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SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 Form 10-QSB
  þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from          to
 BAYOU CITY EXPLORATION, INC.
 (Exact Name of Small Business Issuer as Specified in Its Charter)
 Nevada
    
    61-1306702(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 10777 Westheimer Road, Suite 170, Houston, TX 77042  (Address of Principal Executive Offices)
 (832) 358-3900  (Issuers Telephone Number, Including Area Code)
 (Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
  þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS
  TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
 o þ




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##### 



PART IFINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)FINANCIAL STATEMENTS OF REGISTRANTINDEX
    
    NumberBalance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Statements of Operations for the three months and nine months ended September 30, 2006 and 2005
    
    
    4Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    5Notes to Financial Statements
    
    
    6-14Item 2. Managements Discussion and Analysis of Operations
    
    
    15-21Item 3. Controls and Procedures
    
    
    21PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22Signature
    
    
    23EX-31.1EX-31.2EX-32.1EX-32.2
  2




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\

BAYOU CITY EXPLORATION, INC.
 
 BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    1,014,991
    
    
    $
    1,307,747Accounts receivable:Managed limited partnerships
    
    
    10,040
    
    
    
    21,505Related parties
    
    
    
    
    
    
    218,961Trade and other
    
    
    645,667
    
    
    
    664,555Prepaid expenses and other current assets
    
    
    11,913
    
    
    
    76,225TOTAL CURRENT ASSETS
    
    
    1,682,611
    
    
    
    2,288,993PROPERTY AND EQUIPMENT, NET
    
    
    1,479,039
    
    
    
    1,727,483OTHER NONCURRENT ASSETS
    
    
    7,024
    
    
    
    7,024TOTAL ASSETS
    
    $
    3,168,674
    
    
    $
    4,023,500LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    762,769
    
    
    $
    433,762Accounts payable-related parties
    
    
    
    
    
    
    47,600Advances from joint interest owners
    
    
    328,218
    
    
    
    511,525Current portion of long term debt
    
    
    86,299
    
    
    
    65,896TOTAL CURRENT LIABILITIES
    
    
    1,177,286
    
    
    
    1,058,783ASSET RETIREMENT OBLIGATION
    
    
    80,842
    
    
    
    77,842LONG TERM DEBT
    
    
    86,437
    
    
    
    356,621TOTAL LIABILITIES
    
    
    1,344,565
    
    
    
    1,493,246COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:Preferred Stock, $0.001 par value; 5,000,000 shares authorized; Series E
23,300 shares issued and outstanding at September 30, 2006 and
December 31, 2005 (liquidation preference of $233,000
at September 30, 2006 and December 31, 2005)
    
    
    23
    
    
    
    23Common Stock, $0.005 par value; 150,000,000 shares authorized; 26,089,001
shares issued and outstanding at September 30, 2006 and 24,436,467
shares issued and outstanding at December 31, 2005
    
    
    130,445
    
    
    
    122,182Additional paid-in capital
    
    
    13,033,559
    
    
    
    11,318,377Accumulated deficit
    
    
    (11,339,918
    )
    
    
    (8,910,328
    )TOTAL STOCKHOLDERS EQUITY
    
    
    1,824,109
    
    
    
    2,530,254TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,168,674
    
    
    $
    4,023,500
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BAYOU CITY EXPLORATION, INC.
 
 STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005OPERATING REVENUES:Prospect fees from others
    
    $
    
    
    
    $
    
    
    
    $
    52,500
    
    
    $
    Prospect fees from related parties
    
    
    
    
    
    
    40,000
    
    
    
    10,000
    
    
    
    40,000Management Fees
    
    
    
    
    
    
    60,000
    
    
    
    40,000
    
    
    
    180,000Oil and Gas Sales
    
    
    38,839
    
    
    
    36,713
    
    
    
    171,085
    
    
    
    217,566TOTAL OPERATING REVENUES
    
    
    38,839
    
    
    
    136,713
    
    
    
    273,585
    
    
    
    437,566OPERATING COSTS AND EXPENSES:Lease operating costs
    
    
    22,229
    
    
    
    5,398
    
    
    
    79,362
    
    
    
    68,336Dry hole and abandonment costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,110Exploration costs
    
    
    99,529
    
    
    
    110,437
    
    
    
    276,991
    
    
    
    387,471Depreciation, depletion and amortization
    
    
    55,143
    
    
    
    56,796
    
    
    
    163,841
    
    
    
    197,557Accretion expense
    
    
    1,000
    
    
    
    
    
    
    
    3,000
    
    
    
    12,500Advertising and marketing costs
    
    
    9,388
    
    
    
    17,059
    
    
    
    234,068
    
    
    
    28,106General and administrative costs
    
    
    662,709
    
    
    
    406,608
    
    
    
    2,103,690
    
    
    
    949,196TOTAL OPERATING COSTS
    
    
    849,998
    
    
    
    596,298
    
    
    
    2,860,952
    
    
    
    1,648,276OPERATING LOSS
    
    
    (811,159
    )
    
    
    (459,585
    )
    
    
    (2,587,367
    )
    
    
    (1,210,710
    )OTHER INCOME (EXPENSE)Interest expense
    
    
    (4,816
    )
    
    
    (9,627
    )
    
    
    (20,633
    )
    
    
    (29,672
    )Gain on sale of assets
    
    
    236,372
    
    
    
    
    
    
    
    199,380
    
    
    
    TOTAL OTHER INCOME (EXPENSE)
    
    
    231,556
    
    
    
    (9,627
    )
    
    
    178,747
    
    
    
    (29,672
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (579,603
    )
    
    
    (469,212
    )
    
    
    (2,408,620
    )
    
    
    (1,240,382
    )INCOME TAX PROVISION
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    $
    (579,603
    )
    
    $
    (469,212
    )
    
    $
    (2,408,620
    )
    
    $
    (1,240,382
    )SERIES E PREFERRED STOCK CASH DIVIDENDS
    
    
    (6,990
    )
    
    
    (6,990
    )
    
    
    (20,970
    )
    
    
    (20,970
    )NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS
    
    $
    (586,593
    )
    
    $
    (476,202
    )
    
    $
    (2,429,590
    )
    
    $
    (1,261,352
    )NET LOSS PER COMMON SHARE
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.09
    )
    
    $
    (0.06
    )Weighted Average Common Shares Outstanding  Basic and
Diluted
    
    
    26,037,860,
    
    
    
    21,522,616
    
    
    
    25,646,560
    
    
    
    21,352,541
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BAYOU CITY EXPLORATION, INC.
 
 STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net Loss
    
    $
    (2,408,620
    )
    
    $
    (1,240,382
    )Adjustments to reconcile net loss to net cash flows from
operating activities:Depreciation, depletion and amortization
    
    
    163,841
    
    
    
    197,557Accretion expense
    
    
    3,000
    
    
    
    12,500Dry hole and abandonment costs
    
    
    
    
    
    
    5,110Gain on sale of assets
    
    
    (199,380
    )
    
    
    Stock-based compensation expense
    
    
    788,715
    
    
    
    Change in operating assets and liabilities:Accounts receivable-trade and other
    
    
    30,353
    
    
    
    (72,243
    )Accounts receivable-related parties
    
    
    218,961
    
    
    
    (14,351
    )Prepaid expenses and other assets
    
    
    64,312
    
    
    
    (20,807
    )Advances on joint interest billings
    
    
    (183,307
    )
    
    
    Accounts payable-related parties
    
    
    (47,600
    )
    
    
    Accounts payable and accrued expenses
    
    
    329,007
    
    
    
    248,896NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    (1,240,718
    )
    
    
    (883,720
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of furniture and computer equipment
    
    
    (34,231
    )
    
    
    (65,725
    )Purchase of oil and gas properties
    
    
    (634,515
    )
    
    
    (1,462,189
    )Proceeds from sale of assets
    
    
    156,853
    
    
    
    Reimbursement of oil and gas properties
    
    
    597,686
    
    
    
    NET CASH
PROVIDED BY (USED) IN INVESTING ACTIVITIES
    
    
    85,793
    
    
    
    (1,527,914
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long term debt
    
    
    
    
    
    
    42,095Payments on long term debt
    
    
    (51,591
    )
    
    
    (42,554
    )Proceeds
from 2005 Regulation S offering
    
    
    315,000
    
    
    
    Proceeds from 2005 US exempt offering
    
    
    110,000
    
    
    
    Proceeds from 2006 Regulation S offering
    
    
    131,250
    
    
    
    Stock Issuance Costs
    
    
    (31,000
    )
    
    
    Proceeds
from exercise of stock options
    
    
    5,000
    
    
    
    Proceeds from exercise of common stock warrants
    
    
    404,480
    
    
    
    400,000Long-Term Advance
    
    
    
    
    
    
    1,061,400Dividends paid
    
    
    (20,970
    )
    
    
    (20,970
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    862,169
    
    
    
    1,439,971NET INCREASE (DECREASE) IN CASH
    
    
    (292,756
    )
    
    
    (971,663
    )CASH AT BEGINNING OF PERIOD
    
    
    1,307,747
    
    
    
    1,465,675CASH AT END OF PERIOD
    
    $
    1,014,991
    
    
    $
    494,012SUPPLEMENTAL
DISCLOSURES OF NON-CASH FROM FINANCING ACTIVITIES:Related
party debt forgiveness on property disposition
    
    $
    198,188
    
    
    
    Cash paid
for interest
    
    $
    20,633
    
    
    $
    29,672
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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Interim Reporting
   General
     6




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
   Use of Estimates
  Recently Issued Accounting Standards
 Share-Based
Payment
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
 Accounting For Suspended Well Costs
 7




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
 Interaction of AICPA Statement of Position 78-9 and
EITF Issue No. 04-5
 Accounting Changes and Error Corrections
 Accounting for Conditional Asset Retirement
Obligations  an Interpretation of FASB 143
 Revenue Recognition
  Accounts Receivable
  Cash and Cash Equivalents
  Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits
  Advertising and Marketing
  Managed Limited Partnerships
  8




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
 Property and Equipment
  Computer Equipment and Software
    
    5 yearsFurniture and Fixtures
    
    10 years
  
    Accounting for Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
 Surrender or Abandonment of Developed Properties
  9




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
 Other Dispositions
  Impairment of Long-Lived Assets
 Disclosures
about Oil and Gas Producing Activities
 Income/(Loss) per Common Share
  Warrants
  Stock Options
 Share-Based Payment Accounting for Stock Issued to Employees
  10




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
  Series E Preferred Stock Dividends
  Income Taxes
 Accounting for Income Taxes
  2. AFFILIATED OIL AND GAS PARTNERSHIPS
  3. STOCK OPTIONS
   11




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
              12




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
     Number of
    
    Weighted AverageOptions
    
    Exercise PriceOptions at December 31, 2005
    
    
    5,458,750
    
    
    $
    0.99Options granted
    
    
    900,000
    
    
    $
    2.76Options exercised
    
    
    (360,000
    )
    
    $
    0.30Options forfeited
    
    
    (1,160,000
    )
    
    $
    2.70Options expired
    
    
    (170,000
    )
    
    $
    0.36Options at September 30, 2006
    
    
    4,668,750
    
    
    $
    0.98Options exercisable at September
30, 2006
    
    
    3,373,750
    
    
    $
    0.62
  September 30,
    
    
    September 30,2006
    
    
    2005Net Loss, as reported
    
    $
    (2,408,620
    )
    
    $
    (1,240,382
    )Add: Stock based compensation included in Net Loss
    
    
    788,715
    
    
    
    Deduct: Stock based compensation determined under fair
value
    
    
    (788,715
    )
    
    
    (589,900
    )Pro Forma Net Loss
    
    $
    ( 2,408,620
    )
    
    $
    (1,830,282
    )Net Loss Attributable to Common Stockholders, as reported
    
    $
    (2,429,590
    )
    
    $
    (1,261,352
    )Add: Stock based compensation included in Net Loss
    
    
    788,715
    
    
    
    Deduct: Stock based compensation determined under fair
value
    
    
    (788,715
    )
    
    
    (589,900
    )Pro Forma Net Loss
    
    $
    (2,429,590
    )
    
    $
    (1,851,252
    )Basic and Diluted Income (Loss) per Common Share, as
reported
    
    $
    (0.09
    )
    
    $
    (0.06
    )Basic and Diluted Income (Loss) per Common Share, Pro
Forma
    
    $
    (0.09
    )
    
    $
    (0.09
    )
 13




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BAYOU
CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
  September 30, 2006Risk free interest rate
    
    3.98% to 4.35%Expected option life
    
    5 to 7.5 yearsExpected dividend yield
    
    0%Expected volatility range
    
    0.77 to 1.18Expected volatility weighted average
    
    1.28
 4. RELATED PARTY TRANSACTIONS
 Common Stock Transactions
  Receivables/Payables
  Note Payable
   Joint Participation Agreements
  5. CONTINGENCIES
   14




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MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS
 General
       
    
    Focus in proven geologic trends throughout the onshore Gulf Coast Region of Texas and Louisiana.
    
    Control our geological ideas in both data and land positions that are starting to comprise our prospect inventory.
    
    Continuous expansion of our prospect inventory through acquisition of 3-D seismic
data and land as well as constant re-processing and re-interpretation through
fundamental geologic studies and sophisticated geophysical interpretive techniques.
 15




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MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS
 
    
    Structure our drilling program to enable management to sell down enough interest in
the well to mitigate risk and improve economics.
    
    Strive to maintain the highest possible ownership of our highest potential drilling
prospects.
   Share-Based
Payment Accounting for Stock Issued to Employees
   Key Properties
  16




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MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS
 Developed Properties
          Undeveloped Properties
   17




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MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS
       Results of Operations
 Three Months Ended September 30, 2006 and 2005
  18




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MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS
 Operating Revenues
  Direct Operating Costs
  Exploration Costs
  Stock-Based Compensation Expense
    Other Operating Expenses
  19




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Other
Income and Expenses
  Income Tax Provision
  Nine Months Ended September 30, 2006 and 2005
  Operating Revenues
  Direct Operating Costs
  Exploration Costs
  Stock-Based Compensation Expense
  Other Operating Expenses
  20




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Other
Income and Expenses
  Income Tax Provision
  Capital Resources and Financial Condition
    
 Item 3. Controls and Procedures
  21




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PART II
 
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM
3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
   
 ITEM 6. EXHIBITS
 Exhibit 31.1
    
    Chief Executive Officers 302 CertificationExhibit 31.2
    
    Chief Financial Officers 302 CertificationExhibit 32.1
    
    Chief Executive Officers 906 CertificationExhibit 32.2
    
    Chief Financial Officers 906 Certification
 22




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SIGNATURES
  BAYOU CITY EXPLORATION, INC.Date: November 14, 2006
    By

/s/ Morris T. HewittPresident and Chief Executive Officer 23