make a written determination that thestock is a suitable investment for the purchaser and receive the purchaser’swritten consent to the transaction. These factors could adversely affect the liquidity, trading volume andtransferability of our common shares.

 

***Control by OurOfficers and Directors***

 

In the aggregate, our executive officers anddirectors control approximately 27% of the outstanding shares of our commonstock.  These stockholders, actingtogether, would be able to significantly influence matters requiringstockholder approval.

 

***Key Personnel***

 

Our success is dependent on the performance of oursenior management and key technical personnel. The loss of our Chief Executive Officer or other key employees couldhave an adverse effect on our business. We do not have employment agreements in place with all of our seniormanagement or key employees.

 

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**Item 2.  Properties**

 

**PetroleumIndustry in Kazakhstan**

 

Until 1990, Kazakhstan was one of 15 independentrepublics which comprised the former Soviet Union.  It has chosen to align with Russia and 10 of the former republicsin the Confederation of Independent States (“CIS”), a union of economic andpolitical cooperation.  Kazakhstan is anarea of significant investment activity for the international oil and gasindustry.  Based upon publicly availableinformation, its proved reserves rank among the top 15 countries in the world,with over 180 producing oil fields and 20 billion barrels of provedreserves.  Its current production isapproximately 1.0 million barrels of oil per day (“Bopd), of whichapproximately 80% is exported.

 

Regulation of the oil industry in Kazakhstan hasbeen codified with the development of the Law of Petroleum which sets out theconduct of the oil and gas industry and the roles of participants, both privateand governmental.  The industry isregulated by the Ministry of Energy and Natural Resources, which administersall contracts, licenses and investment programs.  The national oil company, Kazmunaigas, has been through severalstages of consolidation since the country’s independence in 1991.  The government has been merging the variousregional governmental companies which previously handled the extraction andtransportation sectors of the industry into one consolidated entity toeliminate redundant bureaucracy and provide for a more efficient management ofthe country’s natural resources.  Thisentity maintains a direct ownership on behalf of the state in most large oilfield development projects as well as sole ownership and operation of many ofthe interconnecting oil and gas pipeline systems.  However, governmental ownership or participation in explorationand development projects is not required and the government has no ownershipinterest in the South Alibek Field.

 

**Acquisitionof the South Alibek Field**

 

In May 1999, prior to the official formation of theCompany, Transmeridian signed a consulting agreement with KornerstoneInvestment Group Ltd. (“Kornerstone”). The controlling shareholder in Kornerstone is a citizen of Kazakhstanwho is involved in oil and gas production and other business endeavors.  He is also employed on a part-time basis asa consultant and manager of Caspi Neft handling governmental matters andcontract negotiations with governmental entities.  Under this agreement, we engaged Kornerstone to identify andassist in the acquisition of oil and gas properties in Kazakhstan and theCaspian Sea region.  Since we had notreceived any significant funding for the Company at that time, the agreementwith Kornerstone provided that its compensation would be in the form of a 10%carried working interest in all properties shown to the Company in which theCompany acquired an interest.  Theagreement required us to pay all costs of acquisition, development andoperations attributable to the 10% carried working interest.  We are entitled to recover all of our costsrelated to the carried interest from the production revenues attributable tothis interest.  After these costs havebeen fully recovered, Kornerstone would participate as a 10% working interestowner in all development and operating costs incurred subsequent to that point.

 

In early 2000, Kornerstone identified anopportunity in Kazakhstan known as the South Alibek License 1557, which coveredwhat is now known as the South Alibek Field. The Alibekmola Field had been discovered in 1980 by a regionalexploration unit of the Ministry of Geology of the former Soviet Union.  A total of 31 wells were drilled in theAlibekmola Field to delineate the oil bearing reservoirs and structure of thefield.  This delineation work continuedfollowing the breakup of the Soviet Union. The South Alibek field was initially identified by an Alibekmola Fielddelineation well drilled by the Kazakh successors of the Soviet Ministry ofGeology, Alibekmola 29 (A-29).  It wasidentified to be in a separate fault block adjacent to the Alibekmola Field,and from testing in 1996 produced flowing oil from several intervals in the KT2during well testing.  Three of theinitial delineation wells are within the area covered by our License  The successor to the Ministry of Geology didnot have sufficient funding to begin delineation drilling around A-29, and thelicense area was offered in a public tender in Kazakhstan’s privatizationprogram.  The subsequent work by us hasresulted in this license area being designated as the South Alibek Field.

 

The license and related exploration contract wereinitially acquired in the tender by a subsidiary of AIL Alpha Corporation, Ltd.(“Alpha”).  License 1557 was granted bythe Republic of Kazakhstan on April 29,

 

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1999.  OnMarch 24, 2000, we signed a Share Purchase Agreement with Alpha to acquirethe subsidiary which held the title to License 1557.

 

**Licenseand Exploration Contract**

 

Our Exploration Contract (the “ExplorationContract”), entered into with the government of Kazakhstan in March 2000,has a six-year term expiring in April 2005 and requires total capitalexpenditures during this period of approximately $18.0 million.  As of December 31, 2003, the cumulativecapital expenditures which are creditable to our obligations under theExploration Contract have exceeded the minimum commitment.  Under the terms of the Contract, we canproduce wells under a test program subject to royalty payments of 2% ofproduction.  The Exploration Contract maybe extended by mutual agreement for two extension periods of two yearseach.  Any extension periods requirenegotiation with and approval by the government and may require additionalcapital commitments and other changes to the terms.  The Company has requested a two year extension untilApril 2007 and has offered to increase the total expenditure commitment to$31.8 million.

 

If we are successful in establishing commercialproduction from the Field, an application will be made for a productioncontract (the “Production Contract”). We have the exclusive right to negotiate this contract for the Field,and the government is required to conduct these negotiations under the Law ofPetroleum.  However, we are notguaranteed the right to a Production Contract. Such contracts are customarily awarded upon determination that the fieldis capable of commercial rates of production and that the applicant hascomplied with the other terms of its license and Exploration Contract.  A Production Contract will typically require a bonus payment uponexecution, the amount of which is subject to negotiation.  If satisfactory terms cannot be negotiated,we have the right to produce and sell oil under the Law of Petroleum for theterm of our existing Exploration Contract through April 2005, or asextended, at a royalty rate of 2%.  Theroyalty rate under production contracts is on a sliding scale, based onproduction.  The royalty rate rangesfrom 2% to 6%.  The Exploration Contractcontains a provision which will allow the government to recover, from futurerevenues, approximately $4.9 million of exploration costs which were incurredprior to privatization.  The productioncontract, when executed, will contain the final terms for recovery of thesecosts.

 

There are two general forms of production contractsin Kazakhstan, production sharing contracts and tax and royalty basedcontracts.  We favor a tax and royaltybased contract and will seek to negotiate and expect to operate under thisstructure.  Under this financial arrangement,we will pay 100% of the development and operating costs and will be entitled toreceive 100% of the revenues from the Field. In addition to an up-front bonus payment and recovery of certain costsincurred prior to conveyance of the Field, the government will be entitled to aroyalty based on production from the Field and corporate income taxes.  Corporate income taxes in Kazakhstan varyfrom 30% to 40%.  Additionally, there isan excess profit tax on oil and gas production which can vary from 15% to 60%based on the ratio of net income to deductions.  These taxes can significantly affect the economics of theproject.

 

The government may also require that a percentageof our production, which we do not expect to exceed 10%, be sold into domesticmarkets at local prices.  We wouldexpect these prices to be lower than prices which we could receive in theexport market.  However, ourtransportation costs would likely be lower as well.  Most of the smaller producers in the region are not currentlybeing required to sell into the domestic market.

 

**Overviewof Regional Geology**

 

The South Alibek Field is located in northwesternKazakhstan within the prolific oil region of Aktobe.  It is in the Aktubinsk Oblast, 75 miles south of the city ofAktobe.  South Alibek lies in a fairwayof oil fields that produce from carbonate reservoirs of Upper and MiddleCarboniferous age.  The trend followsthe carbonate shelf which was deposited in the shallow waters of an ancient seain what are now the margins of the Pre-Caspian Basin.  Prolific oil field trends are established in the southern andnorthern margins of the basin, as well as in the southeastern margins where theSouth Alibek Field is located.  Thecarbonate fields found along the margins of the Pre-Caspian Basin account forapproximately 75% of Kazakhstan’s oil reserves and production.  The fields in the trend are projected toultimately contain over 40.0 billion barrels of recoverable reserves, includingthe super-giant Tengiz field, which is estimated to hold 9.0

 

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billion barrels of recoverable reserves and theKashagan Field that is estimated to have 13.0 billion barrels of recoverablereserves.

 

South Alibek is located within 40 miles of twolarge developed fields, Kenkiyak and Zhanazhol, which contain ultimaterecoverable reserves of 200 and 900 million barrels of oil, respectively,including  cumulative oil produced andestimated remaining reserves.  SouthAlibek is immediately adjacent to the producing Alibekmola Field, from which itis separated by a large fault.  TheSouth Alibek Field is about 1,000 feet lower than the Alibekmola Field and hasa lower oil water contact.  Productionfrom the Zhanazhol Field is estimated to be in excess of 100,000 Bopd and theAlibekmola Field, still in the early phase of development, reports productionto be over 15,000 Bopd.

 

This region contains good infrastructure for oiland gas development and production, including oil and gas pipelines, electricaltransmission connections, all-weather roads, small towns and trained oilfieldlabor.  This improves our developmentlogistics and lowers our costs compared to drilling in a more remote location.

 

**FieldGeology**

 

The primary oil reservoirs in the South Alibek andAlibekmola Fields are in the Middle Carboniferous (KT1) and Lower Carboniferous(KT-2) limestones, which are the main reservoirs for many of the fieldsthroughout the Southeastern Shelf of the Pre-Caspian Basin.  The tops of these formations are found at aninitial depth of 6,500 feet and they have a combined gross thickness of as muchas 5,000 feet in the area.  Thethickness of net productive intervals can be several hundred feet.

 

We have conducted an extensive evaluation of theinformation available for the Field and adjacent fields.  This information consists of log data fromthe 31 wells drilled prior to privatization, the three new wells we havedrilled under our License, recent vintage 2D seismic data and use of theresults of 3D seismic for which we have rights to.  Based on the evaluation of this data, we believe that theoil-bearing reservoirs within the KT-1 and KT-2 carbonates may bepresent over a substantial part of the area covered by our License.

 

**ProvedReserves**

 

Our estimated proved oil and gas reserve quantitieswere prepared by Ryder Scott Company, independent petroleum engineers.  There are numerous uncertainties inestimating quantities of proved reserves and projecting future rates ofproduction and the timing of development expenditures.  These uncertainties are greater forproperties which are undeveloped or have a limited production history, such asthe South Alibek Field.  They are onlyestimates and actual reserves may vary substantially from these estimates.  All of our proved reserves are in the SouthAlibek Field in Kazakhstan.  Our netquantities of proved developed and undeveloped reserves of crude oil andstandardized measure of future net cash flows are reflected in the table below.  See further information about the basis ofpresentation of these amounts in Note 13 of the Notes to Consolidated FinancialStatements.

 

As of December 31, 2003, we owned a 100%working interest in the South Alibek Field, subject to government royalties anda 10% carried working interest after recovery of costs.  The effect of the carried interest isreflected in the calculation of our net proved reserves.  Our proved reserves have been prepared underthe assumption that we obtain a commercial production contract which will allowproduction for the expected 25-year term of the contract, as more fullydiscussed above in “License and Production Contract.”  Based on forecast production volumes, the average royalty overthe term of the production contract is expected to be 6% or less under currentlaw.

 

**SubsequentEvents Affecting Net Proved Reserves**

 

In February 2002, we granted BramexManagement, Inc. (“Bramex”), the successor to Kazstroiproekt, Ltd. (“KSP”), atwo-year option to acquire a 50% equity interest in Caspi Neft, the subsidiarywhich holds the rights to the South Alibek Field.  In order to exercise the option, Bramex was required to provide$50.0 million in commercial financing to Caspi Neft in two tranches of $20.0million and $30.0 million, respectively. After this financing had been provided, Bramex could exercise the optionby the payment of 

 

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$15.0 million, the proceeds of which were to bededicated to the retirement of part of Caspi Neft’s debt.  Bramex completed all terms and paid $15.0million to Caspi Neft to exercise the option on February 4, 2004.  As a result of the option exercise byBramex, our net interest in the oil and gas reserves of the Field will beproportionally reduced to reflect the new ownership structure.

 

During lateJanuary 2004, the SA-2 well reached its planned total depth, was loggedand production casing was run to undertake completion operations.  As this well had not reached total depth asof December 31, 2003, it could not be included in the proved reserves ofthe Company at that date.  However,Ryder Scott Company attributed proved reserves to this well in an evaluationsubsequent to the end of the year.

 

**Net Proved Crude Oil Reserves and Future Net Cash FlowsAs of December 31, 2003(Quantities in Barrels)**

 
|                                               |   | **Actual**     |            | **Pro Forma  (a)** |       |
|----------------------------------------------------|--------|----------------|-----------------|--------------------|------------|
| Proved Developed                                   |   | 7,815,861      |            | 4,537,063          |       |
| Proved Undeveloped                                 |   | 37,928,927     |            | 20,456,511         |       |
| **Total Proved Reserves**                          |   | **45,744,788** | ** **      | **24,993,574**     | ** ** |
|                                               |   |           |            |               |       |
| **Standardized Measure of Future Net Cash  Flows** |   | **$**          | **180,443,372** | ** **         | **$**      | **99,651,089** | ** ** |
|                                                    |        |                |                 |                    |            |  |  |

 

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(a) As discussed above, the Pro Forma reservequantities and standardized measure of future net cash flows reflect (1) theexercise of the option by Bramex to acquire a 50% interest in Caspi Neft and(2) the completion of the SA-2 well, both of which occurred subsequent to December 31,2003.

 

**Transportationand Marketing**

 

Companies in the area of the South Alibek Fieldutilize both the KazTrans Oil and Russian Transneft pipeline system to exportcrude oil to regional hub locations such as Samara, Ukraine, the Port of Odessaon the Black Sea and European locations such as Poland, Hungry, Lithuania,Germany and Finland.  Pipeline capacityin the area has significantly improved with the opening of the Caspian PipelineConsortium (“CPC”) pipeline, which is increasing capacity from 250,000 Bopd toan expected 800,000 Bopd.  Two Sovietera oil pipelines, with capacities of 50,000 Bopd and 93,000 Bopd,respectively, service nearby producing fields. One of the pipelines is operating at less than full capacity.  These pipelines transport oil to theBestamak rail terminal and the oil refinery in Orsk, which is a transfer pointfor swaps to Western markets.  TheKenkiyak-Atyrau pipeline became operational in 2003 with an initial capacity of120,000 Bopd. This pipeline originates at the Kenkiyak Field and provides alink to the CPC pipeline for the producers in the region.  The Alibekmola Field, adjacent to SouthAlibek, has begun commercial production, and KazTrans Oil has constructed apipeline across our license area to connect Alibekmola production to theKenkiyak-Atyrau pipeline for export markets via the CPC pipeline.  A pump station has been installed about 1.5kilometers from our central production facility.  We expect to have access to this pipeline, subject to possiblecapacity limitations, after we make certain required processing and deliveryinvestments.  Our goal for the SouthAlibek Field is to complete the installation of crude oil treating facilities,pipeline connections and handling equipment so that we can secure a pipelineallotment and export quotas for the Field. Prior to this, our production will be transported by truck for sale intothe local market or for rail shipment to export markets, depending on the bestpricing available at the time.

 

In 2002, we acquired the Emba Terminal, which islocated 35 miles from the Field.  TheEmba Terminal is a facility for storing and loading crude oil for shipment byrail.  The facility has not been operationalfor several years and will require capital improvements to make it suitable foruse.  As of December 31, 2003, wehave advanced approximately $1.465 million to Emba Trans Ltd. which was used toacquire the Emba Terminal, fund the engineering study and begin constructionand refurbishment of the facilities.  Wemay also use the terminal to ship crude oil for third parties if we do notrequire all of the capacity.  The EmbaTerminal is intended primarily for use as an interim solution to sell ourproduction prior to the completion of pipeline and processing facilities.  However, it will also serve as analternative transportation outlet if our pipeline capacity is constrained.  Caspi Neft owns 75% of Emba Trans Ltd., withthe balance of 25% owned by Transmeridian.

 

10

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**DrillingRig**

 

On December 28, 2001, we purchased a landdrilling rig for $5.3 million in total consideration, including a note payablefor $3.3 million and the issuance by the Company of $2.0 million in redeemablecommon stock.  The rig was acquired fordrilling operations in the South Alibek Field. The rig is a diesel and electric powered National 1320UE, with 2,000horsepower rating.  It has a depthrating of approximately 20,000 feet and has a 320 ton rating on the drawworks.  At the time of the purchase, therig was in storage in South America. During 2002, we moved the rig by marine transport to Kazakhstan andundertook various refurbishments and modifications to the rig to make itsuitable for use in our operations.  Weentered into a contract with a firm experienced with international drilling tooversee the operation of the rig and provide expatriate drilling personnel.

 

As more fully discussed in Note 10 of the Notes toConsolidated Financial Statements, there is a legal dispute between theCompany, the seller of the rig and the holder of an apparent first lien on thedrilling rig.

 

**Item 3.  Legal Proceedings**

 

On March 5, 2003, Private Capital Group LLCfiled suit against the Company in connection with its $200,000 investment inconvertible debentures of the Company. On June 18, 2003, the Company entered into a Settlement Agreementwith Private Capital Group LLC. Pursuant to the terms of the Settlement Agreement, the convertibledebentures, plus accrued interest and litigation settlement costs, weresubsequently retired through the issuance of 1,081,865 shares of common stockand the payment of $30,000 in cash.

 

In December 2001, the Company purchased adrilling rig for $5.3 million by the issuance, to the seller, of a note payablefor $3.3 million and redeemable common stock of $2.0 million.  Further discussion of this transaction canbe found in Notes 3, 6 and 7.  InJuly 2003, the Company was notified by the holder of an apparent firstlien on the drilling rig (the “First Lien Holder”) that the seller of the rigwas in default under its note payable obligation to the First Lien Holder.  The Company was not informed of theexistence of the First Lien Holder in the Asset Purchase Agreement related tothe acquisition of the drilling rig. The note payable and the redeemable common stock are now in dispute as aresult of the Seller’s default to the First Lien Holder.  During 2003, the Company held discussionswith the First Lien Holder with the intent to resolve the Seller’s default bymaking certain payments directly to the First Lien Holder.  During the year ended December 31,2003, the Company made installment payments to the First Lien Holder totaling$688,400.

 

Discussions with the seller of the rigbecame increasing adversarial during late 2003 and on December 15, 2003, the seller filed suit in DistrictCourt, Harris County, Texas, 334th Judicial District relating to the Company’s alleged default under the note payableand redeemable common stock agreements with the seller.  At this time, the Company ceased installmentpayments to the First Lien Holder as it had not been able to successfullynegotiate a settlement agreement with both the seller and the First LienHolder.  On February 27, 2004, the First Lien Holder filed suitin United States District Court, Southern District of Texas, against the seller and named the Companyand two of its affiliates as additional defendants.  This action seeks payment of debts owed to the First Lien Holderby the seller related to the drilling rig.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

No matters were submitted to a vote of securityholders during the quarter ended December 31, 2003.

 

11

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**PART II**

 

**Item 5.  Market for Registrant’s Common Equity andRelated Stockholder Matters**

 

**CommonStock**

 

Our common stock, par value $0.0006 per share,began trading publicly on February 26, 2002 and is traded on the OTCBulletin Board under the symbol “TMXN”. There are 200,000,000 shares authorized by our Amended and RestatedCertificate of Incorporation.  As ofDecember 31, 2003, we had 71,673,207 shares issued and outstanding,including 1,000,000 shares subject to mandatory redemption, which were held byan estimated 1,500 beneficial owners. The following table presents the high and low closing prices per sharefor our common shares, as reported by the OTC Bulletin Board.  Such over-the-counter market prices reflectinter-dealer prices, without retail markup, markdown or commissions:

 
|                                                       |   | **High** |   | **Low** |   |
|------------------------------------------------------------|--------|----------|--------|---------|--------|
| **2003:**                                                  |   |     |   |    |   |
| Fourth quarter                                             |   | $        | 0.87   |    | $      | 0.33 |   |
| Third quarter                                              |   | 0.39     |   | 0.19    |   |
| Second quarter                                             |   | 0.42     |   | 0.23    |   |
| First quarter                                              |   | 0.39     |   | 0.10    |   |
| **2002:**                                                  |   |     |   |    |   |
| Fourth quarter                                             |   | $        | 0.37   |    | $      | 0.11 |   |
| Third quarter                                              |   | 0.52     |   | 0.15    |   |
| Second quarter                                             |   | 0.76     |   | 0.20    |   |
| Period from February 26, 2002 to  March 31, 2002 |   | 2.20     |   | 1.20    |   |

 

**PreferredStock**

 

We are authorized by our Amended and RestatedCertificate of Incorporation to issue up to 5,000,000 shares of preferredstock.  No shares of preferred stockwere outstanding as of December 31, 2003.

 

**DividendPolicy on Common Stock**

 

We have never paid cash dividends on our commonstock.  We intend to retain futureearnings, if any, to meet our working capital requirements and to finance thefuture operations of our business. Therefore, we do not plan to declare or pay cash dividends to theholders of our common stock in the foreseeable future.

 

**RecentIssuance of Unregistered Securities**

 

Pursuant to a Subscription Agreement datedOctober 15, 2003, we sold 3,333,333 shares of common stock, for cashproceeds of $1,000,000, to a foreign investment company in a private placementwhich was exempt from registration pursuant to Regulation S.

 

On November 13, 2003, we issued 25,000 sharesof common stock, valued at $10,000 to an individual as compensation for investorrelations services.

 

During the year ended December 31, 2003, weissued 1,081,865 shares of common stock, including 269,551 shares issued duringthe fourth quarter, and $30,000 in cash to settle litigation and retireconvertible debentures with an original principal amount of $200,000.  This matter is more fully discussed in Note6 of the Notes to Consolidated Financial Statements.

 

The foregoing issuances of common stock were madein reliance upon the exemption from registration set forth in Section 4(2)of the Securities Act of 1933 for transactions not involving a publicoffering.  No underwriters were engagedin connection with the foregoing issuances of securities.  The sales were made without generalsolicitation or advertising.  Eachpurchaser was an “accredited investor” or a sophisticated investor with accessto all relevant information necessary to evaluate the investment whorepresented to the Company that the sales were being acquired for investment.

 

12

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**StockOption Plan**

 

During 2003, the Company filed a Form S-8registration statement with the Securities and Exchange Commission to register5.0 million shares under its 2001 Incentive Stock Option Plan (the“Plan”).  The options may be granted toofficers, board members, key employees and consultants throughDecember 31, 2010.  Under the Plan,the exercise price of each option is equal to the fair market value of theCompany’s common stock on the date of the grant and all options granted have aterm of five years.  The vesting periodis determined by the Board of Directors on the date of grant.  As of December 31, 2003, options topurchase 1.74 million shares had been granted and 3.26 million options wereavailable for future grants under the Plan.

 

**StockCompensation Plan**

 

During 2003, the Company filed a Form S-8registration statement with the Securities and Exchange Commission to register2.5 million shares under its 2003 Stock Compensation Plan.  Under the Stock Compensation Plan, suchstock can be issued in lieu of cash to compensate officers, employees,directors and third-party consultants for services rendered.  As of December 31, 2003, approximately1.23 million shares had been issued under the Stock Compensation Plan and 1.27million shares were available for future issuance.

 

**Item 6.  Selected Financial Data**

 

The following selected financial information (whichis not covered by the independent auditors’ report) should be read inconjunction with the consolidated financial statements and the notes theretoincluded in “Item 8. Financial Statements and Supplementary Data.”

 
|                                          |   | **Years  ended December 31,** |       |
|-----------------------------------------------|--------|------------------------------------|------------|
|                                          |   | **2003**                           |       | **2002** |   | **2001** |   | **2000** |   |
|                                          |   |                               |       |   |   |   |   |   |   |
| OPERATING RESULTS:                            |   |                               |       |   |   |   |   |   |   |
| Oil revenues                                  |   | $                                  | 797,411    |   | $ | — |   | $ | 51,289 |   | $ | — |   |
|                                          |   |                               |       |   |   |   |   |   |   |
| Loss from operations                          |   | (4,915,029                         | )          | (2,936,603 | ) | (1,924,245 | ) | (187,140 | ) |
|                                          |   |                               |       |   |   |   |   |   |   |
| Net loss                                      |   | (5,686,568                         | )          | (3,270,903 | ) | (2,112,890 | ) | (810,548 | ) |
|                                          |   |                               |       |   |   |   |   |   |   |
| Net loss attributable to common  stockholders |   | $                                  | (5,706,304 | ) | $ | (3,308,423 | ) | $ | (2,236,161 | ) | $ | (810,548 | ) |
|                                          |   |                               |       |   |   |   |   |   |   |
| Basic and diluted loss per share              |   | $                                  | (0.09      | ) | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.06 | ) |

 
|                                                                |   | **As of  December 31,** |       |
|---------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                |   | **2003**                     |       | **2002** |   | **2001** |   | **2000** |   |
|                                                                |   |                         |       |   |   |   |   |   |   |
| BALANCE SHEET DATA:                                                 |   |                         |       |   |   |   |   |   |   |
| Total current assets                                                |   | $                            | 2,067,804  |   | $ | 813,725 |   | $ | 377,388 |   | $ | 561,675 |   |
| Total property and equipment, net of  accumulated depreciation |   | 54,560,575                   |       | 24,396,599 |   | 13,105,859 |   | 4,452,067 |   |
| Total assets                                                        |   | 57,099,072                   |       | 26,271,414 |   | 13,883,247 |   | 5,013,742 |   |
| Total current liabilities                                           |   | 31,918,658                   |       | 6,637,127 |   | 2,475,669 |   | 1,617,281 |   |
| Long term debt, net of current maturities                           |   | 24,674,196                   |       | 13,752,304 |   | 3,368,796 |   | — |   |
| Stockholders’ equity                                           |   | 506,218                      |       | 3,881,983 |   | 6,038,782 |   | 3,396,461 |   |
|                                                                |   |                         |       |   |   |   |   |   |   |
| CASH FLOW DATA:                                                     |   |                         |       |   |   |   |   |   |   |
| Net cash used in operating activities                               |   | $                            | (3,654,690 | ) | $ | (2,056,297 | ) | $ | (1,880,297 | ) | $ | (495,465 | ) |
| Net cash used in investing activities                               |   | (23,640,308                  | )          | (10,299,391 | ) | (1,813,713 | ) | (3,038,871 | ) |
| Net cash provided by financing activities                           |   | 27,991,705                   |       | 12,873,219 |   | 3,289,171 |   | 1,046,451 |   |

 

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**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

***SEE DISCUSSIONOF RISK FACTORS IN ITEM 1 OF THIS ANNUAL REPORT ON FORM 10-K.***

 

**Introduction**

 

The following discussion and analysis addresschanges in Transmeridian’s financial condition and results of operations duringthe three year period ended December 31, 2003.

 

In June 2003 Caspi Neft, the Company’soperational subsidiary in Kazakhstan, began producing its first well, the SA-1,on a test basis.  In early September, wecompleted an acid treatment which increased the production rate to over 1,100Bopd on a 7/16ths inch choke.  We are continuingto test the well on various size chokes to determine which is operationallymost efficient.  Currently the well isproducing approximately 975 Bopd on a 9/16ths inch choke.  The production is currently being sold to asingle purchaser on a month to month basis. For the year ended December 31, 2003 we produced 117,376 Bbls, sold77,293 Bbls and had 39,863 Bbls in inventory. During 2003 we received an average price of $10.52 per Bbl, or netrevenue of $797,411.  The price receivedfor oil sales has increased during the year as we have been able to sell largervolumes and we realized $12.44 per barrel for sales during the month ofDecember 2003.  We expect ourpricing to continue to improve as we develop new marketing arrangements,improve the quality of the crude with our treatment and processing facilities,are able to sell larger volumes and gain direct pipeline access by early 2005.

 

**Transportationand Expenses**

 

Caspi Neft is transporting its oil production bytruck for sale at a rail terminal approximately 65 miles from the field.  During 2003, we incurred $235,264 in transportationand storage cost, or $2.00 per Bbl produced. When our handling facilities at Emba are completed in 2004, we believewe will achieve a reduction in handling and storage costs.  Additionally, when the treating facilitiesand pipeline pump station is operational, expected in early 2005, we will beable to deliver our crude directly into the Kenkiyak / Atyrau pipeline, whichshould result in a significant reduction in the transportation and storageexpense and improved sales pricing for our crude oil.  See Item 2, “Properties: Transportation and Marketing” forfurther discussion of this matter.

 

Administrative cost consists of two primarycomponents, personnel costs and office expense.  The increase in administrative expense is due to increased personnelcosts, at Caspi Neft, which is a result of the increased activity in ourexploration and development program for the South Alibek Field.  We do not expect these costs to increaseappreciably in 2004, based on our current operational plans.

 

Depreciation, depletion and amortization(“DD&A”) of oil and gas properties is calculated under units of productionmethod, following the successful efforts method of accounting, as described inNote 1 of the Notes to the Consolidated Financial Statements.  During 2003, we sold 77,293 Bbls of oilresulting in DD&A of $189,635, or an average of $2.45 per barrel.

 

Non-oil and gas property DD&A increased $27,759in 2003 compared to 2002.  This increaseis primarily the result of additions to transportation and other equipment inCaspi Neft.

 

Exploration expense, which includes geological andgeophysical expense and the cost of unsuccessful exploratory wells is recordedas an expense in the period incurred under the successful efforts method ofaccounting.  During 2003, Caspi Neftincurred $473,659 in exploration expense which was primarily related to thepurchase and interpretation costs of geologic data.  In July 2003, Transmeridian conducted an operation on one ofits two U. S. properties.  A downholeobstruction was encountered which prevented a successful test of the targetformation.  We recorded a charge toexploration expense of $118,893 in the third quarter of 2003 for thisunsuccessful completion attempt.

 

Interest expense, net of the capitalized portion,for the years ended December 31, 2003, 2002 and 2001, was $772,409,$338,229 and $188,645, respectively. The increase in interest expense when comparing 2003 to 2002 isprimarily attributable to capitalized interest on our drilling rig in 2002during the time it was being prepared for its intended use.  The increase in 2002 compared to 2001 isprimarily due to the

 

14

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amortization of debt financing costs, as describedin Note 1 of the Notes to the Consolidated Financial Statements.

 

**Propertyand Equipment**

 

The following schedule shows the property andequipment, by project, for each of the periods shown.

 
|                              |   | **As of  December 31,** |       |
|-----------------------------------|--------|------------------------------|------------|
|                              |   | **2003**                     |       | **2002** |   | **2001** |   |
|                              |   |                         |       |   |   |   |   |
| Drilling and completion costs (a) |   | $                            | 25,506,735 |   | $ | 8,139,075 |   | $ | 1,886,270 |   |
| Production facility (b)           |   | 10,083,732                   |       | 2,596,251 |   | 172,893 |   |
| Emba terminal (b)                 |   | 1,465,310                    |       | — |   | — |   |
| Drilling rig (c)                  |   | 6,484,983                    |       | 6,040,818 |   | 5,300,000 |   |
| License cost                      |   | 5,706,402                    |       | 5,706,402 |   | 5,706,402 |   |
| Other equipment                   |   | 558,355                      |       | 393,691 |   | 50,724 |   |
| Capitalized interest              |   | 5,972,894                    |       | 1,726,152 |   | — |   |
| Total property and equipment      |   | $                            | 55,778,411 |   | $ | 24,602,389 |   | $ | 13,116,289 |   |

 

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(a)          These amountsinclude costs incurred to construct future well locations, inventory ofequipment and supplies for the drilling of future wells and rig mobilizationcosts.

(b)         These projects areunder construction and have not been placed in service.

(c)          These amountsinclude the initial purchase price and capital improvements and refurbishments.

 

In 2003 the Company began drilling operations ontwo new wells the SA-2 and the SA-4. These are the second and third wells of an initial seven well drillingprogram in the South Alibek Field.  TheSA-2 well is 1.5 miles northwest of SA-1 and the SA-4 is located 1 milesoutheast of SA-1.  Both wells wereplanned to drill through the same KT1 and KT2 carbonate reservoirs encounteredin A-29 and SA-1.

 

As of December 31, 2003, SA-4 had been drilledto its total depth and logged and we were in the process of running productioncasing in the well, while SA-2 was within 1,300 feet of its programmeddepth.  In January 2004, the SA-2reached total depth.  Analysis of thelog data indicated significant apparent oil pay in multiple zones on bothwells.  Production casing has been seton both wells in preparation for the well testing program, which began in lateFebruary.  Both wells will be placed onan extended production testing program.

 

We made considerable progress on the constructionof our permanent production facility in 2003. The tanks and separators have been installed and are currently beingprepared for testing and certification. The field loading facilities are approximately 75% complete.  We expect the facility to become operationalduring the second quarter of 2004.  Theconstruction and installation of the demercaptane unit has been delayed bytechnical issues and we currently do not expect it to be operational until2005.

 

**CapitalExpenditures, Capital Resources and Liquidity**

 

For the years ended December 31, 2003, 2002and 2001, capital expenditures were $31.2, $11.5 and $1.9 million,respectively.  The primary sources offunding have been borrowings under our credit facilities with a Kazakhstan bank(as described in more detail below and in Note 6 to the Notes to ConsolidatedFinancial Statements) and private placements of common stock.  From inception through December 31,2003, we have received a total of $7.4 million in net cash proceeds from salesof common stock.  Our cumulativeproceeds from all borrowings, net of repayments, have amounted to $40.9 millionsince inception.

 

In February 2002, Caspi Neft obtained a $20.0million credit facility with a Kazakhstan bank to fund operations in the SouthAlibek Field.  The available capacityunder the facility was fully utilized in April 2003 and the bank extended$1.5 million in additional financing as an interim step pending arrangementsfor an additional facility.  Under theterms of the credit facility, a portion of this debt and accrued interest wasdue in August 2003.  However, thisamount remained unpaid at December 31, 2003.  It was 

 

15

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subsequently paid in February 2004 from theproceeds of a private placement of common stock.  In connection with this bank financing, in February 2002,the Company granted an option to Bramex to acquire 50% of the common stock ofCaspi Neft.  In order to exercise thisoption, Bramex was required to arrange $30.0 million in additional financingfor Caspi Neft and was also required to pay $15.0 million to Caspi Neft, theproceeds of which were to be dedicated to the repayment of debt.  Bramex completed all required terms toexercise the option and paid the $15.0 million exercise price in February 2004.  See Notes 6 and 12 of the Notes toConsolidated Financial Statements for further information.

 

In June 2003, Caspi Neft entered into a secondfacility with the same Kazakhstan bank in the amount of $30.0 million.  The funds from this facility have been andwill continue to be used for the ongoing development of the project.  As of December 31, 2003, the amountutilized totaled $23.0 million.  Thebalance outstanding under the credit facility in May 2005 is payable in 36monthly installments from June 2005 through May 2008.  The available borrowing capacity atDecember 31, 2003 was approximately $7.0 million.  Management intends to utilize this amount inconnection with its continuing capital program in the South Alibek Field.

 

Caspi Neft has a 2004 capital budget for the SouthAlibek Field of approximately $25.9 million. This budget contemplates the continuous operation of two drilling rigsin the Field and also includes expenditures to complete construction of thecentral production facility and other support facilities for the Field.  The drilling budget includes the completionof the two wells in progress at the end of 2003, the SA-2 and SA-4, thedrilling and completion of four additional wells during 2004 and thecommencement of two additional wells before the end of 2004.  Accordingly, including the SA-1 which iscurrently producing, the 2004 budget would envision a cumulative total of sevenwells drilled and completed in the Field by the end of next year, assuming allof such wells are successful, and two wells in progress.

 

In order to execute the 2004 Budget, Caspi Neftwill be dependent on additional funding. The Company currently estimates the minimum funding requirements for2004 related to its 50% interest in Caspi Neft to be between $5.0 million and$10.0 million.  The other 50% owner ofCaspi Neft, Bramex, has indicated that they have available funds to financetheir proportionate share of the capital required to fully fund the 2004budget.  The Company may seek to raisecapital in excess of this amount to allow it fund new initiatives, furtheraccelerate development of the Field and provide greater assurance of itsability to meet its future financial commitments.  The minimum amount of funding required is highly dependent on theamount and timing of cash flows from the existing and future wells drilled onthe property.  The Company’s near-termgoal is to develop sufficient revenues from production to fund continuingcapital expenditures and meet its minimum debt service requirements.  The amount of capital needed is also dependenton many factors outside the control of the Company, including the costs andresults of drilling operations, the ability to effectively bring its futurecrude oil production to market and future world oil prices.  If the Company is not able to secure suchadditional funding, it may be necessary to delay certain capital expenditures,including drilling costs.  Such actionscould result in delays in the timing of future cash flows and could adverselyaffect the financial position of the Company. The Company believes that it will be able to secure the necessaryfunding to continue development of the Field in accordance with its currentdevelopment plans.  However, the Companycannot provide assurance that it will be successful as many of the factors requiredto execute its plans are outside the control of the Company.

 

The following table presents our future contractualobligations, which consist of long-term debt and lease commitments.

 
| **Contractual obligations**   |   | **2004(3)** |       | **2005** |   | **2006**  |   | **2007** |      | **Thereafter** |   |
|-------------------------------|--------|-------------|------------|----------|--------|-----------|--------|----------|-----------|----------------|--------|
|                          |   |        |       |     |   |      |   |     |      |           |   |
| Long-tern debt (1)            |   | $           | 19,990,125 |     | $      | 6,140,366 |   | $        | 7,669,199 |           | $      | 7,669,199 |   | $ | 3,195,512 |   |
|                          |   |        |       |     |   |      |   |     |      |           |   |
| Lease commitments(2)          |   | 186,000     |       | 186,000  |   | 186,000   |   | 151,000  |      | —         |   |
|                          |   |        |       |     |   |      |   |     |      |           |   |
| Total contractual obligations |   | $           | 20,176,125 |     | $      | 6,326,366 |   | $        | 7,855,199 |           | $      | 7,820,199 |   | $ | 3,195,512 |   |

 

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(1)          See Note 6 of theNotes to Consolidated Financial Statements.

 

16

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(2)          See Note 10 of theNotes to Consolidated Financial Statements.

 

(3)   The amounts shown for 2004 do not includeinterest payable, redeemable common stock and other amounts which areconsidered short term liabilities.  SeeNote 6 and 7, respectively, of the Notes to Consolidated Financial Statements.

 

**CriticalAccounting Policies and Recent Accounting Pronouncements**

 

We have identified the policies below as criticalto our business operations and the understanding of our financialstatements.  The impact of thesepolicies and associated risks are discussed throughout Management’s Discussionand Analysis where such policies affect our reported and expected financialresults.  A complete discussion of ouraccounting policies is included in Note 1 of the Notes to ConsolidatedFinancial Statements.

 

***DevelopmentStage and Going Concern***

 

We are a development stage company and are in theearly stages of establishing production and revenues from the development ofour primary property in Kazakhstan.  Ourability to realize the carrying value of our assets is dependent on being ableto produce and sell significant quantities of oil from the South AlibekField.  Our financial statements havebeen presented on the basis that we are a going concern, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness.  We have accumulated losses ofapproximately $12.1 million and have incurred a significant amount of debt inthe development phase of our operations. To fully develop the Field and achieve positive cash flow, we willrequire additional funding.  Theconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of recorded asset amounts or amounts andclassification of liabilities which might be necessary should the Company beunable to continue in existence.

 

***Principles ofConsolidation***

 

Our consolidated financial statements include allof our consolidated subsidiaries.  Ourmost significant wholly-owned subsidiary is Caspi Neft, which holds License1557 and the related Exploration Contract for the South Alibek Field.  Except for the drilling rig, which is ownedby the parent company, the assets and results of operations of Caspi Neftrepresent substantially all of our consolidated assets and operations.

 

In February 2002, we granted Bramex a two-yearoption to acquire a 50% equity interest in Caspi Neft, the subsidiary whichholds our interest in the South Alibek Field. In order to exercise the option, Bramex was required to provide $50.0million in commercial financing to Caspi Neft in two tranches of $20.0 millionand $30.0 million, respectively.  Afterthis financing had been provided, Bramex could exercise the option by thepayment of $15.0 million, the proceeds of which were to be dedicated to theretirement of part of Caspi Neft’s debt. Bramex completed all terms and funding necessary to exercise the optionon February 4, 2004.  As a resultof the option exercise by Bramex, we may no longer be eligible to fullyconsolidate Caspi Neft after February 4, 2004, which would materially affectthe presentation of our financial statements. The resulting accounting treatment would be dependent on the degree ofmanagement control we retain over Caspi Neft and other factors related to theeconomic substance of our arrangement with Bramex.  Additionally, our net interest in the oil and gas reserves of theField will be proportionally reduced to reflect the new ownershipstructure.  See additional informationon this matter in Note 12 of the Notes to Consolidated Financial Statements.

 

***Oil and Gas ReserveInformation***

 

The information regarding our oil and gas reserves,the changes thereto and the estimated future net cash flows are dependent uponengineering, price and other assumptions used in preparing our annual reservestudy.  A qualified independentpetroleum engineer was engaged to prepare the estimates of our oil and gasreserves in accordance with applicable engineering standards and in accordancewith Securities and Exchange Commission guidelines.  However, there are numerous uncertainties inherent in estimatingquantities of proved reserves and in projecting future rates of production andthe timing of development expenditures. These uncertainties are greater for properties which are undeveloped orhave a limited production history, such as the South Alibek Field.  Changes in prices and cost levels, as wellas the timing of future development costs, may

 

17

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cause actual results to vary significantly from thedata presented.  Our oil and gas reservedata represent estimates only and are not intended to be a forecast or fairmarket value of our assets.

 

Our oil and gas reserve data and estimated futurenet cash flows have been prepared assuming we are successful in negotiating acommercial production contract which will allow production for the expected25-year term of the contract.  Thecurrent maximum statutory royalty rate of 6%, as provided by new legislationwhich came into effect in 2004, has been used to calculate the governmentroyalty.  Production contracts arecustomarily awarded upon determination that the field is capable of commercialrates of production and that the applicant has complied with the other terms ofits license and exploration contract. However, we are not guaranteed the right to a production contract.  If we were not successful in negotiating aproduction contract on acceptable terms, it would materially change our oil andgas reserve data and estimated future net cash flows.

 

***SuccessfulEfforts Method of Accounting***

 

We follow the successful efforts method ofaccounting for our investments in oil and gas properties, as more fullydescribed in Note 1 of the Notes to Consolidated Financial Statements.  This accounting method has a pervasiveeffect on our reported financial position and results of operations.

 

***CapitalizedInterest Costs***

 

We capitalize interest costs on oil and gasprojects under development, including the costs of unproved leasehold andproperty acquisition costs, wells in progress and related facilities.  We also capitalized interest on our drillingrig during the time it was being prepared for its intended use.  During the years ended December 31,2003 and 2002, we capitalized $4.2 million and $1.3 million, respectively, ofinterest costs, which reduced our reported net interest expense to $772,409 and$338,645 respectively.  Since asignificant portion of our financial resources has been dedicated to theexploration and development of our Kazakhstan property, the resulting interestcapitalized has been significant.  Thiscapitalized interest becomes part of the capitalized costs of our propertieswhich will be amortized as a part of depreciation, depletion and amortizationor charged to expense if the results of our drilling should prove unsuccessful.

 

**RecentAccounting Pronouncements**

 

EffectiveJanuary 1, 2003, Transmeridian adopted Statement of Financial AccountingStandards No. 143, Accounting for Asset Retirement Obligations(“SFAS No. 143”) using a cumulative effect approach to recognizetransition amounts for asset retirement obligations, asset retirement costs andaccumulated depreciation. SFAS No. 143 requires liability recognition for retirementobligations associated with tangible long-lived assets, such as producing wellsites, offshore production platforms, and natural gas processing plants.  The obligations included within the scope ofSFAS No. 143 are those for which a company faces a legalobligation.  The initial measurement ofthe asset retirement obligation is to record a separate liability at its fairvalue with an offsetting asset retirement cost recorded as an increase to therelated property and equipment on the balance sheet.  The asset retirement cost is depreciated using a systematic andrational method similar to that used for the associated property andequipment.  Based on operationscompleted as of December 31, 2003, the estimated future dismantlement,restoration and abandonment obligation related to the South Alibek Field was$186,000 and there was no cumulative effect upon adoption of SFAS No. 143.

 

In December 2003, the FASBissued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities*,* (“FIN 46R”) which addresseshow a business enterprise should evaluate whether it has a controlling financialinterest in an entity through means other than voting rights and accordinglyshould consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities,which was issued in January 2003. Transmeridian will be required to apply FIN 46R to variableinterests in variable interest entities (“VIEs”) created afterDecember 31, 2003.  For variableinterests in VIEs created before January 1, 2004, FIN 46R will beapplied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that werecreated before January 1, 2004, the assets, liabilities and noncontrollinginterests of the VIE initially would be measured at their carrying amounts withany difference between the net amount added to the consolidated balance

 

18

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sheet and any previouslyrecognized interest being recognized as the cumulative effect of a change inaccounting principle.  If determiningthe carrying amounts is not practicable, fair value at the date FIN 46Rfirst applies may be used to measure the assets, liabilities and noncontrollinginterest of the VIE.  FIN 46R isnot expected to affect our consolidated financial statements.

 

SFAS Statement No. 150, Accounting for Certain Financial Instrumentswith Characteristics of Liabilities and Equity,(“SFAS No. 150”) was issued in May 2003.  SFAS No. 150 establishes standards for theclassification and measurement of certain financial instruments withcharacteristics of both liabilities and equity.  SFAS No. 150 also includes required disclosures forfinancial instruments within its scope. SFAS No. 150 was effective for instruments entered into ormodified after May 31, 2003 and otherwise will be effective as ofJanuary 1, 2004, except for mandatory redeemable financialinstruments.  For certain mandatoryredeemable financial instruments, SFAS No. 150 will be effective onJanuary 1, 2005.  The effectivedate has been deferred indefinitely for certain other types of mandatoryredeemable financial instruments. SFAS No. 150 is not expected to affect our consolidatedfinancial statements.

** **

**Item7A.  Quantitative and QualitativeDisclosures About Market Risk**

 

**OilPrices**

 

Our future success is dependent on being able totransport and market our production either within Kazakhstan or preferablythrough export to international markets. Crude oil prices are subject to significant volatility in response tochanges in supply, market uncertainty and a variety of other factors beyond ourcontrol.  All of our sales of crude oilhave been based on prevailing current market prices at the time of sale.  As of December 31, 2003 we have notentered into any long-term sales arrangements or financial hedging activitieswith respect to projected oil production and we do not anticipate entering intoany such arrangements at this time.  Wemay consider long-term sales arrangements or hedging at some point in thefuture.

 

**InterestRate Risk**

 

At December 31, 2003, Transmeridian hadlong-term debt outstanding of $24.6 million. The total amount bears interest at a fixed rate of 15% per annum.

 

**ForeignCurrency Risk**

 

The Company’s functional currency is the U.S. dollar.  The financial statements of the Company’sforeign subsidiaries are measured in U.S. dollars.  Accordingly, transaction costs for the conversion to variouscurrencies for foreign operations are recognized in the consolidated financialstatements at the time of each transaction.

 

19

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**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  All statements other thanstatements of historical facts included or incorporated by reference in thisreport, including, without limitation, statements regarding the Company’sfuture financial position, business strategy, budgets, projected revenues,projected costs and plans and objectives of management for future operations,are forward-looking statements,  Inaddition, forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will,” “expect,” “intend,”“project,” “estimate,” “anticipate,” “believe,” or “continue” or the negativethereof or variations thereon or similar terminology.  Although the Company believes that the expectations reflected insuch forward-looking statements are reasonable, it can give no assurance thatsuch expectations will prove to be correct. Important factors that could cause actual results to differ materiallyfrom the Company’s expectations (“cautionary statements”) include, but are notlimited to, the Company’s assumptions about energy markets, production levels,reserve levels, operating results, competitive conditions, technology, theavailability of capital resources, capital expenditure obligations, the supplyand demand for oil, natural gas and other products or services, the price ofoil, natural gas and other products or services, currency exchange rates, theweather, inflation, the availability of goods and services, drilling risks,future processing volumes and pipeline throughput, general economic conditions,either internationally or nationally or in the jurisdictions in whichTransmeridian or its subsidiaries are doing business, legislative or regulatorychanges, including changes in environmental regulation, environmental risks andliability under federal, state and foreign environmental laws and regulations,the securities or capital markets and other factors disclosed under, “Item 2.Properties – Proved Reserves and Estimated Future Net Revenue,” “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and “Item 7A. Quantitative and Qualitative Disclosure About MarketRisk” and elsewhere in this report.  Allsubsequent written and oral forward-looking statements attributable to theCompany, or persons acting on its behalf, are expressly qualified in theirentirety by the cautionary statements. The Company assumes no duty to update or revise its forward-lookingstatements based on changes in internal estimates or expectations or otherwise.

 

20

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**Item 8****.  FinancialStatements**

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report  of Independent Certified Public Accountants                                                                                                    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                   |   |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                                                                          |   |
|                                                                                                                                                   |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001  With Cumulative Total from Inception to December 31, 2003 |   |
|                                                                                                                                                   |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended  December 31, 2003, 2002 and 2001                                            |   |
|                                                                                                                                                   |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001  With Cumulative Total from Inception to December 31, 2003 |   |
|                                                                                                                                                   |   |
| Notes to  Consolidated Financial Statements                                                                                                            |   |

 

21

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**Report of Independent Certified Public Accountants**

 

Board of DirectorsTransmeridian Exploration, Inc. and Subsidiaries

 

We have auditedthe accompanying consolidated balance sheets of Transmeridian Exploration, Inc.and Subsidiaries (a development stage company) as of December 31, 2003 and2002, and the related consolidated statements of operations, stockholders’equity and cash flows for each of the years ended December 31, 2003, 2002 and2001 and for the period from inception to December 31, 2003.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Transmeridian Exploration Inc.and Subsidiaries at December 31, 2003 and 2002 and the consolidated results oftheir operations and cash flows for each of the years ended December 31, 2003, 2002and 2001 and for the period from inception to December 31, 2003, in conformitywith accounting principles generally accepted in the United States of America.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  Asshown in the financial statements, the Company has incurred cumulative netlosses totaling $12,061,436 through December 31, 2003, and, as of that date,the Company’s current liabilities exceeded its current assets by$29,850,854.  These factors, amongothers, including the Company’s ability to develop its proved reserves, asdiscussed in Note 2 to the consolidated financial statements, raise substantialdoubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to thesematters are also described in Note 2. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

 
| /s/                                 | John  A. Braden & Company, P.C. |   |
|-------------------------------------|-------------------------------------|--------|
| John  A. Braden & Company, P.C. |
|                                |
| Houston,  Texas                     |
| March  22, 2004                     |

 

22

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TransmeridianExploration, Inc. and Subsidiaries(A Development Stage Company)Consolidated Balance SheetsAs of December 31, 2003 and 2002

 
|                                                                            |   | **2003**    |       | **2002**   |       |
|---------------------------------------------------------------------------------|--------|-------------|------------|------------|------------|
| **ASSETS**                                                                      |   |        | ** ** |       | ** ** |
|                                                                            |   |        |       |       |       |
| Current assets:                                                                 |   |        |       |       |       |
| Cash and cash equivalents                                                       |   | $           | 1,321,514  |       | $          | 624,807 |   |
| Receivables                                                                     |   | 143,135     |       | 5,527      |       |
| Crude oil inventory                                                             |   | 509,156     |       | —     |       |
| Prepaid expenses                                                                |   | 93,999      |       | 183,391    |       |
| Total current assets                                                            |   | 2,067,804   |       | 813,725    |       |
|                                                                            |   |        |       |       |       |
| Property and equipment:                                                         |   |        |       |       |       |
| Oil and gas properties, successful efforts  method                              |   | 48,800,256  |       | 18,167,880 |       |
| Drilling rig and equipment                                                      |   | 6,484,983   |       | 6,040,818  |       |
| Transportation equipment                                                        |   | 239,821     |       | 222,844    |       |
| Office and technology equipment                                                 |   | 253,351     |       | 170,847    |       |
| Total property and equipment                                                    |   | 55,778,411  |       | 24,602,389 |       |
| Less accumulated depreciation                                                   |   | 1,217,836   |       | 205,790    |       |
| Net property and equipment                                                      |   | 54,560,575  |       | 24,396,599 |       |
|                                                                            |   |        |       |       |       |
| Other assets                                                                    |   | 470,693     |       | 1,061,090  |       |
| Total assets                                                                    |   | $           | 57,099,072 |       | $          | 26,271,414 |   |
|                                                                            |   |        |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                   |   |        | ** ** |       | ** ** |
|                                                                            |   |        |       |       |       |
| Current liabilities:                                                            |   |        |       |       |       |
| Accounts payable and accrued liabilities                                        |   | $           | 3,268,552  |       | $          | 1,419,004 |   |
| Current maturities of long-term debt                                            |   | 20,176,205  |       | 3,842,992  |       |
| Redeemable common stock                                                         |   | 2,000,000   |       | 2,000,000  |       |
| Deferred revenue                                                                |   | 509,156     |       | —     |       |
| Interest payable                                                                |   | 5,716,720   |       | 1,127,106  |       |
| Notes payable to related parties                                                |   | 248,025     |       | 248,025    |       |
| Total current liabilities                                                       |   | 31,918,658  |       | 8,637,127  |       |
|                                                                            |   |        |       |       |       |
| Long-term debt, net of current maturities                                       |   | 24,488,196  |       | 13,752,304 |       |
|                                                                            |   |        |       |       |       |
| Other long term liabilities                                                     |   | 186,000     |       | —     |       |
|                                                                            |   |        |       |       |       |
| Stockholders’ equity:                                                      |   |        |       |       |       |
| Preferred stock, 5,000,000 shares  authorized                                   |   | —      |       | 2          |       |
| Common stock, $0.0006 par value per  share,  200,000,000 shares authorized |   | 42,404      |       | 35,488     |       |
| Additional paid-in capital                                                      |   | 12,525,250  |       | 10,201,625 |       |
| Deficit accumulated during development  stage                                   |   | (12,061,436 | )          | (6,355,132 | )          |
| Total stockholders’ equity                                                 |   | 506,218     |       | 3,881,983  |       |
| Total liabilities and stockholders’ equity                                 |   | $           | 57,099,072 |       | $          | 26,271,414 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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TransmeridianExploration, Inc. and Subsidiaries(A Development Stage Company)Consolidated Statements of OperationsFor the years ended December 31, 2003, 2002 and 2001

 
|                                           |   |       |       | **Cumulative  Total from  Inception to  December 31,  2003** |   |
|------------------------------------------------|--------|------------|------------|--------------------------------------------------------------|--------|
|                                           |
|                                           |
| **For the  years ended December 31,**          |
| **2003**                                       |   | **2002**   |       | **2001**                                                     |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Oil revenues                                   |   | $          | 797,411    |                                                         | $      | — |   | $ | 51,289 |   | $ | 848,700 |   |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Operating and administrative expenses          |   | 5,712,440  |       | 2,936,603                                                    |   | 1,975,534 |   | 10,811,717 |   |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Operating loss                                 |   | (4,915,029 | )          | (2,936,603                                                   | )      | (1,924,245 | ) | (9,963,017 | ) |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Other income (expense):                        |   |       |       |                                                         |   |   |   |   |   |
| Gain on sale of working interest               |   | —     |       | —                                                       |   | — |   | 414,146 |   |
| Interest income                                |   | 870        |       | 3,929                                                        |   | — |   | 4,799 |   |
| Start-up costs                                 |   | —     |       | —                                                       |   | — |   | (246,484 | ) |
| Interest expense, net of capitalized  interest |   | (772,409   | )          | (338,229                                                     | )      | (188,645 | ) | (2,090,353 | ) |
| Total other income (expense)                   |   | (771,539   | )          | (334,300                                                     | )      | (188,645 | ) | (1,917,892 | ) |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Net loss                                       |   | (5,686,568 | )          | (3,270,903                                                   | )      | (2,112,890 | ) | (11,880,909 | ) |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Preferred dividends                            |   | (19,736    | )          | (37,520                                                      | )      | (123,271 | ) | (180,527 | ) |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Net loss attributable to common stockholders   |   | $          | (5,706,304 | )                                                            | $      | (3,308,423 | ) | $ | (2,236,161 | ) | $ | (12,061,436 | ) |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Basic and diluted loss per share               |   | $          | (0.09      | )                                                            | $      | (0.06 | ) | $ | (0.04 | ) |   |   |
|                                           |   |       |       |                                                         |   |   |   |   |   |
| Weighted average common shares outstanding     |   | 64,573,627 |       | 58,142,461                                                   |   | 59,621,255 |   |   |   |

 

The accompanying notes are an integral part ofthese statements.

 

24

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TransmeridianExploration, Inc. and Subsidiaries(A Development Stage Company)Consolidated Statements ofStockholders’ EquityFor the years ended December 31, 2003, 2002 and 2001

 
|                                                            |   | **Preferred  shares** |       | **Preferred  stock** |       | **Common  shares**  |       | **Common  stock** |       | **Additional  paid-in  capital** |       | **Accumulated  deficit** |           | **Treasury  stock** |       | **Total**       |       |
|-----------------------------------------------------------------|--------|-----------------------|------------|----------------------|------------|---------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|----------------|---------------------|------------|-----------------|------------|
|                                                            |   |                  |       |                 |       | **(in 000’s)** |       |              |       |                             |       |                     |           |                |       |            |       |
|                                                            |   |                  |       |                 |       |                |       |              |       |                             |       |                     |           |                |       |            |       |
| **Balances  at December 31, 2000**                              |   | **3,000**             | ** ** | **$**                | **2**      | ** **          | **57,797** | ** **        | **$**      | **34,678**                       | ** ** | **$**                    | **4,172,329**  | ** **          | **$**      | **(810,548**    | **)**      | **$** | **—** | ** ** | **$** | **3,396,461** | ** ** |
|                                                            |   |                  |       |                 |       |                |       |              |       |                             |       |                     |           |                |       |            |       |
| Proceeds from the sale of common stock, net of offering costs   |   | —                |       | —               |       | 2,824               |       | 1,694             |       | 1,633,319                        |       | —                   |           | —              |       | 1,635,013       |       |
| Preferred stock exchanged for working interest                  |   | 100,000               |       | 60                   |       | —              |       | —            |       | 1,499,940                        |       | —                   |           | —              |       | 1,500,000       |       |
| Common stock issued for services                                |   | —                |       | —               |       | 126                 |       | 76                |       | 153,424                          |       | —                   |           | —              |       | 153,500         |       |
| Purchase of treasury stock                                      |   | —                |       | —               |       | —              |       | —            |       | —                           |       | —                   |           | (1,320              | )          | (1,320          | )          |
| Proceeds from the sale of treasury stock, net of offering costs |   | —                |       | —               |       | —              |       | —            |       | 1,540,000                        |       | —                   |           | 1,320               |       | 1,541,320       |       |
| Beneficial conversion feature on convertible preferred stock    |   | —                |       | —               |       | —              |       | —            |       | 52,969                           |       | (52,969                  | )              | —              |       | —          |       |
| Accrued dividends on convertible preferred stock                |   | —                |       | —               |       | —              |       | —            |       | —                           |       | (70,302                  | )              | —              |       | (70,302         | )          |
| Retirement of common stock                                      |   | —                |       | —               |       | (5,000              | )          | (3,000            | )          | —                           |       | —                   |           | —              |       | (3,000          | )          |
| Net loss                                                        |   | —                |       | —               |       | —              |       | —            |       | —                           |       | (2,112,890               | )              | —              |       | (2,112,890      | )          |
|                                                            |   |                  |       |                 |       |                |       |              |       |                             |       |                     |           |                |       |            |       |
| **Balances  at December 31, 2001**                              |   | **103,000**           | ** ** | **$**                | **62**     | ** **          | **55,747** | ** **        | **$**      | **33,448**                       | ** ** | **$**                    | **9,051,981**  | ** **          | **$**      | **(3,046,709**  | **)**      | **$** | **—** | ** ** | **$** | **6,038,782** | ** ** |
|                                                            |   |                  |       |                 |       |                |       |              |       |                             |       |                     |           |                |       |            |       |
| Conversion of preferred stock                                   |   | (100,000              | )          | (60                  | )          | 1,500               |       | 900               |       | (840                             | )          | —                   |           | —              |       | —          |       |
| Common stock issued for services                                |   | —                |       | —               |       | 4,100               |       | 2,460             |       | 767,540                          |       | —                   |           | —              |       | 770,000         |       |
| Proceeds from the sale of common stock, net of offering costs   |   | —                |       | —               |       | 500                 |       | 300               |       | 99,900                           |       | —                   |           | —              |       | 100,200         |       |
| Common stock used to retire deferred financing obligation       |   | —                |       | —               |       | 4,000               |       | 2,400             |       | 197,600                          |       | —                   |           | —              |       | 200,000         |       |
| Beneficial conversion feature on convertible debentures         |   | —                |       | —               |       | —              |       | —            |       | 35,924                           |       | —                   |           | —              |       | 35,924          |       |
| Issuance of warrants in connection with convertible debentures  |   | —                |       | —               |       | —              |       | —            |       | 20,000                           |       | —                   |           | —              |       | 20,000          |       |
| Capital contributed by stockholder                              |   | —                |       | —               |       | —              |       | —            |       | 25,500                           |       | —                   |           | —              |       | 25,500          |       |
| Accrued dividends on convertible preferred stock                |   | —                |       | —               |       | —              |       | —            |       | —                           |       | (37,520                  | )              | —              |       | (37,520         | )          |
| Retirement of common stock                                      |   | —                |       | —               |       | (6,700              | )          | (4,020            | )          | 4,020                            |       | —                   |           | —              |       | —          |       |
| Net loss                                                        |   | —                |       | —               |       | —              |       | —            |       | —                           |       | (3,270,903               | )              | —              |       | (3,270,903      | )          |
|                                                            |   |                  |       |                 |       |                |       |              |       |                             |       |                     |           |                |       |            |       |
| **Balances  at December 31, 2002**                              |   | **3,000**             | ** ** | **$**                | **2**      | ** **          | **59,147** | ** **        | **$**      | **35,488**                       | ** ** | **$**                    | **10,201,625** | ** **          | **$**      | **(6,355,132**  | **)**      | **$** | **—** | ** ** | **$** | **3,881,983** | ** ** |
|                                                            |   |                  | ** ** |                 | ** ** |                | ** ** |              | ** ** |                             | ** ** |                     | ** **     |                | ** ** |            | ** ** |
| Conversion of preferred stock                                   |   | (3,000                | )          | $                    | (2         | )                   | 1,546      |              | 928        |                             | 56,329     |                     | —         |                | —     |            | 57,255     |   |
| Common stock issued for services                                |   | —                |       | —               |       | 5,320               |       | 3,192             |       | 830,075                          |       | —                   |           | —              |       | 833,267         |       |
| Proceeds from the sale of common stock, net of offering costs   |   | —                |       | —               |       | 3,333               |       | 2,000             |       | 998,000                          |       | —                   |           | —              |       | 1,000,000       |       |
| Common stock used to retire debt                                |   | —                |       | —               |       | 1,327               |       | 796               |       | 295,421                          |       | —                   |           | —              |       | 296,217         |       |
| Stock based compensation                                        |   | —                |       | —               |       | —              |       | —            |       | 122,800                          |       | —                   |           | —              |       | 122,800         |       |
| Issuance of warrants in connection with services                |   | —                |       | —               |       | —              |       | —            |       | 21,000                           |       | —                   |           | —              |       | 21,000          |       |
| Accrued dividends on convertible preferred stock                |   | —                |       | —               |       | —              |       | —            |       | —                           |       | (19,736                  | )              | —              |       | (19,736         | )          |
| Net loss                                                        |   | —                |       | —               |       | —              |       | —            |       | —                           |       | (5,686,568               | )              | —              |       | (5,686,568      | )          |
|                                                            |   |                  | ** ** |                 | ** ** |                | ** ** |              | ** ** |                             | ** ** |                     | ** **     |                | ** ** |            | ** ** |
| **Balances  at December 31, 2003**                              |   | **—**            | ** ** | **$**                | **—** | ** **          | **70,673** | ** **        | **$**      | **42,404**                       | ** ** | **$**                    | **12,525,250** | ** **          | **$**      | **(12,061,436** | **)**      | **$** | **—** | ** ** | **$** | **506,218** | ** ** |

 

Theaccompanying notes are an integral part of these statements.

 

25

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TransmeridianExploration, Inc. and Subsidiaries(A Development Stage Company)Consolidated Statements of Cash FlowsFor the years ended December 31, 2003, 2002 and 2001

 
|                                                                         |   |        |       |        |   |       |   | **Cumulative  Total from  Inception to  December 31,  2003** |       |
|------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|------------|--------|--------------------------------------------------------------|------------|
|                                                                         |   |        |       |        |
|                                                                         |
| **For the  years ended December 31,**                                        |
| **2003**                                                                     |   | **2002**    |       | **2001**    |
|                                                                         |   |        |       |        |   |       |   |                                                         |       |
| **Cash flows from operating activities:**                                    |   |        |       |        |   |       |   |                                                         |       |
| Net loss                                                                     |   | $           | (5,686,568 | )           | $      | (3,270,903 | )      | $                                                            | (2,112,890 | ) | $ | (11,880,909 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |        |       |        |   |       |   |                                                         |       |
| Depreciation and amortization                                                |   | 245,712     |       | 51,859      |   | 9,481      |   | 308,002                                                      |       |
| Amortization of debt financing costs                                         |   | 184,166     |       | 126,390     |   | —     |   | 310,556                                                      |       |
| Amortization of prepaid contracts                                            |   | 411,355     |       | 306,250     |   | —     |   | 717,605                                                      |       |
| Stock based compensation expense                                             |   | 122,800     |       | —      |   | —     |   | 122,800                                                      |       |
| Exploration expense                                                          |   | 277,012     |       | —      |   | —     |   | 277,012                                                      |       |
| Stock issued for services                                                    |   | 285,299     |       | 35,000      |   | 153,500    |   | 1,020,199                                                    |       |
| Increase in interest payable                                                 |   | 424,920     |       | —      |   | —     |   | 424,920                                                      |       |
| Imputed interest expense                                                     |   | —      |       | 35,924      |   | —     |   | 35,924                                                       |       |
| Gain on sale of working interest                                             |   | —      |       | —      |   | —     |   | (414,146                                                     | )          |
| Decrease (increase) in receivables                                           |   | (49,465     | )          | 9,753       |   | (270,112   | )      | (309,824                                                     | )          |
| Increase in prepaid expenses                                                 |   | 89,392      |       | (157,891    | )      | —     |   | (118,059                                                     | )          |
| Increase in accounts payable and accrued  liabilities                        |   | 40,687      |       | 807,321     |   | 339,724    |   | 1,419,171                                                    |       |
| Net cash used in operating activities                                        |   | (3,654,690  | )          | (2,056,297  | )      | (1,880,297 | )      | (8,086,749                                                   | )          |
|                                                                         |   |        |       |        |   |       |   |                                                         |       |
| **Cash flows from investing activities:**                                    |   |        |       |        |   |       |   |                                                         |       |
| Capital expenditures                                                         |   | (31,176,022 | )          | (11,486,100 | )      | (1,813,713 | )      | (47,743,010                                                  | )          |
| Non-cash portion of capital expenditures                                     |   | 6,835,378   |       | 1,127,106   |   | —     |   | 7,962,484                                                    |       |
| Capitalized Depreciation                                                     |   | 766,333     |       | 143,501     |   | —     |   | 909,834                                                      |       |
| Increase in other assets                                                     |   | (65,997     | )          | (83,898     | )      | —     |   | (149,895                                                     | )          |
| Proceeds from the sale of working interest                                   |   | —      |       | —      |   | —     |   | 614,146                                                      |       |
| Net cash used in investing activities                                        |   | (23,640,308 | )          | (10,299,391 | )      | (1,813,713 | )      | (38,406,441                                                  | )          |
|                                                                         |   |        |       |        |   |       |   |                                                         |       |
| **Cash flows from financing activities:**                                    |   |        |       |        |   |       |   |                                                         |       |
| Proceeds from long-term debt                                                 |   | 28,807,214  |       | 14,672,759  |   | 1,710,103  |   | 45,690,234                                                   |       |
| Repayments of long-term debt                                                 |   | (1,515,509  | )          | (1,877,463  | )      | (210,103   | )      | (3,603,075                                                   | )          |
| Increase in notes payable to related  parties                                |   | —      |       | 248,025     |   | —     |   | 248,025                                                      |       |
| Payment of deferred financing costs                                          |   | (300,000    | )          | (200,000    | )      | —     |   | (500,000                                                     | )          |
| Payment of dividends on preferred stock                                      |   | —      |       | (70,302     | )      | —     |   | (70,302                                                      | )          |
| Purchase of treasury stock                                                   |   | —      |       | —      |   | (1,320     | )      | (1,320                                                       | )          |
| Proceeds from sale of treasury stock, net                                    |   | —      |       | —      |   | 1,541,320  |   | 1,541,320                                                    |       |
| Proceeds from sale of common stock, net                                      |   | 1,000,000   |       | 100,200     |   | 1,635,013  |   | 5,895,664                                                    |       |
| Repayment of amounts due to third parties                                    |   | —      |       | —      |   | (1,385,842 | )      | (1,385,842                                                   | )          |
| Net cash provided by financing activities                                    |   | 27,991,705  |       | 12,873,219  |   | 3,289,171  |   | 47,814,704                                                   |       |
|                                                                         |   |        |       |        |   |       |   |                                                         |       |
| Net increase (decrease) in cash and cash  equivalents                        |   | 696,707     |       | 517,531     |   | (404,839   | )      | 1,321,514                                                    |       |
|                                                                         |   |        |       |        |   |       |   |                                                         |       |
| Cash and cash equivalents, beginning of  period                              |   | 624,807     |       | 107,276     |   | 512,115    |   | —                                                       |       |
|                                                                         |   |        |       |        |   |       |   |                                                         |       |
| Cash and cash equivalents, end of period                                     |   | $           | 1,321,514  |        | $      | 624,807    |   | $                                                            | 107,276    |   | $ | 1,321,514 |   |

 

The accompanying notes are an integral partof these statements.

 

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Transmeridian Exploration, Inc. and Subsidiaries(A Development Stage Company)Consolidated Statements of Cash Flows – Supplemental InformationFor the years ended December 31, 2003, 2002 and 2001

 
|                                                                           |   |       |    |       |   |      |   | **Cumulative  Total from  Inception to  December 31,  2003** |    |
|--------------------------------------------------------------------------------|--------|------------|---------|------------|--------|-----------|--------|--------------------------------------------------------------|---------|
|                                                                           |   |       |    |       |
|                                                                           |   |       |    |       |
| **For the  years ended December 31,**                                          |
| **2003**                                                                       |   | **2002**   |    | **2001**   |
|                                                                           |   |       |    |       |   |      |   |                                                         |    |
| **Amounts paid for:**                                                          |   |       |    |       |   |      |   |                                                         |    |
| Interest                                                                       |   | $          | 187,613 |       | $      | 393,452   |   | $                                                            | 174,534 |   | $ | 1,546,668 |   |
| Interest capitalized (non-cash)                                                |   | (4,164,694 | )       | (1,285,994 | )      | —    |   | (6,997,356                                                   | )       |
| Income taxes                                                                   |   | —     |    | —     |   | —    |   | —                                                       |    |
|                                                                           |   |       |    |       |   |      |   |                                                         |    |
| **Non-cash transactions:**                                                     |   |       |    |       |   |      |   |                                                         |    |
| Common stock issued for services                                               |   | $          | 833,267 |       | $      | 770,000   |   | $                                                            | 153,500 |   | $ | 2,303,167 |   |
| Issuance of common stock to settle deferred  financing obligation              |   | —     |    | 200,000    |   | —    |   | 200,000                                                      |    |
| Accrued and unpaid dividends on convertible  preferred stock                   |   | 19,736     |    | 37,520     |   | 70,302    |   | 107,822                                                      |    |
| Capital contribution by stockholder for  investor relations services           |   | —     |    | 25,500     |   | —    |   | 25,500                                                       |    |
| Issuance of warrants in connection with services                               |   | 21,000     |    | —     |   | —    |   | 21,000                                                       |    |
| Issuance of warrants in connection with  convertible debentures                |   | —     |    | 20,000     |   | —    |   | 20,000                                                       |    |
| Asset retirement obligation                                                    |   | 186,000    |    | —     |   | —    |   | 186,000                                                      |    |
| Retirement of common stock                                                     |   | —     |    | 4,020      |   | 3,000     |   | 7,020                                                        |    |
| Exchange of convertible preferred stock for  common stock                      |   | 2          |    | 60         |   | —    |   | 62                                                           |    |
| Acquisition of drilling rig for debt and  redeemable common stock              |   | —     |    | —     |   | 5,300,000 |   | 5,300,000                                                    |    |
| Issuance of preferred stock in exchange for  working interest                  |   | —     |    | —     |   | 1,500,000 |   | 1,500,000                                                    |    |
| Deferred financing costs incurred but not  paid in cash                        |   | —     |    | —     |   | 400,000   |   | 400,000                                                      |    |
| Acquisition of oil and gas properties for  debt                                |   | —     |    | —     |   | —    |   | 1,385,842                                                    |    |
| Conversion of debt to preferred stock                                          |   | —     |    | —     |   | —    |   | 300,158                                                      |    |
| Conversion of debt to common stock                                             |   | 296,217    |    | —     |   | —    |   | 296,217                                                      |    |
| Issuance of common stock in exchange for  dividends payable on preferred stock |   | 57,255     |    | —     |   | —    |   | 57,255                                                       |    |

 

The accompanyingnotes are an integral part of these financial statements

 

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Transmeridian Exploration, Inc. andSubsidiaries

(A Development Stage Company)

Notes to Consolidated Financial Statements

December 31, 2003

 

**Note 1 – Organization and Summaryof Significant Accounting Policies**

 

TransmeridianExploration, Inc. (the “Company”) was incorporated in the State of Delaware inApril 2000.  The Company’s primaryoperations are conducted in the Republic of Kazakhstan, through its whollyowned subsidiary, Caspi Neft TME (“Caspi Neft”), which is a KazakhstanSubsidiary Open Joint Stock Company.

 

**Risk Factors**

 

The Company is a developmentstage entity organized to acquire and develop oil and gas properties.  Its primary asset is License 1557 and therelated Exploration Contract for the development of the South Alibek Field (the“Field”) in Kazakhstan.  The Company’sprimary emphasis since its formation in 2000 has been the exploration anddevelopment of the Field.

 

The Company’s operations aresubject to various risks inherent in foreign operations.  These risks may include loss of revenue,property or commercial rights as a result of government action or otherhazards, such as war or civil unrest. The Company’s business is also subject to all the operating risksnormally associated with the exploration and development of oil and gasproperties.

 

**Principles of Consolidation**

 

Our consolidatedfinancial statements include all of our consolidated subsidiaries.  Our most significant wholly-owned subsidiaryis Caspi Neft, which holds License 1557 and the related Exploration Contract forthe South Alibek Field.  Except for thedrilling rig, which is owned by the parent company, the assets and results ofoperations of Caspi Neft represent substantially all of our consolidated assetsand operations.

 

In February 2002,we granted Bramex Management, Inc. (“Bramex”), the successor to Kazstroiproekt,Ltd. (“KSP”), a two-year option to acquire a 50% equity interest in Caspi Neft,the subsidiary which holds the rights to the South Alibek Field.  In order to exercise the option, Bramex wasrequired to provide $50.0 million in commercial financing to Caspi Neft in twotranches of $20.0 million and $30.0 million, respectively.  After this financing had been provided,Bramex could exercise the option by the payment of $15.0 million, the proceedsof which were to be dedicated to the retirement of part of Caspi Neft’sdebt.  Bramex completed all terms andfunding necessary to exercise the option on February 4, 2004.  As a result of the option exercise byBramex, we may no longer be eligible to fully consolidate Caspi Neft afterFebruary 4, 2004, which would materially affect the presentation of ourfinancial statements.  The resultingaccounting treatment would be dependent on the degree of management control weretain over Caspi Neft and other factors related to the economic substance ofour arrangement with Bramex. Additionally, our net interest in the oil and gas reserves of the Fieldwill be proportionally reduced to reflect the new ownership structure.  See additional information on this matter inNote 12.

 

**Use of Estimates**

 

To preparefinancial statements in conformity with U.S. generally accepted accountingprinciples, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results may differ materially fromthose estimates.

 

28

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**Cash and Cash Equivalents**

 

The Companyconsiders all highly liquid instruments with an original maturity of threemonths or less to be cash equivalents. Certain of the Company’s cash balances are maintained in foreign bankswhich are not covered by deposit insurance. The cash balances in theCompany’s U.S. accounts may exceed federally insured limits.

 

**Property and Equipment**

 

The Company follows the“successful efforts” method of accounting for its costs of acquisition,exploration and development of oil and gas properties.

 

Oil and gas leaseacquisition costs are capitalized when incurred.  Unproved properties with significant acquisition costs areassessed quarterly on a property-by-property basis, and any impairment in valueis recognized.  Unproved properties withacquisition costs which are not individually significant are aggregated, andthe portion of such costs estimated to be nonproductive, based on historicalexperience, is amortized over the average holding period.  If the unproved properties are determined tobe productive, the appropriate related costs are transferred to proved oil andgas properties.  Lease rentals areexpensed as incurred.

 

Oil and gasexploration costs, other than the costs of drilling exploratory wells, are chargedto expense as incurred.  Such costsinclude seismic expenditures and other geological and geophysical costs.  The costs of drilling exploratory wells arecapitalized pending determination of whether they have discovered provedcommercial reserves.  If provedcommercial reserves are not discovered, exploratory drilling costs areexpensed.  Costs to develop provedreserves are capitalized, including the costs of all development wells andrelated equipment used in the production of crude oil and natural gas.

 

Depreciation,depletion and amortization of the costs of proved oil and gas properties iscomputed using the unit-of-production method based upon estimated provedreserves.  Estimated futuredismantlement, restoration and abandonment costs, net of salvage values, areincluded in the calculation of costs to be amortized.  Under Statement of Financial Accounting Standards (“SFAS”) No.143, “Accounting for Asset Retirement Obligations”, which the Company isrequired to implement effective January 1, 2003, the discounted present valueof future dismantlement, restoration and abandonment costs will be recognizedas a liability on the balance sheet with the offsetting entry recorded as partof the cost of the asset.  The accretionof the discounted liability will be recognized as an operating expense.  Based on the operations completed as ofDecember 31, 2003, the estimated future dismantlement, restoration andabandonment costs related to the South Alibek Field are estimated to be$186,000.

 

Periodically, or whencircumstances indicate that an asset may be impaired, the Company comparesexpected undiscounted future cash flows at a producing field level to theunamortized capitalized cost of the asset. If the future undiscounted cash flows, based on the Company’s estimatesof anticipated production from proved reserves and future crude oil and naturalgas prices and operating costs, are lower than the unamortized capitalizedcost, the capitalized cost is reduced to fair value.  Fair value is calculated by discounting the future cash flows atan appropriate risk-adjusted discount rate.

 

In December 2001,the Company purchased a drilling rig for use in the development of the SouthAlibek Field.  The rig was placed inservice in October 2002 and is being depreciated on the straight-line methodover an estimated useful life of 10 years. Depreciation of the rig, as well as depreciation of other supportequipment used in exploration and development activities, is capitalized underthe successful efforts method as part of the cost of oil and gas properties.

 

Transportationequipment and office and technology equipment are depreciated on astraight-line basis over the estimated useful lives of the assets, which rangefrom three to five years.

 

Maintenance andrepairs are charged to expense as incurred. Replacements and expenditures which improve or extend the life of assetsare capitalized.  When assets are sold,retired or otherwise disposed 

 

29

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of, the applicablecosts and accumulated depreciation and amortization are removed from theaccounts, and the resulting gain or loss is recognized.

 

**CapitalizedInterest Costs**

 

## **Certaininterest costs have been capitalized as a part of the cost of unproved oil andgas properties, including property acquisition costs, wells in progress andrelated facilities.  Additionally,interest was capitalized on the drilling rig while it was being readied for itsintended use.  Total interest costscapitalized during the years ended December 31, 2003 and 2002 totaled $4.2million and $1.3 million, respectively. There was no interest capitalized during 2001.**

 

**Income Taxes**

 

The Companyaccounts for income taxes using the asset and liability method.  The asset and liability method requires therecognition of deferred tax assets and liabilities for the expected future taxconsequences of (i) temporary differences between financial statement carryingamounts of assets and liabilities and the basis of these assets and liabilitiesfor tax purposes and (ii) operating loss and tax credit carryforwards for taxpurposes.  Deferred tax assets arereduced by a valuation allowance when management concludes that it is morelikely than not that a portion of the deferred tax assets will not be realizedin a future period.

 

**Start-up Costs**

 

Start-up costs,including organizational expenses, are expensed as incurred.

 

**Debt Financing Costs**

 

In April 2001, theCompany entered into an agreement to pay a business and financial consultingfirm $400,000 for assistance in obtaining $20.0 million in financing for thedevelopment of the South Alibek Field. The consultant was successful in arranging the financing package, whichclosed in February 2002.  Under theterms of the agreement, one half of the debt placement fee was to be paid incash.  The balance of $200,000 could beretired with the issuance of 4,000,000 shares of common stock or paid in cashat the Company’s option.  The Companypaid one half of the obligation in cash in 2002 and elected to retire thebalance with the issuance of common stock. The deferred debt financing costs are being amortized over the threeyear term of the financing.

 

In August 2002, inconnection with the issuance of $200,000 in convertible debentures, the Companyissued 200,000 warrants at $0.42 per share to the lender.  These warrants were valued at $20,000 usingthe Black-Scholes model and are being amortized as deferred financing costsover the two year term of the convertible debentures.  The unamortized portion of these costs was charged to expenseupon the early retirement of the convertible debentures.

 

In June 2003, inconnection with the new $30.0 million credit facility, the Company wasobligated to pay a commitment fee of $300,000. Such amount is being amortized over the five year term of the facility.

 

**Loss per Common Share**

 

Basic net loss percommon share is calculated by dividing the net loss attributable to commonstockholders by the weighted average number of common shares outstanding duringthe period.  Diluted net loss per commonshare is computed based upon the weighted average number of common sharesoutstanding plus the common shares which would be issuable upon the conversionor exercise of all potentially dilutive securities.  Diluted net loss per share equals basic net loss per share forthe periods presented because the effects of potentially dilutive securitiesare antidilutive.

 

Net lossattributable to common stockholders is calculated as the net loss afterdeductions for cumulative preferred stock dividends, whether paid or accrued.

 

30

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**Revenue Recognition**

 

The Company sellsits Kazakhstan production in the domestic market on a contract basis.  Revenue is recorded when the purchaser takesdelivery of the oil.  At the end of theperiod, oil that has been produced but not sold is recorded as inventory whichis offset by deferred revenue.  Such oilinventory and deferred revenues are valued at the price of the last oil sold.

 

**Foreign Exchange Transactions**

 

The Company’s functionalcurrency is the U.S. dollar.  Thefinancial statements of the Company’s foreign subsidiaries are measured in U.S.dollars.  Accordingly, transaction costsfor the conversion to various currencies for foreign operations are recognizedin the consolidated statements of operations at the time of eachtransaction.  Translation differences,if any, are considered to be immaterial.

 

**Stock-BasedCompensation**

 

The Companyaccounts for employee stock-based compensation using the fair value method asprescribed in SFAS No. 123.  Under thismethod, the Company records the fair value attributable to stock optionsgranted, based on the Black-Scholes model, and amortizes that amount to expenseover the service period required to vest the options.

 

**Financial Instruments**

 

The Company’sfinancial instruments consist of cash and cash equivalents, accountsreceivable, accounts payable and long-term debt.  The carrying values of cash and cash equivalents, receivables andaccounts payable approximate fair value. See Note 6 for discussion of long-term debt.

 

**Reclassifications and Adjustments**

 

Certain priorperiod amounts have been reclassified to conform to the presentation in theconsolidated financial statements as of December 31, 2003.

 

**Note 2 – Going Concern**

 

The Company is adevelopment stage company and is in the early stages of establishing productionand revenues from the development of its primary property in Kazakhstan.  The ability of the Company to realize thecarrying value of its assets in the ordinary course of business is dependent onbeing able to produce and sell significant quantities of oil from the SouthAlibek Field.  The Company’s primaryemphasis since inception has been the exploration and development of the Field,and the Company has invested approximately $55.8 million in property andequipment through December 31, 2003. This amount includes the initial costs of acquiring the Field, workoverand drilling costs, and the costs of support facilities, including a drillingrig dedicated to the Field.  The Fieldhas four wells which have proved reserves and one is currently producingapproximately 1,000 Bopd on a test basis. The Company has drilled and is currently testing the second and thirdwells in the field.  These wells andsubsequent wells will delineate the extent and reserve potential of theField.  The economic success of theField is dependent on finding and developing sufficient reserves and rates ofproduction to generate positive cash flow and provide an economic rate ofreturn on the investment in the Field. In order to sell significant quantities of oil from the Field over thelong-term, the Company must obtain a production contract from the government ofKazakhstan.

 

The Company’sfinancial statements have been presented on the basis that it is a goingconcern, which contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. The Company has accumulated losses totaling $12.1 million and hasincurred a significant amount of debt in the development phase of itsoperations.  As of December 31, 2003,current liabilities exceed current assets by $29.9 million.  Additionally, to fully develop the areacovered by the Field, the Company will

 

31

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require additionalfunding and such amounts may be substantial. Recoverability of a major portion of the recorded asset amounts shown inthe accompanying consolidated balance sheet is dependent upon continuedoperations of the Company.  Continuedoperations are dependent upon the Company’s ability to meet its financialobligations and to secure additional funding. The consolidated financial statements do not include any adjustmentsrelating to the recoverability and classification of recorded asset amounts oramounts and classification of liabilities which might be necessary should theCompany be unable to continue as a going concern.

 

Management hastaken steps and has the following plans which it believes will be sufficient toenable the Company to continue in existence:

 

1)               Subsequent toDecember 31, 2003, the Company made a private placement of common stock in theamount of $4.4 million.  The primary useof proceeds for this placement was the retirement of $2.9 million in debt owedto the bank in Kazakhstan, which was originally due in August 2003.  As a result of this debt repayment, bothCaspi Neft and Transmeridian are fully in compliance with all terms of the debtagreements relating to the Field.

 

2)               After completionof the $4.4 million private placement and repayment of the debt discussedabove, the Company had sufficient cash reserves to fund its US operations for aperiod in excess of one year, assuming a reasonable continuation of currentexpenditure levels.

 

3)               In February 2002,as more fully described in Note 6, the Company obtained $20.0 million in debtfinancing from a bank in Kazakhstan. The available capacity under this facility was fully utilized duringApril 2003.  In June 2003, as more fullydescribed in Note 6, the Company obtained an additional $30.0 million in debtfinancing from the same bank in Kazakhstan. The available capacity under this facility was approximately $7.0million at December 31, 2003.

 

4)               The Company isdependent on additional funding to continue development of the South AlibekField in accordance with its current development plans, which envision thecontinuous use of two drilling rigs. The Company currently estimates the funding requirements for 2004related to its 50% interest in Caspi Neft to be between $5.0 million and $10.0million.  The Company may seek torestructure the existing debt, raise capital in excess of this amount to allowit to fund new initiatives, further accelerate development of the Field andprovide greater assurance of its ability to meet its future financialcommitments.  The minimum amount offunding required is highly dependent on the amount and timing of cash flowsfrom the existing and future wells drilled on the property.  The Company’s near-term goal is to developsufficient revenues from production to fund continuing capital expenditures andmeet its minimum debt service requirements. The amount of capital needed is also dependent on many factors outsidethe control of the Company, including the costs and results of drillingoperations, the ability to effectively bring its future crude oil production tomarket and future world oil prices.  Ifthe Company is not able to secure such additional funding, it may be necessaryto delay certain capital expenditures, including drilling costs.  Such actions could result in delays in thetiming of future cash flows and could adversely affect the financial positionof the Company.  The Company believesthat it will be able to secure the necessary funding to continue development ofthe Field in accordance with its current development plans.  However, the Company cannot provideassurance that it will be successful as many of the factors required to executeits plans are outside the control of the Company.

 

**Note 3 – Property and Equipment**

 

**Oil and Gas Properties**

 

License 1557 (the“License”), covering the South Alibek Field, was granted by the Republic ofKazakhstan on April 29, 1999. ** **Theoriginal License covered 3,396 acres. In March 2000, the Company acquired the License from an unrelatedthird-party for $4.0 million.  During2001, based on its technical review and analysis of the probable productivearea of the Field, the Company applied to the Kazakhstan Ministry of Energy andMineral Resources to expand the area covered by license area.  In November 2001, the Company’s applicationwas approved and the License was expanded to cover an area of

 

32

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14,111 acres.  Through Caspi Neft, the Company owns 100% ofthe working interest in the Field, subject to a 10% carried working interestand an option agreement under which Bramex may acquire 50% of the stock ofCaspi Neft.  This option was exercisedby Bramex subsequent to December 31, 2003.

 

The ExplorationContract (the “Exploration Contract”) associated with the License has asix-year term which expires in April 2005. The Contract requires capital expenditures during this period ofapproximately $18.0 million.  As ofDecember 31, 2003, the cumulative capital expenditures which are creditable toour obligation under the Contract have exceeded the minimum Contractcommitment.  The Contract may beextended by mutual agreement for two extension periods of two years each.  During the primary term, the Company canproduce wells under a test program and pay a royalty of 2%.  Any extension periods would need to berenegotiated with the government and would require additional capitalcommitments and could potentially include other changes in terms.  The Exploration Contract contains aprovision which will allow the government to recover, from future revenues,approximately $4.9 million of exploration costs which were incurred prior toprivatization.  The Production Contract,when executed, will contain the final terms for recovery of these costs.

 

If the Company issuccessful in establishing commercial production from the Field, an applicationwill be made for a Production Contract (the “Production Contract”).  The Company has the exclusive right tonegotiate this contract for the Field, and the government is required to conductthese negotiations under the Law of Petroleum. Such contracts are customarily awarded upon determination that the fieldis capable of commercial rates of production and that the applicant hascomplied with the other terms of its license and exploration contract.  However, the Company is not guaranteed theright to a Production Contract.  AProduction Contract will typically require a bonus payment upon execution, theamount of which is subject to negotiation. If satisfactory terms cannot be negotiated, the Company has the right toproduce and sell oil under the Law of Petroleum for the term of its existingExploration Contract through April 2005 at a royalty rate of 2%.  The royalty rate under production contractsis determined on a sliding scale based on annual production.  The rates range from 2% to 6%.

 

KornerstoneInvestment Group Ltd. (“Kornerstone”) was originally engaged by the founders ofthe Company to identify and assist in the acquisition of oil and gas propertiesin Kazakhstan and the Caspian Sea region. The agreement with Kornerstone provided for compensation to Kornerstonein the form of a 10% carried working interest. Under the terms of this carried interest, the Company is required to payall acquisition, exploration, development and operating costs attributable tothe 10% carried interest.  The Companyis also entitled to receive all revenues attributable to the 10% carriedinterest until the Company’s costs are recovered.  Thereafter, Kornerstone will participate as a 10% working interestowner.

 

During 2002, theCompany spent $33,484 to acquire leasehold interests for the development of twonatural gas wells in South Texas**. **InJuly 2003, the Company conducted an operation on one of the properties.  A downhole obstruction was encountered whichprevented a successful test of the target formation and the property wasabandoned.  We recorded a charge toexploration expense of $118,893 for this unsuccessful completion attempt.

 

**Drilling Rig and Equipment**

 

In December 2001,the Company purchased a drilling rig for $5.3 million in total consideration,including a note payable for $3.3 million and $2.0 million in common stock,which is redeemable for cash at the option of the seller of the rig.  See Notes 6 and 7 for further discussion ofthe terms of the note payable and redeemable common stock.

 

The rig wasacquired for drilling operations in the South Alibek Field.  At the time the Company purchased thedrilling rig, it was in storage in South America.  In early 2002, the Company arranged to have the rig transportedto Kazakhstan via marine cargo vessel. In addition, the Company undertook various refurbishments andmodifications to the rig to make it suitable for use in the Company’soperations.  The Company contracted witha firm experienced in international drilling to operate the rig and provideexpatriate drilling personnel.  The rigbegan drilling operations in October 2002.

 

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As more fullydiscussed in Note 10, there is a legal dispute between the Company, the sellerof the rig and the holder of an apparent first lien on the drilling rig.

 

**Note 4 – Other Assets**

 

Other assetsconsist of the following:

 
|                                      |   | **2003** |    | **2002** |   |
|-------------------------------------------|--------|----------|---------|----------|--------|
| Debt financing costs, net of amortization |   | $        | 409,443 |     | $      | 293,610 |   |
| Prepaid investment advisory contract      |   | 61,250   |    | 428,750  |   |
| Advances to Emba Trans Ltd.               |   | —   |    | 338,730  |   |
|                                      |   | $        | 470,693 |     | $      | 1,061,090 |   |

 

See Note 1 (Debt FinancingCosts) for discussion of debt financing costs and Note 8 (Common Stock Issuedfor Services) for discussion of prepaid investment advisory contract.

 

As of December 31, 2002, theCompany had made cumulative advances of $338,730 to Emba Trans Ltd.  These advances were used to fund thepurchase of the Emba terminal, a facility for storing and loading crude oil forshipment by rail, which is intended to be used as an alternate transportationroute for the Company’s production from the South Alibek Field.  At that time, ownership of Emba Trans Ltd.had not been legally transferred to the Company.  During 2003, title was transferred and the entity is now owned75% by Caspi Neft and 25% by Transmeridian. As of December 31, 2003, all costs related to Emba Trans Ltd and theEmba terminal are included in oil and gas properties, as this asset will beused as a support facility for production from the South Alibek Field.

## ** **

## **Note 5 – Notes Payable to Related Parties**

 

In a series of notesissued between June 2002 and November 2002, certain shareholders and relatedparties, including the Chief Executive Officer of the Company, loaned theCompany $248,025.  These notes bearinterest at 17% and are due on September 30, 2004.

 

**Note 6 – Long-Term Debt**

 

Long-term debtconsists of the following:

 
|                                               |   | **2003**   |       | **2002**   |   |
|----------------------------------------------------|--------|------------|------------|------------|--------|
| $20 million credit facility with a Kazakhstan bank |   | $          | 20,000,000 |       | $      | 14,253,000 |   |
| $30 million credit facility with a Kazakhstan bank |   | 23,007,613 |       | —     |   |
| Note payable secured by drilling rig               |   | 1,656,788  |       | 3,142,296  |   |
| Convertible debentures                             |   | —     |       | 200,000    |   |
| Total debt (1)                                     |   | 44,664,401 |       | 17,595,296 |   |
| Less current maturities                            |   | 20,176,205 |       | 3,842,992  |   |
| Long-term debt                                     |   | $          | 24,488,196 |       | $      | 13,752,304 |   |

 

Future maturitiesof long-term debt at December 31, 2003, are as follows:

 

|                      |   | **2003**  |       |
|---------------------------|--------|-----------|------------|
| 2004 (1) (2)              |   | $         | 19,990,125 |   |
| 2005                      |   | 6,140,366 |       |
| 2006                      |   | 7,669,199 |       |
| 2007                      |   | 7,669,199 |       |
| Thereafter Long-term debt |   | 3,195,512 |       |
|                      |   | $         | 44,664,401 |   |

 

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(1)          Does not include $2 million redeemablecommon stock due February 4, 2004.  SeeNote 7.

(2)          See Note 12 for discussion of debt paymentssubsequent to December 31, 2003.

 

Managementbelieves the fair value of debt at December 31, 2003 and 2002 approximates itsbook value.

 

**$20 Million Credit Facility**

 

In February 2002,Caspi Neft entered into a credit facility with a Kazakhstan bank (the “$20Million Facility”).  The Facilityprovides for borrowings totaling $20.0 million through July 1, 2003 fordevelopment of the South Alibek Field and is secured by the Field, the stock ofcertain subsidiaries, and the stock and other assets of Caspi Neft.  The $20 Million Facility carries an interestrate of 15% and a fee of 0.5% on the unutilized portion of the commitment.  The parent company, TransmeridianExploration, Inc. has provided a corporate guarantee of $7.0 million.  Under the terms of the $20 Million Facility,the parent company was required to repay principal of $2.23 million and accruedinterest in August 2003.  During late2003, the Company was attempting to negotiate a one-year extension of thispayment date and the bank had indicated its willingness to consider such anextension and had not declared this amount to be in default.  This amount was paid by the Companysubsequent to December 31, 2003 with the proceeds from a private placement ofcommon stock.

 

In connection withthis financing, the Company granted an option to Bramex to acquire 50% of thecommon stock of Caspi Neft.  In order toexercise the option, Bramex was required to (1) arrange an additional $30.0million of financing for Caspi Neft at market rates and (2) make a cashcontribution to Caspi Neft of $15.0 million, the proceeds of which would beused to repay part of the $20 Million Facility.  As discussed in Note 12, this option was exercised by Bramex inFebruary 2004.

 

Under the terms ofthe $20 Million Facility, the accrued interest balance is payable in February2004 and the remaining principal balance at such date is payable in 12 monthlyinstallments from March 2004 through February 2005.  See further discussion of these payment terms and amounts in Note12.

 

**$30 Million Credit Facility**

 

In June 2003, Caspi Neftentered into a new $30.0 million credit facility with the same Kazakhstan Bank(the “$30 Million Facility”).  Thisfacility provides for borrowings up to $30.0 million through May 31, 2005.  The amount outstanding as of May 31, 2005 isscheduled to be repaid over 36 equal monthly installments beginning June 2005through the final maturity date of May 31, 2008.  The $30 Million Facility carries an interest rate of 15% and acommitment fee of 0.5% per annum on the unutilized portion.  Interest accrued during the first 24 monthsis payable on May 31, 2005; thereafter, interest is payable monthly.  Upon execution of the $30 Million Facility,Caspi Neft paid the bank an arrangement fee of $300,000, which has been capitalized as a deferred financingcost and will be amortized over the five-year life of the facility.

 

Both creditfacilities contain certain restrictive covenants, including restrictions ondisposing of material assets, paying dividends, use of crude oil sales andincurring additional indebtedness.  TheCompany is required to provide audited financial statements of Caspi Neft tothe bank within 90 days of the end of the fiscal year.  The Company may not meet this requirement,but such non-compliance has been waived by the bank in prior years.  Both credit facilities are secured bysubstantially all of the assets of Caspi Neft, including the South AlibekLicense, and the stock of Caspi Neft. The Company’s wholly-owned British Virgin Islands subsidiary has also guaranteed theloan.  Both facilities contain certainrestrictive covenants, including restrictions on disposing of material assets,paying dividends and incurring additional indebtedness.

 

**Note Payable Secured by DrillingRig**

 

In December 2001,the Company purchased a drilling rig for $5.3 million by the issuance, to theSeller, of a note payable for $3.3 million and redeemable common stock of $2.0million.  In July 2003, the Company wasnotified by the holder of an apparent first lien on the rig (the “First LienHolder”) that the Seller was in default under its note payable obligation tothe First Lien Holder.  The Company wasnot informed of the

 

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existence of theFirst Lien Holder in the Asset Purchase Agreement related to the acquisition ofthe drilling rig.  The note payable isnow in dispute as a result of the Seller’s apparent default to the First LienHolder.  The Company has held discussionswith the First Lien Holder with the intent to resolve the Seller’s default bymaking certain payments directly to the First Lien Holder.  During the year ended December 31, 2003, theCompany made installment payments to the First Lien Holder totaling $688,400.  See further discussion of this matter inNote 10.

 

**Convertible Debentures**

 

On August 5, 2002,the Company issued $200,000 in convertible debentures to Private Capital Group(“PCG”).  The debentures carried aninterest rate of 7% and were due in August 2004.  PCG had the right to convert the debentures and accrued interestinto shares of common stock of the Company. The number of shares upon conversion was computed based upon aconversion ratio equal to the lesser of (i) $0.36 per common share or (ii) 85%of the average of the three lowest closing bid prices of the Company’s commonstock during the twenty trading days immediately preceding the date that noticeof conversion is given.

 

The 15% discountcontained in the conversion terms represents a beneficial conversion feature asaddressed in EITF 98-5, “Accounting for Convertible Securities with BeneficialConversion Features or Contingently Adjustable Conversion Ratios.”  The amount attributable to the beneficialconversion feature was $35,924.  Thisamount is recorded as additional paid-in capital and is recognized as additionalinterest expense over the period ending with the earliest conversion date.  Since the debentures were immediatelyconvertible, the Company recognized the additional interest expense during2002.

 

Additionally, PCGwas granted warrants to purchase 200,000 shares of Company common stock at$0.42 per share, which expire in August 2005. The warrants were valued at $20,000 using the Black-Scholes model.  This amount has been recorded as additionalpaid-in capital and deferred financing costs which will be amortized tointerest expense over the two-year term of the convertible debentures.

 

In March 2003, PCGfiled suit against the Company, which suit alleged that the Company had failedto comply with certain terms of the debentures.  In June 2003, the Company reached a Settlement Agreement withPCG.  Pursuant to the terms of theSettlement Agreement, the convertible debentures, accrued interest and $35,000in litigation settlement costs were subsequently retired through the issuanceof 1,081,865 shares of common stock and the payment of $30,000 in cash.  In connection with the settlement agreement,the Company expensed $10,833 in unamortized deferred financing costs associatedwith the convertible debentures.

 

**Note 7 – Redeemable Common Stock**

 

During December 2001,the Company purchased a drilling rig for use in its Kazakhstan operations.  Part of the consideration for the purchasewas 1.0 million shares of common stock. Under the terms of the purchase agreement, these shares were redeemable,at the option of the seller, for $2.00 per share, or $2.0 million in theaggregate, by the end of 2002.  Thisobligation was renegotiated on December 28, 2002 and now requires theredemption of the stock, at the option of the holder, on February 1, 2004.  The revised agreement also provides interestat 10% on the unpaid balance of the redemption amount.  In the event the seller sells any of theshares prior to February 1, 2004, the proceeds of such sales would reduce theredemption obligation of the Company.

 

As more fully discussedin Note 10, there is a legal dispute between the Company, the seller of the rigand the holder of an apparent first lien on the drilling rig.

 

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**Note 8 – Stockholders’ Equity**

 

**12.5% Convertible Preferred**

 

During 2000, theCompany borrowed $300,158 from a third party, which carried interest at12.5%.  The Company also issued warrantsto purchase 1.2 million common shares at an exercise price of $1.00 per share.  The Company entered into a credit conversionagreement on August 23, 2000 under which the notes were exchanged for $300,158of convertible preferred stock, consisting of 3,000 shares, with a par value of$0.0006 per share and a preference value of $100 per share.  The convertible preferred stock accruesdividends at 12.5%.  At the Company’soption, the preferred shares may be converted to common stock or redeemed incash.  The conversion rate is 85% of theaverage bid price for the five previous consecutive trading days prior to theconversion date.  In connection withthis credit conversion agreement, the Company issued 1.2 million shares ofcommon stock in exchange for cancellation of the 1.2 million warrantsoutstanding.

 

The 15% discountcontained in the conversion terms represents a beneficial conversion feature asaddressed in EITF 98-5, “Accounting for Convertible Securities with BeneficialConversion Features or Contingently Adjustable Conversion Ratios.”  The amount attributable to the beneficialconversion feature was $52,969.  This amountis treated as additional paid-in capital and is recognized as an additionalpreferred stock dividend charged to retained earnings over the period endingwith the earliest conversion date. Since the preferred shares were immediately convertible, the Companyrecognized the additional preferred stock dividends during 2001.

 

In July 2003,the holders of all 3,000 shares of the outstanding 12.5% convertible preferredstock elected to convert their shares to common stock.  The $300,158 stated value of the preferredstock plus accrued dividends totaling $57,256 were converted into 1,545,910shares of common stock, in accordance with the terms of the preferred stockagreement.  At the time of conversion,the convertible preferred stock was owned in equal amounts by the ChiefExecutive Officer of the Company and the operations manager of the Kazakhstanoperations of Caspi Neft.

 

**2001 Convertible Preferred**

 

In connection withthe acquisition of a 5% working interest in the South Alibek Field in April2001, the Company issued 100,000 shares of convertible preferred stock.  This convertible preferred stock had nodividend obligation and was convertible into 1.5 million shares of theCompany’s common stock.  In March 2002,the preferred stock was converted to common stock.

 

**Common Stock Reserved for Issuance**

 

There are200,000,000 common shares authorized by the Company’s Amended and RestatedCertificate of Incorporation and 70,673,207, 59,147,129 and 55,747,029 commonshares were issued and outstanding as of December 31, 2003, 2002 and 2001,respectively.  These share totalsexclude redeemable common stock.  Sharesof common stock reserved for issuance at December 31, 2003 are summarized asfollows:

 

|                              |   | **December  31,  2003** |   |
|-----------------------------------|--------|-------------------------|--------|
| 2001 Incentive Stock Option Plan  |   | 3,260,000               |   |
| 2003 Stock Compensation Plan      |   | 1,265,953               |   |
| Redeemable common stock           |   | 1,000,000               |   |
| Warrants to purchase common stock |   | 500,000                 |   |
|   Total                 |   | 6,025,953               |   |

 

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**Common Stock Issued for Productsand Services**

 

The Company hasentered into several agreements to exchange common stock for products andservices, including investment advisory services, financial consulting andother services and products related to the operations of the Company.  The stock has been valued based on the fairmarket value of the stock at the time of the agreements or the value of theservices rendered, whichever was more clearly evident.  During the years ended December 31, 2003,2002 and 2001, the Company issued 5.3 million, 4.1 million and 126,000, commonshares, respectively, for products and services.  Certain of the larger transactions which comprise these totalsare discussed below.

 

In January 2003,1.5 million shares, valued at $180,000, were issued to settle all remainingobligations in connection with the April 2002 resignation of the formerChairman of the Company, including obligations related to a consultingcontract.  During 2003, the Companyissued a total of 2.25 million shares of common stock, valued at $323,000, inexchange for drill pipe for use in its operations.  During 2003, the Company also issued 1.1 million shares tofinancial consultants, valued at $208,000, in exchange for work performed toimprove financial reporting procedures and internal controls and other financialmanagement services.

 

During 2002, 4.0million shares were issued as compensation for investment advisory services,which was recorded as a prepaid expense of $735,000.  The agreement covers a two year period ending in February 2004and the prepaid amount is being amortized to expense over its term.

 

**Retirement of Common Stock**

 

On severaloccasions, the founders and major shareholders of the Company have contributedcommon shares back to the Company, which were then retired.  Such share contributions were generally madeto mitigate the dilutive effects of other share issuances by the Company.  During the years ended December 31, 2002 and2001, the founders returned 6.7 million and 5.0 million common shares, respectively.  Additionally, in 2001, the Company purchased2.2 million shares of treasury stock from the founders at par value.  These shares were subsequently sold in aprivate placement.  There were no suchtransactions in 2003.

 

**Capital Contributed by Stockholder**

 

In December 2002,the Chief Executive Officer of the Company transferred, from his personalholdings, 150,000 shares of the Company’s common stock as compensation for acontract with an investor relations firm. The common stock was valued at $0.17 per share, or $25,500 in theaggregate, and has been recorded as contributed capital and a prepaidexpense.  The cost of the services willbe charged to expense over the term of the contract.

 

**Warrants**

 

In connection withthe issuance of $200,000 of convertible debentures in August 2002, the Companyissued warrants to purchase 200,000 shares of the Company’s common stock at$0.42 per share.  These warrants expirein August 2005.  The value of thewarrants, calculated in accordance with the Black-Scholes model, was $20,000and will be recognized as additional interest expense over the two year term ofthe debentures.

 

During 2003, theCompany issued warrants to purchase 300,000 shares of common stock inconnection with investor relations services. Of such warrants, 150,000 carry an exercise price of $0.25 per share andare exercisable at any time prior to December 5, 2004.  The remaining 150,000 warrants carry anexercise price of $0.40 per share and are exercisable at any time prior toMarch 5, 2005.  The value of thewarrants, calculated in accordance with the Black-Scholes model, was $21,000 onthe date of issuance.  This amount willbe amortized to expense over the term of the contract.

 

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**2001 Incentive Stock Option Plan**

 

The Company has a 2001 Incentive Stock OptionPlan (the “Plan”) under which options to purchase 5.0 million shares of commonstock may be granted to officers, board members, key employees and consultantsthrough December 31, 2010.  Under thePlan, the exercise price of each option is equal to the fair market value ofthe Company’s common stock on the date of grant and all options granted had aterm of five years.  The vesting periodis determined by the Board of Directors at the date of grant.  As of December 31, 2003, options to purchase1.74 million shares had been granted and 3.26 million options were availablefor future grants under the Plan.

 

No stock optionswere granted under the Plan prior to December 31, 2002.  The following table reflects additionalinformation about options granted under the Plan during the year endedDecember 31, 2003.

 
|                         |   | **Options  Outstanding** |   | **Options  Exercisable**               |   |
|------------------------------|--------|--------------------------|--------|----------------------------------------|--------|
|                         |   | **Number  Outstanding**  |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|                         |   | **(In  thousands****)**  |   |                                   |   | **(in  thousands)** |   |   |   |
|                         |   |                     |   |                                   |   |   |   |   |   |
| Options granted in 2003      |   | 1,740                    |   | $                                      | 0.253  |   | 75 |   | $ | 0.240 |   |
| Options exercised            |   | —                   |   | —                                 |   | — |   | — |   |
| Options forfeited            |   | —                   |   | —                                 |   | — |   | — |   |
| Balance at December 31, 2003 |   | 1,740                    |   | $                                      | 0.253  |   | 75 |   | $ | 0.240 |   |

 

The aggregate fairvalue of options granted during 2003 was $243,575, which is being amortized toexpense over the vesting period in accordance with FASB 123.  The fair value of each option grant wasestimated on the date of grant using the Black-Scholes option pricing modelwith the following assumptions: risk-free interest rates of 4.5-5.0%; expectedlives between 1 and 3 years; and volatility of the price of the underlyingcommon stock of 41-100%.  Of suchaggregate fair value amount, $117,383 was charged to expense during the yearended December 31, 2003.

 

The followingtable summarizes additional information about the Company’s stock optionsoutstanding, and those which were exercisable, as of December 31, 2003:

 
|                         |   | **Options  Outstanding** |   |                                   |   | **Options  Exercisable**               |        |
|------------------------------|--------|--------------------------|--------|----------------------------------------|--------|----------------------------------------|-------------|
| **Range of Exercise Prices** |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Life** |   | **Weighted  Average  Exercise  Price** |        | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|                         |   | **(In  thousands)**      |   |                                   |   |                                   |        | **(In  thousands)** |   |   |   |
| $  0.215 - $0.240  |   | 1,630                    |   | 4.58 Yrs                               |   | $                                      | 0.231       |   | 75 |   | $ | 0.240 |   |
| $  0.570 - $0.600       |   | 110                      |   | 5.00 Yrs                               |   | $                                      |  0.597 |   | — |   | — |   |
| Total at December 31, 2003   |   | 1,740                    |   | 4.79 Yrs                               |   | $                                      |  0.253 |   | 75 |   | $ |  0.240 |   |

 

**2003 Stock Compensation Plan**

 

In May 2003, theCompany filed a Form S-8 registration statement with the Securities andExchange Commission to register 2.5 million shares under its 2003 StockCompensation Plan.  Under the terms ofthe plan, such stock may be issued in lieu of cash to compensate officers,employees, directors and third-party consultants, all of whom must beindividuals, for bona fide services rendered. During the year

 

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ended December 31,2003, 1.23 million shares of the 2.50 million shares described above wereissued under the Form S-8 and 1.27 million shares were reserved for futureissuance under the 2003 Stock Compensation Plan.

 

**Note 9 – Income Taxes**

 

Income beforeincome taxes is composed of the following:

 
|          |   | **Years  Ended December 31,** |       |
|---------------|--------|-------------------------------|------------|
|          |   | **2003**                      |       | **2002** |   | **2001** |   |
| United States |   | $                             | (2,939,691 | ) | $ | (2,064,614 | ) | $ | (135,320 | ) |
| International |   | (2,766,613                    | )          | (1,206,289 | ) | (1,977,570 | ) |
|          |   | $                             | (5,706,304 | ) | $ | (3,270,903 | ) | $ | (2,112,890 | ) |

 

A reconciliationof the federal statutory income tax amounts to the effective amounts is shownbelow:

 
|                                            |   | **Years  Ended December 31,** |       |
|-------------------------------------------------|--------|-------------------------------|------------|
|                                            |   | **2003**                      |       | **2002** |   | **2001** |   |
| Income tax benefit computed at statutory  rates |   | $                             | (1,940,143 | ) | $ | (1,112,107 | ) | $ | (718,383 | ) |
| Adjustment to valuation allowance               |   | 1,940,143                     |       | 1,112,107 |   | 718,383 |   |
|                                            |   | $                             | —     |   | $ | — |   | $ | — |   |

 

At December 31,2002 and 2001 the components of the Company’s deferred tax assets andliabilities were as follows:

 
|                             |   | **As of  December 31,** |       |
|----------------------------------|--------|-------------------------|------------|
|                             |   | **2003**                |       | **2002** |   | **2001** |   |
| Capitalized interest             |   | $                       | (1,853,000 | ) | $ | (437,000 | ) | $ | — |   |
| Net operating loss carryforwards |   | 5,866,000               |       | 2,543,000 |   | 990,000 |   |
| Valuation allowance              |   | (4,013,000              | )          | (2,106,000 | ) | (990,000 | ) |
|                             |   | $                       | —     |   | $ | — |   | $ | — |   |

 

As of December 31,2003, the Company has estimated net operating loss carryforwards of $6.2million in the U.S. and $11.1 million in Kazakhstan.  The net operating loss carryforwards include the deduction of$5.5 million in interest which has been capitalized for book purposes.  If they are not utilized prior to thesedates, the U.S. net operating losses will expire between 2020 and 2022, whilethe Kazakhstan net operating losses will expire in 2009 and 2010.

 

The Company has notrecorded any deferred tax assets or income tax benefits from the net operatinglosses for the years ended December 31, 2003, 2002 and 2001.  The Company has placed a 100% valuationallowance against the deferred tax asset because future realization of the netoperating losses is not assured.

 

**Note 10 – Commitments andContingencies**

 

**Drilling Rig Dispute**

 

In December 2001,the Company purchased a drilling rig for $5.3 million by the issuance, to theseller, of a note payable for $3.3 million and redeemable common stock of $2.0million.  Further discussion of thistransaction can be found in Notes 3, 6 and 7. In July 2003, the Company was notified by the holder of an apparent firstlien on the drilling rig (the “First Lien Holder”) that the seller of the rigwas in default under its note payable obligation to the First Lien Holder.  The Company was not informed of theexistence of the First Lien Holder in the Asset Purchase Agreement related tothe acquisition of the drilling rig. The

 

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note payable andthe redeemable common stock are now in dispute as a result of the Seller’sdefault to the First Lien Holder. During 2003, the Company held discussions with the First Lien Holderwith the intent to resolve the Seller’s default by making certain paymentsdirectly to the First Lien Holder. During the year ended December 31, 2003, the Company made installmentpayments to the First Lien Holder totaling $688,400.

 

Discussions with the seller of the rig became increasingadversarial during late 2003 and on December 15, 2003, the seller filed suit in DistrictCourt, Harris County, Texas, 334thJudicial District relating to the Company’s alleged default under the note payable and redeemablecommon stock agreements with the seller. At this time, the Company ceased installment payments to the First LienHolder as it had not been able to successfully negotiate a settlement agreementwith both the seller and the First Lien Holder.  On February 27, 2004, the First Lien Holder filed suit in UnitedStates District Court, Southern District of Texas, against the seller and named the Company and two of itsaffiliates as additional defendants. This action seeks payment of debts owed to the First Lien Holder by theseller related to the drilling rig.

 

**Threatened Claims**

 

In early 2003, anattorney for the former Chief Financial Officer of the Company sent a demandletter asserting claims relating to his separation of service from the Companyand threatening further legal action.

 

**International Commitments**

 

The Company,through its subsidiary Caspi Neft, is subject to the terms of License 1557 andthe related Exploration Contract covering 14,111 acres in the South Alibekfield in Kazakhstan.  In connection withthe Exploration Contract, the Company has committed to spend approximately$18.0 million on development of the Field through 2005.  As of December 31, 2003, the cumulativecapital expenditures which are creditable to our obligation under the Contracthave exceeded the minimum Contract commitment.

 

Purchasecommitments are made in the ordinary course of business in connection withongoing operations in the South Alibek Field.

 

**Environmental**

 

The Company, as anowner and operator of oil and gas properties, is subject to various federal,state, local and foreign country laws and regulations relating to discharge ofmaterials into, and protection of, the environment.  These laws and regulations may impose liability on the lesseeunder an oil and gas lease or concession for the cost of pollution clean-upresulting from operations and also may subject the lessee to liability forpollution damages.

 

**Lease Commitments**

 

The Company hasoperating leases for office facilities and certain equipment.  Net rental expense under all operating leasesand rental agreements was $930,698, $378,000 and $178,000 in 2003, 2002 and2001, respectively.

 

The Company leasesoffice facilities in Houston and Kazakhstan under leases greater than oneyear.  Future minimum lease commitmentsunder long-term non-cancelable operating leases are as follows:

 

|       |   | **2003** |    |
|------------|--------|----------|---------|
| 2004       |   | $        | 186,000 |   |
| 2005       |   | 186,000  |    |
| 2006       |   | 186,000  |    |
| 2007       |   | 151,000  |    |
| Thereafter |   | —   |    |
|       |   | $        | 709,000 |   |

 

41

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**Note 11 – Business SegmentInformation**

 

The Company’sbusiness activities relate solely to oil and gas exploration andproduction.  The primary emphasis sinceits formation in 2000 has been the development of the South Alibek Field.  In 2002, the Company made an initialinvestment in U.S. properties.  Thedrilling rig purchased in 2001 is used to support the Company’s developmentactivities in Kazakhstan.  At December31, 2003, 2002 and 2001, substantially all of the Company’s assets were locatedin Kazakhstan.  For each of the threeyears ended December 31, 2003, substantially all of the Company’s results ofoperations were general and administrative, operating and other start-up costsassociated with its operations in Kazakhstan.

 

For the year endedDecember 31, 2003, 100% of the oil sold from the South Alibek Field waspurchased by a single company.

 

**Note 12 – Subsequent Events**

 

On January 9, 2004,Transmeridian sold 7.3 million shares of common stock in a private placementfor net cash proceeds totaling $4.4 million. The shares were purchased primarily by European individualinvestors.  The terms of the transactioninclude certain registration rights which may be exercised no earlier than May2004.  The proceeds from the offeringwill be used for repayment of debt and other corporate purposes.  There were no warrants or other dilutivesecurities issued in connection with this transaction.

 

On February 4, 2004,Bramex Management, Inc. exercised the option which had been granted to it inFebruary 2002 in connection with the arrangement of $50.0 million in totalcredit facilities for Caspi Neft.  Inorder to exercise the option, Bramex was required to pay $15.0 million to CaspiNeft, the proceeds of which were to be used to retire part of the outstandingdebt of Caspi Neft.  On February 4,2004, Bramex paid Caspi Neft $15.0 million, of which $11.7 million was appliedto principal outstanding under the $20.0 million credit facility and $3.3million was applied to accrued interest.

 

Also in February 2004,the Company paid $2.98 million which it had been required to pay under theoriginal terms of the $20.0 million credit facility.  Of such amount, $2.23 million was applied to principal and $.75million was applied to accrued interest. This payment was made from the proceeds of the private placement ofcommon stock on January 9, 2004.

 

After the above paymentswere made, the remaining principal balance under the $20.0 million creditfacility was $6.1 million.  This amount,plus interest at 15%, is payable in 12 monthly installments from March 2004through February 2005.

 

During late January 2004, the SA-2 well reached its planned total depth,was logged and production casing was run to undertake completionoperations.  As this well had notreached total depth and had not been logged as of December 31, 2003, it couldnot be included in the proved reserves of the Company at that date.  However, Ryder Scott Company attributedproved reserves to this well in an evaluation subsequent to the end of theyear.

 

The followingtable presents information about the net proved oil reserves and standardizedmeasure of discounted future net cash flows as of December 31, 2003, on a proforma basis, as if (1) the Bramex option had been exercised as of that date and(2) the SA-2 well had been completed and logged as of that date.  This pro forma information is provided togive readers of the financial statements the most current information availableabout the Company’s proved reserves and standardized measure of discountedfuture net cash flows.

 

42

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**ProForma Net Proved Crude Oil Reserves and Future Net Revenues**

**(Reflectingthe Bramex Option Exercise and Results of SA-2)**

**ProForma as of December 31, 2003**

**(Quantitiesin Barrels)**

** **

|                                                             |   | **2003**       |           |
|------------------------------------------------------------------|--------|----------------|----------------|
| Proved Developed                                                 |   | 4,537,063      |           |
| Proved Undeveloped                                               |   | 20,456,511     |           |
| ** Total Proved Reserves**                                  |   | **24,993,574** | ** **     |
|                                                             |   |           |           |
| **Standardized Measure of Discounted****Future Net  Cash Flows** |   | **$**          | **99,651,089** | ** ** |
|                                                                  |        |                |                |  |

 

The Company hashistorically consolidated the operations of its 100% owned Caspi Neftsubsidiary.  As of the date of theBramex option exercise, the Company may no longer be eligible to fullyconsolidate Caspi Neft.  The table belowpresents summarized balance sheets and results of operations as of December 31,2003 and for the twelve month period then ended (a) for Transmeridian and itsother subsidiaries, excluding Caspi Neft, and (b) for Caspi Neft on astand-alone basis:

 
|                                                                      |   | **Transmeridian  and Other  Subsidiaries** |       | **Caspi  Neft(2)** |   | **Eliminations** |   | **Consolidated** |       |
|---------------------------------------------------------------------------|--------|--------------------------------------------|------------|--------------------|--------|------------------|--------|------------------|------------|
| **Balance Sheets As  of December 31, 2003**                               |   |                                       |       |               |   |             |   |             |       |
| Current assets                                                            |   | $                                          | 812,176    |               | $      | 1,323,025        |   | $                | (67,397    | ) | $ | 2,067,804 |   |
| Property and equipment, net                                               |   | 5,496,282                                  |       | 48,376,937         |   | 687,356          |   | 54,560,575       |       |
| Investment in Caspi Neft                                                  |   | 4,793,393                                  |       | —             |   | (4,793,393       | )      | —           |       |
| Other assets                                                              |   | 61,250                                     |       | 409,443            |   | —           |   | 470,693          |       |
| Total assets                                                              |   | $                                          | 11,163,101 |               | $      | 50,109,405       |   | $                | (4,173,434 | ) | $ | 57,099,072 |   |
|                                                                      |   |                                       |       |               |   |             |   |             |       |
| Current liabilities(1)                                                    |   | $                                          | 7,515,098  |               | $      | 24,403,540       |   | $                | —     |   | $ | 31,918,658 |   |
| Long-term debt, net                                                       |   | —                                     |       | 24,488,196         |   | —           |   | 24,488,196       |       |
| Other long-term liabilities                                               |   | —                                     |       | 186,000            |   | —           |   | 186,000          |       |
| Stockholders’ equity                                                 |   | 3,648,003                                  |       | 1,031,669          |   | (4,173,434       | )      | 506,218          |       |
| Total liabilities and equity                                              |   | $                                          | 11,163,101 |               | $      | 50,109,405       |   | $                | (4,173,434 | ) | $ | 57,099,072 |   |
|                                                                      |   |                                       |       |               |   |             |   |             |       |
| **Statements of Operations for the For the Year Ended December 31, 2003** |   |                                       |       |               |   |             |   |             |       |
| Revenues                                                                  |   | $                                          | —     |               | $      | 797,411          |   | $                | —     |   | $ | 797,411 |   |
| Operating and administrative  expenses                               |   | (2,267,270                                 | )          | (3,445,170         | )      | —           |   | (5,712,440       | )          |
| Other income(expense)                                                     |   | (652,685                                   | )          | (118,854           | )      | —           |   | (771,539         | )          |
| Net loss                                                                  |   | (2,919,955                                 | )          | (2,766,613         | )      | —           |   | (5,686,568       | )          |
| Preferred dividends                                                       |   | (19,736                                    | )          | —             |   | —           |   | (19,736          | )          |
| Net loss attributable to  common stockholders                        |   | $                                          | (2,939,691 | )                  | $      | (2,766,613       | )      | $                | —     |   | $ | (5,706,304 | ) |

 

----

(1)               Transmeridianis obligated to repay $2.233 million of the Caspi Neft debt, plus accruedtotaling $745,000.  Accordingly, theseamounts are recorded by both Transmeridian and Caspi Neft and are eliminated inconsolidation.  See Notes 6 andelsewhere in this footnote for further discussion of this obligation.

 

(2)               Asreflected in the above table, the majority of the total debt of the Company isrecorded on the books of Caspi Neft.  Asa result of the exercise of the option by Bramex, the Company may no longer beable to fully consolidate Caspi Neft and would not include the assets andliabilities of Caspi Neft, including its long-term debt, in the consolidatedfinancial statements of the Company. Accordingly, the Company’s effective net interest in the assets andliabilities of Caspi Neft, including its long term debt, has been reduced by50%.

 

 

43

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**Note 13 – Supplemental Oil and GasDisclosures**

 

**Costs Incurred**

 

Cost incurred inoil and gas property acquisition, exploration and development activities,whether expensed or capitalized, are reflected in the table below.  This schedule does not include the costs ofthe drilling rig which was purchased and modified for use in the Company’sdevelopment activities in Kazakhstan. Costs incurred for the drilling rig were $444,000, $741,000 and $5.3million in 2003, 2002 and 2001, respectively.

 
|                              |   | **Kazakhstan** |       | **United  States** |   | **Total**  |   |
|-----------------------------------|--------|----------------|------------|--------------------|--------|------------|--------|
| **Year ended December 31, 2003**  |   |           |       |               |   |       |   |
| Acquisition costs of properties:  |   |           |       |               |   |       |   |
| Proved                            |   | $              | —     |               | $      | —     |   | $ | — |   |
| Unproved                          |   | —         |       | —             |   | —     |   |
| Exploration costs                 |   | 26,292,534     |       | 118,893            |   | 26,411,427 |   |
| Development costs                 |   | 56,256         |       | —             |   | 56,256     |   |
| Capitalized interest              |   | 4,164,693      |       | —             |   | 4,164,693  |   |
| Total                             |   | $              | 30,513,483 |               | $      | 118,893    |   | $ | 30,632,376 |   |
|                              |   |           |       |               |   |       |   |
| **Year ended December 31, 2002:** |   |           |       |               |   |       |   |
| Acquisition costs of properties:  |   |           |       |               |   |       |   |
| Proved                            |   | $              | —     |               | $      | —     |   | $ | — |   |
| Unproved                          |   | 7,915          |       | 28,463             |   | 36,378     |   |
| Exploration costs                 |   | 8,944,425      |       | —             |   | 8,944,425  |   |
| Development costs                 |   | 355,998        |       | 5,021              |   | 361,019    |   |
| Capitalized interest              |   | 1,060,495      |       | —             |   | 1,060,495  |   |
| Total                             |   | $              | 10,368,833 |               | $      | 33,484     |   | $ | 10,402,317 |   |
|                              |   |           |       |               |   |       |   |
| **Year ended December 31, 2001:** |   |           |       |               |   |       |   |
| Acquisition costs of properties:  |   |           |       |               |   |       |   |
| Proved                            |   | $              | 1,653,023  |               | $      | —     |   | $ | 1,653,023 |   |
| Unproved                          |   | —         |       | —             |   | —     |   |
| Exploration costs                 |   | —         |       | —             |   | —     |   |
| Development costs                 |   | 1,667,090      |       | —             |   | 1,667,090  |   |
| Capitalized interest              |   | —         |       | —             |   | —     |   |
| Total                             |   | $              | 3,320,113  |               | $      | —     |   | $ | 3,320,113 |   |

 

**Capitalized Costs**

 

The aggregateamount of capitalized costs related to oil and gas producing activities and theaggregate amount of the related accumulated depreciation, depletion andamortization (“DD&A”), including any accumulated valuation allowances, arereflected in the table below.  Thesecapitalized costs do not include the drilling rig which was purchased andmodified for use in the Company’s development activities in Kazakhstan.  Capitalized costs for the drilling rig were$6.5 million, $6.0 million and $5.3 million at December 31, 2003, 2002 and2001, respectively.

 
|                         |   | **Kazakhstan** |       | **United  States** |   | **Total**  |   |
|------------------------------|--------|----------------|------------|--------------------|--------|------------|--------|
|                         |   |           |       |               |   |       |   |
| **As of December 31, 2003**  |   |           |       |               |   |       |   |
| Proved properties            |   | $              | 16,300,263 |               | $      | —     |   | $ | 16,300,263 |   |
| Unproved properties          |   | 32,483,389     |       | 16,604             |   | 32,499,993 |   |
| Total oil and gas properties |   | 48,783,652     |       | 16,604             |   | 48,800,256 |   |
| Accumulated DD&A         |   | 189,635        |       | —             |   | 189,635    |   |
| Net oil and gas properties   |   | $              | 48,594,017 |               | $      | 16,604     |   | $ | 48,610,621 |   |
|                         |   |           |       |               |   |       |   |
| **As of December 31, 2002**  |   |           |       |               |   |       |   |
| Proved properties            |   | $              | 7,765,565  |               | $      | —     |   | $ | 7,765,565 |   |
| Unproved properties          |   | 10,368,831     |       | 33,484             |   | 10,402,315 |   |
| Total oil and gas properties |   | 18,134,396     |       | 33,484             |   | 18,167,880 |   |
| Accumulated DD&A         |   | —         |       | —             |   | —     |   |
| Net oil and gas properties   |   | $              | 18,134,396 |               | $      | 33,484     |   | $ | 18,167,880 |   |
|                         |   |           |       |               |   |       |   |
| **As of December 31, 2001**  |   |           |       |               |   |       |   |
| Proved properties            |   | $              | 7,765,565  |               | $      | —     |   | $ | 7,765,565 |   |
| Unproved properties          |   | —         |       | —             |   | —     |   |
| Total oil and gas properties |   | 7,765,565      |       | —             |   | 7,765,565  |   |
| Accumulated DD&A         |   | —         |       | —             |   | —     |   |
| Net oil and gas properties   |   | $              | 7,765,565  |               | $      | —     |   | $ | 7,765,565 |   |

 

44

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**Oil and Gas Reserve Information(Unaudited)**

 

**Basis of Presentation**

 

Proved oil and gasreserve quantities are based on estimates prepared by Ryder Scott Company,independent petroleum engineers.  Thereare numerous uncertainties in estimating quantities of proved reserves andprojecting future rates of production and the timing of developmentexpenditures.  These uncertainties aregreater for properties which are undeveloped or have a limited productionhistory, such as the South Alibek Field. The following reserve data represent estimates only and actual reservesmay vary substantially from these estimates. All of the Company’s proved reserves were in Kazakhstan as of December31, 2003, 2002 and 2001.  The Company’snet quantities of proved developed and undeveloped reserves of crude oil andchanges therein are reflected in the table below.

 

As of December 31,2003, the Company owned a 100% working interest in the South Alibek Field,subject to government royalties and a 10% carried working interest afterrecovery of costs.  The effect of thiscarried interest is reflected in the calculation of the Company’s net provedreserves and future net cash flows.  SeeNote 12 for discussion of Subsequent Events which reduce our net interest inthe Field and one well, the SA-2, which was completed and evaluated subsequentto the end of the year.

 

The Company isoperating under an Exploration Contract with the government of Kazakhstan whichends in April 2005.  At such time as theCompany is successful in establishing commercial production from the Field, anapplication will be made for an exploration and production contract.  The Company has the exclusive right tonegotiate this contract for the Field, and the government is required toconduct these negotiations under the Law of Petroleum.  However, the Company is not guaranteed theright to a production contract.  Suchcontracts are customarily awarded for a period of 25 years upon determinationthat the field is capable of commercial rates of production and that theapplicant has complied with the other terms of its license and explorationcontract.  If satisfactory terms cannotbe negotiated, the Company has the right to produce and sell oil under the Lawof Petroleum for the term of its existing Exploration Contract through April2005 at a royalty rate of 2%.  Theroyalty rate under production contracts is subject to negotiation and varies inaccordance with estimated reserve and production volumes.  Based on forecast production volumes, theaverage royalty over the term of the production contract is expected to be 6%or less under current law.  TheCompany’s oil and gas reserve data and future net cash flows have been preparedassuming a commercial production contract is obtained which will allowproduction for the expected 25 year term of the production contract.

 

The proved reserves as ofDecember 31, 2002 represented the reserves that were estimated to be recoveredfrom one well, A-29, and two development offsets not yet drilled.  Subsequent to December 31, 2002, the Companymade a decision to redrill the A-29 as this is believed to be the mostcost-effective way to recover these reserves and should allow the Company toachieve greater productivity and may potentially access additionalreserves.  As of December 31, 2003, theCompany had two new wells, the SA-1, which is producing, and the SA-4, whichwas being prepared for testing.  TheRyder Scott reserve estimate as of December 31, 2003 included these two wellsas proved developed, and also reflected ten undeveloped well locations whichinclude the redrill of the A-29 and development offsets for A-29, SA-1 andSA-4. As discussed in Note 12, the SA-2, which was in progress at year end, isnot included in proved reserves as of December 31, 2003.

 

45

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As a result of a number oftechnical factors, many of which are subject to varying professionalinterpretation, Ryder Scott's updated reserve report as of December 31, 2003reflected a reduction in the estimated reserves recoverable from A-29 whilesubstantially increasing the total reserve estimates for the Field.  This reduction in the proved reservesattributable to A-29 was based on changes in reserve engineering assumptionsand was not the result of well performance or production issues, nor was itaffected by the decision to redrill the A-29. Certain of the reserves previously attributed to the A-29 have beenreclassified by Ryder Scott Company into reserve categories other than proveduntil such time as they can be reevaluated as proved reserves under SECguidelines.  This reevaluation would bebased on additional technical data obtained during the development of thefield, including in-fill drilling and the extended production testing of theexisting wells.

 

 

**Estimated Quantities of Net Proved Crude OilReserves**

**(Quantities in Barrels)**

 
|                                        |   | **Years  ended December 31,** |   |
|---------------------------------------------|--------|-------------------------------|--------|
|                                        |   | **2003**                      |   | **2002** |   | **2001** |   |
| Net proved crude oil reserves:              |   |                          |   |   |   |   |   |
| Beginning of year                           |   | 17,110,741                    |   | 17,645,418 |   | 17,213,772 |   |
| Revisions of previous estimates             |   | (5,079,386                    | )      | (534,677 | ) | 431,646 |   |
| Extensions, discoveries and other additions |   | 33,830,809                    |   | — |   | — |   |
| Production                                  |   | (117,376                      | )      | — |   | — |   |
| End of year                                 |   | 45,744,788                    |   | 17,110,741 |   | 17,645,418 |   |
|                                        |   |                          |   |   |   |   |   |
| Net proved developed reserves:              |   |                          |   |   |   |   |   |
| Beginning of year                           |   | 5,695,613                     |   | 5,808,683 |   | 5,675,781 |   |
| End of year                                 |   | 7,815,861                     |   | 5,695,613 |   | 5,808,683 |   |

 

**Standardized Measure of DiscountedFuture Net Cash Flows (Unaudited)**

 

**Basis of Presentation**

 

The standardizedmeasure data includes estimates of oil and gas reserve volumes and forecasts offuture production rates over the reserve lives.  Estimates of future production expenditures, including taxes andfuture development costs, are based on management’s best estimate of such costsassuming a continuation of current economic and operating conditions.  No provision is included for depletion, depreciationand amortization of property acquisition costs or indirect costs.  Income tax expense has been computed usingexpected future tax rates and giving effect to tax deductions and creditsavailable, under current laws, and which relate to oil and gas producingactivities.  The sales prices used inthe calculation are the year-end prices of crude oil, including condensate andnatural gas liquids, which as of December 31, 2003, 2002 and 2001 were $12.44,$23.99 and $15.37 per barrel, respectively. The December 31, 2003 price was based on the last sales price receivedfor December 2003. The December 2002 and 2001, prices were based on North SeaBrent crude prices, less a discount for transportation and qualitydifferentials as actual oil sales had not yet occured.  The sales prices used in 2002 and 2001 werebased on the prices expected to be received upon full development of theField.  However, under SEC guidelines,we are required to value the 2003 reserves based on prices received at the endof the year.  This situation cansometimes limit comparison between periods. As of December 31, 2003, the Company was in the very early stages ofselling limited quantities of test production into the local market, primarilyby truck.  The Company does not believethe prices it received for this production at the end of December 2003 arerepresentative of what it would expect to receive when the field is fullydeveloped.

 

No value wasassigned to natural gas reserves, as there is not currently an establishedmarket or pipeline facilities for gas sales. Changes in prices and cost levels, as well as the timing of futuredevelopment costs, may cause actual results to vary significantly from the datapresented.  This information is notintended to represent a forecast or fair market value of the Company’s oil andgas assets, but does present a standardized disclosure of discounted future netcash flows that would result under the assumptions used.  The standardized measure of discountedfuture net cash flows relating to proved oil and gas reserves for 2003, 2002and 2001 were as follows:

 

46

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**StandardizedMeasure of Discounted Future Net Cash Flows**

**(Amountsin Thousands)**

 
| **December 31, 2003:**                                    |   |     |    |
|-----------------------------------------------------------|--------|----------|---------|
| Future cash inflows                                       |   | $        | 569,065 |   |
| Future production and development costs                   |   | (151,096 | )       |
| Undiscounted future net cash flows before  income tax     |   | 417,969  |    |
| 10% discount for estimated timing of cash  flows          |   | (176,618 | )       |
| Present value of future net cash flows  before income tax |   | 241,351  |    |
| Future income tax expense, discounted at 10%              |   | (60,908  | )       |
| Standardized measure of discounted future  net cash flows |   | $        | 180,443 |   |
|                                                      |   |     |    |
| **December 31, 2002:**                                    |   |     |    |
| Future cash inflows                                       |   | $        | 410,487 |   |
| Future production and development costs                   |   | (36,575  | )       |
| Undiscounted future net cash flows before  income tax     |   | 373,912  |    |
| 10% discount for estimated timing of cash  flows          |   | (169,595 | )       |
| Present value of future net cash flows  before income tax |   | 204,317  |    |
| Future income tax expense, discounted at  10%             |   | (60,318  | )       |
| Standardized measure of discounted future  net cash flows |   | $        | 143,999 |   |
|                                                      |   |     |    |
| **December 31, 2001:**                                    |   |     |    |
| Future cash inflows                                       |   | $        | 271,298 |   |
| Future production and development costs                   |   | (37,889  | )       |
| Undiscounted future net cash flows before  income tax     |   | 233,409  |    |
| 10% discount for estimated timing of cash  flows          |   | (104,492 | )       |
| Present value of future net cash flows  before income tax |   | 128,917  |    |
| Future income tax expense, discounted at  10%             |   | (39,511  | )       |
| Standardized measure of discounted future  net cash flows |   | $        | 89,406  |   |

 

The followingtable presents a reconciliation of changes in the standardized measure ofdiscounted future net cash flows:

 

**Changesin the Standardized Measure of Discounted Future Net Cash Flows**

**(Amountsin Thousands)**

 
|                                                                    |   | **Years  ended December 31,** |        |
|-------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                    |   | **2003**                      |        | **2002** |   | **2001** |   |
|                                                                    |   |                          |        |   |   |   |   |
| **Standardized Measure, beginning of year**                             |   | **$**                         | **143,999** | ** ** | **$** | **89,406** | ** ** | **$** | **98,986** | ** ** |
| Sales and transfers of oil and gas  produced, net of production costs   |   | (397                          | )           | — |   | (51 | ) |
| Net changes in prices, development and  production costs                |   | (107,366                      | )           | 83,980 |   | (24,905 | ) |
| Extensions, discoveries and improved  recovery, less related costs |   | 171,513                       |        | — |   | — |   |
| Purchase of minerals in place                                           |   | —                        |        | — |   | — |   |
| Development costs incurred and changes  during the period               |   | (2,887                        | )           | 252 |   | 616 |   |
| Revisions of previous quantity estimates                                |   | (30,436                       | )           | (6,630 | ) | 3,274 |   |
| Increase in present value due to passage of  one year                   |   | 20,431                        |        | 12,892 |   | 14,946 |   |
| Net changes in production rates and other                               |   | (13,824                       | )           | (15,094 | ) | (14,419 | ) |
| Net change in income taxes                                              |   | (590                          | )           | (20,807 | ) | 10,959 |   |
| **Standardized Measure, end of year**                                   |   | **$**                         | **180,443** | ** ** | **$** | **143,999** | ** ** | **$** | **89,406** | ** ** |

 

47

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**Note 14 – Supplemental QuarterlyInformation (Unaudited)**

 

The followingtable reflects a summary of the unaudited interim results of operations for thequarterly periods in the years ended December 31, 2003 and 2002.

 
|                                         |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |    |
|----------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|---------|
|                                         |   |               |   |                |   |               |   |                |    |
| **2003**                                     |   |               |   |                |   |               |   |                |    |
| Revenue                                      |   | $                  | — |                | $      | —             |   | $                   | 158,764 |   | $ | 638,647 |   |
| Expenses                                     |   | 1,083,423          |   | 1,293,664           |   | 1,752,252          |   | 2,354,640           |    |
| Preferred Dividends                          |   | 9,252              |   | 9,352               |   | 1,132              |   | —              |    |
| Net loss attributable to common shareholders |   | (1,092,675         | )      | (1,303,016          | )      | (1,594,619         | )      | (1,715,994          | )       |
| Basic and diluted loss per share             |   | $                  | (0.02  | )                   | $      | (0.02              | )      | $                   | (0.02   | ) | $ | (0.03 | ) |
| Weighted average common shares outstanding   |   | 60,784,650         |   | 61,730,233          |   | 62,957,899         |   | 64,573,627          |    |
|                                         |   |               |   |                |   |               |   |                |    |
| **2002 (a)**                                 |   |               |   |                |   |               |   |                |    |
| Revenue                                      |   | $                  | — |                | $      | —             |   | $                   | —  |   | $ | — |   |
| Expenses                                     |   | 567,347            |   | 583,924             |   | 805,955            |   | 1,313,677           |    |
| Preferred Dividends                          |   | 9,303              |   | 9,303               |   | 9,456              |   | 9,458               |    |
| Net loss attributable to common shareholders |   | (576,650           | )      | (593,227            | )      | (815,411           | )      | (1,323,135          | )       |
| Basic and diluted loss per share             |   | $                  | (0.01  | )                   | $      | (0.01              | )      | $                   | (0.01   | ) | $ | (0.03 | ) |
| Weighted average common shares outstanding   |   | 56,063,753         |   | 58,666,909          |   | 62,957,899         |   | 58,142,461          |    |

 

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(a) The Companymade certain adjustments to its financial statements during the fourth quarterof 2002 which affected the other interim periods of 2002.  These adjustments, which include changes toour accounting policies regarding carried working interests and drilling rigoperations and adjustments for capitalization of interest on unproved oil andgas properties, depreciation of drilling equipment, amortization of deferredfinancing costs and others are discussed in Form 8-K dated February 20, 2003and May 16, 2003.  The above quarterlyfinancial information reflects all of these adjustments.

 

48

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

 

Not applicable.

 

**Item 9A****.  Controls and Procedures**

 

**Corporate Disclosure Controls**

 

During 2002, theCompany’s certifying officers conducted a review of the Company’s disclosurecontrols and procedures and determined that they were in need ofimprovement.  As a result of thisreview, we engaged financial consultants with experience in accounting for oiland gas operations and SEC reporting requirements to conduct a review of ourfinancial reporting procedures and disclosure controls.  That review resulted in changes to theCompany’s accounting policies and procedures and also resulted in adjustmentsto the financial statements of the quarterly periods for the year endedDecember 31, 2002.

 

As disclosed in aCurrent Report on Form 8-K filed February 20, 2003, we changed our accountingpolicies with regard to carried working interests and drilling rigoperations.  This change in accountingpolicies resulted in adjustments to the financial statements for the interimperiods ended June 30, 2002 and September 30, 2002.  These adjusted financial statements were included in the Form8-K.

 

Additionally, asreported in a Current Report on Form 8-K dated May 16, 2003, during the fourthquarter of 2002 we made certain other adjustments to our financial statementswhich also affected the interim periods of 2002.  These adjustments included capitalization of interest on unprovedoil and gas properties, adjustments to the depreciation of drilling equipment,amortization of deferred financing costs and certain other adjustments asdiscussed in the Form 8-K.  The Form 8-Kincluded adjusted financial statements for the interim periods of the yearended December 31, 2002.  There were noadjustments made to any periods prior to the year ended December 31, 2002.

 

As a result of thereview, we have implemented new accounting policies and procedures at thecorporate level in Houston to improve the accuracy and quality of our financialreporting.  Management believes thatsuch new accounting policies and procedures have been effective in achievingthese objectives.

 

**Kazakhstan Internal Controls**

 

Over the past twofiscal years, the volume and dollar amount of Company’s transactions inKazakhstan have increased significantly. We have undertaken improvements in our accounting procedures andpersonnel in Kazakhstan, including the implementation of a computer-basedaccounting system, hiring of additional accounting employees, establishment ofnew procedures, and further training of personnel.  We have detailed policies and procedures relating to theprocurement of goods and services for our operations in Kazakhstan and cashdisbursements for purchases, and we are confident that these procedures arebeing consistently followed.  As aresult of communication issues between our U.S. and Kazakhstan accounting andoperating personnel, we face continuing challenges to improve the timeliness ofour accounting and financial reporting and the quality of information reportedto the Houston office.  During 2003 andcontinuing into 2004, we have made several changes in the flow, quality andquantity of information from our accounting department in Kazakhstan.

 

While we areconfident that cash basis transactions are being recorded accurately, ourfinancial accounting in Kazakhstan does not fully comply with accrual basedaccounting.  As a result, our corporateaccounting personnel in Houston must perform additional procedures to preparefinancial statements in accordance with generally accepted accountingprinciples.  Our independent auditorshave advised management and the audit committee that these additionalprocedures could cause delays in reporting the Company’s results of operationsand represent a deficiency in the financial reporting system.  While we believe that our current proceduresare effective in producing financial statements which comply with generallyaccepted accounting principles, we are aware that further improvements in ouraccounting procedures are needed and we intend to make further improvements inthis area.

 

49

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**Summary and Conclusion**

 

During 2003, wemade considerable progress in improving our financial reporting and systems ofinternal control.  The Company recentlyhired a Chief Financial Officer and a Corporate Controller, both of whom  are certified public accountants and haveextensive experience in finance and accounting for international oil and gasoperations.  We believe that that thesenew officer additions and enhanced procedures and controls, includingimprovements we are undertaking in Kazakhstan, will provide an effective meansto insure that we can timely and accurately disclose the information we arerequired to disclose under applicable laws and regulations.  Based on an evaluation of the Company’s disclosure controls andprocedures as of the end of the period covered by this report conducted by theCompany’s management, with the participation of the Chief Executive Officer,Chief Financial Officer and Corporate Controller, we believe that thesecontrols and procedures are effective.

 

**PART III**

 

**Item 10****.  Directors,Executive Officers, Promoters and Control Persons**

 

The 2004 ProxyStatement is hereby incorporated by reference for the purpose of providinginformation about directors, executive officers, promoters and control persons.

 

**Item 11****.  ExecutiveCompensation**

 

The 2004 ProxyStatement is hereby incorporated by reference for the purpose of providinginformation about executive compensation.

 

**Item 12****.  Security Ownershipof Certain Beneficial Owners and Management**

 

The 2004 ProxyStatement is hereby incorporated by reference for the purpose of providinginformation about security ownership of certain beneficial owners andmanagement.

 

**Item 13****.  CertainRelationships and Related Transactions**

 

The 2004 ProxyStatement is hereby incorporated by reference for the purpose of providinginformation about certain relationships and related transactions.

 

**Item 14****.  PrincipalAccountant Fees and Services**

 

The 2004 ProxyStatement is hereby incorporated by reference for the purpose of providinginformation about principal accountant fees and services.

 

**PART IV**

 

**Item 15****.  Exhibits, FinancialStatements and Schedules and Reports on Form 8-K**

 

**(a)****         ****The following documents are filedas part of this report**:

 

1.               ConsolidatedFinancial Statements

 

Referenceis made to the Index to Consolidated Financial Statements appearing in Item 8of this report.

 

50

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2.               ConsolidatedFinancial Statement Schedules

 

Allfinancial statement schedules are omitted as they are inapplicable, or therequired information has been included in the consolidated statements or notesthereto.

 

3.               Exhibits

 
| **Exhibit  Number** |   | **Description** |                                                                                                                                                             | **Incorporation  by Reference** |
|---------------------|--------|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|
|                |   |            |                                                                                                                                                             |                            |
| 3.1                 |   |            | Amended  and Restated Certificate of Incorporation of the Company                                                                                                |                            | Form  SB-2 filed May 15, 2001 |
|                |   |            |                                                                                                                                                             |                            |   |
| 3.2                 |   |            | Bylaws  of the Company                                                                                                                                           |                            | Form  SB-2 filed May 15, 2001 |
|                |   |            |                                                                                                                                                             |                            |   |
| 10.1                |   |            | License 1557  dated April 29, 1999 from the Republic of Kazakhstan for Oil and Gas  Exploration of the South Alibek Field                                        |                            | Form  SB-2 filed May 15, 2001 |
|                |   |            |                                                                                                                                                             |                            |   |
| 10.2                |   |            | Exploration  Contract dated April 29, 1999 covering the South Alibek Field                                                                                       |                            | Form  SB-2 filed May 15, 2001 |
|                |   |            |                                                                                                                                                             |                            |   |
| 10.3                |   |            | Letter  from the Kazakhstan Ministry of Energy                                                                                                                   |                            | Form  SB-2/A filed October 3, 2001 |
|                |   |            |                                                                                                                                                             |                            |   |
| 10.4                |   |            | General Loan Agreement dated February 4,  2002 by and among Bank TuranAlem, OJSC Caspi Neft TME, Transmeridian  Exploration, Inc. (BVI) and Kazstroiproekt, Ltd. |                            | Form  10-KSB filed May 16, 2002 |
|                |   |            |                                                                                                                                                             |                            |   |
| 10.5                |   |            | Transmeridian  Exploration, Inc. 2001 Incentive Stock Option Plan                                                                                                |                            | Form  S-8 filed May 28, 2003 |
|                |   |            |                                                                                                                                                             |                            |   |
| 10.6                |   |            | General Loan Agreement dated June 2, 2003  by and among Bank TuranAlem, OJSC Caspi Neft TME, Transmeridian Exploration,  Inc. (BVI) and Bramex Management Inc.   |                            | Filed  Herewith |
|                |   |            |                                                                                                                                                             |                            |   |
| 14.                 |   |            | Code  of Ethics                                                                                                                                                  |                            | Filed  Herewith |
|                |   |            |                                                                                                                                                             |                            |   |
| 21.1                |   |            | List  of Subsidiaries                                                                                                                                            |                            | Filed  Herewith |
|                |   |            |                                                                                                                                                             |                            |   |
| 31.1                |   |            | Rule  13a-14(a) Certification of Chief Executive Officer                                                                                                         |                            | Filed  Herewith |
|                |   |            |                                                                                                                                                             |                            |   |
| 31.2                |   |            | Rule  13a-14(a) Certification of Chief Financial Officer                                                                                                         |                            | Filed  Herewith |
|                |   |            |                                                                                                                                                             |                            |   |
| 32.1                |   |            | Section  1350 Certification of Chief Executive Officer                                                                                                           |                            | Filed  Herewith |
|                |   |            |                                                                                                                                                             |                            |   |
| 32.2                |   |            | Section  1350 Certification of Chief Financial Officer                                                                                                           |                            | Filed  Herewith |

 

**(b)****         ****Reports on Form 8-K**

 

On October 21,2003, the Company filed a Current Report on Form 8-K to announce a privateplacement of common stock.

 

51

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this annual report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | Transmeridian  Exploration, Inc.                   |
|--------|----------------------------------------------------|
|   |                                               |
|   |                                               |
|   | /s/  Lorrie T. Olivier                             |   |
|   | Lorrie  T. Olivier                                 |
|   | Chairman  of the Board of Directors, President and |
|   |   Chief Executive Officer                |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Date**        |   | **Signature**             |   | **Title**                                  |
|-----------------|--------|---------------------------|--------|--------------------------------------------|
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  Lorrie T. Olivier    |   | Chairman  of the Board of Directors,       |
|            |   | Lorrie  T. Olivier        |   | President and Chief Executive Officer      |
|            |   |                      |   |                                       |
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  Randall D. Keys      |   | Chief  Financial Officer                   |
|            |   | Randall  D. Keys          |   |                                       |
|            |   |                      |   |                                       |
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  Bruce A. Falkenstein |   | Vice  President of Exploration and Geology |
|            |   | Bruce  A. Falkenstein     |   |                                       |
|            |   |                      |   |                                       |
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  Charles J. Campise   |   | Corporate  Controller                      |
|            |   | Charles  J. Campise       |   |                                       |
|            |   |                      |   |                                       |
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  Philip J. McCauley   |   | Director                                   |
|            |   | Philip  J. McCauley       |   |                                       |
|            |   |                      |   |                                       |
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  Angus G.M.P. Simpson |   | Director                                   |
|            |   | Angus  G.M.P. Simpson     |   |                                       |
|            |   |                      |   |                                       |
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  James H. Dorman      |   | Director                                   |
|            |   | James  H. Dorman          |   |                                       |
|            |   |                      |   |                                       |
|            |   |                      |   |                                       |
| March  30, 2004 |   | /s/  George E. Reese      |   | Director                                   |
|            |   | George  E. Reese          |   |                                       |

 

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