The following summary financial data should be read in conjunction with the remainder of "Management's Discussion and Analysis or Plan of Operation" and the consolidated financial statements and notes to such consolidated financial statements included in this report. The summary historical financial data as at December 31, 2006 and 2005 and for the years ended December 31, 2006 and 2005 has been derived from our audited consolidated financial statements.

Since all of our oil and gas interests are currently held in the Republic of Kazakhstan, in which there is no private ownership of oil and gas properties, good title to our interests is dependent on the validity and enforceability of the governmental licenses and contractual arrangements that we enter into with government entities, either directly or indirectly. We believe that we have satisfactory title to such interests in accordance with standards generally accepted in the crude oil and natural gas industry in the areas in which we operate. Our interests in properties are subject to royalty interests, liens for current taxes and other burdens, none of which we believe materially interferes with the use of, or affects the value of, such interests. However, there is no assurance that our title to its interests will be enforceable in all circumstances due to the

Currently, our wholly owned subsidiary, KoZhaN, is defending its licences against an attempt to convert its licences (See "Item 4 - Legal Proceedings").

SUMMARY FINANCIAL DATA

Statement of Operations Data:

                                                     YEAR ENDED           YEAR ENDED
                                              DECEMBER 31, 2006    DECEMBER 31, 2005
           Loss from continuing operations       ($103,529,832)        ($44,663,778)
           Net loss                              ($103,529,832)        ($44,663,778)
           Basic loss per share                         ($0.66)              ($0.43)
           Basic weighted average                   156,499,590          104,194,520

Balance Sheet Data:

                                              December 31, 2006    December 31, 2005

           Cash and cash equivalents                 $1,833,679          $12,042,965
           Working capital (deficiency)           ($10,234,675)           $2,883,528
           Total assets                             $14,768,227          $50,443,800
           Total stockholders' equity             ($13,865,919)          $21,839,927

Convertible Debenture

On June 30, 2006, the Corporation closed on an unsecured $15 million Convertible Note Purchase Agreement ("Convertible Note") due June 30, 2008. The Convertible Note bears interest at 6% per annum and has an initial conversion rate of $1.22 per share. The Corporation may prepay the note at any time after giving the Noteholders 30 days written notice after 1 year from issuance and the Corporation's common stock has traded in excess of 125% of the conversion price for a period of 20 consecutive trading days.

Westwind Partners (UK) Limited acted as sole agent to the Corporation in connection with the private placement of the Convertible Notes. Neither the Note nor the shares of common stock that may be issued upon conversion of the Note have been registered under the United States Securities Act of 1933 (the "Act"), or the securities laws of any jurisdiction.

On the closing date of the Convertible Note, the Corporation's common stock closed at $1.25 per share. In accordance with EITF 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" the Corporation recorded a beneficial conversion discount in the amount of $368,853. The discount is being amortized to interest expense over the life of the Convertible Note at its effective interest rate of 7.06% .

The Corporation also granted registration rights to the Convertible Note Holders for the shares underlying the conversion feature and agreed to a penalty provision, in which if the Corporation failed to become current with its filings with the Securities and Exchange Commission, or failed to register the convertible shares in either the London AIM market or the Toronto Stock Exchange before March 31, 2007, the Convertible Noteholders would to receive a warrant to purchase 12,295,082 shares of the Corporation's common stock, with a term of 2 years from issuance at an exercise price of $1.22 per share, subject to reset (see below). In accordance with the requirements of FSP EITF 00-19-2 the Corporation determined that it was likely as of December 31, 2006 that it would fail to meet the registration requirements of the Convertible Notes and has recorded a penalty payable in the amount of $768,499 based on a Black-Scholes valuation of $0.0625 per warrant share using a closing stock price of $0.36 per share, a 0% dividend yield, a risk free interest rate of 4.58%, a volatility of 84.5% and a term of 2 years.

On April 16, 2007, the Corporation issued a warrant for Twelve Million, Two Hundred and Ninety-Five Thousand, Nine Hundred and Eighty-Two (12,295,982) shares of common stock at an exercise price of $1.22 per share expiring as of April 16, 2009.

The conversion price of the Convertible Note is subject to adjustment in the event that the Corporation issues common stock or instruments convertible to common stock of the Corporation at a price below the conversion price of the Convertible Note. Exercise of instruments issued prior to the Convertible Note, options issued pursuant to both the 2000 Stock Award Plan and the Big Sky Stock Award Plan and any shares issued in a merger, acquisition or reorganization in which the Corporation is the surviving entity are excluded from the reset provision.

As of March, 2008, management had commenced discussions with the Noteholder with a view to reaching an agreement in respect to payment of this Note which falls due June, 2008.

RESULTS OF OPERATIONS

We are a junior oil and natural gas exploration company whose current operations are located primarily in the Republic of Kazakhstan, once part of the former Soviet Union. The focus of our operations are the acquisition, exploration, development, production and marketing of crude oil and, where volumes permit, natural gas. During 2006 and on to date of filing, we have concentrated on the development and production of the oil and gas properties belonging to our wholly owned subsidiaries, KoZhaN and VEW. We have incurred net losses since inception , and there can be no assurance that operating income and net earnings will be achieved in future periods.

Revenues

Expenses

General and Administrative

In 2006, the Corporation incurred general and administrative expenses of
$37,009,504 - (2005, $17,252,551). The following table provides a breakdown of
the general and administrative expenses by category.

                                YEAR ENDED           YEAR ENDED
                         DECEMBER 31, 2006    DECEMBER 31, 2005

Office Costs(1)                $31,689,603          $12,748,376
Advertising Costs                1,768,350            2,102,641
Professional Services            3,450,942            2,357,366
Investor Relations                 100,609               44,168
TOTAL                          $37,009,504          $17,252,551

(1) $16,349,744 ($3,130,735 for 2005) of this figure represents stock based compensation. In 2006 we transitioned to the new fair value accounting required under FAS 123 (revised) "Stock Based Compensation". Under FAS 123 (revised) we use a Black Scholes model to estimate the grant date fair value of options issued to employees. Prior to 2005 we valued options under the exception to the old FAS 123, APB 25, which allowed us to value options based on their intrinsic value (closing market price less the exercise price of the option) on the date of grant. Under fair value, an option will have value even if the market price is less than the exercise price on the date of grant.

Office costs include the costs of executive management, administrative consultants, rent, insurance, travel and accomodation and general offices costs associated with both maintaining our business offices in Calgary, Canada and Kazakhstan (Almaty and Atyrau) and a corporate presence in London.

Our office costs increased by approximately $6 million in Kazakhstan in 2006 over 2005 in that we hired additional personnel and engaged additional consultants in conjunction with our increased exploration activities in 2006.

Advertising and promotion costs consist of print newspaper and magazine layouts featuring the benefits of doing business in Kazakhstan that we paid for as part of an early campaign to try to foster goodwill towards the Corporation within Kazakhstan. We ceased all advertising and promotion efforts after the first quarter of 2006 and do not expect to incur additional costs in the future.

Geological and Geophysical

Depreciation, Depletion and Amortization

Depreciation and amortization increased to $7,958,712 in 2006 ($117,473 in 2005). The increase was primarily the result of depletion of our proved reserves from oil production, which amounted to $7,716,822 ($15.40 per barrel) in 2006 versus $0 in 2005. As we did not have proved reserves in 2005, we did not record any depletion. Because of the impairment charges taken in 2006 the average depletion per barrel is expected to decline significantly in 2007.

Impairment

Total impairment cost in 2006 was $50,267,353 (2005 $9,537,245). The increase in impairment costs of $40,730,108 was primarily the result of an impairment of $46,285,000 in the first quarter of 2006 based on developing our estimate of the value of the proved reserves within the Morskoye field. Under successful efforts accounting, every reporting quarter, we compare the un-discounted cash flows expected from production of oil and gas over the contract life in effect at that time versus the recorded value of oil and gas assets. If the value of the assets is in excess of the un-discounted cash flows, successful efforts requires that the value of the oil and gas assets be impaired to the value of the discounted cash flows of the producing reserves using the Corporations weighted average cost of capital. In 2005, the primary impairment occurred from the loss of our licenses on the Atyrau field, which resulted in our recording an impairment charge of $7,844,088, which impaired 100% of the oil and gas assets held by VEW. We recorded dry hole impairments of $3,982,353 in 2006 versus $1,693,157 in 2005.

Provision for Loss Contingency

An amount of $5,175,000 has been recorded as a contingency against the outcome of the current legal issues relating to the Corporation's subsidiary, KoZhaN. The Corporation takes the view that all legal claims being made by the spouses of the former participants of KoZhaN, as disclosed herein (See "Item 4 - Legal Proceedings - Claims by former participants in KoZhaN") are off no merit and is seeking to continue to appeal the decisions of the local courts through the highest court in Kazakhstan as well as actively co-operating with the Kazakh judicial authorities in their ongoing criminal investigation. The Corporation is cognisant that the outcome of these legal issues is not wholly and solely predicated by the laws currently in force in the Republic of Kazakhstan and therefore this Loss Contingency is appropriate. If the Corporation does not successfully defend its interests, it could lose up to 90% of the ownership in its subsidiary, which holds 100% of its currently revenue producing oil and natural gas assets.

Foreign Exchange Loss

The financial statements of the Corporation's two subsidiaries have been translated into US Dollars from Kazakhstan Tenge. The subsidiaries maintain their accounting records in Tenge. A majority of KoZhaN's and VEW's capitalized costs, expenses, liabilities, loans and cash flows are denominated in US Dollars. Accordingly, KoZhaN and VEW have determined that the US

Registration Rights Penalty

In November 2004 and February 2005, the Corporation conducted two separate private placements and sold 5,800,000 shares and 27,250,000 shares of its common stock, respectively. The investors participating in these private placements were granted penalty provisions within the terms of their Subscription Agreements, all of which penalties were to be triggered if the Corporation failed to file a Registration Statement within the period as set forth in such Subscription Agreements and registered such shares of common stock on behalf of the investors for resale.

Although the Corporation did file such registration statements within the time frame allowed, subsequently it was not able to bring such registration statements effective as of the required date. Therefore, the Corporation committed to issue penalty shares to such participants who remained beneficial holders of the common shares as per the terms of the various subscription agreements. This amounted to a total of 6,610,000 shares of common stock, valued at $1.73 per share, based on the closing market price for the Corporation's stock on December 31, 2005, and represented an aggregate liability of $11,435,300 as of that date. In 2006 the Corporation revalued those liabilities after the annual general meeting of shareholders on March 1, 2006 at $1.95 per share which resulted in our recording additional costs in 2006 of $1,493,200 during 2006 due to the increase in the price of our common stock at the time when the penalty shares were issued.

In December 2005 the Company conducted an additional private placement in which penalty provisions much the same as the earlier private placements. At March 31, 2006 the Corporation determined it had failed those provisions and was required to issue an additional 1,161,575 shares at the closing market price of $2.00 per share. This resulted in the Corporation incurring additional penalty costs of $2,323,150 during 2006.

Included in the $15 million Convertible Note Agreement we signed in June 2006 was a provision that required us to register the underlying common stock of the Convertible Notes on or before March 31, 2007. We determined as of December 31, 2006 that we would fail to meet that requirement and were required under the terms of the note agreement to issue a warrant to acquire 12,295,892 shares of our common stock at an exercise price of $1.22 per share as a penalty . We valued the warrant at $768,499 and included that cost in registration rights penalty expense during 2006.

Since we did not engage in any capital raising activities in 2007 we do not expect penalty costs to continue in 2007

The tax environment in Kazakhstan is subject to change, inconsistent application, interpretation and enforcement. Non-compliance with Kazakhstan laws and regulations can lead to the imposition of penalties and interest. We intend to make every effort to conform to these laws and regulations. However, our interpretations and those of our advisors may not be the same as those of government officials, which could lead to penalties and interest.

In January 2008, the taxing authorities in Almaty, Kazakhstan completed a comprehensive review of our Kozhan subsidiary tax filings for 2005, 2006 and 2007 covering income taxes, value added taxes and property taxes filed for those years. The audit resulted in our recording additional income taxes of $808,450 for 2006. Allowable deductions for income tax purposes are governed by the provisions of the production sharing contracts. In these periods, the taxing authorities disputed a number of the deductions we had taken during those years, which when reversed, resulted in our having taxable income instead of losses in Kazakhstan. In 2007, upon entering the full field development plan, we are able to deduct more expenses against our oil revenues.

We were also assessed penalties of approximately $319,000 which have been included in general and administrative expenses. We are currently appealing those penalties.

Losses

The Corporation has incurred significant losses in prior years and in 2006 while developing the Oil and Natural Gas properties. In 2006, the Net Loss was $103,529,832 (2005 - ($44,663,778). This net loss reflects both the impairment and the penalty shares costs disclosed above.

During 2006, the Corporation had a net loss of approximately $103.5 million on revenues of approximately $8,5 million. As a result, the Corporation's accumulated deficit increased from approximately $74.8 million as at December 31, 2005, to approximately $178 million as at December 31, 2006. The Corporation's net loss of approximately $103.5 million includes an impairment writedown of its Kozhan oil and gas properties in the amount of $46.3 million as a result of impairment tests performed based on the results of reserve estimates in the first quarter 2006, additional impairments from unsuccessful exploration activities of approx $3.9 million, equity based compensation of approximately $16.3 million and costs in the amount of $4.6 million for the issuance of shares of common stock and warrants to subscribe to common stock as a penalty for the Corporation's inability to meet certain registration rights that it had granted to investors that participated in the Corporation's private placements conducted in September/October 2004, February/March 2005, August 2005 and December 2005 (see our financial statements foot note 16). During 2006, the Corporation utilized cash for operating activities of approximately $1.27 million per month, averaged over the fiscal year.

CAPITAL EXPENDITURES AND INVESTMENTS

Material Commitments for Capital Expenditures

As a result of the acquisition of KoZhaN we have acquired significant commitments for future capital expenditure. The majority or these commitments are not required to be settled until we have fully completed all the requirements for inclusion of an asset in the Production Phase, at which time we expect to have sufficient cash flows from production to meet these commitments and will rely primarily on production cash-flows to meet future capital expenditures. If the future

Certain commitments relating to KoZhaN require capital expenditure prior to the production phase. These include investment commitments of $16.4 million. We anticipate we will be able to meet these capital costs through a number of financing alternatives. The investment commitment of $16.4 million is required to be spent in the Republic of Kazakhstan during the exploration phase, which may last until approximately 2009. We plan to finance this commitment through a combination of the sale of exploration related production and future equity financing. The government's objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the license holder, including drilling new wells and seismic activity. The government will measure the degree to which the Corporation has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of the Corporation towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.

Commercial discovery bonuses will be equal to 0.1% of the value of proved reserves found, as defined by the MEMR which should not be associated with the Commission definition of "proved reserves". We accrued for approximately $473,000 for the commercial reserve discovery bonus for the Morskoye field in 2006. We anticipate that any commercial discovery bonus will be financed out of our current oil production.

For 2008, KoZhaN work commitments are defined as follows:

Morskoye:

Work Program for 2007 was accepted by Zapkaznedra on December 20, 2006 (Letter #91/2007). Total financial liabilities for 2007 amounted to $5,276,200, where Seismic work amounted to $455,100 (Including Seismic processing and Interpretation) and 2 wells drilling amounted to $3,400, 000.

2008 work commitments are determined under the Full Field Development Plan. The Corporation has budgeted approximately $16.3 million in 2008 for drilling and other operations.

Dauletaly:

Work Program for 2007 was accepted by Zapkaznedra at December 20, 2006 (#93/2007). Total financial liabilities for 2007 amounted to $3,605,400, where Seismic work amounted to $27,300 (Seismic/gravimetric data re-interpretation) and 3 wells drilling amounted to $2,775,000.

Work Program for 2008 were accepted by Zapkaznedra at December 11, 2007 (#92/2008). Total financial liabilities for 2008 amounted to $991,200, with no seismic and drilling planned.

Karatal:

Work Program for 2007 was accepted by Zapkaznedra at December 20, 2006 (#92/2007). Total financial liabilities for 2007 amounted to $1,931,300, where 2 wells drilling amounted to $1,200,000. No seismic work was planned at Karatal block in 2007.

The KoZhaN work commitments are measured by actual work undertaken and completed. The cost to complete the work can be lower, or higher, than the estimated cost. Actual cost is not the determining factor in meeting work commitment obligations.

LIQUIDITY AND CAPITAL RESOURCES

During 2006, the Corporation utilized cash for management and corporate administrative activities of approximately $1.27 million per month.

In 2007 and through March 21, 2008, the Corporation has utilized approximately $1.1 million per month, which it has funded from revenues from current production. The Corporation anticipates that it will meet its ongoing overhead costs throughout 2008 from its revenues.

As of the date of this filing, current cash resources are not anticipated to be sufficient to fund the acquisition of producing properties or additional licenses or the repayment in June 2008 of the $15 million Convertible Notes. It will be necessary to consider seeking additional private equity or debt financing for these purposes. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Corporation's objective, or result in commercial success. The Corporation cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subsidiaries will be commercially successful.

As of December 31, 2006, the Corporation had outstanding current liabilities of approximately 13 million. During 2007 and into early 2008, management has and is addressing the satisfaction of these liabilities in several ways:

º engaging with tax and other authorities to negotiate and agree settlement figures and making good faith payments funded from production income;
º negotiating the inclusion of existing accounts payable into new contracts with suppliers, wherein such payment obligations will be rolled into the new contract payments and spread out over the term of the new contract and thus able to be paid off from production income
º ongoing negotiation with other suppliers in an attempt to reach settlement
º ongoing disputation of such accounts payable

In the future, should we be unsuccessful in defending our ownership interest in KoZhaN, we could lose up to 90% ownership in our sole subsidiary that has revenue producing operations. If this were to happen, we would have no cash to cover our operating expenses and would need to raise funds from additional debt and equity financing. However, should the loss of 90% of KoZhan have occurred, the terms under which we could expect to raise such funds would no doubt likely . . .