Caza Oil & Gas, Inc.
TSX : CAZ
AIM : CAZA

Caza Oil & Gas, Inc.

December 12, 2007 14:10 ET

Caza Oil & Gas, Inc.: First Day of Dealings on AIM and the Toronto Stock Exchange

CALGARY, ALBERTA--(Marketwire - Dec. 12, 2007) - Caza Oil & Gas, Inc. ("Caza" or the "Company") (TSX:CAZ) (AIM:CAZA):

NOT FOR DISTRIBUTION IN THE UNITED STATES OF AMERICA

Caza, an oil and gas exploration and production company with on-shore assets across three US States (Louisiana, Texas and New Mexico), today announces the placing of 18,821,000 common shares (the "Placing") and the admission of the Company's issued and to be issued common shares with no par value ("Common Shares") to trading on AIM, a market operated by the London Stock Exchange plc ("AIM") and to a listing on the Toronto Stock Exchange (the "TSX") (together "Admission").

Effective from this date, the Common Shares will commence trading on AIM under the symbol "CAZA" and on the TSX under the symbol "CAZ".

Noble & Company Limited is the Company's nominated adviser and Noble & Company Limited and Haywood Securities (UK) Limited are the Company's joint brokers.

Regarding the issuance of the Common Shares and the Admission, John McGoldrick, Executive Chairman of the Company, commented:

"We are delighted to have received support for our plans from investors. The funds raised will accelerate our drilling programme and provide investors with exposure to a balance of exploration, appraisal and development drilling."

Following Admission, Caza will have 69,319,000 Common Shares in issue which will be trading under the following ISIN numbers:



ISIN no. No. of Common Shares Type of shares

CA 1498011024 58,989,200 Unrestricted
US 1498012012 10,329,800 "Reg D"


"Reg D"

Certificates evidencing Common Shares issued to purchasers in the United States pursuant to Regulation D of the US Securities Act 1933 ("Reg D") will be issued in legended, certificated form. If such Common Shares are subsequently traded in compliance with Regulation S under the US Securities Act of 1933 with non-US investors then such Common Shares will become identical to the other Caza Common Shares held by non-US investors and will no longer be subject to Reg D restrictions.



Admission details:

Placing price per Common Share Cdn$0.80 (39 pence)
Number of Common Shares in the
Placing to be issued by the
Company 18,821,000
Percentage of enlarged issued
share capital represented by
the Common Shares being placed 27.2%
Common Shares in issue on
Admission 69,319,000
Market capitalisation on
Admission at the Placing
price Cdn$55.5 million (Pounds Sterling 27.0 million)
Estimated net proceeds of
the Placing receivable by
the Company (1) Cdn$11.8 million (Pounds Sterling 5.7 million)

(1) Net proceeds receivable by the Company are stated after deduction of
the Placing expenses of approximately Cdn$3.3 million (Pounds Sterling
1.6 million).


This press release is not an offer to sell Common Shares of the Company in the United States. Common Shares may not be offered or sold in the United States absent registration under the U.S. Securities Act of 1933 or an exemption from registration. Any public offering of Common Shares to be made in the United States will be made by means of a prospectus that may be obtained from the Company and will contain detailed information about the Company and management as well as financial statements.

Further information about Caza

Caza is engaged in the acquisition, exploration, development and production of hydrocarbons in the Texas Gulf Coast (on-shore), south Louisiana, southeast New Mexico and the Permian Basin of west Texas regions of the United States of America through its subsidiary, Caza Petroleum, Inc. ("Caza Petroleum"). Caza Petroleum and its predecessors have been managed by the current members of its management team (John R. McGoldrick, W. Michael Ford, James M. Markgraf, Anthony B. Sam and Richard R. Albro, together the "Management Team") and have been engaged in the acquisition, exploration, development and production of hydrocarbons in Caza Petroleum's core operating areas since 2000.

Caza Petroleum has drilled two successful exploration wells in its south Louisiana focus area. These are the Thunder Stud discovery, located in Calcasieu Parish, Louisiana, which is awaiting completion, and another which resulted in the extension of the Dulac Field, located in Terrebonne Parish, Louisiana. The well located in the Dulac Field was brought on stream in December 2006. Four of seven wells drilled by Caza Petroleum in Wharton County, Texas, were successful and have been completed as producing wells.

Caza Petroleum has interests in approximately 34,000 gross (11,400 net) acres of land and operates the majority of its acreage. Caza Petroleum also enjoys non-exclusive data licenses in respect of 8,000 square miles of 3-D Seismic data. The Company's strategy is to utilize its 3-D Seismic data base to identify undeveloped targets within proven hydrocarbon arenas.

Caza Petroleum's current asset portfolio includes producing assets, new development projects, appraisal and exploration targets, prospects and leads.

A Competent Persons Report, prepared by Netherland Sewell Associates Inc. ("NSAI") (the "NSAI Report") estimates that, as at 30 June 2007, Caza Petroleum's total net proved, probable and possible oil and natural gas reserves were approximately 166.9 Mbbl of light and medium crude oil, 74.7 Bcf of natural gas and 656.8 Mbbl of natural gas liquids. The NSAI Report also attributes a net present value of US$187.9 million to Caza Petroleum's proved, probable and possible reserves, before taxes, based on a discount rate of 10% and forecast prices effective as at June 30, 2007.

Biographies of the directors of Caza

John Russell McGoldrick, Executive Chairman and Director

John Russell McGoldrick is a director and Executive Chairman of Caza and a director and Executive Chairman of Caza Petroleum. From February 2004 to August 2006, Mr. McGoldrick served as President of Falcon Bay. Prior thereto, Mr. McGoldrick was employed by Enterprise Oil plc from June 1984 to October 2002, serving in a number of positions, including President of Enterprise Oil Gulf of Mexico Inc. from August 2000 to October 2002 and Managing Director of Enterprise Energy Ireland Ltd. from December 1997 to August 2000.

William Michael Ford, President, Chief Executive Officer and Director

William Michael Ford is Chief Executive Officer of Caza and President of Caza Petroleum. From November 2000 to July 2006, Mr. Ford served as a Vice President of Falcon Bay. Mr. Ford was also a founder and has served as President of Penwell Energy, Inc. from 1988 to present. Penwell Energy, Inc. is depleting its existing assets and has no plans for future business.

J. Russell Porter, Non-Executive Director

J. Russell Porter is a director of Caza and has served as an officer of Gastar Exploration Ltd. since September 2000 and as President and Chief Executive Officer of such company since February 2004. Prior thereto, Mr. Porter served as Executive Vice President of Forcenergy Inc. from April 1994 to September 2000, as Vice President of the Natural Resources Group of International Nederlanden (U.S.) Capital Corporation from January 1992 to April 1994, as an Associate of the energy merchant banking division of Manufacturers Hanover Trust Company from July 1990 to January 1992, as assistant to the president of Gamxx Energy/Reliable Production Service from 1987 to 1988, and as Gulf Coast Project Director of Ramco Energy Corporation from 1986 to 1987.

John Ross Rooney, Non-Executive Director

John Ross Rooney has served as Chief Executive Officer and a director of TUSK Energy Corporation. since December 2006. Mr. Rooney has also previously served as President, Chief Executive Officer and a director of Zenas Energy Corp. from August 2005 to January 2007, as President and Chief Executive Officer of Blizzard Energy Inc. from December 2002 to July 2005, as Vice President and Chief Financial Officer and then President and Chief Executive Officer of Equatorial Energy Inc. from May 1999 to June 2002, as Vice President and Chief Financial Officer of Calgary Louisiana Energy LLC from July 1997 to May 1999, as an originator and organizer of a private drilling fund from May 1997 to March 1999, as Vice President and Chief Financial Officer of Tidal Resources Inc. from June 1993 to January 1997, and as an accountant and other positions for Ernst & Young and Clarkson Gordon from January 1980 to December 1992. Mr. Rooney is also a director of Saxon Energy Services Inc.

James De Vaux Brillantes Guiang, Non-Executive Director

James De Vaux Brillantes Guiang is a director of Caza. Mr. Guiang has more than 25 years' experience in the international oil and gas exploration and production industry and has served as a Portfolio Manager with Millennium Global Investments since May 2006. Prior thereto, Mr. Guiang was an independent consultant. Mr. Guiang also served as a non-executive director of Petrolatina Energy PLC (an AIM listed company) until November 2007.

Biographies of the Management Team

Caza and Caza Petroleum are managed on a day to day basis by the Management Team which consists of John McGoldrick, Michael Ford and the following three executives:

James Michael Markgraf, Vice President Finance and Chief Financial Officer

James Michael Markgraf is Vice President, Finance and Chief Financial Officer of Caza and Caza Petroleum. From October 2000 to July 2006, Mr. Markgraf served as Chief Financial Officer and Treasurer of Falcon Bay. Prior thereto, Mr. Markgraf served as Chief Financial Officer and Treasurer of Penwell Energy, Inc. from October 1991 to October 2001, and as an accounting manager and accountant of several different firms from 1984 to October 1991. Mr. Markgraf is a Certified Public Accountant.

Anthony Bryan Sam, Vice President Operations

Anthony Bryan Sam is Vice President, Operations of Caza and has been Vice President, Operations of Caza Petroleum and its predecessors since October 2000. Mr. Sam also served as President of Chahta Petroleum, Inc. since January 1992. Prior thereto, Mr. Sam served as President of Sendero Petroleum, Inc. from January 1989 to June 1992, as Operations Manager of Mussleman, Owen & King Operating, Inc. from August 1987 to January 1989, and as a Petroleum Engineer of Chevron U.S.A. from May 1982 to August 1987.

Richard Ronald Albro, Vice President Land and Secretary

Richard Ronald Albro is Vice President, Land and Secretary of Caza and has been Vice President, Land of Caza Petroleum and its predecessors since October 2000. Mr. Albro also previously served in various land positions for Penwell Energy, Inc. from September 1993, after serving two years as Penwell Energy's in-house landman.

Quarter 3 results

Set out below is the text of an announcement made by the Company through the Canadian System for Electronic Document Analysis and Retrieval ("SEDAR") on 7 December 2007.

Consolidated Financial Statements of

CAZA OIL & GAS, INC.

For the three and nine months ended 30 September 2007

(Unaudited)



Caza Oil & Gas, Inc.

Consolidated Statements of Net Loss and Comprehensive Income (Loss), and
Retained Earnings (Deficit)
(unaudited)
For the Periods Ended (In Thousands of United States dollars, except per
share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
-----------------------------------------------
Revenue
Petroleum and natural gas 273 110 780 269
Other income - 135 - 239
Interest income 113 10 393 10
-----------------------------------------------

386 255 1,173 518
-----------------------------------------------

Expenses
Severance tax 21 13 64 36
Production 135 11 206 70
General and administrative 1,073 3,018 2,287 3,256
Depletion, depreciation,
amortization and accretion 104 24 215 52
Interest 33 10 33 28
1,366 3,076 2,805 3,442
-----------------------------------------------

Loss Before Income Taxes (980) (2,821) (1,632) (2,924)

Taxes
Current income tax expense
(recovery) (4) 4 - 4
Future income tax expense (303) (216) (408) (216)
-----------------------------------------------
(307) (212) (408) (212)
-----------------------------------------------

Net loss and comprehensive
loss (673) (2,609) (1,224) (2,712)

Retained Earnings (Deficit),
Beginning of Period (1,954) 2,671 (1,403) 2,794

Amount ascribed to
exchangeable share rights on
acquisition of Caza Petroleum - (970) - (970)
Future income taxes
recognized on
acquisition of Caza
Petroleum - (308) - (308)
Distributions - (331) - (351)
-----------------------------------------------

Deficit, End of Period (2,627) (1,547) (2,627) (1,547)
-----------------------------------------------
-----------------------------------------------

Loss per share
basic and diluted $ (0.01) $ (0.04) $ (0.02) $ (0.04)
-----------------------------------------------
-----------------------------------------------

Weighted average shares
outstanding (Note 7(a))
basic and diluted 73,336,717 67,420,000 73,056,623 67,420,000
-----------------------------------------------
-----------------------------------------------

See accompanying notes to the consolidated financial statements

Caza Oil & Gas, Inc.

Consolidated Balance Sheets
(unaudited)
(In Thousands of United States dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

September 30, December 31,
2007 2006
----------------------------------
Assets
Current
Cash and cash equivalents 9,250 13,697
Accounts receivable 4,186 2,155
Prepaid and other 93 123
----------------------------------

13,529 15,975
----------------------------------
Future income tax asset 187 -
Deferred financing costs (Note 9(c)) 1,400 -
Petroleum and natural gas properties and
equipment (Note 3) 17,291 8,243
----------------------------------

32,407 24,218
----------------------------------
----------------------------------

Liabilities
Current
Accounts payable and accrued liabilities 12,963 4,171

Asset retirement obligation (Note 4) 62 56
Future income taxes - 221
----------------------------------
13,025 4,448
----------------------------------

Shareholders' Equity
Share capital (Note 5(b)) 19,378 18,923
Contributed surplus (Note 5(f)) 2,631 2,250
Deficit (2,627) (1,403)
----------------------------------
19,382 19,770
----------------------------------
32,407 24,218
----------------------------------
----------------------------------
Subsequent events (Note 9)

See accompanying notes to the consolidated financial statements


Caza Oil & Gas, Inc.

Consolidated Statements of Cash Flows
(unaudited)
For the Periods Ended (In Thousands of United States dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss (673) (2,609) (1,224) (2,712)
Adjustments for items not
affecting
cash:
Depletion, depreciation,
amortization
and accretion 104 24 215 52
Stock-based compensation 64 2,250 304 2,250
Future income taxes recognized
on acquisition of Caza Petroleum - (308) - (308)
Future income tax expense
(recovery) (303) 92 (408) 92
Changes in non-cash working
capital (Note 7(b)) (435) 197 2,376 1,129
-----------------------------------------------
Cash flow from (used in)
operating activities (1,243) (354) 1,263 503
-----------------------------------------------

FINANCING
Distributions - (331) - (351)
Deferred financing costs (1,400) - (1,400) -
Proceeds from issuance of
shares, net of issue costs - 16,323 455 16,323
Increase in notes payable - - - 280
Repayment of notes payable - (397) - (397)
Changes in non-cash working
capital (Note 7(b)) 1,280 - 1,310 -
Cash flow from (used in)
financing activities (120) 15,595 365 15,855
-----------------------------------------------

INVESTING
Purchase of petroleum
and gas properties (3,622) (1,348) (8,700) (1,937)
Purchase of equipment (108) (3) (480) (4)
Changes in non-cash working
capital (Note 7(b)) 2,224 (906) 3,105 257
-----------------------------------------------
Cash flow from (used in)
investing activities (1,506) (2,257) (6,075) (1,684)
-----------------------------------------------

INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,869) 12,984 (4,447) 14,674

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 12,119 1,892 13,697 202
-----------------------------------------------

CASH AND CASH EQUIVALENTS,
END OF PERIOD (Note 7 (d)) 9,250 14,876 9,250 14,876
-----------------------------------------------
-----------------------------------------------

Supplementary information (Note 7)

See accompanying notes to the consolidated financial statements.


Notes to the Consolidated Financial Statements
(All Amounts In Thousands of United States dollars)
For the Three and Nine Months Ended September 30, 2007
(Unaudited)

1. BASIS OF PRESENTATION

Caza Oil & Gas, Inc. ("Caza" or the "Corporation") is a private Corporation, incorporated under the laws of British Columbia on June 9, 2006 for the purposes of acquiring shares of Caza Petroleum, Inc. ("Caza Petroleum"). The Corporation and its subsidiaries are engaged in the exploration for and the development, production and acquisition of, petroleum and natural gas reserves in the United States. Caza owns 63.7% of the outstanding common shares of Caza Petroleum. The remaining interest in Caza Petroleum is held by senior management of Caza and may be exchanged for Common Shares pursuant to a Share Exchange and Shareholders Agreement (Note 5).

The interim unaudited consolidated financial statements of Caza have been prepared by management, in accordance with Canadian generally accepted accounting principles. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements are expressed in United States of America ("US") dollars as this is the functional currency of Caza and its subsidiaries. The interim consolidated financial statements have, in management's opinion, been properly prepared using careful judgment with reasonable limits of materiality. These interim consolidated financial statements do not include all the note disclosures required for annual consolidated financial statements and therefore they should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2006. The interim consolidated financial statements have been prepared following the same significant accounting policies as the most recently reported audited consolidated financial statements of Caza.

2. NEW ACCOUNTING POLICIES

Effective January 1, 2007, the Corporation adopted the Canadian Institute of Chartered Accountants ("CICA") Section 1530, "Comprehensive Income", Section 3855, "Financial Instruments - Recognition and Measurement", Section 3861, "Financial Instruments - Disclosure and Presentation" and Section 3865, "Hedges". The Corporation has adopted these standards prospectively and the comparative interim consolidated financial statements have not been restated.

Upon adoption of Section 3855, all financial instruments are classified into one of the following five categories: held-for-trading, loans and receivables, held-to-maturity investments, available-for-sale financial assets or other financial liabilities. Subsequent measurement of the financial instruments is based on their initial classification. Held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income. Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized or impaired. All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the normal sale and normal purchase exemption. All changes in their fair value are recorded in net income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income until the underlying hedged transaction is recognized in net income. Any hedge ineffectiveness is immediately recognized in net income. The other categories of financial instruments are recognized at amortized cost using the effective interest rate method.

Upon adoption of these standards, the Corporation classified its cash and cash equivalents as held-for-trading, which are measured at fair value. Accounts receivable are classified as loans and receivables, which are amortized at cost. Accounts payable and notes payable are classified as other financial liabilities, which are measured at amortized cost.

For financial assets and financial liabilities that are not classified as held-for-trading, the transaction costs that are directly attributable to the acquisition or issue of a financial asset or financial liability are adjusted to the fair value initially recognized for that financial instrument. These costs are expensed using the effective interest rate method.

The adoption of Section 1530 has no material impact on the consolidated financial statements of the Corporation.

The Corporation currently does not utilize hedges or other derivative financial instruments in its operations, and as a result of the adoption of Section 3865 had no material impact on the consolidated financial statements of the Corporation.

The adoption of these new standards had no impact on the Corporation's opening retained earnings (deficit) as at January 1, 2007.

The Corporation has also adopted Section 3251, "Equity" and Section 1506, "Accounting Changes". Section 3251 replaces Section 3250, "Surplus" and describes standards for the presentation of equity and changes in equity for reporting periods as a result of the application of Section 1530, "Comprehensive Income". The only impact of Section 1506, "Accounting Changes", is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. This is the case with Section 3862, Financial Instruments Disclosures" and Section 3863, "Financial Instruments Presentations" which are required to be adopted for fiscal years beginning on or after October 1, 2007. The Corporation will adopt these standards on January 1, 2008 and it is expected the only effect on the Corporation will be additional disclosures regarding the significance of financial instruments for the entity's financial position and performance; and the nature, extent and management of risks arriving from financial instruments to which the entity is exposed.

The Company has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Company:

- As of January 1, 2008, Caza will be required to adopt two new CICA standards, Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation," which will replace Section 3861 "Financial Instruments - Disclosure and Presentation." The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. The new financial instruments presentation and disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements.

- As of January 1, 2008, Caza will be required to adopt two new CICA standards, Section 1535 "Capital Disclosures," which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements. The new capital disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements.

- The Corporation will be required to adopt CICA Handbook Section 3031, Inventories. This new accounting standard is effective for interim and annual financial statements for fiscal years beginning on or after January 1, 2008. This new standard is not expected to have a material impact on the Corporation's consolidated financial statements.

- In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by the end of 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS.



3. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

----------------------------------------------------------------------------

September 30, 2007

Accumulated Depletion Net Book
($'000's) Cost and Depreciation Value
----------------------------------------------------------------------------
Petroleum and natural
gas assets 17,734 923 16,811
Equipment 582 102 480
----------------------------------------------------
18,316 1,025 17,291
----------------------------------------------------
----------------------------------------------------

----------------------------------------------------------------------------


December 31, 2006


Accumulated Depletion Net Book
($'000's) Cost and Depreciation Value
----------------------------------------------------------------------------
Petroleum and natural
gas assets 8,954 766 8,188
Equipment 102 47 55
----------------------------------------------------
9,056 813 8,243
----------------------------------------------------
----------------------------------------------------


At September 30, 2007 the cost of petroleum and natural gas properties includes $9,574 (December 31, 2006 - $6,674) relating to unproven properties which have been excluded from costs subject to depletion and depreciation.

Caza capitalized general and administrative expenses of $1,004 in the nine month period ended September 30, 2007 (first nine months of 2006 of $26) relating to exploration and development activities of which $77 related to stock based compensation. Capitalized general and administrative expense for the three month periods ending September 30, 2006 and 2007 were $17 and $389, respectively.

4. ASSET RETIREMENT OBLIGATIONS

The following table presents the reconciliation of the beginning and ending aggregate carrying amount of the obligation associated with the retirement of oil and gas properties.



----------------------------------------------------------------------------
September 30, December 31,
As at 2007 2006
($'000's)
----------------------------------------------------------------------------

Beginning balance 56 160
Obligations incurred 4 10
Accretion expense 2 2
Obligations settled - (116)
-----------------------------------
Ending balance 62 56
-----------------------------------
-----------------------------------


The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas properties. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligation as at September 30, 2007 to be $68 (December 31, 2006 - $62) which will be incurred between 2008 and 2028. This amount has been discounted using a credit-adjusted risk free rate of 6.0 percent and an inflation rate of 3.0 percent.



5. SHARE CAPITAL

(a) Authorized:

Unlimited number of voting Common Shares.

(b) Issued:

----------------------------------------------------------------------------
Common Shares Warrants
Number of Amount Number of Amount
Shares ($'000's) Warrants ($'000's)
----------------------------------------------------------------------------
Incorporation on June 9, 2006 1 - - -
Redemption of initial share (1) - - -
Founders shares (Note (c)) 5,000,000 243 - -
Initial offering shares
(Note (d)) 34,420,000 11,659 17,210,000 3,700
Initial offering broker warrants - - 2,065,200 246
1st Over-allotment closing
(Note (d)) 4,610,000 1,576 2,305,000 496
1st Over-allotment broker
warrants - - 276,600 33
--------------------------------------------
Balance at December 31, 2006 44,030,000 13,478 21,856,800 4,475
2nd Over-allotment closing
(Note (d)) 970,000 345 485,000 104
2nd Over-allotment broker
warrants - - 58,200 7
Issued for exchange rights 1,498,000 52 - -
Issued Entitlement shares
(Note (d), (iv)) 3,442,000 - - -
--------------------------------------------
Balance September 30, 2007 49,940,000 13,875 22,400,000 4,585
--------------------------------------------
--------------------------------------------
Number of
Common Shares to Amount
Exchangeable Share Rights (See Note 4(e)) be issued ($'000's)
----------------------------------------------------------------------------

Issued on the acquisition of Caza
Petroleum 28,000,000 970
----------------------------------
Outstanding as of December 31, 2006 28,000,000 970
Rights exercised on March 8, 2007 (1,103,200) (38)
Rights exercised on April 20, 2007 (394,800) (14)
----------------------------------
Outstanding as of September 30, 2007 26,502,000 918
----------------------------------
----------------------------------


(c) Founders Shares:

On August 28, 2006, the Corporation completed a founders Common Share offering of 5,000,000 shares at a purchase price of US$0.05 per share. A stock-based compensation expense of $2,250 was recognized on the issuance of the founders shares.

(d) Initial Placement:

(i) On September 22, 2006, the Corporation completed the initial closing of its private equity offering of 34,420,000 units at a purchase price of US$0.50 per unit. Each unit consisted of one Common Share, 1/2 of a warrant and one entitlement right (see Note 5(d)(iv)). Each full warrant gives the holder the right to purchase one Common Share at an exercise price of US$1.00 per Common Share. Share issuance costs of $1,812 have been netted against this offering. On November 20, 2006, the Corporation completed its first over-allotment closing of 4,610,000 units. On January 17, 2007 the Corporation completed its second over-allotment closing of 970,000 units. The initial closing of the private equity offering and subsequent over-allotment closings are referred to as the "Initial Placement". The Corporation has allocated US$0.215 per warrant to the warrants issued in conjunction with the Private Equity Offering, with the remaining value allocated to the Common Shares.

(ii) Each full warrant is exercisable until the earlier of (i) three years after the date the Common Shares are listed on the Toronto Stock Exchange or the TSX Venture Exchange, subject to reduction by the Corporation to such lesser time period as may be required by the exchange on which the Corporation's securities are listed and (ii) four years following the closing date on which the warrants were acquired. Pursuant to the entitlement rights described below (see Note 5 (d)(iv)), if a liquidity event is not completed within one year of the closing date, the warrants will entitle the holder to acquire 1.1 Common Shares.

(iii) In connection with the Initial Placement, the Corporation issued 2,400,000 warrants (the "Broker Warrants") to the agents as partial consideration for their services rendered in connection with the Initial Placement. Each Broker Warrant entitles the holder to purchase one Common Share at a price of US$0.50 until March 22, 2008 in the case of 334,800 warrants and March 31, 2008 for the balance of the warrants. The Corporation ascribed US$0.119 per warrant to each of the Broker Warrants. No Broker Warrants have been exercised at December 31, 2006 or June 30, 2007.



The fair value of each warrant and Broker Warrant was determined using the
assumptions set out below:

----------------------------------------------------------------------------
Broker
Warrants Warrants
----------------------------------------------------------------------------
Exercise price US$1.00 US$0.50
Risk-free interest rate 4.75% 4.75%
Expected maturity (years) 3.0 1.5
Expected volatility 88.16% 88.16%
Dividend yield 0% 0%


(iv) As part of the Initial Placement, the Corporation issued to the purchaser's liquidity entitlements, which provided purchasers under the September 22, 2006 closing, the right to receive for no additional consideration an aggregate of 3,442,000 Common Shares if as the "liquidity event" did not occur by September 22, 2007. Purchasers under the November 20, 2006 and January 17, 2007 closings have the right to receive an aggregate of 558,000 Common Shares if a "liquidity event" does not occur by November 20, 2007, see (Note 9(a)). The entitlement is based on the receipt of 0.10 of a Common Share for each Common Share purchased in the Initial Placement. Additionally, a comparable adjustment would be made to the exercise of the warrants those purchasers received in the Initial Placement. A "liquidity event" is either (i) the completion of an initial public offering and listing of the Common Shares on the TSX or the TSX Venture Exchange or (ii) a reverse take over transaction which involves the exchange of the Common Shares for common shares of a company that is listed on the TSX or TSX Venture Exchange.

(e) Acquisition of Caza Petroleum:

Share Exchange and Shareholders Agreement

Prior to the consummation of the Initial Placement the Corporation became a party to a Share Exchange and Shareholders Agreement with Caza Petroleum and the management of Caza Petroleum and their respective spouses. Under the agreement management are not permitted to transfer their shares of Caza Petroleum (other than among themselves and family members), except to the Corporation under certain conditions. Management has the right at any time to exchange their Caza Petroleum shares for Common Shares of the Corporation on the basis of 2,800 Common Shares for each Caza Petroleum share. In addition, the Corporation has the right to cause each manager to exchange his Caza Petroleum shares for common shares in certain circumstances, including a change of control, liquidation, sale of substantially all of the assets, or bankruptcy of the Corporation, or the divorce, death or incapacity of the manager or a breach of the agreement.



(f) The following table presents the changes in contributed surplus.

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September 30, December 31,
2007 2006
----------------------------------------------------------------------------
Balance, beginning of period 2,250 -
Stock-based compensation 381 2,250
-----------------------------------
Balance, end of period 2,631 2,250
-----------------------------------
-----------------------------------


6. STOCK-BASED COMPENSATION

The Corporation granted stock options to its directors, officers and employees under the stock option plan dated January 31, 2007. The Corporation has authorized for issuance options in respect of 7,000,000 Common Shares. As at September 30, 2007, the remaining options available for issuance are 3,035,000. The exercise price of each option is no less than the fair market value of the Corporation's Common Shares on the date of grant. Except as otherwise determined by the Board and subject to the limitation that the stock options may not be exercised later than the expiry date provided in the relevant option agreement but in no event later than 10 years (or such shorter period required by an exchange) from their date of grant. Subject to the Board's sole discretion in modifying the vesting of stock options, stock options granted shall vest, and become exercisable, as to 33 1/3% on the first anniversary date and 33 1/3% on each subsequent anniversary of that date. All options granted to a participant but not yet vested shall vest immediately upon a change of control (as defined in the Stock Option Plan) or upon the Corporation's termination of a participant's employment without cause.



A summary of the changes during the nine months ended September 30, 2007 is
presented below:

Number Weighted
Average
Price (US$)
----------------------------------------------------------------------------
Outstanding December 31, 2006
Granted 3,965,000 0.50
---------------------------------
Outstanding September 30, 2007 3,965,000 0.50
---------------------------------
---------------------------------



----------------------------------------------------------------------------
Number Weighted Weighted
outstanding Average Life Average Number
at Remaining Exercise Exercisable at
Date of September Contractual Price September
Grant 30, 2007 Date of Expiry Life (US$) 30, 2007
----------------------------------------------------------------------------
January
31, 2007 3,325,000 January 31, 2017 9.33 Years 0.50 1,108,333
February
5, 2007 400,000 February 5, 2017 9.34 Years 0.50 -
May 10,
2007 220,000 May 10, 2017 9.60 Years 0.50 -
June 11,
2007 20,000 June 11, 2017 9.69 Years 0.50 -
-------------------------------------------------------------------
3,965,000 9.35 Years 0.50 1,108,333
-------------------------------------------------------------------
-------------------------------------------------------------------


The weighted-average remaining contractual life of the options with an exercise price of US$0.50 per option granted during the first nine months of 2007, as at September 30, 2007 was 9.3 years. The fair value of the stock options is estimated using the Black-Scholes option-pricing model that takes into account, the assumptions listed below. For the nine months ended September 30, 2007 the Corporation recorded stock-based compensation expense of $381 in connection with issuance of stock options to directors, officers and employees of which $304 is included in G&A and $77 was capitalized in PP&E. The fair value of the stock options granted is US$0.293 per option.



----------------------------------------------------------------------------
Assumptions
----------------------------------------------------------------------------

Exercise price US$0.50
Risk-free interest rate 4.75%
Expected maturity (years) 10
Expected volatility 88.16%
Dividend yield 0%


7. SUPPLEMENTARY INFORMATION

(a) per share information

The following table summarizes the Common Shares used in the per share
calculations.

----------------------------------------------------------------------------

Nine months ended Three months ended
Sept. 30, Sept. 30 Sept 30 Sept 30
2007 2006 2007 2006
----------------------------------------------------------------------------

Weighted average shares
outstanding
Basic 73,056,623 67,420,000 73,336,717 67,420,000
Diluted 73,056,623 67,420,000 73,336,717 67,420,000

(b) net change in non-cash
working capital

----------------------------------------------------------------------------
Nine months ended Three Months ended
Sept 30, Sept 30, Sept 30, Sept 30,
($'000's) 2007 2006 2007 2006
----------------------------------------------------------------------------
Provided by (used in)
---------------------
Accounts receivable (2,031) (222) 200 (1,015)
Prepaids and other 30 (20) 127
Accounts payable and
accrued liabilities 8,792 1,628 2,742 306

-----------------------------------------------
6,791 1,386 3,069 (709)
-----------------------------------------------
-----------------------------------------------

Summary of changes
Operating 2,376 1,129 (435) 197
Financing 1,310 - 1,280 -
-----------------------------------------------
Investing 3,105 257 2,224 (906)
-----------------------------------------------
6,791 1,386 3,069 (709)
-----------------------------------------------
-----------------------------------------------

(c) supplementary cash flow
information
----------------------------------------------------------------------------
Nine Months ended Three Months ended
($'000's) Sept. 30, Sept. 30 Sept 30 Sept 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Interest paid 33 28 33 10
Interest received 393 10 113 10
Cash taxes paid - - - -

(d) cash and cash
equivalents

----------------------------------------------------------------------------
Nine Months ended
Sept. 30, Sept 30, year end December 31,
($'000's) 2007 2006 2006
----------------------------------------------------------------------------
Cash on deposit 1,755 106 195
Money market
instruments 7,495 14,770 13,502
-----------------------------------------------
Cash and cash
equivalents 9,250 14,876 13,697
-----------------------------------------------
-----------------------------------------------

The money market instruments bear interest at a rate of 5.29% as at
September 30, 2007 (December 31, 2006 - 5.19%)


8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

The nature of oil and gas operations exposes the Corporation to fluctuations in commodity prices and foreign currency exchange rates. The Corporation may use derivative instruments to manage these risks.

Credit Risk

A substantial portion of the Corporation's accounts receivable are with customers and joint-venture participants in the oil and natural gas industry and are subject to normal industry credit risks. The carrying amount of accounts receivable reflects management's assessment of the credit risk associated with theses customers and participants. The Corporations accounts receivable trade balance is comprised primarily of joint interest receivables derived from outside joint venture partners participating in the Corporations drilling activities. The Corporation's oil and natural gas production is sold to large marketing companies. Typically, the Corporation's maximum credit exposure to customers is revenue from two months sales. During the three and nine month period ended September 30, 2007, the Corporation sold a significant amount of its crude oil and natural gas production to a single purchaser. This purchaser accounted for 95% of the production for the three month and nine month periods ended September 30, 2007. For the three and nine month periods ended September 30, 2006 this purchaser acquired 82% and 74% respectively of our production. These sales were conducted on transaction terms that are typical for the sale of crude oil and natural gas in the US.

Foreign Currency Exchange Risk

The Corporation is exposed to foreign currency exchange fluctuations, as certain general and administrative expenses and financing costs are or will be denominated in Canadian dollars and United Kingdom pounds sterling. The Corporations' sales of oil and natural gas are all transacted in US dollars.

Fair Value of Financial Instruments

The Corporation has determined that the fair value of the financial instruments consisting of cash and cash equivalents, accounts receivable and accounts payable is not materially different from the carrying value of such instruments reported on the balance sheet due to their short-term nature.

9. SUBSEQUENT EVENTS

(a) On November 20, 2007, the liquidity entitlements issued to purchasers in the November 20, 2006 closing of the Initial Placement and the purchaser of the final closing of the Initial Placement on January 17 2007 became effective. On November 20, 2007, the Corporation issued 558,000 additional Common Shares to those purchasers and adjusted the warrants held by those purchasers to have the right to receive 1.1 Common Shares in lieu of each Common Share that they were previously entitled to receive upon exercise of the warrants.

(b) On October 9 2007, the Corporation amended its stock option plan to convert to a 10% rolling plan.

(c) Under the terms of an agency agreement dated November 28, 2007, the Corporation agreed to issue a minimum of 18,750,000 Common Shares and a maximum of 25,000,000 Common Shares. Upon closing, the maximum net proceeds of this issue are estimated to be $16,613, net of the estimated issue expenses and agents' fees in the aggregate of approximately $2,224 of which $1,400 was recorded at September 30, 2007. In connection with the terms of this agency agreement and an admission agreement involving one of the agents, the Company has agreed to grant compensation options entitling the agents to acquire from the Corporation at the offering price, a number of Common Shares equal to an aggregate of 5% of the number of Common Shares sold by the Corporation under this offering for a period of 24 months after the Common Shares are listed on the Toronto Stock Exchange or AIM, a market operated by the London Stock Exchange, plc.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes for the three and nine month periods ended September 30, 2007 and the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2006. The financial statements and the financial data included in the MD&A have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and the amounts reported in this MD&A are in thousands (US$000's) of US dollars, unless otherwise noted. This MD&A is dated December 7, 2007.

Caza Oil & Gas, Inc. ("Caza") owns 63.7% of the outstanding common shares of Caza Petroleum, Inc. ("Caza Petroleum"). The remaining interest in Caza Petroleum is held by the management team and may be exchanged for Common Shares pursuant to the share exchange agreement dated September 22, 2006 (the "Share Exchange Agreement") between the management of Caza Petroleum and Caza. Caza Petroleum amalgamated with Falcon Bay Energy ("Falcon Bay") on September 14, 2006. As Caza, Caza Petroleum and Falcon Bay (collectively, the "Corporation") were under common control, the Corporation's consolidated financial statements are presented on a continuity-of-interest basis of accounting and represent the activities of Caza from September 14, 2006 to September 30, 2007 and Falcon Bay prior to that date.

The information herein contains forward-looking information relating to the Corporation's plans and other aspects of the Corporation's anticipated future operations, strategies, financial and operating results and business opportunities. Forward-looking information is typically contained in statements using words such as "anticipate", "believe", "project", "expect", "plan", "intend" or similar words suggesting future outcomes, statements that actions, events or conditions "may", "would", "could" or "will" be taken or occur in the future, or statements regarding the outlook for petroleum prices, estimated amounts and timing of capital expenditures, anticipated results of construction projects, estimates of future production, operating costs or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance. Statements concerning reserves are also forward-looking statements, as they reflect estimates as to the expectation that the deposits can be economically exploited in the future.

Forward-looking information is based on certain facts and assumptions including, without limitation, with respect to expected growth, results of operations, business prospects and opportunities, oil and natural gas prices, reserves estimates, estimates of quantities of hydrocarbons recoverable from the Corporation's properties, the ability of the Corporation to replace and expand reserves, the cost and availability of drilling and other oilfield services and the ability to access external sources of debt and equity capital in order to make capital investments, fund acquisitions or further the Corporation's exploration and development program. While the Board of Directors, having made due and careful enquiry, believe such assumptions are accurate and the Corporation and the Board of Directors, consider the assumptions to be reasonable based on information currently available to them, these assumptions may prove to be incorrect.

By its nature, forward-looking information involves numerous assumptions, risks and uncertainties and other factors that contribute to the possibility that the predicted outcome will not occur. Among the factors that could cause actual events or results to differ materially from those reflected in the forward-looking information in this MD&A include those identified under the heading "Risk Factors" in the final long prospectus of Caza dated November 28, 2007. Readers should be aware that the list of risks set forth hereunder and there under is not exhaustive.

Except as required by applicable securities laws, Caza undertakes no obligation to update or revise any forward-looking information.

Per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. BOE's may be misleading, particularly if used in isolation. The boe conversion ratio used is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Non-GAAP Measures

"Netbacks" and "Funds flow from operations" are used in the following MD&A, but do not have any standardized meaning under GAAP and are unlikely to be comparable to similarly defined measures presented by other issuers. For these purposes, Caza defines netbacks as revenue less royalty and production costs. Funds flow from operations includes all cash from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be cash flow from operating activities. Funds flow from operations is reconciled with cash flow from operating activities in this MD&A. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the Corporation's efficiency and its ability to fund a portion of its future growth expenditures.

The above terms should not, on their own, be construed as indicators of the Corporation's performance or as a measure of liquidity and should only be used in conjunction with the financial statements to which they relate.



The Corporation calculates funds flow from operations as follows:

----------------------------------------------------------------------------
($'000's) Nine months Three months
ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Cash flow from (used in) operating
activities 1,263 503 (1,243) (354)

Adjustment for items not affecting
cash 2,376 1,129 (435) 197
Changes in non-cash working capital

--------------------------------------
Funds flow from (used in) operations (1,113) (626) (808) (551)
--------------------------------------
--------------------------------------


Comparison of Results of Operations for the three and nine month periods ended September 30, 2007 and 2006.

Petroleum and natural gas revenues increased to $780 and $273 for the nine and three month periods ended September 30, 2007 from $269 and $110 for the nine and three month periods ended September 30, 2006. The Corporation produced 109.6 MMcf of gas and 725 bbls of condensate during the nine month period ended September 30, 2007 and for the three month period ended September 30, 2007 the Corporation produced 43.3MMcf of gas and 286 bbls of condensate. This represents an average production rate for the nine month period ended September 30, 2007 of 418 Mcfe/d compared to an average production rate during the nine month period ended September 30, 2006 of 171 Mcfe/d. The average natural gas price received by Caza increased to $6.68 per Mcf from $5.75 per Mcf during the first nine months of the prior year, an increase of 16.0%. The average price received for the Corporation's condensate production during the period was $64.86 per barrel. The Corporation did not produce any condensates in the respective 2006 periods. Caza has not hedged any of its production and does not have any commodity price management programs in place.

Other income, which is comprised primarily of consulting fees received from third party oil and gas companies decreased to $nil in the first nine months of 2007 from $239 during the same period of 2006.

Interest income increased to $393 from $10 during the same period last year, primarily as a result of interest earned on the proceeds from the Corporation's Initial Private Placement ("Initial Placement") which was completed in the last half of 2006 and in early 2007. The Corporation invested the proceeds from these financings in short-term money market funds.

Severance taxes were $64 during the nine month period ended September 30, 2007 an increase from the $36 incurred during the nine month period ended September 30, 2006. The increases in the Corporation's production during the nine months of 2007 and in the price of natural gas received by the Corporation were largely responsible for the increase.

Production expenses for the nine month period ended September 30, 2007 were $206 compared to $70 for the same period in 2006. The Corporation's average lifting cost for the three and nine month periods ended September 30, 2007 was $3.00 and $1.81 per Mcfe, respectively. The Corporation's average lifting costs for the three and nine month periods ended September 30, 2006 was $0.54 and $1.49 per Mcfe, respectively. The overall increase in lease operating expenses per Mcfe resulted from four of the Corporation's wells decreasing in production while the lease operating expenses remain relatively fixed. On a per Mcfe basis, lease operating expenses increased by 17.7% as a result of this decrease in production. The Corporation's production expenses in 2006 and 2007 were also affected by higher costs in the Aldwell Ranch area.

General and administrative expenses for the three month period ended September 30, 2007 were $1,073 and for the nine month period ended September 30, 2007 were $2,287. For the nine month period ended September 30, 2006 general and administrative expenses were $3,256 of which $2,250 were stock based compensation expense incurred in 2006. General and administrative expenses for the three months ended September 30, 2006 were $768 excluding stock based compensation expense of $2,250. Stock-based compensation expenses in the amount of $64 and $304 are included in general and administrative expenses for the respective three and nine month periods ended September 30, 2007. Increased salaries and wages, travel, administration, consulting and other expenses were largely responsible for the increase in total general and administrative expenses as a result of company growth and the initial public offering activities. During the period ended September 30, 2007 the Corporation capitalized general and administrative expenses relating to exploration and development activities of $1,004 (first nine months of 2006 of $26) of which $77 related to capitalized stock-based compensation. The Corporation issued 3,965,000 stock options to directors, officers and employees at an exercise price of $0.50 per share during the first nine months of 2007. These were the first grants of options made under the Corporation's option plan. The future stock option expense will be dependent on the number of new options granted, volatility of the share price and the vesting provisions thereof.

Depletion, depreciation, amortization and accretion expense for the first nine months of 2007 increased to $215 from $52 in the prior period. For the three month period ended September 30, 2007 the depletion, depreciation and amortization expense was $104 and $24 in the prior period. The drilling costs associated with, and production from, three new wells in Texas were the reasons for the increase.

During the nine month period ended September 30, 2007 the Corporation incurred interest expense of $33, an increase of $5 from the $28 incurred during the first nine months of 2006. The Corporation eliminated the balance of the debt during the last quarter of 2006. The Corporation incurred interest expense relating to the payment of suspended royalty payments made to the state of Louisiana during the third quarter of 2007. This interest expense was incurred because of the royalty in one of the Corporation's wells within the state of Louisiana was suspended until the royalty owners, including the state of Louisiana, could agree upon the allocation of their respective royalty percentage.

The Corporation accrued a future tax recovery of $(408) for the nine month period ended September 30, 2007. The Corporation did not pay cash taxes during the nine months of 2007.

The Corporation's net loss for the first nine months of 2007 was $1,224 as compared to net loss of $2,712 during the first nine months of 2006 which includes the $2,250 stock based compensation expense in the third quarter of 2006. For the three month period ended September 30, 2007 the Corporation's net loss was $673 as compared to $2,609 for the same period in 2006.

Liquidity and Capital Resources

At September 30, 2007, Caza had a working capital surplus of $566. This was a decline from the December 31, 2006 working capital of $11,804. The Corporation had a cash balance of $9,250 and has no bank credit facilities in place. The major components of Caza's working capital are cash and cash equivalents, accounts receivable and accounts payable. As at September 30, 2007 the Corporation's accounts receivable and joint venture receivable were $308 and $3,878 and their accounts payable and joint venture payable were $5,299 and $7,664 respectively. As at December 31, 2006 the Corporation's accounts receivable and joint venture receivable were $203 and $1,952 and their accounts payable and joint venture payable were $901 and $3,270 respectively.

The decline in working capital is the result of the Corporation's capital expenditure program during the first nine months of 2007 and the corresponding decline in cash and cash equivalents and the increase in accounts receivable and accounts payable. Under the terms of an agency agreement dated November 28, 2007, the Corporation agreed to issue a minimum of 18,750,000 Common Shares and a maximum of 25,000,000 Common Shares. Upon closing, the maximum net proceeds of this issue are estimated to be $16,613, net of the estimated issue expenses and agents' fees in the aggregate amounting to approximately $2,224 of which $1,400 was incurred as at September 30, 2007. In connection with the terms of this agency agreement and an admission agreement involving one of the agents, the Company has agreed to grant broker warrants entitling the agents to acquire from the Corporation at the offering price an aggregate of 700,000 Common Shares for a period of 24 months after the Common Shares are listed on the Toronto Stock Exchange or AIM, a market operated by the London Stock Exchange, plc. The net proceeds from the Initial Public Offering ("Offering") will be used for exploration and development drilling, for general and administrative expenses and to provide working capital for the operations of the Corporation.



Contractual Obligations Payments due by Period
----------------------------------------------
Less
than 1 1 - 3 4 - 5
US$000's year Years Years Thereafter Total
----------------------------- ------- ------- ------ ----------- -------
Operating leases 240 216 - - 456
Asset retirement obligations 48 - 39 87
------- ------- ------ ----------- -------
------- ------- ------ ----------- -------
240 264 - 39 543
------- ------- ------ ----------- -------
------- ------- ------ ----------- -------

Note:
The Corporation has commitments with respect to the lease on its offices
located in Houston and Midland, Texas and a corporate apartment located
in Houston.


Contractual obligations can be financial or non-financial. Financial obligations are known future cash payments that the Corporation must make under existing contracts such as lease arrangements. Commercial commitments are contingent obligations that become payable if certain pre-defined events occur. The Corporation has $87 of undiscounted asset retirement obligations after inflation. As of September 30, 2007, the discounted value ($62) of these estimated obligations have been provided for in our consolidated interim financial statements. The timing of any payments is difficult to determine with certainty, and the table has been prepared using our best estimates.

On August 31, 2004, the Corporation entered into a financing arrangement with a third party for the purposes of financing drilling on the Aldwell Ranch project. During 2004, 2005 and 2006 the Corporation received a total $2,565 under this agreement. These funds are repayable out of the production from three wells on the Aldwell Ranch project at a rate of 47.281% of 100% of the gross revenues from the wells until repayment of the loan amount and 40.787% of 100% of the gross revenues thereafter. The repayment obligation ceases upon ninety percent (90%) of the then current estimated recoverable reserves being produced.

Financial instruments held by Caza include cash and cash equivalents which included an interest bearing money market account, accounts receivable and accounts payable.

The Corporation's prospects are dependent upon the investment of capital into its development and exploration projects. Caza anticipates through a combination of funds raised from the initial public offering, its existing cash balances and internally generated cash flow, that it will have adequate liquidity to fund future capital expenditures during 2007 and 2008 and pursue new opportunities that are consistent with its business plan.

At September 30, 2007, Caza had 49,940,000 Common Shares outstanding. During the first half of 2007 the Corporation completed a financing, issuing 970,000 Common Shares, 485,000 warrants and liquidity entitlements (entitling the holders thereof to acquire 97,000 Common Shares in certain situations) for net proceeds of $455. The shares were issued as a result of the exercise of the over-allotment option granted to the agents retained in connection with the Initial Placement completed during the second half of 2006. The Corporation also issued 1,498,000 Common Shares in exchange for common shares of Caza Petroleum. The remaining shares of Caza Petroleum held by the management team are exchangeable for 26,502,000 Common Shares pursuant to the Share Exchange Agreement.

On September 22, 2007, the Corporation issued 3,442,000 Common Shares to subscribers of the Corporation's Initial Placement under their entitlement rights. These entitlement rights resulted in each subscriber receiving an additional 0.1 Common Shares for each Common Share initially purchased. The total number of shares outstanding after the issuance of these shares is 49,940,000, as at September 30, 2007. On November 20, 2007, the Corporation issued 558,000 additional Common Shares to those purchasers and adjusted the warrants held by those purchasers to have the right to receive 1.1 Common Shares in lieu of each Common Share that they were previously entitled to receive upon exercise of the warrants.

As of the date of this MD&A, the Corporation has 50,498,000 shares outstanding.



Funds Flow from Operating Activities

9 months 9 months 3 months 3 months
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
(in $000's)
----------------------------------------------------------------------------
Net income (loss) (1,224) (2,712) (673) (2,609)
Funds flow used in
operations (1) (1,113) (626) (808) (551)

Notes:
Funds flow from operating activities is before changes in non-cash working
capital. See "Non- GAAP Measures" discussion above.


The Corporation's net loss was $1,224 for the first nine months of 2007, compared to a net loss of $2,712 incurred in the first nine months of 2006. Caza's net loss is reflective of the Corporation's early stage of development. The Corporation has focused on increasing the number of employees over the last 18 months and developing a large group of prospective drilling opportunities. The Corporation's current level of production from its existing wells is small. To the extent the Corporation's general and administrative and other expenses are in excess of cash flow from operations, Caza will finance these expenses and future capital expenditures from its existing cash balances and from future equity offerings. The Corporation's cash flow from operations was reduced during the first nine months of the year primarily due to the increased general and administrative expenses.



Investing Activities
9 months 9 months 3 months 3 months
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
(in $000's)
----------------------------------------------------------------------------
Purchase of petroleum and
natural gas properties 8,700 1,937 3,622 1,348
Purchase of equipment 480 4 108 3


The Corporation's expenditures for petroleum and natural gas properties increased to $8,700 for the nine months ended September 30, 2007 ($1,937 for the first nine months of 2006). The Corporation participated in the drilling of five gross (1.1 net) to date in 2007. Our drilling program was financed with the proceeds from the initial placements made in 2006 and first half of 2007. Relatively small expenditures were made to acquire other equipment, which represents additional office equipment and leasehold improvements required in connection with the Corporation's increased staffing levels.



Financing Activities
9 months 9 months 3 months 3 months
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
(in $000's)
----------------------------------------------------------------------------
Distributions - (351) - (331)
Deferred finance costs 1,400 - 1,400 -
Proceeds from share issuances, net 455 - - -
Increase in notes payable - 280 - -
Principal payments on notes
payable - (397) - (397)


The Corporation did not make any distributions in the first nine months of 2007. The distributions made in 2006 represent distributions made by Falcon Bay prior to its amalgamation with Caza Petroleum.

During the first nine months of 2007 the Corporation completed a financing, issuing 970,000 Common Shares for net proceeds of $455. The shares were issued as part of the over-allotment option granted to the agents of the private placement completed during the second half of 2006. The Corporation also issued 1,103,200 Common Shares in March and 394,800 Common Shares in April pursuant to the Share Exchange Agreement.

New Accounting Standards

Effective January 1, 2007, the Corporation adopted the Canadian Institute of Chartered Accountants ("CICA") Section 1530, "Comprehensive Income", Section 3855, "Financial Instruments - Recognition and Measurement", Section 3861, "Financial Instruments - Disclosure and Presentation" and Section 3865, "Hedges". The Corporation has adopted these standards prospectively and the comparative interim consolidated financial statements have not been restated.

Upon adoption of Section 3855, all financial instruments are classified into one of the following five categories: held-for-trading, loans and receivables, held-to-maturity investments, available-for-sale financial assets or other financial liabilities. Subsequent measurement of the financial instruments is based on their initial classification. Held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income. Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized or impaired. All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the normal sale and normal purchase exemption. All changes in their fair value are recorded in net income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income until the underlying hedged transaction is recognized in net income. Any hedge ineffectiveness is immediately recognized in net income. The other categories of financial instruments are recognized at amortized cost using the effective interest rate method.

Upon adoption of these standards, the Corporation classified its cash and cash equivalents as held-for-trading, which are measured at fair value. Accounts receivable are classified as loans and receivables, which are amortized at cost. Accounts payable and notes payable are classified as other financial liabilities, which are measured at amortized cost.

For financial assets and financial liabilities that are not classified as held-for-trading, the transaction costs that are directly attributable to the acquisition or issue of a financial asset or financial liability are adjusted to the fair value initially recognized for that financial instrument. These costs are expensed using the effective interest rate method.

The adoption of Section 1530 has no material impact on the consolidated financial statements of the Corporation.

The Corporation currently does not utilize hedges or other derivative financial instruments in its operations, and as a result of the adoption of Section 3865 had no material impact on the consolidated financial statements of the Corporation.

The adoption of these new standards had no impact on the Corporation's opening retained earnings (deficit) as at January 1, 2007.

The Corporation has also adopted Section 3251, "Equity" and Section 1506, "Accounting Changes". Section 3251 replaces Section 3250, "Surplus" and describes standards for the presentation of equity and changes in equity for reporting periods as a result of the application of Section 1530, "Comprehensive Income". The only impact of Section 1506, "Accounting Changes", is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. This is the case with Section 3862, "Financial Instruments Disclosures" and Section 3863, "Financial Instruments Presentations" which are required to be adopted for fiscal years beginning on or after October 1, 2007. The Corporation will adopt these standards on January 1, 2008 and it is expected the only effect on the Corporation will be additional disclosures regarding the significance of financial instruments for the entity's financial position and performance; and the nature, extent and management of risks arriving from financial instruments to which the entity is exposed.

The Company has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Company:

- As of January 1, 2008, Caza will be required to adopt two new CICA standards, Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation," which will replace Section 3861 "Financial Instruments - Disclosure and Presentation." The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. The new financial instruments presentation and disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements.

- As of January 1, 2008, Caza will be required to adopt two new CICA standards, Section 1535 "Capital Disclosures," which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements. The new capital disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements.

- The Corporation will be required to adopt CICA Handbook Section 3031, Inventories. This new accounting standard is effective for interim and annual financial statements for fiscal years beginning on or after January 1, 2008. This new standard is not expected to have a material impact on the Corporation's consolidated financial statements.

- In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by the end of 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS.

Critical Accounting Policies and Estimates

The Corporation's financial statements are prepared in accordance with GAAP, which require management to make judgments, estimates and assumptions which may have a significant impact on the financial statements. A summary of the Corporation's significant accounting policies found in Note 2 to the Corporation's financial statements. The following is a discussion of those accounting policies and estimates that are considered critical in the determination of the Corporation's financial results.

Capital Assets - Full Cost Accounting

The Corporation follows the full cost method of accounting as described in Note 2 to the financial statements. Alternatively, the Corporation could follow the successful efforts method of accounting whereby all costs related to non-productive wells are expensed in the period in which they are incurred.

Under the full cost method of accounting, capitalized costs are subject to a country-by-country cost center impairment test. Under successful efforts method of accounting, the costs are aggregated on a property-by-property basis and the carrying value of each property is subject to an impairment test. These policies may result in a different carrying value for capital assets and net income. The Corporation has elected to follow the full cost method and it is the method most commonly followed.

Under full cost accounting, a limit is placed on the carrying value of the net capitalized costs in each cost center in order to test impairment. Impairment exists when the carrying value of developed properties of a cost center exceeds the estimated undiscounted future net cash flows associated with the cost center's proved reserves. Costs relating to undeveloped properties are subject to individual impairment assessments until it can be determined whether proved reserves exist. If impairment is determined to exist, the costs carried on the balance sheet in excess of the discounted future net cash flows associated with the cost center's proved plus probable reserves are charged to income.

Reserve estimates

Reserve estimates can have a significant impact on net income and the carrying value of capital assets. The process of estimating reserves requires significant judgment based on available geological, geophysical, engineering, and economic data, projected rates of production, estimated commodity price forecasts and the timing of future expenditures, all of which are subject to interpretation and uncertainty. Reserve estimates impact net income through depletion expense and the application of impairment tests. Revisions or changes in reserve estimates can have either a positive or a negative impact on net income and can impact the carrying amount of capital assets.

Potential lenders may also use reserve estimates to assess the allowable borrowing base under a secured credit facility. Changes to the reserve estimates can result in borrowing base increases or decrease, which could impact the Corporation's financial position.

Asset Retirement Obligations

The Corporation recognizes the estimated fair value of future retirement obligations associated with capital assets as a liability. The Corporation estimates the liability based on the estimated cost to abandon and reclaim its net ownership in tangible long-lived assets such as wells and the estimated timing of the costs to be incurred in future periods. Actual payments to settle the obligations may differ from estimated amounts.

Income taxes

The amounts recorded as future income tax assets and liabilities and the utilization of future tax assets subject to an expiry date are based on estimates of future cash flows and profitability. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements of changes of estimates in future periods could be significant.

Stock based Compensation

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. This model is used to value the stock options granted. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Internal Controls over Financial Reporting

Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP.

During the third quarter of 2007 there were no changes in the Corporation's internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Corporation's internal controls over financial reporting.

Contact Information

  • Caza Oil & Gas, Inc.
    John McGoldrick
    Executive Chairman
    +1(0) 281 363 4442
    Website: www.cazapetro.com
    or
    Noble & Company Limited
    Nick Naylor
    Nominated Adviser and Joint Broker
    +44 (0) 20 7763 2200
    or
    Haywood Securities (UK) Limited
    Daniel Brooks
    Joint Broker
    +44 (0) 20 7031 8000
    or
    Aquila Financial Ltd.
    Peter Reilly
    Financial Public Relations Advisers
    +44 (0) 20 7202 2601