NOTE 6 - DISCONTINUED OPERATIONS

Emir Oil LLP

As noted in detail in the Current Report of the Company on Form 8-K filed with the SEC on February 18, 2011, the Company has entered into the Purchase Agreement pursuant to which the Company agreed to sell all of its interest in its wholly-owned operating subsidiary, Emir Oil. Accordingly, the results of operations and the financial position of Emir Oil has been reclassified in the accompanying unaudited condensed consolidated financial statements as discontinued operations.

Net assets of discontinued operations at June 30, 2011 and March 31, 2011 consisted of following:

A summary of discontinued operations for three months ended June 30, 2011 and 2010 was as follows:

ACCOUNTING FOR VARIABLE INTEREST ENTITIES

The Company has a relationship with Term Oil LLC where it has an implicit VIE through common ownership. Management has evaluated this relationship and concluded that the Company does not have the ability to control Term Oil LLC and the Company does not have the obligation to absorb losses or the right to receive returns of the VIE. Therefore this implicit VIE is not consolidated in these financial statements.

LICENSES AND CONTRACTS

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

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

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

OIL AND GAS PROPERTIES

Oil and gas properties using the full cost method as of June 30, 2011 and March 31, 2011, were as follows:

GAS UTILIZATION FACILITY

The Company officially placed the GUF into service on May 1, 2010 and is depreciating the GUF over an estimated useful life of 10 years. During the three months ended June 30, 2011 and 2010, depreciation expense for the GUF was $339,243 and $226,162, respectively.

In February 2011, the Company entered into an agreement with LLP Artelon located in Kazakhstan, for construction of the second line of the GUF. The total amount of the construction as per agreement with Artelon LLP equals 1,650,000,000 Kazakh Tenge, which is equivalent to approximately $11.3 million.

In accordance with terms of the Agreement, as of June 30, 2011, the Company has made total payments of $5,312,831 for development of project documentation, purchase of equipment, transportation and customs, and construction of a gas pipe-line. During the three months ended June 30, 2011, prepayments to Artelon LLP amounted to $3,712,831. These payments are reported as “Prepayments for materials used in oil and gas properties”, within discontinued operations.

The second line of the GUF is under the construction process and is expected to be completed by December 2011.

INVENTORIES FOR OIL AND GAS PROJECTS

As of June 30, 2011 and March 31, 2011 inventories included:

LIQUIDATION FUND

Reconciliation on the Liquidation Fund (Asset Retirement Obligation) at June 30, 2011 and March 31, 2011 is as follows:

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

At June 30, 2011, undiscounted expected future cash flows that will be required to satisfy the Company’s obligation by 2013 for the Dolinnoe, Aksaz, Emir and Kariman fields, respectively, are $6,204,545. After application of a 10% discount rate, the present value of the Company’s liability at June 30, 2011 and March 31, 2011 was $5,339,562 and $5,207,842 respectively.

REVENUES

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

The Company recognized revenue from sales as follows:

During the three months ended June 30, 2011 and 2010, oil sales to one customer represented 99% and 100% of total sales, respectively. At June 30, 2011 and 2010, this customer made up 98% and 95% of accounts receivable from oil and gas sales, respectively. While the loss of this foregoing customer could have a material adverse effect on the Company in the short-term, the loss of this customer should not materially adversely affect the Company in the long-term because of the available market for the Company’s crude oil and natural gas production from other purchasers.

The Company began realizing revenue from natural gas sales to the domestic market in May 2010.

RELATED PARTY TRANSACTIONS

Non-Consolidated VIE

The Company has an implicit VIE through common ownership with Term Oil LLC from which Company leases ground fuel tanks and other oil fuel storage facilities and warehouses. Management has evaluated and concluded that the Company is not the primary beneficiary because it does not have the ability to control the VIE and does not have the obligation to absorb losses or the right to receive returns. The VIE leases fuel tanks and other fuel storage facilities to third parties. The maximum exposure to loss due to involvement with the VIE is the amount of advances paid to Term Oil LLC.

The lease expenses for the three months ended June 30, 2011 and 2010, totaled to $24,615 and $24,413, respectively. The Company has not made any payments to Term Oil during the three months ended June 30, 2011 and 2010; the expenses were partially covered by the advance prepayment made during the fiscal year 2010. Mr. Toleush Tolmakov, the Vice President of the Company and a holder of more than 10% of the outstanding common stock of the Company, is 100% owner of Term Oil LLC.

3D Seismic Survey

On March 31, 2010 the Company entered into an agreement for conducting a 3D seismic survey with Geo Seismic Service LLP (“Geo Seismic”). Mr. Toleush Tolmakov is a 30% owner of Geo Seismic.

The agreement provided that Geo Seismic would carry out 3D field seismic exploration activities of the Begesh, Aday, North Aday and West Aksaz structures, an area of approximately 96 square kilometers within the Company’s Northwest Block.  The survey was completed in July 2010. In exchange for these services, Emir Oil will pay in cash Geo Seismic 570,000,000 Kazakh tenge ($3,800,000) following completion of the Sale.

COMMITMENTS AND CONTINGENCIES

Historical Investments by the Government of the Republic of Kazakhstan

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

Capital Commitments

To retain its rights under the exploration contract, the Company must spend $14.8 million between January 10, 2012 and January 9, 2013.

In addition to the minimum capital expenditure requirement, the Company must also comply with the other terms of the work program associated with the contract, which includes the drilling of at least nine new wells by January 9, 2013. With the identification of four potential structures in the Northwest Block, we anticipate that well drilling requirement will increase significantly if we are to determine the existence of commercially producible reserves in any of the possible structures in the Northwest Block. The failure to meet the minimum capital expenditures or to comply with the terms of the work program could result in the loss of the subsurface exploration contract.

FINANCIAL INSTRUMENTS

As of June 30, 2011 and March 31, 2011 cash and cash equivalents from discontinued operations included deposits in Kazakhstan banks in the amount $3,769,772 and $1,345,504, respectively. Kazakhstan banks are not covered by FDIC insurance, nor does the Republic of Kazakhstan have an insurance program similar to FDIC. Therefore, the full amount of the Company’s deposits in Kazakhstan banks was uninsured as of June 30, 2011 and March 31, 2011.

RESTRICTED CASH

Restricted cash includes funds deposited in a Kazakhstan bank and is restricted to meet possible environmental obligations according to the regulations of the Republic of Kazakhstan. As of June 30, 2011 and March 31, 2011, restricted cash amounted to $881,932 and 885,261, respectively and is reported as “Restricted cash” within discontinued operations.