RESULTS OF OPERATIONS

Revenues

For 2004 and 2003, the Corporation did not earn revenues. We have added oil and gas properties through the acquisition of KoZhaN and Vector; however these properties are currently undeveloped and consequently did not provide revenue during the period.

Expenses

During 2004 and 2003, we incurred operating expenses of $6,591,615 and $3,208,603 respectively. The following table provides a breakdown of operating expenses by category.

Office costs include the costs of executive management, administrative consultants, rent, insurance, travel and general offices costs associated with maintaining our business offices and operation in Canada and Kazakhstan. The increase in office costs from 2003 is due to acquisition of additional subsidiaries during the year and their related costs.

There is $385,690 (2003 – $455,000) of office costs related to maintaining an office in Beijing. These costs decreased as a result of the Corporations change in focus to oil and gas operations

Professional services include accounting, audit and legal advisory costs.  Professional costs have increased in 2004 compared to 2003.  The overall increase in professional services was due to increased legal, audit and accounting fees due to the increased activity of the oil and gas operations in the subsidiaries.

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 Vector’s capitalized costs, expenses, liabilities, loans and cash flows are denominated in US Dollars.  Accordingly, KoZhaN and Vector have determined that the US Dollars is its functional currency.  KoZhaN’s and Vector’s long-lived assets and equity are translated using historic exchange rates.  Gains and losses arising from these translations are reported in the consolidated statement of operations.  The foreign currency loss related to this translation was $193,130.  The Corporation maintains offices in Canada and China and may incur foreign exchange losses in meeting its operating expenses in local currencies relative to the US dollar. In 2004, foreign exchange losses for operations in China and Canada were $33,808.  The Kazakhstan Tenge is not a fully convertible currency outside of the Republic of Kazakhstan. The translation of Tenge denominated assets and liabilities into US Dollars for the purpose of these financial statements does not indicate that the Corporation could realize or settle in US Dollars the reported values of the assets and liabilities.

We record the fluctuations in the fair value of certain unexercised stock options as a deferred compensation asset (reported as a reduction of stockholders’ equity on the balance sheet). This asset is amortized over the life of the stock options as non-cash compensation expense. The non-cash compensation expense in 2004 was $758,264 (2003 – $1,541,174)

17

Summary of Non-cash Compensation Expense since inception:

Losses

Since we are in the development stage, all losses accumulated since inception is considered as part of our development stage activities.

Discontinued Operations

In December 2004, we sold our 100% shareholding in Big Sky Network Canada Ltd., which held our remaining assets in China, Big Sky Chengdu Technology Services Ltd, 100% owned, and our interest in the Sichuan Huayu Big Sky Network Ltd. joint venture, 50% owned. With this sale, we exited the Internet business in China. The sale of Big Sky Network Canada is presented as a discontinued operation in our financial statements.

CAPITAL EXPENDITURES AND INVESTMENTS

The Corporation began investing in oil and gas assets in addition to its Internet service business in China, to become an international oil and gas exploration and production company. This began with the acquisition of KoZhaN and continued with the acquisition of Vector.  By acquiring these companies the Corporation gained a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan located close to infrastructure and transportation. The Corporation sold all of its Internet assets in China on December 9, 2004.

In the fourth quarter of 2004, the Corporation spudded its first well, Morskoe # 10. Our near term objectives include the drilling, completion and testing of Morskoe #10, followed by the drilling or working over of additional wells offsetting Morskoe #10, should we have positive test results.  We farmed out 45% of out interest in the Morskoe license in exchange for a turnkey completion of the Morskoe # 10 well with cost of completing the well to be paid by the farmee.

We are also intent on farming out selected high risk and high cost exploration targets.  Initially, the Corporation focused its partnership initiatives on China’s major national oil and gas production and service companies and since has expanded its farm out discussions to include established energy companies.

 We believe that these activities will lead to a sustainable platform on which to build the Corporation. In addition to building a base in Kazakhstan, the Corporation is trying to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.

 The Corporation raised over US$12 million of new common equity in 2004. While access to the capital markets is always subjective, the current levels of energy prices support investor interest in financing new projects. The Corporation is basing its growth strategies on attaining a sustainable level of cash flow from low risk energy development of existing licenses while securing additional licenses, subject to available financing on economic terms.    

During the first quarter of 2004, we successfully completed the acquisition of BSEK and its subsidiary, KoZhaN, and in the second quarter of 2004, we successfully completed the acquisition of Vector. These were important initial steps in our efforts to redirect our operations toward exploration and exploitation of oil and gas.  See Note 5 in our Financial Statements.

We expect this new direction to bring increased value as the management team has extensive expertise and experience in the oil and gas business.

18

Material Commitments for Capital Expenditures

As a result of the acquisition of KoZhaN and Vector, we have acquired significant commitments for future capital expenditure. The majority or these commitments are not required to be settled until we are 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 cash flows from production are insufficient to meet these commitments, we will likely have to rely on additional equity financing.  

Certain commitments relating to KoZhaN require capital expenditure prior to the production phase. These include investment commitments of $16.43 million.  We anticipate we will be able to meet these capital costs through a number of financing alternatives. The investment commitment of $16.43 million is required to be spent in exploration phase in the Republic of Kazakhstan during the exploration phase, which is expected to 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 governments’ 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 if found.  We anticipate that any commercial discovery bonus will be small enough to be financed out of our working capital.

 For 2004, we have met the work commitments expected of Vector and KoZhaN. For 2005, we defined work commitments as follows:

•

KoZhaN – Expected Capital Expenditures are $5.2 million of which $1.6 million is allocated for 3 work over wells in Karatal; $0.5 million is allocated to new drilling in Dauletaly. We expect to spend an additional $1.4 million developing the Morskoe area, subject to results of drilling Morskoe #10. The balance of spending will be made up from administration, training and related business activities.

•

Vector – Expected Capital Expenditures $29.4 million of which $9.0 million is allocated for seismic work and $17.0 million allocated for drilling 10 wells. The balance will be made up of administration, training and related business activities.

The Vector and KoZhaN work commitments are measure 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. As the undertaken work commitments in 2005 are higher than those defined in the Hydrocarbon Contracts, Vector and KoZhaN expects to apply to the government to amend the commitment to the lesser amounts defined in the Hydrocarbon Contracts.