** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**For Annual and Transition Reports pursuant to Section 13 or 15(d) oftheSecurities Exchange Act of 1934**

 

**(MarkOne)**

 
| **ý****    Annual  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                             | ** ** | ** ** |
| **For the fiscal year ended**                                                                                          |
| **December 31, 2004**                                                                                                  |
| ** **                                                                                                             | ** ** | ** ** |
| **o****    Transition  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |

 

**Commission File Number: 000-50715**

 

**TransmeridianExploration, Inc.**

(Exact name of Registrant as specified in its 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 area code:  **(281) 999-9091**

 

Securities registered pursuant to Section 12(b) of the ExchangeAct:  **None****.**

 

Securities registered pursuant to Section 12(g) of the ExchangeAct:  **CommonStock.**

 

Checkwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes   ý        No   o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.        o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).   Yes   ý        No   o

 

Theaggregate market value of the common stock held by non-affiliates of theRegistrant was approximately $134,922,328 on March 4, 2005 based upon theclosing sale price of common stock on such date of $2.20 per share on the OTCBulletin Board.  As of March 4, 2005, theRegistrant had 80,092,318 shares of common stock issued and outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

** **

Portions of the Proxy Statement for the 2005 Annual Meeting ofShareholders to be held inMay 2005 are incorporated by reference, with respect to Part II and III of thisForm 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**

 

TransmeridianExploration, Inc. (the “Company” or “Transmeridian”) was incorporated in theState of Delaware in April 2000.  We areengaged in the business of development and production of oil and gasproperties.  Our activities are primarilyfocused on the Caspian Sea region of the former Soviet Union and our primaryoil and gas property is License 1557 and the related Exploration Contract forthe development of the South Alibek Field (“South Alibek” or the “Field”) inthe Republic of Kazakhstan.  We conduct ouroperations in Kazakhstan through a 50% owned subsidiary, Caspi Neft TME (“CaspiNeft”).  Caspi Neft is an Open JointStock Company (“OJSC”) organized under the laws of Kazakhstan.  The remaining 50% of Caspi Neft is owned byBramex Management, Inc. (“Bramex”), the successor to Kazstroiproekt, Ltd.

 

AtDecember 31, 2004, the Company’s 50% share of Caspi Neft’s estimated totalproved reserves were 26,813,736 barrels of oil (“Bbls”).  All of thesereserves are attributable to the South Alibek Field.  The present value ofestimated future net revenues before income taxes, discounted at 10% per annum,based on prices being received at the end of the year, with assumptions heldconstant throughout the estimated producing life of the reserves (“10% PresentValue”) was $219,996,017.  After deducting estimated future taxes, theCompany’s share of the net present value of such reserves was $176,841,559.  The total proved reserve estimates and the netpresent value before income tax have been prepared by Ryder Scott Company, anindependent petroleum engineering company, in accordance with SEC guidelines.

 

Weare in the early stages of developing the South Alibek Field.  As ofDecember 31, 2004, only 4,476,364 Bbls, or 17% of Caspi Neft’s provedreserves were classified as proved developed reserves.  The balance of ourestimated reserves are classified as proved undeveloped and will require thedrilling of future wells to produce these reserves.  We have an activedevelopment program in the Field, including plans to drill wells which are notcurrently included within the boundaries of our proved reserves. See Item2, “Properties: Proved Reserves” and Note 12 of the Notes to ConsolidatedFinancial Statements for further information about our estimated provedreserves.

 

 InFebruary 2004, Bramex exercised its option to acquire 50% of the common stockof Caspi Neft.  Thus, our equityownership of Caspi Neft was reduced to 50%, which reduced our effective netinterest in the proved reserves in the Field to 50%.

 

**Availabilityof Reports**

** **

Transmeridianmakes available free of charge on its internet website, www.tmei.com, itsAnnual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports onForm 8-K and amendments to those reports filed or furnished pursuant to Section13 (a) or 15 (a) of the Securities Act of 1934 as soon as reasonablypracticable after it electronically files or furnishes them to the Securitiesand Exchange Commission.  Such filingsand reports are also available from the Securities and Exchange Commission atits website at www.sec.gov.

 

**Strategy**

** **

Ourbusiness strategy is to build reserves, production and cash flow through (a)the acquisition and development of oil and gas reserves, (b) exploring for newreserves, and (c) optimizing production and value from the existing reservebase.  We prefer to target oil and gasproperties with proved or probable reserves and avoid significant explorationrisk.  Through the contacts, technicalknowledge and experience of our management team, we believe we can successfullyidentify and 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 enable us to exploit future opportunities.

 

**DrillingActivity**

** **

During2004, we drilled and placed on extended production testing four wells, theSouth Alibek #2 (SA-2), South Alibek #4 (SA-4), South Alibek #5 (SA-5) andSouth Alibek #17 (SA-17) and began drilling of one additional well, the SouthAlibek #14 (SA-14). The SA-14 is the sixth well of an initial seven welldrilling program in the South

 

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Alibek Field.  The SA-5 and SA-17 are in-fielddevelopment wells.  As of December 31,2004, SA-14 was within 3,300 feet of its programmed depth. All wells areplanned to drill the same KT1 and KT2 carbonate reservoirs of the South AlibekField.  Production casing has been set onall completed wells for the well testing program.  With the exception of SA-4, all completedwells have been producing oil on an extended production testing program.  In late November, a workover program wasinitiated to prepare the wells for long-term commercial production and includesreservoir stimulation and installation of production tubing and packers withthe aim to increase the field’s oil production.

 

Thefollowing table shows the number of wells drilled:

 
| ** **        | ** ** | **For the years ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Exploration wells |       | 2                                    |       | 1 |   | 0 |   |
| Development wells |       | 2                                    |       | 0 |   | 0 |   |
| Total wells       |       | 4                                    |       | 1 |   | 0 |   |

 

**Customers**

** **

Webegan selling oil from our first well, the SA-1, during the second quarter of2003.  In 2004 we sold 100% of ourproduction into the domestic market, to six different purchasers.  Until the pipeline transfer connections andhandling facilities are complete, we are producing our oil into the centralproduction facility where it is temporarily stored until being transferred tothe buyer.  See Item 2: “Properties:Transportation and Marketing” for further discussion of our current marketingarrangements and future plans.   See alsobelow under “Risk Factors: Marketing and Oil Prices” regarding various riskfactors relating to marketing and crude oil prices.

 

**Competition**

** **

Theoil and gas industry is highly competitive, and our future business plans couldbe jeopardized by competition from larger and better-financed companies.  We compete for reserve acquisitions,exploration leases, licenses, concessions and marketing agreements againstcompanies with financial and other resources substantially greater thanours.  Many of our competitors have moreestablished positions and stronger governmental relationships, which may makeit more difficult for us to compete effectively with them.

 

**GovernmentRegulation**

** **

Ouroperations are subject to various levels of government controls and regulationsin the United States and in the Republic of Kazakhstan.  We attempt to comply with all legalrequirements in the conduct of our operations and employ business practiceswhich 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 othergovernmental regulations as such costs are an integral part of our operations.

 

Inthe Republic of Kazakhstan, legislation affecting the oil and gas industry is underconstant review for amendment or expansion. Pursuant to such legislation, various governmental departments andagencies have issued extensive rules and regulations which affect the oil andgas industry, some of which carry substantial penalties for failure tocomply.  These laws and regulations canhave a significant impact on the industry by increasing the cost of doingbusiness and, consequentially, can adversely affect our profitability.  Inasmuch as new legislation affecting theindustry is commonplace and existing laws and regulations are frequentlyamended or reinterpreted, we are unable to predict the future cost or impact ofcomplying with such laws and regulations.

 

**Officesand Employees**

** **

Ourcorporate headquarters office is in Houston, Texas, where we lease 6,725 squarefeet of office space.  As of December 31,2004, we had 8 full-time employees in Houston. We also maintain 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.

 

4

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**RiskFactors**

** **

*Exploration and Development Risks*

* *

Oursuccess is dependent on finding, developing and producing economic quantitiesof oil and gas.  Our future 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, such coverageis either not available or is not cost-effective.

 

*Oil and Gas Reserve Risks*

* *

Provedoil and gas reserves are the estimated quantities of natural gas, crude oil,condensate and NGLs that geological and engineering data demonstrate withreasonable certainty to be recoverable in future years from known reservoirsunder existing economic and operating conditions. Reserves are consideredproved if economical production is supported by either actual production orconclusive formation tests. Reserves that can be produced economically throughapplication of improved recovery techniques are included in the “proved”classification when successful testing by a pilot project or the operation ofan installed program in the reservoir provides support for the engineeringanalysis on which the project or program is based. Proved developed oil and gasreserves can be expected to be recovered through existing wells with existingequipment and operating methods.

 

Transmeridianemphasizes that the volumes of reserves are estimates which, by their nature,are subject to revision. The estimates are made using available geological andreservoir data, as well as production performance data. These estimates arereviewed annually and revised, either upward or downward, as warranted byadditional performance data. In addition, our reserves are contained incarbonate reservoirs, and there is a larger uncertainty inherent in carbonatereservoirs as compared to sandstone reservoirs.

 

Weengage an independent petroleum engineering firm to review our estimates ofproved reserves. During 2004, 2003 and 2002, their review covered 100 percentof the reserve value. This value, which represents estimated future net cashflows, is based on prices at year-end and is calculated in accordance withStatement of Financial Accounting Standards (SFAS) No. 69, “Disclosures aboutOil and Gas producing Activities.” Disclosure of this value and relatedreserves has been prepared in accordance with SEC Regulation S-X Rule 4-10 andis presented in Note 12 of the Notes to Consolidated Financial Statements.

 

*Risks of International Operations*

* *

Weare subject to risks inherent in international operations, including adversegovernmental actions, political risks, expropriationof assets, loss of revenues and the risk of civil unrest or war.  Our primary oil and gas property is locatedin 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 todevelop its own legal, regulatory and financial systems.  As the political and regulatory environmentchanges, we may face uncertainty about the interpretation of our agreements andin the event of dispute, may have limited recourse within the legal andpolitical system.

 

Wehave commenced negotiations, through CaspiNeft, of a production contract and weanticipate that these negotiations will be concluded and a production contractin place by the end of 2005. The Company has the exclusive right to negotiatethis contract for the Field, and the government is required to conduct these negotiationsunder Kazakhstan’s “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.  Theterms of the production contract establish the royalty and other payments dueto the government in connection with commercial production.  While we believe that we can successfullynegotiate a production contract, we cannot be

 

5

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assured that we will be able to do so or that theterms of such contract will be acceptable. If satisfactory terms cannot be negotiated, it could have a materialadverse effect on our financial position.

 

*Marketing and Oil Prices*

* *

Ourfuture success is dependent on being able to transport and market ourproduction either within Kazakhstan or preferably through export tointernational markets.  Thus, our revenues could be adversely affected byissues which are outside our control relating to the crude oil transportationinfrastructure both within and outside Kazakhstan. The exportation of oil fromKazakhstan depends on access to transportation routes, primarily pipelinesystems, which can have limited available capacity and are subject to otherrestrictions.  Pipeline access is the preferred and most cost effectivemethod to sell crude oil production into the export market, and thus the Companyis subject to the risk that unless the Company obtains access to pipelines totransfer crude oil out of Kazakhstan, the price at which the Company sells itscrude oil may remain well below world market prices.  We currently do not have a long-term contractfor the transportation or sale of our crude oil.  We are producing our oilinto the early production facility where it is temporarily stored until beingtransferred to the buyer. Our longer-term plans include the shipment of oil bypipeline.  We would expect the implementation of these plans to result inhigher realized prices than our current marketing arrangements, but we cannotbe assured that we will be successful in implementing these plans.

 

Theprices we have received thus far for the sale of our crude oil aresignificantly less than the full world market price for crude oil. For example,in June 2004, Caspi Neft entered into a contract to sell approximately 157,500barrels of crude oil to a local purchaser for approximately $11.61 per barrel,and in December 2004, Caspi Neft entered into a contract to sell approximately15,000 barrels of crude oil to a local purchaser for approximately $20.00 perbarrel.  In comparison to the full worldmarket price for crude oil at such times, these prices are significantlylower.  The Company believes the primaryreason we have not received the full world market price is because we have notyet been able to produce crude oil in sufficient quantities to attractcustomers that supply the world oil markets. Unless and until such time as we are able to produce crude oil insufficient quantities to attract customers that supply the world oil markets,the price at which we are able to sell crude oil may be significantly lowerthan the full world market price, and the Company will be at a competitivedisadvantage compared to other exploration and production companies thatreceive full world market price for their crude oil.

 

Inaddition, prices of oil and gas are subject to significant volatility inresponse to changes in supply, market uncertainty and a variety of otherfactors beyond our control.  There are currently no economic markets forour natural gas production and our gas reserves have been given no value in thefuture net cash flow data presented herein.

 

*Environmental Risks*

* *

Asan owner and operator of oil and gas properties, we are subject to various lawsand regulations relating to discharge of materials into, and protection of, theenvironment.  These laws and regulationsmay impose liability on us for the cost of pollution cleanup resulting fromoperations and could subject us to liability for pollution damages.

 

*Transferability of Our Common Shares*

* *

Ourstock has limited trading volume and is not listed on a national exchange.  Because our stock price is less than $5.00and is not listed on a national exchange, broker-dealers face additionalrestrictions on transactions in our stock. Such restrictions include the requirement to deliver to purchasers astandardized risk disclosure document prepared by the SEC, which specifiesinformation about low-priced stocks and the risks involved with suchinvestments.  Additionally, these rulesrequire that broker-dealers make a written determination that the stock is asuitable investment for the purchaser and receive the purchaser’s writtenconsent to the transaction.  Thesefactors could adversely affect the liquidity, trading volume andtransferability of our common shares.

 

InMarch 2005, the Company received approval for listing our common shares on theAmerican Stock Exchange (“AMEX”).

 

*Control by Our Officers and Directors*

 

Inthe aggregate, our executive officers and directors control approximately 23.2%of the outstanding shares of our common stock. These stockholders, acting together, would be able to significantlyinfluence matters requiring stockholder approval.

 

6

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*Key Personnel*

* *

Oursuccess is dependent on the performance of our senior management and keytechnical personnel.  The loss of ourChief Executive Officer or other key employees could have an adverse effect onour business.  We do not have employmentagreements in place with all of our senior management or key employees.

 

**Item 2.****  Properties**

** **

**PetroleumIndustry in Kazakhstan**

 

Until1991, Kazakhstan was one of 15 independent republics which comprised the formerSoviet Union.  It has chosen to align with Russia and 10 of the formerrepublics in the Confederation of Independent States (“CIS”), a union ofeconomic and political cooperation.  Kazakhstan is an area of significantinvestment activity for the international oil and gas industry.  Basedupon publicly available information, its provedreserves rank among the top 15 countries in the world, with over 180 producingoil fields and 20 billion barrels of proved reserves.  Its currentproduction is approximately 1.25 million barrels of oil per day (“Bopd”), ofwhich approximately 85% is exported.

 

Regulationof the oil industry in Kazakhstan has been codified with the development of theLaw of Petroleum which sets out the conduct of the oil and gas industry and theroles of participants, both private and governmental.  The industry isregulated by the Ministry of Energy and Natural Resources, which administersall contracts, licenses and investment programs.  The national oilcompany, Kazmunaigas, has been through several stages of consolidation sincethe country’s independence in 1991.  The government has been merging thevarious regional governmental companies which previously handled the extractionand transportation sectors of the industry into one consolidated entity toeliminate redundant bureaucracy and provide for a more efficient management ofthe country’s natural resources.  This entity maintains a direct ownershipon behalf of the state in most large oil field development projects as well assole ownership and operation of many of the interconnecting oil and gaspipeline systems.  It is responsible for about 25% of Kazakhstan’s oilproduction and for 80% of oil transportation, contributing $850 million to thestate budget in 2004.  However,governmental ownership or participation in exploration and development projectsis not required and the government has no ownership interest in the SouthAlibek Field.

 

**Acquisitionof the South Alibek Field**

** **

InMay 1999, prior to the official formation of the Company, Transmeridian signeda consulting agreement with Kornerstone Investment Group Ltd. (“Kornerstone”).  The controlling shareholder in Kornerstone isa citizen of Kazakhstan who is involved in oil and gas production and otherbusiness endeavors.  He is also employedon a part-time basis as a consultant and manager of Caspi Neft, handlinggovernmental matters and contract negotiations with governmental entities.  Under this agreement, we engaged Kornerstoneto identify and assist in the acquisition of oil and gas properties inKazakhstan and the Caspian Sea region. Since we had not received any significant funding for the Company atthat time, the agreement with Kornerstone provided that its compensation wouldbe in the form of a 10% carried working interest in all properties shown to theCompany in which the Company acquired an interest.  The agreement required us to pay all costs ofacquisition, development and operations attributable to the 10% carried workinginterest.  We are entitled to recover allof our costs related to the carried interest from the production revenuesattributable to this interest.  Afterthese costs have been fully recovered, Kornerstone will participate as a 10%working interest owner in all development and operating costs incurredsubsequent to that point.

 

Inearly 2000, Kornerstone identified an opportunity in Kazakhstan known as theSouth Alibek License 1557, which covered what is now known as the South AlibekField.  The Alibekmola Field had beendiscovered in 1980 by a regional exploration unit of the Ministry of Geology ofthe former Soviet Union.  A total of 31wells were drilled in the Alibekmola Field to delineate the oil bearingreservoirs and structure of the field. This delineation work continued following the breakup of the SovietUnion.  The South Alibek field wasinitially identified by an Alibekmola Field delineation well drilled by theKazakh successors of the Soviet Ministry of Geology, Alibekmola 29 (A-29).  It was identified to be in a separate faultblock adjacent to the Alibekmola Field, and from testing in 1996 producedflowing oil from several intervals in the KT2 during well testing.  Three of the initial delineation wells arewithin the area covered by our License The successor to the Ministry of Geology did not have sufficient fundingto begin delineation drilling around A-29, and the license area was offered ina public tender in

 

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Kazakhstan’sprivatization program.  The subsequent work by us hasresulted in this license area being designated as the South Alibek Field.

 

Thelicense and related exploration contract were initially acquired in the tenderby a subsidiary of AIL Alpha Corporation, Ltd. (“Alpha”).  License 1557 was granted by the Republic ofKazakhstan on April 29, 1999.  On March24, 2000, we signed a Share Purchase Agreement with Alpha to acquire thesubsidiary which held the title to License 1557.

 

**Licenseand Exploration Contract**

** **

OurExploration Contract (the “Exploration Contract”), entered into with thegovernment of Kazakhstan in March 2000, has a six-year term expiring inApril 2005 and requires total capital expenditures during this period ofapproximately $18.0 million.  As of December 31, 2004, the cumulativecapital expenditures which are creditable to our obligations under theExploration Contract have exceeded the minimum commitment.  Under theterms of the Contract, we can produce wells under a test program subject toroyalty payments of 2% of production.  The Exploration Contract may beextended by mutual agreement for two extension periods of two yearseach. In 2003 the Company requested an extension and in April 2004, wewere granted the first of these two-year extensions through April 2007. Inconnection with such extension, we also agreed to an additional work programcommitment of $30.5 million. As of December 31, 2004, $15 million of thisadditional minimum commitment has been made through the cumulative capitalexpenditures creditable to our obligations under the Exploration Contract.  Future extension periods require negotiationwith and approval by the government and may require additional capitalcommitments and other changes to the terms.

 

Wehave commenced negotiations for a production contract (“Production Contract”)and we anticipate that these negotiations will be concluded and a ProductionContract in place by the end of 2005. We have the exclusive right to negotiatefor a Production Contract for the Field, and the government is required toconduct these negotiations under the Law of Petroleum.  However, we are not guaranteed the right to aProduction Contract.  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.  AProduction Contract will typically require a bonus payment upon execution, theamount of which is predetermined based upon the reserves approved by the StateCommittee of Reserves (“SRC”). If satisfactory terms cannot be negotiated, wehave the right to produce and sell oil under the Law of Petroleum for the termof our existing Exploration Contract through April 2007, or as extended, at aroyalty rate of 2%.  The royalty rateunder production contracts is on a sliding scale, based on production.  The royalty rate ranges from 2% to 6%.  The Exploration Contract contains a provisionwhich will allow the government to recover, from future revenues, approximately$4.9 million of exploration costs which were incurred prior to privatization,usually over a 10 year period beginning one year following the approval of theProduction Contract.  The ProductionContract, when executed, will contain the final terms for recovery of thesecosts.

 

InDecember 2004, The State Committee of Reserves (“SCR”) of the Republic ofKazakhstan approved the commercial reserves for development and exploitation ofthe South Alibek Field. This approval provides the Company with the basis tofinalize the terms of a Production Contract relating to this portion of the Fieldwith the Ministry of Energy and Mineral Resources. The Government has assesseda commercial bonus of $1.2 million based on the SCR reserves audit as providedunder the country’s Petroleum Code.

 

Thereserve audit covered by the SCR approval defines an initial production area ofabout 3,500 acres, about 25% of the total area under license. This area can beextended based on the drilling of additional exploration wells pursuant to theCompany’s current Exploration Contract, which was recently extended for another2 years until 2007

 

Thereare two general forms of production contracts in Kazakhstan, production sharingcontracts and tax and royalty based contracts. We favor a tax and royalty based contract and will seek to negotiate andexpect to operate under this structure. Under this financial arrangement, we will pay 100% of the developmentand operating costs and will be entitled to receive 100% of the revenues fromthe Field.  In addition to an up-frontbonus payment and recovery of certain costs incurred prior to conveyance of theField, the government will be entitled to a royalty based on production fromthe Field and corporate income taxes. Corporate income taxes in Kazakhstan vary from 30% to 40%.  Additionally, there is an excess profit taxon oil and gas production which can vary from 15% to 60% based on the ratio ofnet income to deductions.  These taxescan significantly affect the economics of the project. The

 

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Companyis requesting an Exploration and Production Contract to allow for continuedexploration while developing the known reserves. This type of contract shouldallow for maintaining the pre-January 2004 tax regime.

 

Thegovernment may also require that a percentage of our production, which we donot expect to exceed 10%, be sold into domestic markets at local prices.  We would expect these prices to be lower thanprices which we could receive in the export market.  However, our transportation costs wouldlikely be lower as well.  Most of thesmaller producers in the region are not currently being required to sell intothe domestic market.

 

**Overviewof Regional Geology**

 

TheSouth Alibek Field is located in a fairway of large producing fields in the oilregion of Aktobe in northwestern Kazakhstan. The largest city in the Aktubinsk Oblast is Aktobe, approximately 125miles north of the Field.  Within thisfairway, the South Alibek Field is among a set of fields which are formed froma carbonate platform and which produce from carbonate reservoirs of Upper andMiddle Carboniferous age.  The trend follows the carbonate shelf which wasdeposited in the shallow waters of an ancient sea in what isnow the margins of the Pre-Caspian Basin.  Prolific oil fieldtrends are established in the southern and northern margins of the basin, aswell as in the southeastern margins where the South Alibek Field islocated.  The carbonate fields found along the margins of the Pre-CaspianBasin account for approximately 75% of Kazakhstan’s oil reserves andproduction.  The fields in the trend are projected to ultimately containover 40.0 billion barrels of recoverable reserves, including the super-giantTengiz Field, which is estimated to hold 9.0 billion barrels of recoverablereserves and the Kashagan Field that is estimated to have 13.0 billion barrelsof recoverable reserves.

 

SouthAlibek Field is located within 40 miles of two large developed fields, Kenkiyakand Zhanazhol, which contain ultimate recoverable reserves of 200 and 900million barrels of oil, respectively, including cumulative oil producedand estimated remaining reserves.  South Alibek is immediately adjacent tothe producing Alibekmola Field, from which it is separated by a largefault.  The South Alibek Field is about 1,000 feet lower than theAlibekmola Field and has a lower oil water contact.  Production from theZhanazhol Field is estimated to be in excess of 100,000 Bopd and the AlibekmolaField, still in the early phase of development, reports production to be over25,000 Bopd.

 

Thisregion contains good infrastructure for oil and gas development and production,including oil and gas pipelines, electrical transmission connections,all-weather roads, small towns and trained oilfield labor.  This improves our development logistics andlowers our costs compared to drilling in a more remote location.

 

**FieldGeology**

** **

Theprimary oil reservoirs in the South Alibek and Alibekmola Fields are in theUpper – Middle Carboniferous (KT1) and Middle-Lower Carboniferous (KT-2)limestones, which are the main reservoirs for many of the fields throughout theSoutheastern margin of the Pre-Caspian Basin.  The tops of theseformations are found at an initial depth of 6,500 feet and they have a combinedgross thickness of as much as 5,000 feet in the area.  The thickness ofnet productive intervals can be several hundred feet.

 

Wehave conducted an extensive evaluation of the information available for theField and adjacent fields.  This information consists of log data from the31 wells drilled prior to privatization, the five new wells we have drilledunder our License, recent vintage 2D seismic data and use of the results of 3Dseismic for which we have rights to. Based on the evaluation of this data, webelieve that the oil-bearing reservoirs within the KT-1 and KT-2carbonates may be present over a substantial part of the area coveredby our License.

 

**ProvedReserves**

** **

Ourestimated proved oil and gas reserve quantities were prepared by Ryder ScottCompany, independent petroleum engineers. There are numerous uncertainties in estimating quantities of provedreserves and projecting future rates of production and the timing ofdevelopment expenditures.  Theseuncertainties are greater for properties which are undeveloped or have alimited production history, such as the South Alibek Field.  They are only estimates and actual reservesmay vary substantially from these estimates. All of our proved reserves are in the South Alibek Field inKazakhstan.  Our net quantities of proveddeveloped and undeveloped reserves of crude oil and standardized measure offuture net cash flows are reflected in the table below.  See further information about the basis ofpresentation of these amounts in Note 12 of the Notes to Consolidated FinancialStatements.

 

9

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Asof December 31, 2004, we own a 50% working interest in the South Alibek Field,subject to government royalties and a 10% carried working interest afterrecovery of costs. The effect of the carried interest is reflected in thecalculation of our net proved reserves. Our proved reserves have been prepared under the assumption that weobtain a commercial production contract which will allow production for theexpected 25-year term of the contract, as more fully discussed above in “Licenseand Production Contract”, above. In February 2004, Bramex exercised its optionto acquire 50% of the common stock of Caspi Neft.  Thus, our equity ownership of Caspi Neft wasreduced to 50%, which reduces our effective net interest in the proved reservesin the Field to 50%.   This 50% workinginterest is also subject to government royalties.  Based on forecast production volumes, theaverage royalty over the term of the production contract is expected to be 6%or less under current law.

 

**Net Proved Crude Oil Reserves and Future Net Cash FlowsAs of December 31, 2004**

**(Quantities in Barrels)**

 
| ** **                                              | ** ** | **Actual** | ** **  |
|---------------------------------------------------------|------------|------------|-------------|
| Proved Developed                                        |       | 4,476,364  |        |
| Proved Undeveloped                                      |       | 22,337,372 |        |
| Total Proved Reserves                                   |       | 26,813,736 |        |
|                                                    |       |       |        |
| Future Net Income Before Income Taxes,  Discounted @10% |       | $          | 219,996,017 |   |
|                                                    |       |       |        |
| Standardized Measure of Future Net Cash  Flows          |       | $          | 176,841,559 |   |

 

Thefollowing table shows the number of developed and undeveloped acres in theSouth Alibek Field as of the dates indicated:

 
| ** **        | ** ** | **As of December 31,** | ** ** |
|-------------------|------------|------------------------|------------|
| ** **        | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
| Developed acres   |       | 232                    |       | 160 |   | 80 |   |
| Undeveloped acres |       | 1,448                  |       | 765 |   | 160 |   |
| Total acreage     |       | 1,680                  |       | 925 |   | 240 |   |

 

**Transportationand Marketing**

** **

Companiesin the area of the South Alibek Field utilize both the KazTrans Oil and RussianTransneft pipeline systems to export crude oil to regional hub locations suchas Samara, Ukraine, the Port of Odessa on the Black Sea and European locationssuch as Poland, Hungry, Lithuania, Germany and Finland.  Pipeline capacityin the area has significantly improved with the opening of the Caspian PipelineConsortium (“CPC”) pipeline, which ultimately will increase capacity from250,000 Bopd to an expected 800,000 Bopd.  Two Soviet era oil pipelines,with capacities of 50,000 Bopd and 93,000 Bopd, respectively, service nearbyproducing fields.  One of the pipelines is operating at less than fullcapacity.  These pipelines transport oil to the Bestamak rail terminal andthe oil refinery in Orsk, which is a transfer point for swaps to Westernmarkets.  The nearest rail terminal for export is approximately 30 milesfrom the South Alibek Field at Zhem, and is utilized by local producers fordomestic and export oil sales by rail. The Kenkiyak-Atyrau pipeline becameoperational in 2003 with an initial capacity of 120,000 Bopd. This pipelineoriginates at the Kenkiyak Field and provides a link to the CPC pipeline forthe producers in the region.  The Alibekmola Field, adjacent to SouthAlibek, has begun commercial production, and KazTrans Oil has commissioned a 20”pipeline across our license to connect Alibekmola production to theKenkiyak-Atyrau pipeline for export markets via the CPC pipeline.  A pumpstation has been installed about 1.5 kilometers from our central productionfacility.  We expect to have access to this pipeline, subject to possiblecapacity limitations, after we make certain required processing and deliveryinvestments.  Our goal for the South Alibek Field is to complete theinstallation of crude oil treating facilities, pipeline connections andhandling equipment so that we can secure a pipeline allotment and export quotasfor the Field.  Prior to this, our production will be transported by truckfor sale into the local market or for rail shipment to export markets,depending on the best pricing available at the time.

 

In2002, we acquired the Emba Terminal, which is located 35 miles from theField.  The Emba Terminal is a facility for storing and loading crude oilfor shipment by rail.  The facility has not been operational for severalyears and will require capital improvements to make it suitable for use. As of December 31, 2004 , we have advanced

 

10

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approximately $1.465 million to Emba Trans Ltd. which wasused to acquire the Emba Terminal, fund the engineering study and beginconstruction and refurbishment of the facilities.  We may also use theterminal to ship crude oil for third parties if we do not require all of thecapacity.  The Emba Terminal is intended primarily for use as an interimsolution to sell our production prior to the completion of pipeline andprocessing facilities.  However, it will also serve as an alternativetransportation outlet if our pipeline capacity is constrained.  Caspi Neftowns 75% of Emba Trans Ltd., with the balance of 25% owned by Transmeridian.

 

Anotheroperator in the immediate area of the Field is in the planning stages ofextending the rail line from Zhem to its field. The planned construction ofthis extension will cross our Field, thereby giving us another alternative fortransporting our crude oil and making it available to the export market.

 

**DrillingRig**

** **

OnDecember 28, 2001, we purchased a land drilling rig for $5.3 million in totalconsideration, including a note payable for $3.3 million and the issuance bythe Company of $2.0 million in redeemable common stock.  The rig was acquired for drilling operationsin the South Alibek Field.  The rig is adiesel and electric powered National 1320UE, with 2,000 horsepower rating.  It has a depth rating of approximately 20,000feet and has a 320 ton rating on the draw works.  At the time of the purchase, the rig was instorage in South America.  During 2002,we moved the rig by marine transport vessel to Kazakhstan and undertook variousrefurbishments and modifications to the rig to make it suitable for use in ouroperations.  We entered into a contractwith a firm experienced with international drilling to oversee the operation ofthe rig and provide expatriate drilling personnel.

 

Asmore fully discussed in Item 3 and Notes 2, 5 and 9 of the Notes toConsolidated Financial Statements, there is a legal dispute between the Companyand the holder of an apparent first lien on the drilling rig.

 

**Item 3.****  Legal Proceedings**

 

**DrillingRig Dispute**

 

InDecember 2001, the Company purchased a drilling rig for $5.3 million by theissuance, to the seller, of a note payable for $3.3 million and redeemablecommon stock of $2.0 million.  Furtherdiscussion of this transaction can be found in Notes 2, 5 and 9 of the Notes toConsolidated Financial Statements.  InJuly 2003, the Company was notified by the holder of an apparent first lien onthe drilling rig (the “First Lien Holder”) that the seller of the rig was indefault under its note payable obligation to the First Lien Holder.  The Company was not informed of the existenceof the First Lien Holder in the Asset Purchase Agreement related to theacquisition of the drilling rig.  Thenote payable and the redeemable common stock are now in dispute as a result ofthe Seller’s default 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 payments directlyto the First Lien Holder.  During theyear ended December 31, 2003, the Company made installment payments to theFirst Lien Holder totaling $688,400.

 

Discussionswith the seller of the rig became increasingly adversarial during late 2003 andon December 15, 2003, the seller filed suit in District Court, Harris County,Texas, 334th Judicial District relating to the Company’s allegeddefault under the note payable and redeemable common stock agreements with theseller.  At this time, the Company ceasedinstallment payments to the First Lien Holder as it had not been able tosuccessfully negotiate a settlement agreement with both the seller and theFirst Lien Holder.  On February 27, 2004,the First Lien Holder filed suit in United States District Court, SouthernDistrict 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.

 

InApril 2004, the Company filed a Counterclaim and Third-Party Claim against theseller and certain of its affiliates. This action seeks recovery of repair costs incurred by the Company inconnection with undisclosed latent defects in the drilling rig, recovery ofpayments made to the seller, including the redeemable common stock, andrecovery of additional costs associated with the drilling rig.

 

InAugust 2004, the Company and the seller of the rig entered into a Settlementand Release Agreement whereby the seller of the rig agreed to cancel thepromissory note of $1.6 million, plus accrued interest of $700,000, and return200,000 of the 1.0 million shares of redeemable common stock. Pursuant to theterms of the Settlement and Release Agreement the remaining balance due on thenote of $1.6 million, plus accrued interest of $550,000 has been

 

11

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cancelled and was replaced by assuming the obligationof the seller of the rig to the First Lien Holder. The Company has estimatedthis liability to be approximately $2.9 million including accrued and unpaidinterest. The Company also agreed to pay $120,000 of the legal fees incurred bythe seller of the rig in its lawsuit with the First Lien Holder. In December2004, the Company began making the seller’s payment obligation to the FirstLien Holder of $137,680 per month.

 

**FormerChief Financial Officer**

** **

InMay 2003, Jim W. Tucker (the “Plaintiff”), the former Chief Financial Officerof the Company, filed suit in the 359th District Court, Montgomery County,Texas, against Transmeridian Exploration, Inc., in connection with hisseparation from service with the Company on January 3, 2003.  The suit alleges breach of an oral employmentagreement.  The Company was never servedwith notice and had no knowledge of this suit. Counsel for the Plaintiff claimed they were unable to serve the Company’sregistered agent with notice of this suit. Based on these representations, the Court awarded the Plaintiff aDefault Judgment on November 25, 2003, in the amount of $922,275.61.  The Company was notified of a Writ ofGarnishment and Writ of Execution on March 29, 2004 and April 6, 2004,respectively.

 

OnApril 5, 2004, the Company filed a Petition for Bill of Review and a Motion toVacate the Writ of Garnishment.  Ahearing was held on the Motion to Vacate the Writ of Garnishment on April 8,2004. On May 11, 2004, the court granted the Motion to Vacate the Writ ofGarnishment, but has not issued a ruling on the Petition for Bill of Review. InFebruary 2005, the court granted the Motion to Vacate the Default Judgment andthe Company withdrew its Petition for a Change of Venue.  The case going forward will be reinstated andwill begin as if the Company had just been served notice.  The Company intends to vigorously contestthis matter and pursue all legal remedies available to it.

 

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

** **

Nomatters were submitted to a vote of security holders during the quarter endedDecember 31, 2004.

 

**PART II**

 

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

 

**CommonStock**

** **

Ourcommon stock, par value $0.0006 per share, began trading publicly on February26, 2002 and is traded on the OTC Bulletin Board under the symbol “TMXN”.  There are 200,000,000 shares authorized byour Amended and Restated Certificate of Incorporation.  As of December 31, 2004, we had 79,829,062shares issued and outstanding, which were held by an estimated 1,850 beneficialowners.  The following table presents thehigh and low closing prices per share for our common shares, as reported by theOTC Bulletin Board.  Suchover-the-counter market prices reflect inter-dealer prices, without retailmarkup, markdown or commissions:

 

| ** **                                       | ** ** | **High**   | ** ** | **Low**    | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| **2004:**                                        |       |       |       |       |       |
| Fourth quarter                                   |       | $          | 1.97       |       | $          | 1.24 |   |
| Third quarter                                    |       |       | 1.35       |       |       | 0.81 |   |
| Second quarter                                   |       |       | 1.88       |       |       | 0.98 |   |
| First quarter                                    |       |       | 2.15       |       |       | 0.78 |   |
| **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       |       |

 

12

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**PreferredStock**

** **

Weare authorized by our Amended and Restated Certificate of Incorporation toissue up to 5,000,000 shares of preferred stock.  As of December 31, 2004, we had 1,785.714shares of Series A Cumulative Convertible PreferredStock issued and outstanding which are held by an estimated nine beneficialowners.

 

**Dividend Policy on Common Stock**

** **

Wehave never paid cash dividends on our common stock.  We intend to retain future earnings, if any,to meet our working capital requirements and to finance the future operationsof our business.  Therefore, we do notplan to declare or pay cash dividends to the holders of our common stock in theforeseeable future.

 

**RecentIssuance of Unregistered Securities**

** **

In November 2004, the Company sold 1,785.714 sharesof its Series A Cumulative Convertible Preferred Stock(the “Series A Preferred”) in a private placement at a purchase price of$14,000 per share, and issued warrants to purchase up to 4,464,286 shares ofthe Company’s common stock at an exercise price equal to $1.55 per share. The aggregatepurchase price for the Series A Preferred and therelated warrants was cash consideration of $25.0 million.  This issuance is more fully discussed in Note8 of the Notes to Consolidated Financial Statements.

 

Theforegoing issuance of Series A Preferred stock were made in reliance upon theexemption from registration set forth in Section 4(2) of the Securities Act of1933 for transactions not involving a public offering.  No underwriters were engaged in connectionwith the foregoing issuances of securities. The sales were made without general solicitation or advertising.  Each purchaser was an “accredited investor”or a sophisticated investor with access to all relevant information necessaryto evaluate the investment who represented to the Company that the sales werebeing acquired for investment.

 

**StockOption Plan**

** **

During2003, the Company filed a Form S-8 registration statement with the Securitiesand Exchange Commission to register 5.0 million shares under its 2001 IncentiveStock Option Plan (the “Option Plan”). The options may be granted to officers, board members, key employees andconsultants through December 31, 2010. Under the Option Plan, the exercise price of each option is equal to thefair market value of the Company’s common stock on the date of the grant andall options granted have a term of five years. The vesting period is determined by the Board of Directors on the dateof grant.  As of December 31, 2004,options to purchase 2,045,000 shares had been granted and options to purchase2,955,000 shares were available for future grants under the Option Plan.

 

**StockCompensation Plan**

** **

During2003, the Company filed a Form S-8 registration statement with the Securitiesand Exchange Commission to register 2.5 million shares under its 2003 StockCompensation Plan (the “Stock Compensation Plan”).  Under the Stock Compensation Plan, such stockcan be issued in lieu of cash to compensate officers, employees, directors andthird-party consultants for services rendered. As of December 31, 2004, 1,443,327 shares had been issued and 775,000shares have been granted, but have not yet been earned. There are 281,673shares available for future grants under the Stock Compensation Plan.

 

13

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**Item 6.****  Selected Financial Data**

** **

Thefollowing selected financial information (which is not covered by theindependent auditors’ report) should be read in conjunction with theconsolidated financial statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data.”

 

| ** **                                                     | ** ** | **Years ended December 31,**                         | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                     | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
| **OPERATING RESULTS:**                                         |       |                                                 |       |   |   |   |   |   |   |   |   |
| Oil Revenues                                                   |       | $                                                    | 3,923      |   | $ | 797 |   | $ | — |   | $ | 51 |   | $ | — |   |
| Loss from operations                                           |       | (3,305                                               | )          | (4,915 | ) | (2,936 | ) | (1,924 | ) | (187 | ) |
| Net loss                                                       |       | (3,848                                               | )          | (5,686 | ) | (3,270 | ) | (2,112 | ) | (810 | ) |
| Net loss attributable to common  stockholders                  |       | (4,002                                               | )          | (5,706 | ) | (3,308 | ) | (2,236 | ) | (810 | ) |
| Basic and diluted net loss per share                           |       | (0.05                                                | )          | (0.09 | ) | (0.06 | ) | (0.04 | ) | (0.06 | ) |
|                                                           |       |                                                 |       |   |   |   |   |   |   |   |   |
| Oil sales price                                                |       | 11.87                                                |       | 10.52 |   | 0.00 |   | 0.00 |   | 0.00 |   |
| Operating cost per barrel produced                             |       | 1.55                                                 |       | 3.41 |   | 0.00 |   | 0.00 |   | 0.00 |   |
|                                                           |       |                                                 |       |   |   |   |   |   |   |   |   |
| **BALANCE SHEET DATA:**                                        |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total current assets                                           |       | $                                                    | 20,659     |   | $ | 2,067 |   | $ | 813 |   | $ | 377 |   | $ | 561 |   |
| Total property and equipment, net of  accumulated depreciation |       | 78,934                                               |       | 54,560 |   | 24,396 |   | 13,105 |   | 4,452 |   |
| Total assets                                                   |       | 99,810                                               |       | 57,099 |   | 26,271 |   | 13,883 |   | 5,013 |   |
| Total current liabilities                                      |       | 25,671                                               |       | 31,918 |   | 6,637 |   | 2,475 |   | 1,617 |   |
| Long term debt, net of current maturities                      |       | 23,683                                               |       | 24,674 |   | 13,752 |   | 3,368 |   | — |   |
| Stockholders’ equity                                      |       | 42,345                                               |       | 506 |   | 3,881 |   | 6,038 |   | 3,396 |   |
|                                                           |       |                                                 |       |   |   |   |   |   |   |   |   |
| **CASH FLOW DATA:**                                            |       |                                                 |       |   |   |   |   |   |   |   |   |
| Net cash used in operating activities                          |       | $                                                    | (9,981     | ) | $ | (3,654 | ) | $ | (2,056 | ) | $ | (1,880 | ) | $ | (495 | ) |
| Net cash used in investing activities                          |       | (17,647                                              | )          | (23,640 | ) | (10,299 | ) | (1,813 | ) | (3,038 | ) |
| Net cash provided by financing activities                      |       |                                                 | 43,052     |   |   | 27,991 |   |   | 12,873 |   |   | 3,289 |   |   | 1,046 |   |

 

**Item 7.**** Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

***SEE DISCUSSION OF RISK FACTORS IN ITEM 1 OF THIS ANNUAL REPORT ON FORM10-K.***

 

**Introduction**

 

The following discussion andanalysis addresses changes in Transmeridian’s financial condition and results ofoperations during the three year period 2002 through 2004.

 

There is limited or nocomparability for revenue and operating expense to the comparable periods in2002 and 2003, as sales and production did not commence until the third quarterof 2003.

 

Management’sprimary goals for 2004 were:

 

•                  Continuethe development of the Field by operating two drilling rigs;

•                  Secureadditional financing for our 50% share of the 2004 budget;

•                  CompletePhase I of the production facilities;

•                  Positionthe Company for pipeline sales in 2005.

 

14

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Webelieve that these primary goals were achieved in 2004. We are currentlydeveloping our goals for 2005, which will be finalized in the first quarter of2005. We anticipate, however, that these goals will include increasedproduction from all the wells in the Field, more efficient drilling andcompletion programs, improving our price received for oil sales, execution of aProduction Contract and securing additional financing for Caspi Neft.

 

**Current Activities**

** **

During2004, we drilled and placed on extended production testing four wells, theSouth Alibek #2 (SA-2), South Alibek #4 (SA-4), South Alibek #5 (SA-5) andSouth Alibek #17 (SA-17) and began drilling of one additional well, the SouthAlibek #14 (SA-14). The SA-14 is the sixth well of an initial seven welldrilling program in the South Alibek Field.  The SA-5 and SA-17 arein-field development wells.  As ofDecember 31, 2004, SA-14 was within 3,300 feet of its programmed depth. Allwells are planned to drill the same KT1 and KT2 carbonate reservoirs of theSouth Alibek Field.  Production casinghas been set on all completed wells for the well testing program.  With the exception of SA-4, all completedwells have been producing oil on an extended production testing program.  In late November, a workover program wasinitiated to prepare the wells for long-term commercial production and includesreservoir stimulation and installation of production tubing and packers withthe aim to increase the field’s oil production. The additional perforation andstimulation programs for wells SA-2 and SA-5 have been completed.  The wells are being flowed and evaluated todetermine their optimum flow potential.

 

Weplan to perform a hydraulic fracture stimulation of well SA-17 during the firstquarter of 2005.  Logistical challengesin procuring the high strength proppant material and a lack of availability ofservice company equipment have caused a delay in performing thisoperation.  The service company hasmobilized its team to the field and last minute preparations are underway. Oncethis operation is completed the well will undergo long term testing to evaluatethe effectiveness of the hydraulic fracture stimulation for application to theother existing and future wells.

 

TheCentral Production Facility is being completed. One of the three oil storage tanks has been commissioned and iscurrently being used for crude oil storage. We expect the facility to becomefully operational during 2005. A de-marcaptane unit is being designed to meetquality specifications required for entry into the regional pipeline system.Our contractors estimate that completion and Field commissioning should occurin the third quarter of 2005.

 

InJuly 2004, we established an office in Baku, Azerbaijan to evaluate prospectsin that country. We will be allowed to view data from the national oil company’sarchives to evaluate the available properties and enter into a Memorandum ofUnderstanding to undertake the study of various plays in the country. We seekproperties which meet our objectives of 1) low up-front acquisition costs, 2)identified reserves, 3) significant upside reserve potential, 4) reasonablyshort payback period and 5) lower than average international finding costs. Weare not obligated to purchase or participate in a property and have anindefinite time to review the data.

 

**Results of Operations**

** **

*Oil production and revenue*

* *

Forthe year ended December 31, 2004, Caspi Neft produced 313,305 barrels (“Bbls”) ofcrude oil, or an average of 858 Bopd, as compared to 117,376 Bbls, or anaverage of 641 Bopd for the year ended December 31, 2003. The increase in 2004when compared to 2003 is due to the Field having three producing wells in 2004as compared to only one producing well in 2003, and the Field was on productionfor all of 2004 and only six months of 2003. There is no comparability of production for the years ended December 31,2003 and 2002, because production from the Field did not commence until July of2003.

 

Forthe year ended December 31, 2004, we sold (by physical delivery to thepurchaser) 336,440 Bbls of crude oil at an average price of $11.87 per Bbl, fornet revenues of $3,922,990, as compared to 77,293 Bbls at an average price of$10.52 and net revenue of $797,411 for the year ended December 31, 2003.  The increase in 2004 when compared to 2003 isdue to the Field having three producing wells in 2004 as compared to only oneproducing well in 2003, and the Field producing for all of 2004 and only sixmonths of 2003.  There is nocomparability of revenue for the years ended December 31, 2003 and 2002,because sales from the Field did not commence until the third quarter of 2003.

 

15

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Werecognize revenue from the sale of oil when the purchaser takes delivery of theoil at the Field. As of December 31, 2004, the Company had 16,576 Bbls ininventory for which it had received payment, but had not recognized the revenuebecause delivery had not yet been taken by the purchaser. The average pricereceived for these Bbls was $11.61, which will be recognized as revenue infuture periods of 2005 upon delivery to the purchaser.

 

Ourcrude oil sales in the last eight months of 2004 occurred at the Field and werenot subject to transportation costs. Consequently, our net realization improved by approximately $2.00 perBbl compared to year end 2003. (For additional discussion on transportation,see *Transportation Expense*, below).

 

InDecember, we entered into a new contract for sales of crude oil from SouthAlibek Field. The arrangement provides for deliveries to take place at thefield and a net sales price of approximately $20 per barrel. While theagreement is short-term in nature, it may be extended by mutual agreement ofthe parties.

 

*Exploration expense*

* *

Explorationexpense, which includes geological and geophysical expense and the cost ofunsuccessful exploratory wells, is recorded as an expense in the periodincurred under the successful efforts method of accounting. During 2004 weincurred $130,926 in exploration expense as compared to $592,553 for thecomparable period in 2003. The decrease is primarily due to the fact no newgeologic data was purchased and interpreted in 2004. In 2004 we expensed theremaining book value of our South Texas properties, $66,844, due to theunsuccessful reentry in the third quarter. During 2003, we incurred $592,553 inexploration expense which was primarily related to the purchase andinterpretation costs of geologic data and a charge for the unsuccessfulcompletion attempt on one of our two U. S. properties. For the year endedDecember 31, 2002, there were no charges to exploration expense.

 

*Depreciation, depletion and amortization*

* *

Depreciation,depletion and amortization (“DD&A”) of oil and gas properties is calculatedunder units of production method, following the successful efforts method ofaccounting, as described in Note 1 of the Notes to Consolidated FinancialStatements. In 2004 we sold 336,440 Bbls of oil resulting in DD&A of$709,496, as compared to 77,293 Bbls of oil sales resulting in DD&A of$189,635 for 2003. This increase is primarily due to increased oil sales in2004.  There is no comparability forDD&A for the years ended December 31, 2003 and 2002, because sales from theField did not commence until the third quarter of 2003.

 

Non-oiland gas property DD&A for 2004 was $79,261 and $56,079 for 2003. Thisincrease is primarily due to asset additions in the Kazakhstan operation. Forthe year ended December 31, 2002 we recorded $28,320, in non-oil and gasproperty DD&A. The increases in 2003 and 2002 are primarily due toadditional transportation and other equipment acquired by Caspi Neft.

 

*Transportation and Expenses*

* *

Duringthe second quarter of 2004, the first of three storage tanks at our permanentproduction facility was commissioned for use. This allowed us to begin oil sales from the Field, resulting in a costsavings of approximately $517,887.  Forthe year ended December 31, 2004, transportation and storage costs were$173,847, or $0.55 per Bbl produced. For the year ended December 31, 2003, weincurred $235,264 or $2.00 per Bbl produced. We are currently negotiating tohave a railroad spur built from our production facility to the main rail line.See Item 2. “Properties: Transportation and Marketing.” This will allow fordirect shipment of the crude oil to the export terminals located on therailroad.  Additionally, when thetreating facilities and pipeline pump station discussed in Item 2 areoperational, expected during 2005, we should be able to deliver crude oilproduction directly into the regional pipeline system, which should result in asignificant improvement in sales pricing for our crude oil.  The prices received for pipeline sales shouldbe much closer to prevailing world oil prices than our current salesarrangements.

 

*Operating and administrative expense - Kazakhstan*.

 

Forthe year ended December 31, 2004 operating and administrative expense inKazakhstan was $3.6 million, as compared $2.5 million for the year endedDecember 31, 2003. This increase is primarily due to increased activity in ourexploration, development and production program for the South Alibek Field. In2002 operating and

 

16

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administrative cost in Kazakhstan was $1.2 million. Theincrease of $1.3 million, when comparing 2002 to 2003, is primarily due toincreased personnel costs at Caspi Neft, which is a result of increasedactivity.

 

*General and administrative expense – Houston*

* *

Forthe year ended December 31, 2004 general and administrative expense in Houstonwas $2.6 million, as compared $2.1 million for the year ended December 31,2003. This increase is primarily due to increased legal costs associated withthe lawsuits explained in Item 3. In 2002 general and administrative expense inHouston was $1.8 million. The increase when comparing 2002 to 2003 is primarilydue to legal costs and investor relation cost.

 

*Interest expense*

* *

Interestexpense, net of the capitalized portion, for the years ended December 31, 2004,2003 and 2002, was $1,400,227, $772,409 and $338,229, respectively. Theincrease in interest expense when comparing 2004 to 2003 is primarily due toincreased debt levels and expensing of interest that had been capitalized inthe prior year. Once a well has been completed and is producing oil, we nolonger continue to capitalize interest. The increase in 2003 compared to 2002is primarily due to capitalizing the interest on our drilling rig in 2002during the time it was being prepared for its intended use. We expect interestexpense to increase in 2005 due to more wells being placed on production.However, if we are successful in securing a new credit facility orrenegotiating the current facility at more favorable interest rates, we wouldexpect interest expense to decrease.

** **

**Liquidityand Capital Resources**

** **

Forthe years ended December 31, 2004, 2003 and 2002, capital expenditures were$26.1 million, $31.2 and $11.5 million, respectively. The primary sources offunding have been private placements of common and preferred stock,  borrowings underour credit facilities with a Kazakhstan bank (as described in more detail belowand in Note 5 to the Notes to Consolidated Financial Statements) and loans fromthe Company and Bramex to Caspi Neft. From inception through December 31, 2004,we have received a total of $12.0 million in net cash proceeds from sales ofcommon stock and $23.4 million in net cash proceeds from the sale of preferredstock. Our cumulative proceeds from all borrowings, net of repayments, haveamounted to $34.6 million since inception. These proceeds have been used toconduct remedial work and production tests on SA - 29, drill and complete theSA - 1, SA-2, SA-4,  SA-5 and SA-17, thedrilling of the SA – 14, the initial construction costs of support andproduction facilities and the administrative cost of the office in Kazakhstan.The total capitalized cost attributable to the South Alibek Field as ofDecember 31, 2004, was $78.9 million, which includes $10.0 million ofcapitalized interest.

 

InFebruary 2002, Caspi Neft obtained a $20.0 million credit facility with aKazakhstan bank to fund operations in the South Alibek Field.  The available capacity under the facility wasfully utilized in April 2003 and the bank extended $1.5 million in additionalfinancing as an interim step pending arrangements for an additional facility.Under the terms of the credit facility, a portion of this debt and accruedinterest was due in August 2003. This amount was subsequently paid in February2004 in conjunction with the Bramex option exercise discussed below. See Note 5to the Notes to Consolidated Financial Statements for further discussion.

 

Inconnection with this bank financing, the Company granted an option to Bramex toacquire 50% of the common stock of Caspi Neft. To exercise this option, Bramex made a capital contribution to CaspiNeft of $15.0 million, which was used to repay part of the bank’s creditfacility. The option was exercised in February 2004. For additionalinformation, see Note 5 of the Notes to Consolidated Financial Statements.

 

InSeptember 2003, Caspi Neft entered into a second facility with this bank in theamount of $30.0 million. The funds from this facility were used for the ongoingdevelopment of the project.  As ofDecember 31, 2004, the total amount available had been fully utilized. Theprincipal balance with accrued interest is payable in 36 monthly installmentsfrom June 2005 through May 2008. For additional information, see Note 5 of theNotes to Consolidated Financial Statements.

 

In February 2005, the Company, through itssubsidiary Caspi Neft, entered into an agreement with the bank in Kazakhstan todefer all payments of principal and interest due on both credit facilities forsix months or until July 15, 2005. At the expiration of the extension the totalamount of principal and interest deferred, $13.7 million will become due andpayable. In exchange for this deferral the Company has agreed to advance up to$10.0 million to Caspi Neft to fund 100% of anticipated capital requirementsfor the first six months of 2005.

 

17

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In November 2004, the Company sold 1,785.714 sharesof its Series A Cumulative Convertible Preferred Stock(the “Series A Preferred”) in a private placement at a purchase price of$14,000 per share, and issued warrants to purchase up to 4,464,286 shares ofthe Company’s common stock at an exercise price equal to $1.55 per share. Theaggregate purchase price for the Series A Preferredand the related warrants was cash consideration of $25.0 million.  Proceeds from the private placement of SeriesA Preferred Stock and Warrants will be used forgeneral corporate purposes, including funding the Company’s developmentdrilling program in the South Alibek field in Kazakhstan, and to pursue growthopportunities.

 

The Series A Preferred hasa liquidation value of $14,000 per share and is convertible at the holders’option into common stock at a conversion price of $1.40 per share, subject toadjustments in certain circumstances. The holders of the Series A Preferred will beentitled to a quarterly dividend payable at the rate of four and one-halfpercent (4.5%) per annum, payable in cash. The holders of the Series A Preferred Stock shallhave full voting rights and powers (subject to a beneficial ownership cap asdescribed below) equal to the voting rights and powers of the holders of commonstock, voting together with the holders of common stock as one class.  Each holder of the Series A Preferred shallnot, unless it chooses in advance not to be governed by this limitation,convert the Series A Preferred or exercise the Warrant Shares into common stocksuch that the number of shares of common stock issued after the conversionwould exceed, when aggregated with all other shares of common stock owned bysuch holder at such time, in excess of 4.999% of the then issued andoutstanding shares of common stock outstanding of the Company.   So long as at least twenty (20%) percent ofthe Series A Preferred remains outstanding, the Company shall not issue any newsecurities or financial instruments that rank pari pasu or senior to the SeriesA Preferred without the approval of at least 75% of the Series A Preferredoutstanding. Beginning one year following the effective date of theregistration statement to be filed for the underlying shares of common stock,the Series A Preferred shall automatically convert into the common stock of theCompany at the conversion price of $1.40 per share (subject to adjustments), ifthe common stock trades at a price equal to or greater than $4.15 per share fortwenty (20) consecutive trading days, subject to the applicable ownershiplimitations. In the event a holder is prohibited from converting into commonstock due to the 4.999% ownership limitation described above, the excessportion of the Series A Preferred shall remainoutstanding, but shall cease to accrue a dividend.

 

Wecontributed $10.5 million of the Series A preferredStock proceeds to the working capital of Caspi Neft. The other 50% owner ofCaspi Neft has also contributed $10.5 million.

 

Managementexpects cash flow from operations to increase throughout 2005 and provide aportion of the funds needed to further develop the field and repay debt. Suchcash flow is dependent upon many factors, such as achieving and sustainingadequate production rates, oil prices, and other factors which may be beyondthe control of the Company.

 

Bythe end of 2005, we expect to drill and complete four new wells, bringing ourtotal number of producing wells to ten, complete the construction of theproduction facility, tie into the regional pipeline system, and completenegotiation of a Production Contract. We have an approved budget ofapproximately $36.6 million for capital expenditures and an operating budget(lease operating expense and general and administrative expense) budget ofapproximately $12.0 million. We currently anticipate that this capital spendingplan will result in a cash shortfall of approximately $10.0 - $15.0 million,before including debt service. We are currently discussing new financingalternatives with several financial institutions, but cannot be assured that wewill be successful in securing the new financing. If an agreement is notachieved for new financing we will have to reduce or suspend our capitalprogram in order to fund operating expenses and debt service. The Companybelieves it will be successful in obtaining new financing to continuedevelopment of the Field in accordance with its current development plan.However, the Company cannot provide assurance that it will be successful, asmany factors required to execute its plans are outside the control of theCompany.

 

18

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Thefollowing table presents our future contractual obligations, which consist oflong-term debt and lease commitments:

 
| ** **                    | ** ** | **2005** | ** ** | **2006** | ** ** | **2007**   | ** ** | **2008** | ** ** | **Thereafter** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------------|------------|
|                          |       |     |       |     |       |       |       |     |       |           |       |
| Long-term debt (1)            |       | $        | 12,005,207 |     | $          | 9,799,862  |       | $        | 9,799,862  |           | $          | 4,083,276 |   | $ | — |   |
|                          |       |     |       |     |       |       |       |     |       |           |       |
| Lease commitments (2)         |       | 210,324  |       | 210,324  |       | 181,743    |       | 96,000   |       | —         |       |
|                          |       |     |       |     |       |       |       |     |       |           |       |
| Total contractual obligations |       | $        | 12,215,531 |     | $          | 10,010,186 |       | $        | 9,981,605  |           | $          | 4,179,276 |   | $ | — |   |

 

----

(1)          SeeNote 5 to the Notes to Consolidated Financial Statements.

(2)          SeeNote 9 to the Notes to the Consolidated Financial Statements.

 

**CriticalAccounting Policies and Recent Accounting Pronouncements**

** **

Wehave identified the policies below as critical to our business operations andthe understanding of our financial statements. The impact of these policies and associated risks are discussedthroughout Management’s Discussion and Analysis where such policies affect ourreported and expected financial results. A complete discussion of our accounting policies is included in Note 1of the Notes to Consolidated Financial Statements.

 

*Principles of Consolidation*

* *

Ourconsolidated financial statements include all of our subsidiaries.  Our most significant subsidiary is CaspiNeft, which holds License 1557 and the related Exploration Contract for theSouth 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 at December 31, 2004.

 

DuringFebruary 2004, Bramex Management, Inc., successor in interest toKazstroiproekt, Ltd. (“Bramex”), exercised its option to acquire 50% of thecommon stock of OJSC Caspi Neft TME (“Caspi Neft”), the Company’s primaryoperating subsidiary in Kazakhstan and the entity which holds the license andexploration contract covering the South Alibek Field.  Accordingly, as ofDecember 31, 2004, the Company owns a 50% equity interest in thissubsidiary.  Based on the Company’s ability to exercise significantcontrol over Caspi Neft, the Company believes that the most meaningfulaccounting treatment is to fully consolidate this entity, with the 50% shareowned by Bramex reflected as a minority interest.

 

Toexercise its option to acquire 50% of Caspi Neft, Bramex contributed $15million in cash to Caspi Neft, the proceeds of which were used by Caspi Neft toretire debt.  The difference between the$15 million of capital contributed to Caspi Neft and 50% of the book equity ofCaspi Neft after such capital contribution represents an excess purchase pricepaid by Bramex of $6.0 million. This amount has been included in additionalpaid-in capital on the accompanying consolidated balance sheet.

 

*Oil and Gas Reserve Information*

* *

Theinformation regarding our oil and gas reserves, the changes thereto and theestimated future net cash flows are dependent upon engineering, price and otherassumptions used in preparing our annual reserve study.  A qualified independent petroleum engineerwas engaged to prepare the estimates of our oil and gas reserves in accordancewith applicable engineering standards and in accordance with Securities andExchange Commission guidelines.  Changesin prices and cost levels, as well as the timing of future development costs,may cause actual results to vary significantly from the data presented.  Our oil and gas reserve data representestimates only and are not intended to be a forecast or fair market value ofour assets.

 

Ouroil and gas reserve data and estimated future net cash flows have been preparedassuming we are successful in negotiating a commercial production contractwhich will allow production for the expected 25-year term of the contract.  The current maximum statutory royalty rate of6%, as dictated by new tax rules which came into effect in

 

19

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2004,has been used to calculate the government royalty.  Production contracts are customarily awardedupon determination that the field is capable of commercial rates of productionand that the applicant has complied with the other terms of its license andexploration contract.  However, we arenot guaranteed the right to a production contract.  If we are not successful in negotiating aproduction contract on acceptable terms, it will materially change our oil andgas reserve data and estimated future net cash flows.

 

*Successful Efforts Method of Accounting*

* *

Wefollow the successful efforts method of accounting for our investments in oiland gas properties, as more fully described in Note 1 of the Notes toConsolidated Financial Statements.  Thisaccounting method has a pervasive effect on our reported financial position andresults of operations.

 

*Capitalized Interest Costs*

* *

Wecapitalize interest costs on oil and gas projects under development, includingthe costs of unproved leasehold and property acquisition costs, wells inprogress and related facilities.  We alsocapitalized interest on our drilling rig during the time it was being preparedfor its intended use.  During the yearended December 31, 2004, 2003 and 2002, we capitalized $4.5 million, $4.2million and $1.3 million, respectively, of interest costs, which reduced ourreported net interest expense to $1.4 million, $772,409 and $338,645respectively.  Since a significantportion of our financial resources has been dedicated to the exploration anddevelopment of our Kazakhstan property, since 2001, 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**

** **

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123 (R), Share-Based Payment (“SFASNo. 123 (R)”) that requires compensation costs related to share-based paymenttransactions to be recognized in the financial statements. With limitedexceptions, the amount of compensation cost will be measured based on the grantdate fair value of the equity or liability instruments issued. In addition,liability awards will be remeasured each reporting period. Compensation costwill be recognized over the period that an employee provides service inexchange for the award. This Statement replaces SFAS No. 123 and is effectiveas of the first interim or annual reporting period that begins after June 15,2005. The cumulative effect of applying this Statement, if any, is not expectedto be material.

 

InNovember 2004, the FASB issued Statement of Financial Accounting Standards No.151, Inventory Costs (“SFAS No. 151”) to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and spoilage. TheStatement requires that abnormal expenses be recognized in the period in whichthey were incurred. The Statement is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. SFAS No. 151 is not expectedto effect our consolidated financial statements.

 

InDecember 2004, the FASB issued Statement of Financial Accounting Standards No.153, Exchanges of Nonmonetary Assets (“SFAS No. 153”) to eliminate an exceptionfrom fair value measurement in APB Opinion No. 29, for nonmonetary exchanges ofsimilar productive assets. SFAS No. 153 replaces this exception with a generalexception from fair value measurement for exchanges of nonmonetary assets thatdo not have commercial substance. A nonmonetary exchange has commercial substanceif the future cash flows of the entity are expected to change significantly asa result of the exchange. SFAS No. 153 is not expected to effect ourconsolidated financial statements.

 

**Item 7A.**** Quantitative and Qualitative Disclosures AboutMarket Risk**

** **

**OilPrices**

** **

Ourfuture success is dependent on the Company being able to transport and marketits production either within Kazakhstan or preferably through export tointernational markets.  Crude oil pricesare subject to significant volatility in response to changes in supply, marketuncertainty and a variety of other factors beyond our control.  The majority of our sales of crude oil havebeen based on prevailing current local market prices at the time of sale.  In

 

20

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June2004, Caspi Neft entered into a contract to sell approximately 157,500 barrelsof crude oil to a local purchaser for approximately $11.61 per barrel. As ofDecember 31, 2004, the purchaser has not taken delivery of approximately 39,260barrels on this contract.

 

**InterestRate Risk**

** **

AtDecember 31, 2003, Transmeridian had long-term debt outstanding of $23.7million.  The total amount bears interestat a fixed rate of 15% per annum.

 

**ForeignCurrency Risk**

 

The Company’s functional currencyis the U.S. dollar.  The financialstatements 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 financial statements at the time of each transaction.

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

Thisreport includes “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Allstatements other than statements of historical facts included or incorporatedby reference in this report, including, without limitation, statementsregarding the Company’s future financial position, business strategy, budgets,projected revenues, projected costs and plans and objectives of management forfuture operations, are forward-looking statements,  In addition, forward-looking statementsgenerally can be identified by the use of forward-looking terminology such as “may,”“will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or “continue”or the negative thereof or variations thereon or similar terminology.  Although the Company believes that theexpectations reflected in such forward-looking statements are reasonable, itcan give no assurance that such expectations will prove to be correct.  Important factors that could cause actualresults to differ materially from the Company’s expectations (“cautionarystatements”) include, but are not limited to, the Company’s assumptions aboutenergy markets, production levels, reserve levels, operating results,competitive conditions, technology, the availability of capital resources,capital expenditure obligations, the supply and demand for oil, natural gas andother products or services, the price of oil, natural gas and other products orservices, currency exchange rates, the weather, inflation, the availability ofgoods and services, drilling risks, future processing volumes and pipelinethroughput, general economic conditions, either internationally or nationallyor in the jurisdictions in which Transmeridian or its subsidiaries are doingbusiness, legislative or regulatory changes, including changes in environmentalregulation, environmental risks and liability under federal, state and foreignenvironmental laws and regulations, the securities or capital markets and otherfactors disclosed under, “Item 2. Properties – Proved Reserves and EstimatedFuture Net Revenue,” “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and “Item 7A.Quantitative and Qualitative Disclosure About MarketRisk” and elsewhere in this report.  Allsubsequent written and oral forward-looking statements attributable to the Company,or persons acting on its behalf, are expressly qualified in their entirety bythe cautionary statements.  The Companyassumes no duty to update or revise its forward-looking statements based onchanges in internal estimates or expectations or otherwise.

 

21

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**Item 8.****  Financial Statements**

** **

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report  of Independent Certified Public Accountants                                                         |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| Consolidated Balance Sheets  as of December 31, 2004 and 2003                                               |   |
|                                                                                                        |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002                 |   |
|                                                                                                        |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2004,  2003 and 2003 |   |
|                                                                                                        |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                 |   |
|                                                                                                        |   |
| Notes to  Consolidated Financial Statements                                                                 |   |

 

 

22

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**Report of Independent Certified Public Accountants**

 

Boardof DirectorsTransmeridian Exploration, Inc. and Subsidiaries

 

Wehave audited the accompanying consolidated balance sheets of TransmeridianExploration, Inc. and Subsidiaries as of December 31, 2004 and 2003, and therelated consolidated statements of operations, stockholders’ equity and cashflows for each of the years in the three year period ended December 31,2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with standards of Public Company AccountingOversight Board (United States of America). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,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 our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of TransmeridianExploration Inc. and Subsidiaries at December 31, 2004 and 2003 and theconsolidated results of their operations and cash flows for each of the yearsin the three year period ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.

 
| /s/                                 | John  A. Braden & Company, P.C. |   |
|-------------------------------------|-------------------------------------|--------|
| John  A. Braden & Company, P.C. |
|                                |
| Houston,  Texas                     |
| March  14, 2004                     |

 

23

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**TRANSMERIDIAN EXPLORATION, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

 
| ** **                                                                 | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                 | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **ASSETS**                                                                 |       |             |       |   |   |
| Current Assets:                                                            |       |             |       |   |   |
| Cash and cash equivalents                                                  |       | $                | 16,746,137 |   | $ | 1,321,514 |   |
| Accounts receivables                                                       |       | 3,644,891        |       | 143,135 |   |
| Crude oil inventory                                                        |       | 192,465          |       | 509,156 |   |
| Prepaid expenses                                                           |       | 75,850           |       | 93,999 |   |
| Total current assets                                                       |       | 20,659,343       |       | 2,067,804 |   |
|                                                                       |       |             |       |   |   |
|                                                                       |       |             |       |   |   |
| Property and Equipment:                                                    |       |             |       |   |   |
| Oil and gas properties, successful efforts  method                         |       | 75,448,530       |       | 48,800,256 |   |
| Drilling rig and equipment                                                 |       | 5,850,729        |       | 6,484,983 |   |
| Transportation equipment                                                   |       | 239,821          |       | 239,821 |   |
| Office and technology equipment                                            |       | 291,305          |       | 253,351 |   |
| Total property and equipment                                               |       | 81,830,385       |       | 55,778,411 |   |
| Less accumulated depreciation                                              |       | 2,895,579        |       | 1,217,836 |   |
| Property and equipment, net                                                |       | 78,934,806       |       | 54,560,575 |   |
|                                                                       |       |             |       |   |   |
| Other assets                                                               |       | 216,111          |       | 470,693 |   |
|                                                                       |       |             |       |   |   |
|                                                                       |       | $                | 99,810,260 |   | $ | 57,099,072 |   |
|                                                                       |       |             |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                              |       |             |       |   |   |
|                                                                       |       |             |       |   |   |
| Current liabilities:                                                       |       |             |       |   |   |
| Accounts payable and accrued liabilities                                   |       | $                | 7,137,016  |   | $ | 3,268,552 |   |
| Current maturities of long-term debt                                       |       | 12,005,208       |       | 20,176,205 |   |
| Accrued interest payable                                                   |       | 6,132,477        |       | 5,716,720 |   |
| Redeemable common stock                                                    |       | —           |       | 2,000,000 |   |
| Deferred revenue                                                           |       | 192,465          |       | 509,156 |   |
| Dividends payable                                                          |       | 154,110          |       | — |   |
| Notes payable to related parties                                           |       | 50,000           |       | 248,025 |   |
| Total current liabilities                                                  |       | 25,671,276       |       | 31,918,658 |   |
|                                                                       |       |             |       |   |   |
| Long-term debt, net of current maturities                                  |       | 23,682,999       |       | 24,488,196 |   |
|                                                                       |       |             |       |   |   |
| Other long term liabilities                                                |       | 186,000          |       | 186,000 |   |
|                                                                       |       |             |       |   |   |
| Minority interest                                                          |       | 7,924,558        |       | — |   |
|                                                                       |       |             |       |   |   |
| Stockholders’ equity:                                                 |       |             |       |   |   |
| Preferred stock, $0.0006 par value per  share, 5,000,000 shares authorized |       | 1                |       | — |   |
| Common stock, $0.0006 par value per share,  200,000,000 shares authorized  |       | 47,897           |       | 42,404 |   |
| Additional paid-in capital                                                 |       | 58,361,256       |       | 12,525,250 |   |
| Retained deficit                                                           |       | (16,063,727      | )          | (12,061,436 | ) |
| Total stockholders’ equity                                            |       | 42,345,427       |       | 506,218 |   |
|                                                                       |       |             |       |   |   |   |   |
|                                                                       |       | $                | 99,810,260 |   | $ | 57,099,072 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**TRANSMERIDIAN EXPLORATION, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

 
| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                               |       |                        |       |   |   |   |   |
| Revenue from oil sales                             |       | $                           | 3,922,990  |   | $ | 797,411 |   | $ | — |   |
|                                               |       |                        |       |   |   |   |   |
| Operating Costs and Expenses:                      |       |                        |       |   |   |   |   |
| Exploration expense                                |       | 130,926                     |       | 592,553 |   | — |   |
| Depreciation, depletion and amortization           |       | 788,758                     |       | 245,712 |   | 28,318 |   |
| Transportation expense                             |       | 154,993                     |       | 235,264 |   | — |   |
| Operating and administrative expense -  Kazakhstan |       | 3,591,529                   |       | 2,503,674 |   | 1,122,476 |   |
| General and Administrative expense -  Houston      |       | 2,562,033                   |       | 2,135,237 |   | 1,785,809 |   |
| Total operating costs and expenses                 |       | 7,228,239                   |       | 5,712,440 |   | 2,936,603 |   |
|                                               |       |                        |       |   |   |   |   |
| Operating loss                                     |       | (3,305,249                  | )          | (4,915,029 | ) | (2,936,603 | ) |
|                                               |       |                        |       |   |   |   |   |
| Other income (expense):                            |       |                        |       |   |   |   |   |
| Interest income                                    |       | 34,242                      |       | 870 |   | 3,929 |   |
| Interest expense, net of capitalized  interest     |       | (1,400,227                  | )          | (772,409 | ) | (338,229 | ) |
| Total other income (expense)                       |       | (1,365,985                  | )          | (771,539 | ) | (334,300 | ) |
|                                               |       |                        |       |   |   |   |   |
| Earnings (loss) before minority interest           |       | (4,671,234                  | )          | (5,686,568 | ) | (3,270,903 | ) |
|                                               |       |                        |       |   |   |   |   |
| Minority Interest                                  |       | (823,053                    | )          | — |   | — |   |
|                                               |       |                        |       |   |   |   |   |
| Net loss                                           |       | (3,848,181                  | )          | (5,686,568 | ) | (3,270,903 | ) |
|                                               |       |                        |       |   |   |   |   |
| Preferred dividends                                |       | 154,110                     |       | 19,736 |   | 37,520 |   |
|                                               |       |                        |       |   |   |   |   |
| Net loss attributable to common Stockholders       |       | $                           | (4,002,291 | ) | $ | (5,706,304 | ) | $ | (3,308,423 | ) |
|                                               |       |                        |       |   |   |   |   |
| Basic and diluted loss per share                   |       | $                           | (0.05      | ) | $ | (0.09 | ) | $ | (0.06 | ) |
|                                               |       |                        |       |   |   |   |   |
| Weighted average common shares Outstanding         |       | 78,615,433                  |       | 64,573,627 |   | 58,142,461 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

25

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**TRANSMERIDIAN EXPLORATION, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

 
| ** **                                                            | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Deficit** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|----------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                                            | **Shares** | ** **          | **Amount** | ** **       | **Shares** | ** **                       | **Amount** |
|                                                                  |       |                |       |             |       | **(000’s)**                 |       |                  |       |       |       |   |   |   |   |
|                                                                  |       |                |       |             |       |                             |       |                  |       |       |       |   |   |   |   |
| Balance 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 | ) |
| Balance 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 | ) |
| Balance December  31, 2003                                            |       | —              |       | —           |       | 70,673                           |       | 42,404                |       |       | 12,525,250 |   | (12,061,436 | ) | 506,218 |   |
|                                                                  |       |                |       |             |       |                             |       |                  |       |       |       |   |   |   |   |
| Conversion of  warrants                                               |       | —              |       | —           |       | 358                              |       | 214                   |       | (214       | )          | — |   | — |   |
| Issuance of  common stock to retire debt                              |       | —              |       | —           |       | 800                              |       | 480                   |       | 703,520    |       | — |   | 704,000 |   |
| Proceeds from the  sale of common stock, net of offering costs        |       | —              |       | —           |       | 7,268                            |       | 4,361                 |       | 4,377,689  |       | — |   | 4,382,050 |   |
| Proceeds from the  sale of preferred stock, net of offering costs     |       | 1,786               |       | 1                |       | —                           |       | —                |       | 20,762,056 |       | — |   | 20,762,057 |   |
| Issuance of  warrants in connection with sale of preferred stock sale |       | —              |       | —           |       | —                           |       | —                |       | 2,678,570  |       | — |   | 2,678,570 |   |
| Stock based  compensation                                             |       | —              |       | —           |       | 730                              |       | 439                   |       | 395,851    |       | — |   | 396,290 |   |
| Private placement  termination fee                                    |       | —              |       | —           |       | —                           |       | —                |       | 200,000    |       | — |   | 200,000 |   |
| Elimination of  minority interest                                     |       | —              |       | —           |       | —                           |       | —                |       | 16,718,534 |       | — |   | 16,718,534 |   |
| Net loss                                                              |       | —              |       | —           |       | —                           |       | —                |       | —     |       | (4,002,291 | ) | (4,002,291 | ) |
| Balance December  31, 2004                                            |       | 1,786               |       | $                | 1          |                             | 79,829     |                  | $          | 47,898     |       | $ | 58,361,256 |   | $ | (16,063,727 | ) | $ | 42,345,427 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

26

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**TRANSMERIDIANEXPLORATION, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                         |       |                             |       |   |   |   |   |
| Operating  Activities:                                                       |       |                             |       |   |   |   |   |
| Net loss                                                                     |       | $                                | (4,002,291 | ) | $ | (5,686,568 | ) | $ | (3,270,903 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                             |       |   |   |   |   |
| Depreciation  and amortization                                               |       | 788,759                          |       | 245,712 |   | 51,859 |   |
| Amortization  of debt financing costs                                        |       | 193,332                          |       | 184,166 |   | 126,390 |   |
| Amortization  of prepaid contracts                                           |       | 61,250                           |       | 411,355 |   | 306,250 |   |
| Stock based  compensation expense                                            |       | 396,290                          |       | 122,800 |   | — |   |
| Exploration  expense                                                         |       | 130,926                          |       | 277,012 |   | — |   |
| Stock issued  for services                                                   |       | —                           |       | 285,299 |   | 35,000 |   |
| Minority  interest in net income (loss) of consolidated subsidiaries         |       | (823,053                         | )          | — |   | — |   |
| Increase  (decrease) in interest payable                                     |       | (4,253,422                       | )          | 424,920 |   | — |   |
| Imputed  interest expense                                                    |       | —                           |       | — |   | 35,924 |   |
| Decrease  (increase) in receivables                                          |       | (3,501,756                       | )          | (49,465 | ) | 9,753 |   |
| Decrease  (increase) in prepaid expenses                                     |       | 18,149                           |       | 89,392 |   | (157,891 | ) |
| Increase in  accounts payable and accrued liabilities                        |       | 886,846                          |       | 40,687 |   | 807,321 |   |
| Net cash  used in operating activities                                       |       | (10,104,970                      | )          | (3,654,690 | ) | (2,056,297 | ) |
|                                                                         |       |                             |       |   |   |   |   |
| Investing  Activities:                                                       |       |                             |       |   |   |   |   |
| Capital  expenditures                                                        |       | (17,647,162                      | )          | (23,574,311 | ) | (10,215,493 | ) |
| Increase in  other assets.                                                   |       | —                           |       | (65,997 | ) | (83,898 | ) |
| Net cash  used in investing activities                                       |       | (17,647,162                      | )          | (23,640,308 | ) | (10,299,391 | ) |
|                                                                         |       |                             |       |   |   |   |   |
| Financing  Activities:                                                       |       |                             |       |   |   |   |   |
| Proceeds  from long-term debt                                                |       | 16,891,972                       |       | 28,807,214 |   | 14,672,759 |   |
| Repayments  of long-term debt                                                |       | (16,539,868                      | )          | (1,515,509 | ) | (1,877,463 | ) |
| Increase  (decrease) in notes payable to related parties                     |       | (198,025                         | )          | — |   | 248,025 |   |
| Payment of  deferred financing costs                                         |       | —                           |       | (300,000 | ) | (200,000 | ) |
| Payment of  dividends on preferred stock                                     |       | —                           |       | — |   | (70,302 | ) |
| Proceeds  from sale of stock by Caspi Neft                                   |       | 15,000,000                       |       | — |   | — |   |
| Proceeds  from sale of common stock, net                                     |       | 4,582,050                        |       | 1,000,000 |   | 100,200 |   |
| Proceeds  from sale of preferred stock                                       |       | 23,440,626                       |       | — |   | — |   |
| Net cash  provided by financing activities                                   |       | 43,176,755                       |       | 27,991,705 |   | 12,873,219 |   |
|                                                                         |       |                             |       |   |   |   |   |
| Net increase  in cash and cash equivalents                                   |       | 15,424,623                       |       | 696,707 |   | 517,531 |   |
|                                                                         |       |                             |       |   |   |   |   |
| Cash and  cash equivalents, beginning of period                              |       | 1,321,514                        |       | 624,807 |   | 107,276 |   |
|                                                                         |       |                             |       |   |   |   |   |
| Cash and  cash equivalents, end of period                                    |       | $                                | 16,746,137 |   | $ | 1,321,514 |   | $ | 624,807 |   |

 

The accompanying notes are an integral partof these financial statements.

 

27

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**TRANSMERIDIANEXPLORATION, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CASHFLOWS – SUPPLEMENTAL INFORMATION**

 
| ** **                                                           | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                 |       |                             |       |   |   |   |   |
| Cash paid  for:                                                      |       |                             |       |   |   |   |   |
| Interest                                                             |       | $                                | 4,864,749  |   | $ | 187,613 |   | $ | 393,452 |   |
| Interest  capitalized (non-cash)                                     |       | (4,519,759                       | )          | (4,164,694 | ) | (1,285,994 | ) |
| Income taxes                                                         |       | —                           |       | — |   | — |   |
|                                                                 |       |                             |       |   |   |   |   |
| Non-cash  transactions:                                              |       |                             |       |   |   |   |   |
| Common stock  issued for services                                    |       | $                                | —     |   | $ | 833,267 |   | $ | 770,000 |   |
| Issuance of  common stock to settle deferred financing obligation    |       | —                           |       | — |   | 200,000 |   |
| Accrued and unpaid  dividends on convertible preferred stock         |       | 154,110                          |       | 19,736 |   | 37,520 |   |
| Issuance of  common stock to retire debt                             |       | 704,000                          |       | 296,217 |   | — |   |
| Capital  contribution by stockholder for investor relations services |       | —                           |       | — |   | 25,500 |   |
| Settlement  of drilling rig dispute                                  |       | (2,345,188                       | )          | — |   | — |   |
| Assumption  of note payable on drilling rig                          |       | 3,393,158                        |       | — |   | — |   |
| Issuance of  warrants in connection with services                    |       | 1,004,464                        |       | 21,000 |   | — |   |
| Issuance of  warrants in connection with convertible debentures      |       | —                           |       | — |   | 20,000 |   |
| Asset  retirement obligation                                         |       | —                           |       | 186,000 |   | — |   |
| Retirement  of common stock                                          |       | —                           |       | — |   | 4,020 |   |
| Exchange of  convertible preferred stock for common stock            |       | —                           |       | 2 |   | 60 |   |

 

The accompanying notes are an integral partof these financial statements

 

28

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**TRANSMERIDIANEXPLORATION, INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 – Organization and Summary of Significant Accounting Policies**

 

TransmeridianExploration, Inc. (the “Company”) was incorporated in the State of Delaware in April 2000.  We are engaged in the business of developmentand production of oil and gas properties. Our activities are primarily focused on the Caspian Sea region of theformer Soviet Union and our primary oil and gas property is License 1557 andthe related Exploration Contract for the development of the South Alibek Field(“South Alibek” or the “Field”) in the Republic of Kazakhstan.  We conduct our operations in Kazakhstanthrough a 50% owned subsidiary, Caspi Neft TME (“Caspi Neft”).  The Company was a development stage Companyin prior periods.

 

*Principles of Consolidation*

 

Ourconsolidated financial statements are presented in United States Dollars, areprepared in accordance with generally accepted accounting principles in theUnited States and include all of our consolidated subsidiaries.  Our most significant subsidiary is CaspiNeft, which holds License 1557 and the related Exploration Contract for theSouth 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.

 

DuringFebruary 2004, Bramex Management, Inc., successor in interest toKazstroiproekt, Ltd. (“Bramex”), exercised its option to acquire 50% of thecommon stock of Caspi Neft, the Company’s primary operating subsidiary inKazakhstan and the entity which holds the license and exploration contractcovering the South Alibek Field.  Accordingly, as of December 31,2004, the Company owns a 50% equity interest in this subsidiary.  Based onthe Company’s ability to exercise significant control over Caspi Neft, theCompany believes that the most meaningful accounting treatment is to fullyconsolidate this entity, with the 50% share owned by Bramex reflected as aminority interest.

 

Toexercise its option to acquire 50% of Caspi Neft, Bramex contributed $15.0million in cash to Caspi Neft, the proceeds of which were used by Caspi Neft toretire debt.  The difference between the $15.0 million of capitalcontributed to Caspi Neft and 50% of the book equity of Caspi Neft after suchcapital contribution represents an excess purchase price paid by Bramex of $6.0million. This amount has been included in additional paid-in capital onthe consolidated balance sheet.

 

*Use of Estimates*

 

Toprepare financial statements in conformity with U.S. generally acceptedaccounting principles, management is required to make estimates and assumptionsthat affect 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.

 

*Cash and Cash Equivalents*

 

TheCompany considers all highly liquid instruments with an original maturity ofthree months 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 the Company’sU.S. accounts may exceed federally insured limits.

 

*Property and Equipment*

 

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

 

Oiland gas lease acquisition costs are capitalized when incurred.  Unproved properties with significantacquisition costs are assessed quarterly on a property-by-property basis, andany impairment in value is recognized. Unproved properties with acquisition costs which are not individuallysignificant are aggregated, and the portion of such costs

 

29

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estimatedto be nonproductive, based on historical experience, is amortized over theaverage holding period.  If the unprovedproperties are determined to be productive, the appropriate related costs aretransferred to proved oil and gas properties. Lease rentals are expensed as incurred.

 

Oiland gas exploration costs, other than the costs of drilling exploratory wells,are charged to expense as incurred.  Suchcosts include seismic expenditures and other geological and geophysicalcosts.  The costs of drilling exploratorywells are capitalized pending determination of whether they have discoveredproved commercial 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 AccountingStandards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”,which the Company was required to implement effective January 1, 2003, thediscounted present value of future dismantlement, restoration and abandonmentcosts are recognized as a liability on the balance sheet with the offsettingamount reflected as part of the cost of the asset.  The accretion of the discounted liability isrecognized as an operating expense. Based on the operations completed as of December 31, 2004, theestimated future dismantlement, restoration and abandonment costs related tothe South Alibek Field are estimated to be $186,000.

 

Periodically,or when circumstances indicate that an asset may be impaired, the Companycompares expected undiscounted future cash flows at a producing field level tothe unamortized 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 thefuture cash flows at an appropriate risk-adjusted discount rate.

 

InDecember 2001, the Company purchased a drilling rig for use in thedevelopment of the South Alibek Field. The rig was placed in service in October 2002 and is beingdepreciated on the straight-line method over an estimated useful life of tenyears.  Depreciation of the rig, as wellas depreciation of other support equipment used in exploration and developmentactivities, is capitalized under the successful efforts method as part of thecost 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.

 

Maintenanceand repairs 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 of, the applicable costs and accumulateddepreciation and amortization are removed from the accounts, and the resultinggain or loss is recognized.

 

*Capitalized Interest Costs*

 

Certain interest costs havebeen capitalized as a part of the cost of unproved oil and gas properties,including property acquisition costs, wells in progress and relatedfacilities.  Additionally, interest wascapitalized on the drilling rig while it was being readied for its intendeduse.  Total interest costs capitalizedduring the years ended December 31, 2004, 2003 and 2002 totaled $4.5million, $4.2 million and $1.3 million, respectively.

 

*Income Taxes*

 

TheCompany accounts 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

 

30

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taxassets are reduced by a valuation allowance when management concludes that itis more likely than not that a portion of the deferred tax assets will not berealized in a future period.

 

*Debt Financing Costs*

 

Debtfinancing costs are amortized over the term of the related financing facility.

 

*Loss per Common Share*

 

Basicnet loss per common share is calculated by dividing the net loss attributableto common stockholders by the weighted average number of common sharesoutstanding during the period.  Dilutednet loss per common share is computed based upon the weighted average number ofcommon shares outstanding plus the common shares which would be issuable uponthe conversion or exercise of all potentially dilutive securities.  Diluted net loss per share equals basic netloss per share for the periods presented because the effects of potentiallydilutive securities are antidilutive.

 

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

 

*Revenue Recognition*

 

TheCompany sells its Kazakhstan production in the domestic market on a contractbasis.  Revenue is recorded when the purchasertakes delivery of the oil.  At the end ofthe period, oil that has been produced but not sold is recorded as inventorywhich is offset by deferred revenue. Such oil inventory and deferred revenues are valued at the price of thelast oil sold.

 

*Foreign Exchange Transactions*

 

The Company’s functional currency is theU.S. dollar.  The financial statements ofthe Company’s foreign subsidiaries are measured in U.S. dollars.  Accordingly, transaction costs for theconversion to various currencies for foreign operations are recognized in theconsolidated statements of operations at the time of each transaction.

 

*Concentration of Credit Risk*

 

TheCompany’s concentrations of credit risk consist principally of cash andaccounts receivable. Our cash is deposited in high credit quality financialinstitutions, however amounts on deposit do exceed the maximum amount insuredby the Federal Deposit Insurance Corporation.

 

*Stock-Based Compensation*

 

TheCompany accounts for employee stock-based compensation using the fair valuemethod as prescribed in SFAS No. 123. Under this method, the Company records the fair value attributable tostock options granted, based on the Black-Scholes model, and amortizes thatamount to expense over the service period required to vest the options.

 

*Financial Instruments*

 

TheCompany’s financial instruments consist of cash and cash equivalents, accountsreceivable, accounts payable and long-term debt.  The carrying values of cash and cashequivalents, receivables and accounts payable approximate fair value.  See Note 5 for discussion of long-term debt.

 

*Reclassifications and Adjustments*

 

Certainprior period amounts have been reclassified to conform to the presentation inthe consolidated financial statements as of December 31, 2004.

 

31

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**Note 2 – Property and Equipment**

 

*Oil and Gas Properties*

 

License1557 (the “License”), covering the South Alibek Field, was granted by theRepublic of Kazakhstan on April 29, 1999. ** **The original License covered 3,396acres.  In March 2000, the Companyacquired the License from an unrelated third-party for $4.0 million.  During 2001, based on its technical reviewand analysis of the probable productive area of the Field, the Company appliedto the Kazakhstan Ministry of Energy and Mineral Resources to expand the areacovered by license area.  In November 2001,the Company’s application was approved and the License was expanded to cover anarea of 14,111 acres.  Through CaspiNeft, the Company owns 50% of the working interest in the Field, subject to a10% carried working interest.

 

TheExploration Contract associated with the License has a six-year initial termwhich expires in April 2005 and may be extended by mutual agreement fortwo additional two-year periods.  TheCompany has been granted the first of these two-year extensions through April 2007.  The Exploration Contract required capitalexpenditures during the initial period of approximately $18.0 million, whichhas now been satisfied.  In connectionwith the recent two-year extension, the Company has committed to an additionalwork program of $30.6 million. During the primary term and in the firstextension period, the Company can produce wells under a test program and pay aroyalty of 2%.  Any future extensionperiods would need to be renegotiated with the government and would requireadditional capital commitments and could potentially include other changes interms.  The Exploration Contract containsa provision 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.

 

Ifthe Company is successful in establishing commercial production from the Field,an application will 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 toconduct these negotiations under the Law of Petroleum.  Such contracts are customarily awarded upondetermination that the field is capable of commercial rates of production andthat the applicant has complied with the other terms of its license andexploration contract.  However, theCompany is not guaranteed the right to a Production Contract.  A Production Contract will typically requirea bonus payment upon execution, the amount of which is subject to negotiation.  If satisfactory terms cannot be negotiated,the Company has the right to produce and sell oil under the Law of Petroleumfor the term of its existing Exploration Contract through April 2007 at aroyalty rate of 2%.  The royalty rateunder production contracts is determined on a sliding scale based on annualproduction.  The rates range from 2% to6%.

 

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 Company isalso entitled to receive all revenues attributable to the 10% carried interestuntil the Company’s costs are recovered. Thereafter, Kornerstone will participate as a 10% working interestowner.

 

During2002, the Company spent $33,484 to acquire leasehold interests for thedevelopment of two natural gas wells in South Texas**. **In July 2003 and in August 2004,the Company conducted operations on these properties.  A downhole obstruction was encountered onboth properties which prevented a successful test of the target formation andthe property was abandoned.  We recordeda charge to exploration expense of $66,844 and $118,893 for the years ended December 31,2004 and 2003, respectively, for this unsuccessful completion attempt.

 

*Drilling Rig and Equipment*

 

InDecember 2001, the Company purchased a drilling rig for $5.3 million intotal consideration, including a note payable for $3.3 million and $2.0 millionin common stock, which is redeemable for cash at the option of the seller ofthe rig.  See Notes 5 and 6 for furtherdiscussion of the terms of the note payable and redeemable common stock.

 

32

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Therig was acquired 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 havethe rig transported to Kazakhstan via marine cargo vessel.  In addition, the Company undertook variousrefurbishments and modifications to the rig to make it suitable for use in theCompany’s operations.  The Companycontracted with a firm experienced in international drilling to operate the rigand provide expatriate drilling personnel. The rig began drilling operations in October 2002.

 

Asmore fully discussed in Note 9, there is a legal dispute between the Companyand the holder of an apparent first lien on the drilling rig.

 

**Note 3 – Other Assets**

 

Otherassets consist of the following:

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Debt  financing costs, net of amortization |       | $                     | 216,110    |   | $ | 409,443 |   |
| Prepaid  investment advisory contract      |       | —                |       | 61,250 |   |
|                                       |       | $                     | 216,110    |   | $ | 470,693 |   |

 

## **See Note 1 (Debt FinancingCosts) for discussion of debt financing costs and Note 7 (Common Stock Issuedfor Products and Services) for discussion of prepaid investment advisorycontract.**

## ** **

## **Note4 – Notes Payable to Related Parties**

## ** **

In a series of notes issued between June 2002and November 2002, certain shareholders and related parties, including theChief Executive Officer of the Company, loaned the Company $248,025.  These notes bear interest at 17% and are dueon September 30, 2005. As of December 31, 2004, the remaining balancewas $50,000.

 

**Note 5 – Long-Term Debt**

 

Long-termdebt consists of the following:

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2004**              | ** ** | **2003** | ** ** |
| $20 million  credit facility with a Kazakhstan bank |       | $                     | 3,583,863  |   | $ | 20,000,000 |   |
| $30 million  credit facility with a Kazakhstan bank |       | 29,399,585            |       | 23,007,613 |   |
| Note payable  secured by drilling rig               |       | 2,704,758             |       | 1,656,788 |   |
| Total long –  term debt                        |       | 35,688,206            |       | 44,664,401 |   |
| Less current  maturities                            |       | 12,005,207            |       | 20,176,205 |   |
| Long-term  portion                                  |       | $                     | 23,682,999 |   | $ | 24,488,196 |   |

 

Futurematurities of long-term debt at December 31, 2004, are as follows:

 
| ** **                 | ** ** | **Amount** | ** ** |
|----------------------------|------------|------------|------------|
| 2005                       |       | $          | 12,005,207 |   |
| 2006                       |       | 9,799,862  |       |
| 2007                       |       | 9,799,862  |       |
| 2008                       |       | 4,083,276  |       |
| Thereafter  Long-term debt |       | —     |       |
|                       |       | $          | 35,688,207 |   |

 

Managementbelieves the fair value of debt at December 31, 2004 and 2003 approximatesits book value.

 

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*$20 Million Credit Facility*

 

InFebruary 2002, Caspi Neft entered into a credit facility with a Kazakhstanbank (the “$20 Million Facility”).  The$20 Million Facility provided for borrowings totaling $20.0 million through July 1,2003 for development of the South Alibek Field and is secured by the Field, thestock of certain subsidiaries and the stock and other assets of CaspiNeft.  The $20 Million Facility carriesan interest rate of 15% and a fee of 0.5% on the unutilized portion of thecommitment.

 

Inconnection with this financing, the Company granted an option to Bramex toacquire 50% of the common stock of Caspi Neft. In order to exercise the option, Bramex was required to (1) arrange anadditional $30.0 million of financing for Caspi Neft at market rates and (2)make a cash contribution to Caspi Neft of $15.0 million, the proceeds of whichwould be used to repay part of the $20 Million Facility.

 

InFebruary 2004, Bramex exercised its option and paid Caspi Neft $15.0million, of which $11.7 million was applied to principal and $3.3 million wasapplied to accrued interest. Also in February 2004, the Company repaidCaspi Neft $3.0 million, which it had been required to pay under the originalterms of the $20 Million Facility. Of such amount, $2.3 million was applied toprincipal and $744,690 was applied to accrued interest.

 

InFebruary 2005, the Company renegotiated the terms of this facility whichallowed for a six month deferral of all interest and principal payments oruntil July 15, 2005. See additional information on this matter in Note 11.

 

*$30 Million Credit Facility*

 

In June 2003, Caspi Neft entered into a new$30.0 million credit facility with the same Kazakhstan Bank (the “$30 MillionFacility”).  This facility provides forborrowings 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 interestrate of 15% and a commitment fee of 0.5% per annum on the unutilizedportion.  Interest accrued during thefirst 24 months is payable on May 31, 2005; thereafter, interest is payablemonthly.  Upon execution of the $30Million Facility, Caspi Neft paid the bank an arrangement fee of $300,000,which has been capitalized as a deferred financing cost and will be amortizedover the five-year life of the facility.

 

InFebruary 2005, the Company renegotiated the terms of this facility whichallowed for a six month deferral of all interest and principal payments until July 15,2005. See additional information on this matter in Note 11.

 

Bothcredit facilities contain certain restrictive covenants, including restrictionson disposing of material assets, paying dividends and incurring additionalindebtedness.  The Company is required toprovide audited financial statements of Caspi Neft to the bank within 90 daysof the end of the fiscal year.  In 2004,the Company did not meet this requirement, but such non-compliance has beenwaived by the bank.  Both creditfacilities are secured by substantially all of the assets of Caspi Neft,including the South Alibek License, and the stock of Caspi Neft.  The Company’s wholly-owned British VirginIslands subsidiary has also guaranteed the loan.  Both facilities contain certain restrictivecovenants, including restrictions on disposing of material assets, payingdividends and incurring additional indebtedness.

 

*Note Payable Secured by Drilling Rig*

 

InDecember 2001, the Company purchased a drilling rig for $5.3 million bythe issuance, to the seller, of a note payable for $3.3 million and redeemablecommon stock of $2.0 million.  In July 2003,the Company was notified by the holder of an apparent first lien on the rig(the “First Lien Holder”) that the seller was in default under its note payableobligation to the First Lien Holder.  TheCompany was not informed of the existence of the First Lien Holder in the AssetPurchase Agreement related to the acquisition of the drilling rig.  The note payable is now in dispute as aresult of the seller’s apparent default to the First Lien Holder.  The Company has held discussions with theFirst Lien Holder with the intent to resolve the seller’s default by makingcertain payments directly to the First Lien Holder. The Company madeinstallment payments to the First Lien Holder totaling $688,400 during 2003.However, in December 2003 the Company ceased installment payments to theFirst Lien Holder as it had not been able to reach a settlement agreement withboth the seller and the First Lien Holder. In August 2004, the Company

 

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settledits legal dispute with the seller of the drilling rig. Pursuant to the terms ofthe Settlement and Release Agreement the remaining balance due on the note of$1.6 million, plus accrued interest of $550,000 has been cancelled and wasreplaced by assuming the obligation of the seller of the rig to the First LienHolder. The Company has estimated this liability to be approximately $2.9million, including accrued and unpaid interest. See further discussion of thismatter in Notes 6 and 9.

 

**Note 6 – Redeemable Common Stock**

 

DuringDecember 2001, the Company purchased a drilling rig for use in its Kazakhstanoperations.  Part of the considerationfor the purchase was 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 the aggregate, by the end of 2002.  This obligation was renegotiated in December 2002,to require the redemption of the stock, at the option of the holder, on February 1,2004.  The revised agreement alsoprovided for interest at 10% on the unpaid balance of the redemption amount.

 

Pursuantto the Settlement and Release Agreement executed in August 2004, theseller of the drilling rig has returned 200,000 shares to the Company, theremaining 800,000 shares have been retained by the seller of the drilling rigand such shares are no longer redeemable. As a result, the $2.0 million debthas been satisfied. See further discussion of this matter in Note 9.

 

**Note 7 – Stockholders’ Equity**

 

*12.5% Convertible Preferred*

 

InJuly 2003, the holders of all 3,000 shares of the outstanding 12.5%convertible preferred stock elected to convert their shares to commonstock.  The $300,158 stated value of thepreferred stock plus accrued dividends totaling $57,256 were converted into1,545,910 shares of common stock, in accordance with the terms of the preferredstock agreement.  At the time ofconversion, the convertible preferred stock was owned in equal amounts by theChief Executive Officer of the Company and the operations manager of CaspiNeft.

 

*Series A Convertible Preferred Stock*

 

In November 2004, theCompany sold 1,785.714 shares of its Series A Cumulative Convertible PreferredStock (the “Series A Preferred”) in a private placement at a purchase price of$14,000 per share, and issued warrants to purchase up to 4,464,286 shares of theCompany’s common stock at an exercise price equal to $1.55 per share. Theaggregate proceeds, net of cash offering costs, for the Series A Preferred andthe related warrants was $23.4 million.  Inaddition, the Company issued warrants to purchase 1,674,107 shares of commonstock at an exercise price equal to $1.55 per share for financial advisoryservice in connection with the private placement of Series A Preferred Stock.  The estimated value of these warrants, $1.0million has been reflected as a reduction of additional paid-in capital in theaccompanying consolidated financial statements.  Proceeds from the private placement of SeriesA Preferred Stock and Warrants will be used for general corporate purposes,including funding the Company’s development drilling program in the SouthAlibek field in Kazakhstan, and to pursue growth opportunities.

 

The Series A Preferred has aliquidation value of $14,000 per share and is convertible at the holders’option into common stock at a conversion price of $1.40 per share, subject toadjustments in certain circumstances. The holders of the Series A Preferred will be entitled to a quarterlydividend payable at the rate of four and one-half percent (4.5%) per annum,payable in cash.  The holders of theSeries A Preferred Stock shall have full voting rights and powers (subject to abeneficial ownership cap as described below) equal to the voting rights andpowers of the holders of common stock, voting together with the holders ofcommon stock as one class.  Each holderof the Series A Preferred shall not, unless it chooses in advance not to begoverned by this limitation, convert the Series A Preferred or exercise theWarrant Shares into common stock such that the number of shares of common stockissued after the conversion would exceed, when aggregated with all other sharesof common stock owned by such holder at such time, in excess of 4.999% of thethen issued and outstanding shares of common stock outstanding of theCompany.   So long as at least twenty(20%) percent of the Series A Preferred remains outstanding, the Company shallnot issue any new securities or financial instruments that rank pari pasu orsenior to the Series A Preferred without the approval of at least 75% of theSeries A Preferred outstanding. Beginning one year following the effective dateof the registration statement to be filed for the underlying shares of commonstock, the Series A Preferred shall automatically convert into the common stockof the Company at the conversion price of $1.40 per share (subject toadjustments), if the common stock trades at a price equal to or greater than$4.15 per share for

 

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twenty (20) consecutivetrading days, subject to the applicable ownership limitations. In the event aholder is prohibited from converting into common stock due to the 4.999%ownership limitation described above, the excess portion of the Series APreferred shall remain outstanding, but shall cease to accrue a dividend.

 

*Common Stock Reserved for Issuance*

 

Thereare 200,000,000 common shares authorized by the Company’s Amended and RestatedCertificate of Incorporation and 79,829,062, 70,673,207 and 59,147,129 commonshares were issued and outstanding as of December 31, 2004, 2003 and 2002,respectively.  These share totals excluderedeemable common stock.  Shares ofcommon stock reserved for issuance at December 31, 2004 are summarized asfollows:

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| 2001  Incentive Stock Option Plan  |       | 2,955,000             |       | 3,260,000 |   |
| 2003 Stock  Compensation Plan      |       | 706,673               |       | 1,265,953 |   |
| Redeemable  common stock           |       | —                |       | 1,000,000 |   |
| Convertible  preferred stock       |       | 17,857,140            |       | — |   |
| Warrants to  purchase common stock |       | 6,138,393             |       | 500,000 |   |
| Total                              |       | 27,657,206            |       | 6,025,953 |   |

 

*Common Stock Issued for Products and Services*

 

Priorto 2004, the Company entered into several agreements to exchange common stockfor products and services, including investment advisory services, financialconsulting and other 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, 2003and 2002, the Company issued 5.3 million and 4.1 million common shares,respectively, for products and services. Certain of the larger transactions which comprise these totals arediscussed below.

 

InJanuary 2003, 1.5 million shares, valued at $180,000, were issued tosettle all remaining obligations in connection with the April 2002resignation of the former Chairman of the Company, including obligationsrelated to a consulting contract.  During2003, the Company issued a total of 2.25 million shares of common stock, valuedat $323,000, in exchange for drill pipe for use in its operations.  During 2003, the Company also issued 1.1million shares to financial consultants, valued at $208,000, in exchange forwork performed to improve financial reporting procedures and internal controlsand other financial management services.

 

During2002, 4.0 million shares were issued as compensation for investment advisoryservices, which was recorded as a prepaid expense of $735,000.  The agreement covers a two year period endingin February 2004 and the prepaid amount is being amortized to expense overits term.

 

*Retirement of Common Stock*

 

Onseveral occasions, the founders and major shareholders of the Company havecontributed common 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 year ended December 31, 2002,the founders returned 6.7 million common shares.  There were no such transactions for the yearsended December 31, 2004 and 2003.

 

*Capital Contributed by Stockholder*

 

InDecember 2002, the Chief Executive Officer of the Company transferred,from his personal holdings, 150,000 shares of the Company’s common stock ascompensation for a contract with an investor relations firm.  The common stock was valued at $0.17 pershare, or $25,500 in the aggregate, and has been recorded as contributedcapital and a prepaid expense.  The costof the services are being charged to expense over the term of the contract.

 

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*Warrants*

 

Inconnection with the issuance of $200,000 of convertible debentures in August 2002,the Company issued warrants to purchase 200,000 shares of the Company’s commonstock at $0.42 per share.  These warrantsexpire in August 2005.  The value ofthe warrants, calculated in accordance with the Black-Scholes model, was$20,000 and are being recognized as additional interest expense over the twoyear term of the debentures.

 

During2003, the Company issued warrants to purchase 300,000 shares of common stock inconnection with investor relations services. Of such warrants, 150,000 carried an exercise price of $0.25 per shareand were exercisable 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 to March 5,2005.  The value of the warrants,calculated in accordance with the Black-Scholes model, was $21,000 on the dateof issuance.  This amount is beingamortized to expense over the term of the contract.

 

*2001 Incentive Stock Option Plan*

 

TheCompany has a 2001 Incentive Stock Option Plan (the “Plan”) under which optionsto purchase 5.0 million shares of common stock may be granted to officers,board members, key employees and consultants through December 31,2010.  Under the Plan, the exercise priceof each option is equal to the fair market value of the Company’s common stockon the date of grant and all options granted have a term of five years.  The vesting period is determined by the Boardof Directors at the date of grant.  As ofDecember 31, 2004, options to purchase 1.74 million shares had beengranted and 3.26 million options were available for future grants under thePlan.

 

Nostock options were granted under the Plan prior to 2003.  The following table reflects additionalinformation about options granted under the Plan during the years ended December 31,2004 and 2003.

 
| ** **                      | ** ** | **2004**                | ** ** | **2003**                               | ** ** |
|---------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                      | ** ** | **(In thousands)**      | ** ** | ** **                             | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Outstanding,  beginning of year |       | 1,740                   |       | $                                      | 0.253      |   | — |   | $ | — |   |
| Granted                         |       | 555                     |       | 1.500                                  |       | 1,740 |   | 0.253 |   |
| Exercised                       |       | (634                    | )          | (0.230                                 | )          | — |   | — |   |
| Forfeited                       |       | (266                    | )          | (0.221                                 | )          | — |   | — |   |
| Outstanding,  end of year       |       | 1,395                   |       | $                                      | 0.769      |   | 1,740 |   | $ | 0.253 |   |
|                            |       |                    |       |                                   |       |   |   |   |   |
| Exercisable,  end of year       |       | 790                     |       | $                                      | 0.267      |   | 75 |   | $ | 0.240 |   |

 

Theaggregate fair value of options granted during 2004 and 2003 was $567,900 and$243,575, respectively, which is being amortized to expense over the vestingperiod in accordance with SFAS No. 123. The fair value of each option grant was estimated on the date of grantusing the Black-Scholes option pricing model with the following assumptions:risk-free interest rates of 5%; expected lives between 1.5 and 2.5 years; andvolatility of the price of the underlying common stock of 45-75%.  Of such aggregate fair value amount, $105,997and $117,383 was charged to expense during the years ended December 31,2004 and 2003, respectively.

 

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Thefollowing table summarizes additional information about the Company’s stockoptions outstanding, and those which were exercisable, as of December 31,2004:

 
| ** **                       | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                | ** ** |
|----------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| **Price Range**                  | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                       | ** ** | **(In thousands)**      | ** ** | ** **                             | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $0.215 -  $0.240                 |       | 730                     |       | 3.36 Yrs                               |       | $ | 0.240 |   | 730 |   | $ | 0.240 |   |
| $0.570 -  $0.600                 |       | 110                     |       | 3.96 Yrs                               |       | 0.597 |   | 60 |   | 0.595 |   |
| $1.50                            |       | 555                     |       | 4.88 Yrs                               |       | 1.500 |   | — |   | — |   |
| Total at December 31,  2004 |       | 1,395                   |       | 4.01 Yrs                               |       | $ | 0.769 |   | 790 |   | $ | 0.493 |   |

 

*2003 Stock Compensation Plan*

 

InMay 2003, the Company filed a Form S-8 registration statement with theSecurities and Exchange Commission to register 2.5 million shares under its2003 Stock Compensation Plan.  Under theterms of the plan, such stock may be issued in lieu of cash to compensateofficers, employees, directors and third-party consultants, all of whom must beindividuals, for bona fide services rendered. During the years ended December 31, 2004 and 2003, 109,280 sharesand 1,234,047 shares, respectively,  wereissued under the 2003 Stock Compensation Plan and 1,156,673 million shares werereserved for future issuance. For the year ended December 31, 2004 and2003, $114,854 and $283,625, respectively, was charged to expense on the consolidated statement of operations.

 

**Note 8 – Income Taxes**

 

Incomebefore income taxes is composed of the following:

 
| ** **     | ** ** | **Year ended December 31,** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| United  States |       | $                                | (3,184,918 | ) | $ | (2,939,691 | ) | $ | (2,064,614 | ) |
| International  |       | (817,373                         | )          | (2,766,613 | ) | (1,206,289 | ) |
|           |       | $                                | (4,002,291 | ) | $ | (5,706,304 | ) | $ | (3,270,903 | ) |

 

Areconciliation of the federal statutory income tax (34%) amounts to theeffective amounts is shown below:

 
| ** **                                      | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income tax  benefit computed at statutory rates |       | $                                | (1,360,782 | ) | $ | (1,940,143 | ) | $ | (1,112,107 | ) |
| Adjustment  to valuation allowance              |       | 1,360,782                        |       | 1,940,143 |   | 1,112,107 |   |
|                                            |       | $                                | —     |   | $ | — |   | $ | — |   |

 

Thecomponents of the Company’s deferred tax assets and liabilities were asfollows:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Capitalized  interest             |       | $                     | (3,390,000 | ) | $ | (1,853,000 | ) | $ | (437,000 | ) |
| Net operating  loss carryforwards |       | 8,797,000             |       | 5,866,000 |   | 2,543,000 |   |
| Valuation  allowance              |       | (5,407,000            | )          | (4,013,000 | ) | (2,106,000 | ) |
|                              |       | $                     | —     |   | $ | — |   | $ | — |   |

 

Asof December 31, 2004, the Company has estimated net operating losscarryforwards of $9.3 million in the U.S. and $16.5 million in Kazakhstan.  The net operating loss carryforwards includethe deduction of $10.0 million in

 

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interestwhich has been capitalized for book purposes. If they are not utilized prior to these dates, the U.S. net operatinglosses will expire between 2020 and 2023, while the Kazakhstan net operatinglosses will expire in 2009 and 2011.

 

TheCompany has not recorded any deferred tax assets or income tax benefits fromthe net operating losses for the years ended December 31, 2004, 2003 and2002.  The Company has placed a 100%valuation allowance against the deferred tax asset because future realizationof the net operating losses is not assured.

 

**Note 9 – Commitments and Contingencies**

 

*Drilling Rig Dispute*

 

InDecember 2001, the Company purchased a drilling rig for $5.3 million bythe issuance, to the seller, of a note payable for $3.3 million and redeemablecommon stock of $2.0 million.  Furtherdiscussion of this transaction can be found in Notes 4 and 5.  In July 2003, the Company was notifiedby the holder of an apparent first lien on the drilling rig (the “First LienHolder”) that the seller of the rig was in default under its note payableobligation to the First Lien Holder.  TheCompany was not informed of the existence of the First Lien Holder in the AssetPurchase Agreement related to the acquisition of the drilling rig.  The note payable and the redeemable commonstock are now in dispute as a result of the Seller’s default to the First LienHolder.  During 2003, the Company helddiscussions with the First Lien Holder with the intent to resolve the Seller’sdefault by making 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.

 

Discussionswith the seller of the rig became increasing adversarial during late 2003 andon December 15, 2003, the seller filed suit in District Court, HarrisCounty, Texas, 334th Judicial District relating to the Company’salleged default under the note payable and redeemable common stock agreementswith the seller.  At this time, theCompany ceased installment payments to the First Lien Holder as it had not beenable to successfully negotiate a settlement agreement with both the seller andthe First Lien Holder.  On February 27,2004, the First Lien Holder filed suit in United States District Court,Southern District of Texas, against the seller and named the Company and two ofits affiliates as additional defendants. This action seeks payment of debts owed to the First Lien Holder by theseller related to the drilling rig.

 

InApril 2004, the Company filed a Counterclaim and Third-Party Claim againstthe seller and certain of its affiliates. This action seeks recovery of repair costs incurred by the Company inconnection with undisclosed latent defects in the drilling rig, recovery ofpayments made to the seller, including the redeemable common stock, andrecovery of additional costs associated with the drilling rig.

 

InAugust 2004, the Company and the seller of the rig entered into aSettlement and Release Agreement. Pursuant to the terms of the Settlement andRelease Agreement the remaining balance on the note of $1.6 million, plus accruedinterest of $550,000 has been cancelled and was replaced by assuming theobligation of the seller of the rig to the First Lien Holder. The seller alsowas required to return 200,000 of the 1.0 million shares of redeemable commonstock.. The Company has estimated this liability to be approximately $2.9million including accrued and unpaid interest. The Company also agreed to pay$120,000 of the legal fees incurred by the seller of the rig in its lawsuitwith the First Lien Holder.

 

*Former Chief Financial Officer*

 

InMay 2003, Jim W. Tucker (the “Plaintiff”), the former Chief Financial Officerof the Company, filed suit in the 359th District Court, Montgomery County,Texas, against Transmeridian Exploration, Inc., in connection with hisseparation from service with the Company on January 3, 2003.  The suit alleges breach of an oral employmentagreement.  The Company was never servedwith notice and had no knowledge of this suit. Counsel for the Plaintiff claimed they were unable to serve the Company’sregistered agent with notice of this suit. Based on these representations, the Court awarded the Plaintiff aDefault Judgment on November 25, 2003, in the amount of $922,275.61.  The Company was notified of a Writ ofGarnishment and Writ of Execution on March 29, 2004 and April 6,2004, respectively.

 

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OnApril 5, 2004, the Company filed a Petition for Bill of Review and aMotion to Vacate the Writ of Garnishment. A hearing was held on the Motion to Vacate the Writ of Garnishment on April 8,2004. On May 11, 2004, the court granted the Motion to Vacate the Writ ofGarnishment, but has not issued a ruling on the Petition for Bill of Review. InFebruary 2005, the court granted the Motion to Vacate the Default Judgmentand the Company withdrew it’s Petition for a Change of Venue.  The case going forward will be reinstated andwill begin as if the Company had just been served notice.  The Company intends to vigorously contestthis matter and pursue all legal remedies available to it.

 

*International Commitments*

 

TheCompany, through its subsidiary Caspi Neft, is subject to the terms of License1557 and the related Exploration Contract covering 14,111 acres in the SouthAlibek field in Kazakhstan.  Inconnection with the Exploration Contract, the Company has committed to spendapproximately $18.0 million on development of the Field through 2005.  As of December 31, 2004, the cumulativecapital expenditures which are creditable to our obligation under the Contracthave exceeded the minimum Contract commitment. The two year extension grantedon July 8, 2004, the Company committed to spend approximately $30.6million from 2005 to 2007.

 

Purchasecommitments are made in the ordinary course of business in connection with ongoingoperations in the South Alibek Field.

 

Ouroperations are subject to various levels of government controls and regulationsin the United States and in the Republic of Kazakhstan.  We attempt to comply with all legalrequirements in the conduct of our operations and employ business practiceswhich 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 othergovernmental regulations as such costs are an integral part of our operations.

 

Inthe Republic of Kazakhstan, legislation affecting the oil and gas industry isunder constant review for amendment or expansion.  Pursuant to such legislation, variousgovernmental departments and agencies have issued extensive rules andregulations which affect the oil and gas industry, some of which carrysubstantial penalties for failure to comply. These laws and regulations can have a significant impact on the industryby increasing the cost of doing business and, consequentially, can adverselyaffect our profitability.  Inasmuch asnew legislation affecting the industry is commonplace and existing laws andregulations are frequently amended or reinterpreted, we are unable to predictthe future cost or impact of complying with such laws and regulations.

 

*Environmental*

 

TheCompany, as an owner and operator of oil and gas properties, is subject tovarious federal, state, local and foreign country laws and regulations relatingto discharge of materials into, and protection of, the environment.  These laws and regulations may imposeliability on the lessee under an oil and gas lease or concession for the costof pollution clean-up resulting from operations and also may subject the lesseeto liability for pollution damages.

 

*Lease Commitments*

 

TheCompany has operating leases for office facilities and certain equipment.  Net rental expense under all operating leasesand rental agreements was $546,639, $930,698 and $378,000 in 2004, 2003 and2002, 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:

 
| ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2005       |       | $          | 210,324    | ** ** |
| 2006       |       | 210,324    |       |
| 2007       |       | 181,743    |       |
| 2008       |       | 96,000     |       |
| Thereafter |       | —     |       |
|       |       | $          | 698,391    |   |

 

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**Note 10 – Business Segment Information**

 

TheCompany’s business 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 December 31,2004, 2003 and 2002, substantially all of the Company’s assets were located inKazakhstan.  For each of the three yearsended December 31, 2004, substantially all of the Company’s results ofoperations consisted of revenues, operating, general and administrative, andother costs associated with its operations in Kazakhstan.

 

Forthe year ended December 31, 2004, 91% of the oil sold from the SouthAlibek Field was purchased by three companies. For the year ended December 31,2003 100% of the oil sold was purchased by a single company.

 

**Note 11 – Subsequent Events**

 

In January 2005, theCompany, through its subsidiary Caspi Neft, entered into an agreement with thebank in Kazakhstan to defer all payments of principal and interest due on bothcredit facilities for six months or until July 15, 2005. At the expirationof the extension the total amount of principal and interest deferred, $13.7million will become due and payable. In exchange for this deferral the Companyhas agreed to advance up to $10.0 million to Caspi Neft to fund 100% ofanticipated capital requirements for the first six months of 2005.

 

41

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**Note 12 – Supplemental Oil and Gas Disclosures**

 

**Costs Incurred**

 

Costincurred in oil and gas property acquisition, exploration and developmentactivities, whether expensed or capitalized, are reflected in the tablebelow.  This schedule does notinclude the costs of the drilling rig which was purchased and modified for usein the Company’s development activities in Kazakhstan.  Costs incurred for the drilling rig were$444,000 and $741,000 in 2003 and 2002, respectively.

 
| ** **                          | ** ** | **Kazakhstan** | ** ** | **United States** | ** ** | **Total**  | ** ** |
|-------------------------------------|------------|----------------|------------|-------------------|------------|------------|------------|
| Year ended December 31,  2004  | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** |
| Acquisition  costs of properties:   | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** |
| Proved                              |       | $              | —     |              | $          | —     |       | $ | — |   |
| Unproved                            |       | —         |       | —            |       | —     |       |
| Exploration  costs                  |       | 3,477,336      |       | —            |       | 3,477,336  |       |
| Development  costs                  |       | 18,651,179     |       | —            |       | 18,651,179 |       |
| Capitalized  interest               |       | 4,519,759      |       | —            |       | 4,519,759  |       |
| Total                               |       | $              | 26,648,274 |              | $          | —     |       | $ | 26,648,274 |   |
|                                |       |           |       |              |       |       |       |
| 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 |   |

 

42

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**Capitalized Costs**

 

Theaggregate amount of capitalized costs related to oil and gas producingactivities and the aggregate amount of the related accumulated depreciation,depletion and amortization (“DD&A”), including any accumulated valuationallowances, are reflected in the table below. These capitalized costs do not include the drilling rig which waspurchased and modified for use in the Company’s development activities inKazakhstan.  Capitalized costs for thedrilling rig were $6.5 million, $6.5 million and $6.0 million at December 31,2004, 2003 and 2002, respectively.

 
| ** **                    | ** ** | **Kazakhstan** | ** ** | **United States** | ** ** | **Total**  | ** ** |
|-------------------------------|------------|----------------|------------|-------------------|------------|------------|------------|
| ** **                    | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** |
| As of December 31,  2004 | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** |
| Proved  properties            |       | $              | 39,487,758 |              | $          | —     |       | $ | 39,487,758 |   |
| Unproved  properties          |       | 35,960,772     |       | —            |       | 35,960,772 |       |
| Total oil  and gas properties |       | 75,448,530     |       | —            |       | 75,448,530 |       |
| Accumulated  DD&A         |       | 899,131        |       | —            |       | 899,131    |       |
| Net oil and  gas properties   |       | $              | 74,549,399 |              | $          | —     |       | $ | 74,549,399 |   |
|                          |       |           |       |              |       |       |       |
| 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 |   |

 

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

 

*Basis of Presentation*

 

Provedoil and gas reserve quantities are based on estimates prepared by Ryder ScottCompany, independent petroleum engineers. 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 December 31,2004, 2003 and 2002.  The Company’s netquantities of proved developed and undeveloped reserves of crude oil andchanges therein are reflected in the table below.

 

Asof December 31, 2004, the Company owned a 50% working interest in theSouth Alibek Field, subject to government royalties and a 10% carried workinginterest after recovery of costs.  Theeffect of this carried interest is reflected in the calculation of the Company’snet proved reserves and future net cash flows.

 

TheCompany is operating under an Exploration Contract with the government ofKazakhstan, which was extended in July 2004, for two years and ends in April 2007.   We have the exclusive right to negotiate fora production contract for the Field, and the government is required to conductthese negotiations under the Law of Petroleum. However, we are not guaranteed the right to a Production Contract.  Such contracts are customarily awarded upondetermination that the field is capable of commercial rates of production andthat the applicant has complied with the other terms of its license andExploration Contract.  A ProductionContract will typically require a bonus payment upon execution, the amount ofwhich is predetermined based upon the reserves approved by the State Committeeof Reserves (“SRC”). If satisfactory terms cannot be negotiated, we have theright to produce and sell oil

 

43

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underthe Law of Petroleum for the term of our existing Exploration Contract through April 2007,or as extended, at a royalty rate of 2%. The royalty rate under production contracts is on a sliding scale, basedon production.  The royalty rate rangesfrom 2% to 6%. The Company’s oil and gas reserve data and future net cash flowshave been prepared assuming a commercial production contract is obtainedwhich will allow production forthe expected 25 year term of the production contract.

 

The proved reserves as of December 31, 2004represent the reserves that were estimated to be recovered from fivewells, SA-1, SA-2, SA-4, SA-5, SA-17 and sixteen developmentoffsets not yet drilled.  Subsequent to December 31, 2002, theCompany made a decision to redrill the A-29 as SA-17 as this is believedto be the most cost-effective way to recover these reserves and should allowthe Company to achieve greater productivity and may potentially accessadditional reserves.  As of December 31, 2004, the Company had twonew wells, the SA-5 and SA-2, which were shut-in during a workoverprogram.  The Ryder Scott reserve estimate as of December 31, 2004included these two wells and SA-1 and SA-17 as proved developed, and theSA-4 as undeveloped, which has reservoir damage that preventedplacing the well on production during 2004 and sixteen additional offsetlocations.  The SA-14, which was in progress at year end, is notincluded in proved reserves as of December 31, 2004.

 

**Estimated Quantities of NetProved Crude Oil Reserves**

**(Quantities in Barrels)**

 
| ** **                                   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net proved  crude oil reserves:              |       |                             |       |   |   |   |   |
| Beginning of  year                           |       | 45,744,788                       |       | 17,110,741 |   | 17,645,418 |   |
| Revisions of  previous estimates             |       | (521,118                         | )          | (5,079,386 | ) | (534,677 | ) |
| Extensions,  discoveries and other additions |       | 6,827,529                        |       | 33,830,809 |   | — |   |
| Option  exercised by Bramex                  |       | (25,085,729                      | )          |   |   |   |   |
| Production                                   |       | (151,734                         | )          | (117,376 | ) | — |   |
| End of year                                  |       | 26,813,736                       |       | 45,744,788 |   | 17,110,741 |   |
|                                         |       |                             |       |   |   |   |   |
| Net proved  developed reserves:              |       |                             |       |   |   |   |   |
| Beginning of  year                           |       | 7,815,861                        |       | 5,695,613 |   | 5,808,683 |   |
| End of year                                  |       | 4,476,364                        |       | 7,815,861 |   | 5,695,613 |   |

 

**Standardized Measure of Discounted Future Net Cash Flows (Unaudited)**

 

*Basis of Presentation*

 

Thestandardized measure data includes estimates of oil and gas reserve volumes andforecasts of future production rates over the reserve lives.  Estimates of future production expenditures,including taxes and future development costs, are based on management’s bestestimate of such costs assuming a continuation of current economic andoperating conditions.  No provision isincluded for depletion, depreciation and amortization of property acquisitioncosts or indirect costs.  Income taxexpense has been computed using expected future tax rates and giving effect totax deductions and credits available, under current laws, and which relate tooil and gas producing activities.  Thesales prices used in the calculation are the year-end prices of crude oil,including condensate and natural gas liquids, which as of December 31,2004, 2003 and 2002 were $20.09, $12.44 and $23.00 per barrel,respectively.  The December 31, 2004and 2003 prices were based on the last sales price received for December 2004and 2003, respectively. The December 2002 price was based on North SeaBrent crude prices, less a discount for transportation and qualitydifferentials.  No value was assigned tonatural gas reserves, as there is not currently an established market orpipeline 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 discounted futurenet cash flows relating to proved oil and gas reserves for 2004, 2003 and 2002were as follows:

 

44

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**Standardized Measure ofDiscounted Future Net Cash Flows**

**(Amounts in Thousands)**

 
| December 31,  2004:                                  |   |     |    |
|-----------------------------------------------------------|--------|----------|---------|
| Future cash  inflows                                      |   | $        | 538,688 |   |
| Future  production costs                                  |   | (74,001  | )       |
| Future  development costs                                 |   | (65,260  | )       |
| Undiscounted  future net cash flows before income tax     |   | 399,427  |    |
| 10% discount  for estimated timing of cash flows          |   | (179,431 | )       |
| Present  value of future net cash flows before income tax |   | 219,996  |    |
| Future  income tax expense, discounted at 10%             |   | (43,154  | )       |
| Standardized  measure of discounted future net cash flows |   | $        | 176,842 |   |
|                                                      |   |     |    |
| December 31,  2003:                                  |   |     |    |
| Future cash  inflows                                      |   | $        | 569,065 |   |
| Future  production costs                                  |   | (74,723  | )       |
| Future development  costs                                 |   | (76,373  | )       |
| 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 costs                                  |   | (26,369  | )       |
| Future  development costs                                 |   | (10,206  | )       |
| 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 |   |

 

45

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Thefollowing table presents a reconciliation of changes in the standardizedmeasure of discounted future net cash flows:

 

**Changes in the StandardizedMeasure of Discounted Future Net Cash Flows**

**(Amounts in Thousands)**

 
| ** **                                                            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Standardized  Measure, beginning of year                              |       | $                                | 180,443    |   | $ | 143,999 |   | $ | 89,406 |   |
| Sales and  transfers of oil and gas produced, net of production costs |       | (152                             | )          | (397 | ) | — |   |
| Net changes  in prices, development and production costs              |       | 151,644                          |       | (107,366 | ) | 83,980 |   |
| Extensions,  discoveries and improved recovery, less related costs    |       | 65,492                           |       | 171,513 |   | — |   |
| Purchase of  minerals in place                                        |       | —                           |       | — |   | — |   |
| Development  costs incurred and changes during the period             |       | 17,754                           |       | (2,887 | ) | 252 |   |
| Revisions of  previous quantity estimates                             |       | (4,458                           | )          | (30,436 | ) | (6,630 | ) |
| Increase in  present value due to passage of one year                 |       | 24,135                           |       | 20,431 |   | 12,892 |   |
| Exercise of  Option by Bramex                                         |       | (203,699                         | )          | — |   | — |   |
| Net changes  in production rates and other                            |       | (36,563                          | )          | (13,824 | ) | (15,094 | ) |
| Net change  in income taxes                                           |       | (17,754                          | )          | (590 | ) | (20,807 | ) |
| Standardized  Measure, end of year                                    |       | $                                | 176,842    |   | $ | 180,443 |   | $ | 143,999 |   |

 

**Note 13 – Supplemental Quarterly Information (Unaudited)**

 

Thefollowing table reflects a summary of the unaudited interim results ofoperations for the quarterly periods in the years ended December 31, 2004and 2003.

 
| ** **                                    | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
|                                          |       |               |       |                |       |               |       |                |       |
| **2004**                                      |       |               |       |                |       |               |       |                |       |
| Revenue                                       |       | $                  | 642,927    |                | $          | 1,562,656          |       | $                   | 843,348    |   | $ | 874,059 |   |
| Expenses                                      |       | 1,463,781          |       | 2,235,200           |       | 1,735,301          |       | 1,793,957           |       |
| Minority  interest                            |       | 207,379            |       | (117,481            | )          | 401,802            |       | 331,353             |       |
| Preferred  Dividends                          |       | —             |       | —              |       | —             |       | 154,110             |       |
| Net loss  attributable to common shareholders |       | (1,028,233         | )          | (555,063            | )          | (1,293,755         | )          | (1,125,240          | )          |
| Basic and  diluted loss per share             |       | $                  | (0.01      | )                   | $          | (0.01              | )          | $                   | (0.02      | ) | $ | (0.01 | ) |
| Weighted  average common shares outstanding   |       | 77,382,894         |       | 78,208,663          |       | 79,153,647         |       | 79,685,312          |       |
|                                          |       |               |       |                |       |               |       |                |       |
| **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          |       |

 

46

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**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

Notapplicable.

 

**Item9A.  Controls and Procedures**

 

**Corporate Disclosure Controls**

 

*Evaluation of Disclosure Controlsand Procedures***.**

 

Basedon our evaluation during the most recent quarter, our principal executiveofficer and principal financial officer have concluded that our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) wereeffective as of December 31, 2004 to ensure that information required tobe disclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin SEC rules and forms.

 

*Changes in Internal Controls.*

 

Therehave been no significant changes in our internal controls or in other factorsthat could significantly affect our disclosure controls and proceduressubsequent to the date of the previously mentioned evaluation.

 

*Management’s Report on Internal Control overFinancial Reporting*

 

The management of the Company is responsible forestablishing and maintaining adequate internal control over financialreporting. The Company’s internal control over financial reporting is a processdesigned under the supervision of the Company’s Chief Executive Officer andChief Financial Officer to provide reasonable assurance regarding thereliability of financial reporting and the preparation of the Company’sfinancial statements for external purposes in accordance with U.S. generallyaccepted accounting principles. Beginning with this Form 10-K for the year ending December 31,2004, the SEC’s rules require the Company to include in its annual report botha management report on internal control over financial reporting and a relatedattestation report of the Company’s registered public accounting firm on theeffectiveness of the Company’s internal controls over financial reporting.   However, the Company is permitted (pursuantto the SEC’s exemptive order dated November 30, 2004) to file themanagement’s report and the related attestation report of the Company’s auditorwithin forty five (45) days after the date on which this Form 10-K is due.  Thus, the Company will be filing by anamendment to this Form 10-K, within the time period permitted by such exemptiveorder, management’s report and the related attestation report of the Company’sauditors.

 

**Item 9B. Other Information**

 

OnNovember 15, 2004 the Company filed a Current Report on Form 8-K toannounce the sale of 1,785.714 shares of its Series A CumulativeConvertible Preferred Stock (the “Series A Preferred”) in a privateplacement at a purchase price of $14,000 per share, and issued warrants topurchase up to 4,464,286 shares of the Company’s common stock at an exerciseprice equal to $1.55 per share. The aggregate purchase price for theSeries A Preferred and the related warrants was cash consideration of$25,000,000.

 

**PART III**

 

**Item10.  Directors, Executive Officers,Promoters and Control Persons**

 

The2005 Proxy Statement is hereby incorporated by reference for the purpose ofproviding information about directors, executive officers, promoters andcontrol persons.

 

47

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**Item11.  Executive Compensation**

 

The2005 Proxy Statement is hereby incorporated by reference for the purpose ofproviding information about executive compensation.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management**

 

The2005 Proxy Statement is hereby incorporated by reference for the purpose ofproviding information about security ownership of certain beneficial owners andmanagement.

 

**Item13.  Certain Relationships and RelatedTransactions**

 

The2005 Proxy Statement is hereby incorporated by reference for the purpose ofproviding information about certain relationships and related transactions.

 

**Item14.  Principal Accountant Fees andServices**

 

The2005 Proxy Statement is hereby incorporated by reference for the purpose ofproviding information about principal accountant fees and services.

 

**PART IV**

 

**Item15.  Exhibits, Financial Statements andSchedules and Reports on Form 8-K**

 

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

 

1.               Consolidated Financial Statements

 

Reference is made to the Index to ConsolidatedFinancial Statements appearing in Item 8 of this report. Consolidated FinancialStatement Schedules.

 

All financial statement schedules are omitted asthey are inapplicable, or the required information has been included in theconsolidated statements or notes thereto.

 

2.               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           |
|                |       |                                                                                                                           |       |                                   |
| 4.1                 |       | Certificate of Designations of Series A Preferred Stock                                                                        |       | Form 8-K filed November 15, 2004  |
|                |       |                                                                                                                           |       |                                   |
| 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 |

 

48

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                  | ** ** | **Incorporation by Reference**        |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|
| 10.7                |       | Addendums #1-5 to the $20  Million General Loan Agreement dated February 14, 2002 by and among Bank  Turan-Alem, OJSC Caspi Neft TME, Transmeridian Exploration, Inc. (BVI) and  Bramex Management, Inc., successor to Kazstroiproekt, Ltd. |       | Form 10-Q filed May 24, 2004          |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 10.8                |       | Shareholders Joint  Operating Agreement dated February 14, 2002 by and among Transmeridian  Exploration, Inc. (BVI) and Kazstroiproekt, Ltd.                                                                                                |       | Form 10-Q filed May 24, 2004          |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 10.9                |       | Addendums #1-5 to the  Shareholders Joint Operating Agreement dated February 14, 2002 by and  among Transmeridian Exploration, Inc. (BVI) and Bramex Management, Inc.,  successor to Kazstroiproekt, Ltd.                                   |       | Form 10-Q filed May 24, 2004          |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 10.10               |       | Addendum #6 to the $20  Million General Loan Agreement dated February 14, 2002 by and among Bank  Turan-Alem, OJSC Caspi Neft TME, Transmeridian Exploration, Inc. (BVI) and  Bramex Management, Inc., successor to Kazstroiproekt, Ltd     |       | Form 8-K filed February 17, 2005 |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 10.11               |       | Addendum #1 to the $30  Million General Loan Agreement dated June 2, 2003 by and among Bank  Turan-Alem, OJSC Caspi Neft TME, Transmeridian Exploration, Inc. (BVI) and  Bramex Management, Inc., successor to Kazstroiproekt, Ltd          |       | Form 8-K filed February 17, 2005 |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 10.12               |       | Agreement by and among  OJSC Caspi Neft TME, Bank Turan-Alem, Transmeridian exploration, Inc. (BVI),  and Bramex Management, Inc., successor to Kazstroiproekt, Ltd                                                                              |       | Form 8-K filed February 17, 2005 |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 10.13               |       | Preferred Stock and  Warrant Purchase Agreement, dated November 12, 2004                                                                                                                                                                    |       | Form 8-K filed November 15, 2004 |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 10.14               |       | Investor Rights Agreement                                                                                                                                                                                                                        |       | Form 8-K filed November 15, 2004 |
|                |       |                                                                                                                                                                                                                                             |       |                                  |
| 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                        |

 

49

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**SIGNATURES**

 

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

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

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
| **Date**            | ** ** | **Signature**            | ** ** | **Title**                             |
|---------------------|------------|--------------------------|------------|---------------------------------------|
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Lorrie T. Olivier    |       |                                  | Chairman of the Board of Directors, |
|                |       | Lorrie T. Olivier        |       | President and Chief Executive Officer |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Earl W. McNiel       |       |                                  | Vice President and Chief Financial Officer |
|                |       | Earl W. McNiel           |       |                                  |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Bruce A. Falkenstein |       |                                  | Vice President of Exploration and |
|                |       | Bruce A. Falkenstein     |       | Geology                               |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Joseph S. Thornton   |       |                                  | Vice President of Operations |
|                |       | Joseph S. Thornton       |       |                                  |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Charles J. Campise   |       |                                  | Corporate Controller |
|                |       | Charles J. Campise       |       |                                  |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Marvin Carter        |       |                                  | Director |
|                |       | Marvin Carter            |       |                                  |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ James H. Dorman      |       |                                  | Director |
|                |       | James H. Dorman          |       |                                  |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Philip J. McCauley   |       |                                  | Director |
|                |       | Philip J. McCauley       |       |                                  |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ Angus G.M.P. Simpson |       |                                  | Director |
|                |       | Angus G.M.P. Simpson     |       |                                  |
|                |       |                     |       |                                  |
| March 14, 2005 |       | /s/ George E. Reese      |       |                                  | Director |
|                |       | George E. Reese          |       |                                  |

 

50

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