U. S. Securities and Exchange Commission Washington, D. C. 20549  FORM 10-QSB  [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended June 30, 2007  [   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____  Commission File No. 0-52485 CASPIAN INTERNATIONAL OIL CORPORATION(Name of Small Business Issuer in its Charter)Delaware20-5588710(State of Other Jurisdiction of
incorporation or organization)(I.R.S.  Employer
Identification No.)  1800 West Loop South, Suite 850, Houston, TX77027(Address of principal executive offices)(Zip Code)(713) 621-9222(Registrants telephone number including area code)   Indicate  by check mark  whether the  Registrant  (1) has filed all reports required to be filed by Sections 13 or 15(d) of the  Securities Exchange Act of 1934  during  the  preceding  12 months  (or for such shorter  period  that the Registrant was required to file such reports),  and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]        No [  ]  Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]      No [X]  APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: August 12, 2007 Common Stock: 63,267,028 shares  Transitional Small Business Disclosure Format (check one):    Yes   [  ]    No [X]    CASPIAN INTERNATIONAL OIL CORPORATION FORM 10-QSB TABLE OF CONTENTS PART I  FINANCIAL INFORMATION  Item 1.  Unaudited Consolidated Financial Statements  Consolidated Balance Sheet as of June 30, 2007 1  Consolidated Statement of Income for the Three and Six Month Periods Ended June 30, 2007 and 2006 3  Consolidated Statements of Cash Flows for Three and Six Month Periods Ended June 30, 2007 and 2006 4  Notes to Consolidated Financial Statements 6  Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations 31  Item 3.  Controls and Procedures 40  PART II  OTHER INFORMATION   Item 1.  Legal Proceedings 41  Item 2.  Unregistered Sales of Equity Securities 41  Item 3. Default Upon Senior Securities 41  Item 4.  Submission of Matters to a Vote of Security Holders 41  Item 5.  Other Information 41  Item 6.  Exhibits 41  Signatures 41


Caspian International Oil CorporationUnaudited Consolidated Balance Sheet  As of June
30, 2007NoteUSDASSETSCurrent assetsCash5114,151Accounts receivable, net63,878,556Inventories71,338,975Deferred income tax assets18664,951Total current assets5,996,633Non-current assetsInvestments, equity method867,884Oil and gas exploration assets, full cost method94,480,465Property, plant and equipment1014,951,436Intangible assets11197,645Restricted cash417Total non-current assets19,697,847TOTAL ASSETS25,694,480                    The accompanying notes are an integral part of these consolidated financial statements 1   Caspian International Oil CorporationUnaudited Consolidated Balance Sheet  As of June
30, 2007NoteUSDLIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable and other liabilities127,336,876Short-term loans132,961,618Taxes payable141,162,865Dividends payable430,300Total current liabilities11,891,659Non-current liabilitiesLong-term loans136,083,073Deferred income tax liabilities181,477,255Obligation for historical reimbursement153,037,863Asset retirement obligations16183,166Total non-current liabilities10,781,357Total liabilities22,673,016Minority interest259,098Stockholders equity17Common stock, $ 0.001 par value  authorized 200,000,000 shares; issued and outstanding 63,267,028 shares63,267Additional paid-in capital3,684,148Accumulated other comprehensive income354,887Accumulated deficit(1,339,936)Total stockholders equity2,762,366TOTAL LIABILITIES AND STOCKHOLDERS EQUITY25,694,480   The accompanying notes are an integral part of these consolidated financial statements 2     Caspian International Oil CorporationUnaudited Consolidated Statements of Income  For the three months ended
June
30, 2007For the three months ended June
30, 2006For the six
months ended June
30, 2007For the six months ended June
30, 2006NoteUSDUSDUSDUSDRevenuesSales2,852,5666,093,0965,693,53511,246,9032,852,5666,093,0965,693,53511,246,903ExpensesProduction and operating expenses(2,388,158)(4,406,760)(6,524,891)(7,281,709)General and administrative expenses(1,206,585)(1,052,728)(2,482,011)(1,480,102)Accretion expenses(58,816)(53,729)(116,564)(106,191)Income/(loss) from operating activities(800,993)579,879(3,429,931)2,378,901Share of profits of associates(10,813)-18,699-Interest expense(256,690)(225,951)(415,446)(462,437)Foreign currency exchange gain, net64,294965,681305,110965,433Other non-operating income, net(3,533)(64,388)90,150(64,388)Income/(loss) before income taxes and minority interest(1,007,735)1,255,221(3,431,418)2,817,509Income tax benefit/(expense)1842,363(418,058)548,781(903,316)Minority interest5,091(50,204)66,508(104,056)Net income/(loss)(960,281)786,959(2,816,129)1,810,137  Basic and diluted earnings per share20Basic and diluted(0.02)0.02(0.04)0.03           The accompanying notes are an integral part of these consolidated financial statements 3   CaspianInternationalOil CorporationUnaudited Consolidated Statements of Cash Flows  For six months ended June 30, 2007
USDFor six months ended June 30, 2006
USDOperating activities:Net income/(loss)(2,816,129)1,810,137Adjustments for non-cash items:Depreciation, depletion and amortization1,320,9731,556,601Stock-based compensation364,290-Investment income(18,699)-Accretion expenses116,564106,191Minority interest66,508104,056Impairment loss on fixed assets6,022-Loss on acquisition of subsidiary-64,388Foreign exchange difference on long-term obligations(179,580)(732,175)Deferred income taxes(548,781)2,365Changes in assets and liabilitiesAccounts receivable(240,718)(2,930,009)Inventories90,638310,884Accounts and taxes payable and other liabilities412,717(421,193)Net cash used in operating activities(1,426,195)(128,755)Investing activities:Acquisition of property, plant and equipment(1,128,691)(492,706)Proceeds from disposal of property, plant and equipment11,724-Acquisition of intangible assets1,388-Acquisition of investments-(47,218)Increase in accounts receivable (financial aid)-(589,533)Acquisition of oil and gas exploration assets(1,355,686)-Net cash used in investing activities(2,471,265)(1,129,457)Financing activities:Increase in accounts payable (financial aid)865,699137,289Proceeds from loans4,740,845621,188Proceeds from common stock200-Decrease of accounts payable (financial aid)(510,538)-Repayment of loans(1,127,534)(1,931,648)Payment of dividends(44,143)-Net cash provided by/(used in) financing activities3,924,529(1,173,171)  The accompanying notes are an integral part of these consolidated financial statements 4   Effect of exchange rates on cash(151,818)(67,721)Net increase (decrease) in cash and cash equivalents(124,749)(2,499,104)Cash and cash equivalents at beginning of the period238,9002,625,775Cash at end of the period (Note 5)114,151126,671Supplemental informationInterest paid415,446462,438Income tax paid-275,990Fixed Assets purchased as accounts payable2,662,958-  The accompanying notes are an integral part of these consolidated financial statements 5


Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  1 Background (a) Organization and environment CRSI Group, Inc. was organized under the laws of the State of Florida on April 9, 1987 as HWS November Corporation.  On May 19, 1989, the Company filed an amendment to its Articles of Incorporation changing its name to Abcor Products, Inc.  On August 22, 2005, the Company filed an amendment to its Articles of Incorporation changing its name to CRSI Group, Inc. (CRSI Group, Inc.) Care Recruitment Solutions International, Inc. (CRSI) was organized under the laws of the State of Florida on October 18, 2004. CRSI was a development stage enterprise that primarily provided international recruiting, placement and staffing of nurses to hospitals and other health care agencies. World Nursing Corps, Inc. (WNC) is a development stage company organized under the laws of the State of Florida on June 22, 2005 as a wholly owned subsidiary of CRSI.  WNC was established to function as a resource and support organization for nurses placed by CRSI. WNC had no operating activities, assets or liabilities as of June 30, 2007. On June 30, 2005, CRSI Group consummated an agreement with CRSI pursuant to which CRSI exchanged all of its then issued and outstanding shares of common stock for 17,995,912 (approximately 90%) of the common stock shares of CRSI Group. On August 10, 2006 CRSI Group acquired all of the beneficial interest in the registered capital stock of Caspian International Oil Corporation (CIOC) B.V., a corporation organized under the laws of The Kingdom of the Netherlands (CIOC).  CIOC is a holding company that owns 95% of the equity in each of two limited liability partnerships organized under the laws of the Republic of Kazakhstan:  SIF Dank, LLP (Dank) and Kor-Tazh, LLP (Kor-Tazh).  Dank is engaged in the business of providing oil field services such as 2D and 3D seismic acquisitions, data processing and interpretation, reservoir modelling and topography to the oil exploration industry in Kazakhstan.  Kor-Tazh operates an oil field in western Kazakhstan. CIOC BV was treated s acquirer for accounting purposes. A new Board of Directors was elected that is comprised primarily of the former directors of CIOC BV. The Companys financial statements presented as continuation of CIOC BV, and not those of CRSI, and the capital structure of the Company is now different from that appearing in the historical financial statements of CRSI due to the effect of the recapitalization. On October 6, 2006 the Articles of Merger were filed to Division of Corporations of Florida Department of State, according to which CRSI Group, Inc was merged with and into Caspian International Oil Corporation (Delaware), the surviving company. Each share of common stock of CRSI Group, Inc outstanding prior to the merger was changed and converted into one fully paid share of common stock of Caspian International Oil Corporation (Delaware). Hereinafter, Caspian International Oil Corporation and its wholly owned subsidiaries may be referred to individually or in the aggregate as the "Company". (b) Kazakhstan business environment Company activity is subject to economical, political and social risks inherent to doing business in Kazakhstan. Those risks include the consequences of government policy, economic conditions, legislative changes in tax and laws, currency exchange rates fluctuations, uncovered execution of the rights under the contracts.   6  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements     2 Basis of preparation The Companys operations are subject to country risk being the economic, political, and social risks inherent in doing business in Kazakhstan. These risks include matters arising out of the policies of the government, economic conditions, imposition of or changes to taxes and regulations, foreign exchange fluctuations and the enforceability of contract rights. (a) Statement of compliance These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The accompanying unaudited financial data as of and for the six months ended June 30, 2007 and 2006 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the Footnotes thereto included in the Companys annual Report on Form 10-KSB for the fiscal year ended December 31, 2006.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary  to present fairly the financial position, results of operations, and cash flows as of and for the six months ended June 30, 2007 have been made. The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the operating results for the full year. (b) Principles of consolidation These consolidated financial statements include the financial position and results of the Company, controlled subsidiaries of which the Company directly or indirectly owns more than 50% of the voting interest, unless minority interest shareholders have substantive participating rights. Investments in companies of which the Company directly or indirectly owns more than 50% of the voting interest but where minority interest shareholders have substantive participating rights, and investments in companies of which the Company directly or indirectly owns between 20% and 50% of the voting interest and over which it exercises significant influence but not control, are accounted for using the equity method of accounting. Equity investments and investments in other companies are included in Investments in the consolidated balance sheet. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Accounting records Two Kazakhstan subsidiaries of the Company, Dank and Kor-Tazh maintain their accounting records in accordance with the legislative requirements of the Republic of Kazakhstan. CIOC BV maintains its accounting records in accordance with the legislative requirements of the Kingdom of the Netherlands. The accompanying consolidated financial statements have been prepared from those accounting records and adjusted as necessary to comply, in all material respects, with the requirements of US GAAP. (d) Functional and reporting currency The accounting records of the entities operating in Kazakhstan (Dank and Kor-Tazh), are maintained in Kazakhstan Tenge (KZT). The accounting records of CIOC B.V. and the Company are maintained in EUR and USD, respectively.  7  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   2 Basis of preparation (continued) The Company has determined that the functional currency of Dank and Kor-Tazh is KZT and functional currency of CIOC BV is EUR in accordance with US Statement of Financial Accounting Standards ("SFAS") No. 52Foreign Currency Translation, based on the economic substance of the underlying events and circumstances relevant to the entities within the Company. For the purposes of presenting consolidated financial statements prepared in conformity with US GAAP, the USD is considered to be the reporting currency of the Company. For presentation purposes, the consolidated financial statements are translated into USD using the current-rate method. Accordingly, assets and liabilities are translated at rates of exchange in effect at the consolidated balance sheet date. Capital accounts are translated at their historical exchange rates when the capital stock was issued. Retained earnings are translated at the translated amount at the end of the prior period, plus the translated amount of the net income for the period, less the translated amount of any dividends declared during the current period. Revenues and expenses are translated at average rates of exchange in effect during six months ended June 30, 2007. Differences arising from the translation are included in accumulated other comprehensive income as a separate component of stockholders equity. Exchange differences are recognised in profit or loss in the period in which they arise. The Company has not entered into any material transactions that are denominated in hyper-inflationary currencies. For translation purposes the Company has used the closing exchange rates of USD 1 to KZT 122.31. (e) Convertibility of the Kazakhstan tenge KZT is not a convertible currency outside the Republic of Kazakhstan. Accordingly, any conversion of KZT amounts to USD should not be construed as a representation that KZT amounts have been, could be, or will be in the future, convertible into USD at the exchange rate shown, or at any other exchange rate. (f)       Going concern The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business and the continuation of the Company as a going concern.   We had a substantial net loss of $2,816,129 for the six month period ended June 30, 2007.  As of June 30, 2007, the Company had $5,895,026 of negative working capital and $114,151 of cash with which to satisfy any future cash requirements. These factors raise substantial doubt about our ability to continue as a going concern.  During the six months ended June 30, 2007 the Companys profitability was unfavorably impacted by certain situations which are not expected to continue in future periods.  These situations have prevented Dank, the Companys revenue generating subsidiary, from fully utilizing its work crews. Included in these situations were particularly harsh winter conditions which delayed seismic crews from getting into the field. Also, one of the Companys seismic crews was put on standby status well into the second quarter of 2007 while our client attempted to resolve an issue with the Uzbek government.  Barring any other unforeseen events that prevent Dank from fulfilling its contracts on schedule, the Company expects to return to profitability for the remainder of 2007. All of Danks seismic crews are currently engaged on contracts. In addition, the company has added a fourth crew and it should begin work in August. Finally, Dank  8  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  recently signed three new contracts totaling $26.8 million for work later in 2007 and in 2008. Management believes these factors will contribute towards achieving profitability. Therefore , the consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 3 Significant accounting policies The following significant accounting policies have been applied in the preparation of the consolidated financial statements. These accounting policies have been consistently applied. (a) Use of estimates The preparation of the consolidated financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying value of oil and gas exploration assets and property, plant and equipment; valuation allowances for receivables, inventories and deferred income tax assets; asset retirement obligations and assets and obligations related to employee benefits.  Actual results could differ from those estimates. (b) Cash Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. (c) Receivables Trade accounts receivable are recorded at their transaction amounts less provisions for doubtful debts. Provisions for doubtful debts are recorded to extent that there is likelihood that any of the amounts due will not be obtained. (d) Inventories Inventories, consisting primarily of spare parts and fuel are stated at the lower cost or market value. Cost is determined using the average cost method. (e) Oil and gas exploration assets The Company follows the full cost method of accounting for its costs of acquisition, exploration and development of oil and natural gas properties. Under this method, all productive and non-productive costs incurred in connection with the acquisition of, exploration for and development of oil and natural gas reserves for each cost center are capitalized. Capitalized costs include acquisition costs, geological and geophysical work, delay rentals and the costs of drilling, completing and equipping oil and natural gas wells. Capitalized costs of proved oil and natural gas properties are depleted on a unit of production method using estimated proved oil and natural gas reserves. The amortizable base used to calculate unit of production depletion includes estimated future development costs and dismantlement, restoration, and abandonment costs, net of estimated salvage values. Sales of oil and natural gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves.  9  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   3 Significant accounting policies (continued) Internal costs, including salaries, benefits and other salary related costs, which can be directly identified with acquisition, exploration or development activities, are capitalized while any costs related to production, general corporate overhead, or similar activities are charged to expense. Geological and geophysical costs not directly associated with a specific unevaluated property are included in the amortization base as incurred. Capitalized internal costs directly identified with the Companys acquisition, exploration and development activities amounted to approximately $ 1,363,796 and $ 38,203during the six months ended June 30, 2007 and 2006, respectively. Under full cost accounting rules, the net capitalized costs of evaluated oil and natural gas properties shall not exceed an amount equal to the present value of future net cash flows from estimated production of proved oil and natural gas reserves, based on current economic and operating conditions, including the use of oil and natural gas prices as of the end of each quarter. Given the volatility of oil and natural gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and natural gas reserves could change. If oil and natural gas prices decline, even if only for a short period of time, it is possible that impairments of oil and natural gas properties could occur. In addition, it is reasonably possible that impairments could occur if costs are incurred in excess of any increases in the cost ceiling, revisions to proved oil and natural gas reserves occur, or if properties are sold for proceeds less than the discounted present value of the related proved oil and natural gas reserves. The capitalized oil and natural gas property costs, less accumulated depreciation, depletion and amortization and related deferred income taxes, if any, are generally limited to an amount (the ceiling limitation) equal to the sum of (a) the present value of estimated future net revenues computed by applying current prices in effect as of the balance sheet date to estimated future production of proved oil and natural gas reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing the reserves using a discount factor of 10% and assuming continuation of existing economic conditions; and (b) the cost of investments in unevaluated properties excluded from the costs being amortized.  In determining whether impairment of unevaluated properties has occurred, management evaluates, among other factors, current oil and natural gas industry conditions, capital availability, holding periods of the properties, and available geological and geophysical data. Any impairment assessed is added to the costs being amortized. Costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that a well is dry. No ceiling write down was recorded in any of the periods presented. The Companys oil and natural gas properties primarily include the value of the license and other capitalized costs under this method of accounting. (f) Property, plant and equipment Property, plant, and equipment are stated at cost. Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful life of buildings is 12.5 years, while machinery and equipment is 5 to 12.5 years.  10  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  3 Significant accounting policies (continued) (g) Intangible assets Intangible assets, which are acquired by the Company and which have finite useful lives, are stated at cost less accumulated amortisation and impairment losses. Intangible assets are amortised on a straight-line basis over their estimated useful lives from the date the asset is available for use. (h) Impairment In accordance with SFAS No 144 Accounting for the Impairment or Disposal of Longlived Assets, long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortisation, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognised by the amount by which the carrying amount of the asset exceeds the fair value of the asset. (i) Restricted cash Cash funds for which restrictions on immediate use exist are accounted for within other non-current assets. (j) Trade and other payables Trade and other payables are stated at cost. (k) Asset retirement obligations The Company follows SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 requires that the fair value of a liability for an assets retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement cost is capitalized as part of the carrying value of the long-lived asset. Subsequently, the asset retirement cost is amortized to expense over the useful life of the asset. The asset retirement obligation recorded relates to the expected plugging and abandonment costs of oil and natural gas wells and the removal of pipeline, compressor and related production facilities. (l) Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognised for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in the consolidated statement of income in the reporting period that includes the enactment date and is not accounted for as an adjustment of the annual effective tax rate. (m) Revenue recognition Revenue for oil filed services companies is recognized when we determine that following criteria are met: (i) persuasive evidence an arrangement exists; (ii) services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectibility is reasonable assured. All advance client payments are classified as   11  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  3 Significant accounting policies (continued) unearned revenues until services are provided. The Company uses the sales method of accounting for natural gas and crude oil revenues. Under this method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers. The volumes sold may differ from the volumes to which the Company is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under produced owner to recoup its entitled share through production. There are no significant balancing arrangements or obligations related to the Companys operations. The oil company is at the exploration stage at the moment and does not generate any revenue. Nurse-staffing business will not continue any more. (n) Rental income Rental income from rent of equipment is recognised on a straight-line basis over the term of the relevant lease. (o) Minority interest Minority interest in the consolidated balance sheet reflects minority owners percentage share of capital in the subsidiaries of CIOC. The minority interest is calculated based on the stockholders equity capital of each subsidiary as determined under US GAAP. (p) Earnings per share Basic and diluted earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the reporting period. (q) Segment reporting SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information requires that a business enterprise report financial and descriptive information about its reportable operating segments. The Companys business activities are conducted predominantly through three major business segments: oil field services, oil field exploration and other. Oil field services are presented by 2D and 3D seismic acquisitions, data processing and interpretation, reservoir modelling and topography to the oil exploration industry in Kazakhstan. Oil field exploration is presented by operating an oil field in western Kazakhstan. (r) Contingencies Certain conditions may exist as of the balance sheet date, which may result in losses to the Company but impact of which will only be resolved when one or more future events occur or fail to occur. If the Companys assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of liability can be estimated, then the estimated liability is accrued and charged to the consolidated statement of income. If the assessment indicates that a potentially material loss is not probable, but is reasonably possible, or is possible, but can not be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, is disclosed in the notes to the consolidated financial statements. (s) Recent accounting pronouncements In June 2006, the FASB issued FASB Interpretations No.48 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109(FIN 48). This interpretation clarifies the accounting for uncertainty in income taxes recognised in an enterprises financial statements in accordance with FASB Statement No. 109 Accounting for Income Taxes.The Company adopted the provisions of FIN 48 in the first quarter 2007. There  12  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  3 Significant accounting policies (continued) has been no changes in second quarter and there is no significant impact on its Consolidated Financial Statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. The Company is required to adopt SFAS No. 157 effective at the beginning of fiscal year 2008. The Company is currently evaluating the impact that SFAS.  No. 157 will have on its consolidated financial statements.  In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.  In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). FSP FIN 39-1 allows entities that are party to a master netting arrangement to offset the receivable or payable recognized upon payment or receipt of cash collateral against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with FASB Interpretation No. 39. The guidance in FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. Entities are required to recognize the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. There is no impact on financial statements as of June 30, 2007.  (t) Stock-Based Compensation  On January 1, 2006 the Company adopted SFAS 123r which requires the measurement and recognition of compensation expenses for all share based payment awards based on estimated fair values.  In December 2006, the Company issued to four employees a total of 500,000 shares of common stock and options for 1,875,000 shares of common stock. In April, 2007 an additional 60,000 shares of common stock and additional options for 200,000 shares of common stock were issued. The shares and options were issued in compensation for the execution of employment agreements. The shares vest after one year of service while the stock options vest over three years of service. The fair value of the shares of common stock and the stock options is being amortized on a straight line basis over the respective vesting period as compensation cost. For the three and six months ended June 30, 2007 the Company recorded in General and Administrative expense  $48,501and $230,207, respectively, as compensation cost related to the common stock and stock options.  The fair value of the employee stock options was determined using the Black-Scholes method based on the following weighted average assumptions:  13  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   3 Significant accounting policies (continued)  Expected Dividend Yield              0.0% Risk Free Interest Rate                  4.8% Expected life (years)                      5.1 Volatility                                       110%  The weighted average fair value of the 2,075,000 employee stock options was $0.38 per share. As of June 30, 2007 the remaining deferred compensation cost for the employee stock options was $653,693  The fair value of the shares of common stock was based on the market value of the stock on the dates of execution of the employment agreements. The weighted average value  of the 560,000 shares was $0.50 per share. As of June 30, 2007 the amount of deferred compensation cost for the shares was $159,275.  On July 30,2007 the Companys Board of Directors terminated J.E. Knight from his position as Caspian Internationals Chief Executive Officer. Mr. Knight was one of the employees of the Company who received shares of common stock and stock options for the execution of an employment agreement in December, 2006. No common shares or stock options issued to Mr. Knight had vested as of July 30, 2007.  Therefore, the total amount of deferred compensation for the employee stock options and the shares will decrease by $565,388.  (See Footnote 22 Post Balance Sheet Events for the details of the common shares and stock options)  In February, 2007 the Company issued 200,000 shares of its common  stock to a third party in exchange for its undertaking to provide the Company with corporate consulting services principally related to investor relations. The market value of the stock was $0.51 per share and resulted in the Company recording $102,000 of General and Administrative expense.  In May, 2007 the company issued 275,000 shares of its common stock to an outside Director of the Company in compensation for services regarding marketing and communication. Such services are outside the  Directors responsibilities as a member of the Companys Board of Directors. The market value of the stock was $96,250 and is being amortized to General and Administrative expense over the six month term of the agreement . The market value will be  reassessed during the third quarter with the final value to be determined when the agreement expires in October ,2007.  4 Acquisition of subsidiaries On August 10, 2006 the Company acquired all of the beneficial interest in the registered capital stock of CIOC B.V., a company organized under Dutch law in 1994. On May 10, 2006 CIOC B.V. acquired 95% of the equity in each of three limited liability partnerships organized under the laws of the Republic of Kazakhstan:  Dank and Kor-Tazh. Dank, in turn, owns 100% of the capital stock of PGD Services, LLP. CIOC B.V. acquired the companies with funds and equity interests contributed to CIOC B.V. by Nurlan Janseitov and Timur Bergaliyev. This business combination is accounted as a reverse acquisition. CIOC B.V. is considered the nominal acquiree and accounting acquirer and the Company is considered the nominal acquirer and accounting acquiree for financial reporting purposes.  Accordingly, the consolidated balance sheet contains the net assets of the accounting acquirer and acquiree at historical cost and the statement of income includes the operations of the acquirer for the periods presented and the operations of the acquiree from the date of the transaction.  14  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   5 Cash As of June 30, 2007USDCash  held in bank - KZT92,165Cash held in bank - other currencies17,778Petty cash4,208114,151
 6 Accounts receivable, net As of June 30, 2007USDTrade receivables2,544,882Financial aid to related parties473,214Advances paid620,514Taxes prepaid20,699Receivables from employees126,423Loan receivable from employee91,437Other receivables158,2054,035,374Less allowance for doubtful accounts(156,818)3,878,556
 The activity in the allowance for doubtful accounts is as follows: For six
months ended June 30,
2007For six
months ended
June 30,
2006USDUSDAllowance for doubtful accounts at the beginning of the period150,529113,672Foreign currency translation adjustment6,28914,442Allowance for doubtful accounts at the end of the period156,818128,114
       15  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  7 Inventories As of June 30,
2007USDSpare parts1,256,067Fuel77,350Other materials5,5581,338,975
  8 Investments Investments as of June 30, 2007 amounting to USD 67,884 represent shares of PGD Services, LLP (PGDS). In accordance with the agreement, dated April 5, 2006, Dank acquired 100% of PGDSs shares from Janseitov Nurlan Sattarovich (85%), Janseitova Irina Petrovna (5%), Safronov Gennadiy Nikolayevich (5%) and Sapozhnikov Anatoliy Ivanovich (5%). In accordance with the agreement signed between Dank and Paradigm Geophysical B.V. on providing processing and analysis of seismic data services in Kazakhstan, Paradigm Geophysical B.V. has the power to govern the financial and operating policies of the PGDS. Management of the Company considers that the Company does not have control but has significant influence over PGDS. Therefore PGDS is not consolidated in the Companys consolidated financial statements. Investments in PGD are accounted for using the equity method. Income of PGDS for the six months ended June 30, 2007 in the amount of USD 18,699 was recognised in the consolidated income statement for the six months ended June 30, 2007 under the equity method.  9 Oil and gas exploration assets As of June 30, 2007USDOil and gas exploration assetsEvaluated1,447,190Unevaluated3,033,275Less accumulated depletion4,480,465
   16  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   10 Property, plant and equipment As of June 30,
2007USDMachinery and equipment25,516,634Vehicles1,646,681Land and buildings627Other property, plant and equipment200,842CIP321,52527,686,309Less accumulated depreciation(12,734,873)14,951,436
 Total depreciation for six months ended June 30, 2007 was USD 1,276,393, of which USD 1,242,518 (97.35 %) was recorded in production expenses and USD 33,874 (2.65 %) was recorded in general and administrative expenses.  11 Intangible assets As of June 30, 2007USDProgram software628,282License13,695641,977Less accumulated amortization(444,332)197,645
  12 Accounts payable and other liabilities As of June 30, 2007USDTrade accounts payable5,109,964Payables to employees715,322Advances received218,187Financial aid from related parties599,910Payable to related parties70,428Payables to pension fund stipulated by the law of the Republic of Kazakhstan115,256
  17  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   Interest payable92,555Vacation provision81,105Other payables334,1497,336,876
  13 Loans As of June 30, 2007USDBank TuranAlem:KZT  fixed from 14% to 16%4,773,527USD  fixed at Libor + 5.65%4,080,4188,853,945ShareholderUSD140,746140,746ShareholderUSD - fixed at 6.00%50,00050,0009,044,691Short-term loans2,961,620Long-term loans6,083,0719,044,691  On May 29, 2005 Dank received a loan from BankTuranAlem in the amount of USD 5,042,943 as per the agreement No. 2000/05/301/59 for 5 years at LIBOR +1.65% + 4% per annum. Payments under the agreement are made on semi-annual basis. The purpose of the loan is to finance the acquisition of fixed assets. On September 14, 2006 Dank received a loan from BankTuranAlem amounting to KZT 80 million, under the credit line agreement No. 2000/06/100/1852 for one year at 16 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 163,519. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. As of October 12, 2006, the Company received a loan of USD 50,000 at 6% interest rate from principal shareholder.  The loan is due within one year. The loan is unsecured. On February 6, 2007 Dank received a loan from BankTuranAlem amounting to KZT 60 million, under the credit line agreement No. 2000/07/100/242 for one year at 14 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 367,918. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. On March 28, 2007 Dank received a loan from BankTuranAlem amounting to KZT 80 million, under the credit line agreement No. 2000/07/100/670 for one year at 14 % annual interest. As of June 30, 2007 the amount of the  18  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  loan was equal to USD 654,076. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. On March 29, 2007 Dank received a loan from BankTuranAlem amounting to KZT 23 million, under the credit line agreement No. 2000/07/100/682 for one year at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 188,047. Payments under the agreement are made quarterly. The purpose of the loan is to finance the acquisition of fixed assets. As of March 28, 2007 the Company received irrevocable Letter of Credit for the purpose of purchase of equipment in the amount of USD 5,314,500. According to amendment # 1 to the additional agreement of General Credit Line agreement # 1632 as of  March 30, 2001, the credit line for Dank was increased to $ 17,900,000. On April 6, 2007 Dank received a loan from BankTuranAlem amounting to KZT 40 million, under the credit line agreement No. 2000/07/100/755 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 327,038. Payments under the agreement are made quarterly. The purpose of the loan is to finance the acquisition of fixed assets. On April 13, 2007 Dank received a loan from BankTuranAlem amounting to KZT 30 million, under the credit line agreement No. 2000/07/100/810 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 245,278. Payments under the agreement are made quarterly. The purpose of the loan is to finance the acquisition of fixed assets. On April 24, 2007 Dank received a loan from BankTuranAlem amounting to KZT 30 million, under the credit line agreement No. 2000/07/100/876 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 245,278. Payments under the agreement are made quarterly. The purpose of the loan is to finance the acquisition of fixed assets. On April 24, 2007 Dank received a loan from BankTuranAlem amounting to KZT 15 million, under the credit line agreement No. 2000/07/100/885 for one year at 14 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 122,639. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. On May 25, 2007 Dank received a loan from BankTuranAlem amounting to KZT 50 million, under the credit line agreement No. 2000/07/100/1073 for one year at 16 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 408,797. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. On June 12, 2007 Dank received a loan from BankTuranAlem amounting to KZT 25 million, under the credit line agreement No. 2000/07/100/1257 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 204,399. Payments under the agreement are made quarterly. The purpose of the loan is to finance the acquisition of fixed assets. As of March 31, 2007 Kor-Tazh concluded a credit line agreement # 2000/07/27 with BankTuranAlem for the amount of $5,000,000. The agreement was concluded for five years, interest rate is 14.5%, the interest is to be paid on a monthly basis.  On April 4, 2007 Kor-Tazh received a loan from BankTuranAlem amounting to KZT 47.8 million, under the credit line agreement # 2000/07/27 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 390,810. The interest is to be paid on a monthly basis The purpose of the loan is oil field exploration, well drilling and operation.  On May 11, 2007 Kor-Tazh received a loan from BankTuranAlem amounting to KZT 33.8 million, under the credit line agreement # 2000/07/27 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of  19  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  the loan was equal to USD 275,938. The interest is to be paid on a monthly basis.  The purpose of the loan is oil field exploration, well drilling and operation.  On May 23, 2007 Kor-Tazh received a loan from BankTuranAlem amounting to KZT 144.3 million, under the credit line agreement # 2000/07/27 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 1,179,789. The interest is to be paid on a monthly basis.  The purpose of the loan is oil field exploration, well drilling and operation.  In May 2007 Kor-Tazh fully repaid loan received from Nurbank in the amount of KZT 24 million or USD 196,223.  20  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  14 Taxes Payable As of June 30, 2007USDIncome tax638,710Personal income tax292,521Social tax112,040VAT payable57,158Vehicle tax6,059Property tax24,761Other taxes31,6161,162,865
  15 Obligation for historical reimbursement As of June 30, 2007USDObligation for historical reimbursement as of December 31, 20062,927,930Accretion expense109,933Obligation for historical reimbursement as of June 30, 20073,037,863
 On August 4, 2004 the subsurface contract # 1483 on Zhetibay Severo-Zapadnay oil and natural gas field was assigned to Kor-Tazh.  The contract was concluded for twenty years ending 2024 with five years for exploration at the date of contract commencement. The Company through its purchase of Kor-Tazh is obliged to reimburse USD 6,363,310, which represents historical costs incurred by the Republic of Kazakhstan for the oilfield as per the terms of the subsurface contract. Settlement of the obligation for historical reimbursement should be made in line with a payment schedule agreed between Kor-Tazh and the Government. The remaining amount shall be paid by equal portions starting from the ending date of the exploration period. Therefore no payments were made during six months ended June 30, 2007. The obligation is discounted at 7.65%, being the estimated credit-adjusted risk free discount rate.  16 Asset retirement obligations As of June 30, 2007USDAsset retirement obligation as of December 31, 2006176,535Accretion expense6,631Asset retirement obligation as of June 30, 2007183,166
   21  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  The Company has asset retirement obligations arising from the requirements of subsurface contract on Zhetibay Severo-Zapadnay field to abandon oil and natural gas wells and remove pipeline, compressor and related production facilities. The liability was initially measured at fair value USD 108,918 and subsequently is adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. As of December 31, 2006 the asset retirement obligation was reassessed as result of technical audit performed by Companys specialists in order to reflect fair value as of December 31, 2006. The corresponding asset retirement costs are capitalised as part of the carrying amount of the related oil and gas exploration assets and depreciated over the assets useful life. Management determined that asset retirement obligations should be recognised for future costs to abandon wells drilled at field before Kor-Tazh signed the subsurface contract, but which, in managements opinion, were not properly abandoned.  Management believes that this obligation is likely to be settled at the end of the exploration phase. The asset retirement obligations in the amount of 216,000 USD are discounted at 7.65%, being the estimated credit-adjusted risk free discount rate.  17 Stockholders equity On May 10, 2006 CIOC B.V. acquired three Kazakhstan companies: Dank, CGE and Kor-Tazh. The transaction was accounted as a combination under common control recognising the assets and liabilities transferred at their carrying amounts as of December 31, 2005. The difference USD 64,699 between the carrying amount of net assets received and the consideration paid is recognised in CIOC B.V. equity as an additional paid-in capital. On June 13, 2006 CIOC B.V. issued 718 ordinary shares each with a nominal value of EUR 100, at a premium of EUR 3,479 per share. The total value of the share issue, including premium, is equivalent to USD 3,229,947. On August 10, 2006 CIOC B.V acquired CRSI Group, Inc. (subsequently changed to CIOC) in a reverse acquisition transaction. The stockholders equity section of the consolidated balance sheet as of June 30, 2007 is that of the nominal acquiree CIOC B.V., not the nominal acquirer CRSI Group, Inc. (subsequently changed to CIOC). Consequently, the amount shown for capital is valued in terms of the issued capital of CIOC B.V., plus the cost of the acquisition, which is equal to zero. The number of shares issued and outstanding of the nominal acquirer CRSI Group, Inc. is 63,267,028 as of June 30, 2007. During the 4th Quarter 2006 and in the 2nd quarter 2007 the Company issued common stock and stock options to four employees in compensation of their execution of employment agreements. 560,000 shares of common stock were issued and vest after one year of service. Stock options for 2,075,000 shares were issued and generally vest equally over a three year period. The following table summarizes the Companys stock option activity:  Weighted- Average Options             Exercise    Fair Outstanding          Price         Value  Balance, December 31, 2006                2,025,000             0.52           0.38 Granted during the period                        200,000             0.35            0.18 Balance, June 30, 2007                         2,225,000             0.50            0.36    22  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  (See footnote 22, Post balance sheet events )  18 Income tax The income tax charge in the income statement comprised: For the three months ended June 30, 2007For the three months ended June 30, 2006For the six months ended June 30, 2007For the six months ended June 30, 2006USDUSDUSDUSDCurrent tax (expense)/benefit-(415,693)-(900,951)Deferred tax (expense)/benefit42,363(2,365)548,781(2,365)42,363(418,058)548,781(903,316)  Relationship between tax expenses and accounting income for the three and six months ended June 30, 2007 and 2006 is explained as follows: Three months ended June 30, 2007Three months ended June 30, 2006Six months ended June 30, 2007Six months
ended June 30, 2006Income/(loss) before income taxes(960,281)786,959(2,816,129)1,810,137Expected tax (provision)/benefit288,084(236,088)844,839(543,041)Add tax effect of:Permanent differences(245,721)(181,970)(296,058)360,27542,363(418,058)548,781(903,316) Deferred taxes reflect the estimated tax effect of temporary differences between assets and liabilities for financial reporting purposes and those measured by tax laws and regulations. The components of deferred tax assets and deferred tax liabilities are as follows: As of June 30, 2007USDDeferred tax assets:Allowance for bad debts1,919Accrued vacation provision7,591Accrued tax liabilities50,267Tax losses carried forward605,174664,951Deferred tax liabilities:Fixed assets and intangible assets1,477,255Net deferred tax liability812,304   23  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   18 Income tax(continued) Deferred taxes reflect the estimated tax effect of temporary differences between assets and liabilities for financial reporting purposes and those measured by tax laws and regulations. The components of deferred tax assets and deferred tax liabilities are as follows:  Deferred Tax Assets
As of June 30,
2007Deferred Tax Liabilities
As of June 30,
2007USDUSDAt the beginning of the period60,8811,371,062Charge recognized in income548,781-Foreign currency translation adjustment55,289106,193At the end of the period664,9511,477,255   19 Earnings per share For the
three
months ended
June
30, 2007For the three months ended June
30, 2006For the
six
months ended
June
30, 2007For the
six
months ended
June
30, 2006USDUSDUSDUSDNet profit/(loss) attributable to ordinary shareholders(960,281)786,959(2,816,129)1,810,137Weighted average number of outstanding common shares62,991,75362,230,02862,647,59262,230,028Weighted average number of outstanding common shares after dilution62,991,75362,230,02862,647,59262,230,028Basic and diluted earnings per share(0.02)0.01(0.04)0.03   Basic income (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company's common stock equivalents at June 30, 2007  24  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  include  2,225,000 unexercised options .The computation of diluted net earnings per share does not include dilutive common stock equivalents in the weighted average shares outstanding as they would be anti-dilutive. 20 Segment reporting The following table presents the Companys segment information. For management purposes, the Company is organized into two major segments  oil field services and oil field exploration. These segments are the basis on which the Company reports its primary segment information. Oil field services segment is represented by Dank. Oil field exploration segment is represented by Kor-Tazh.   Business segmentsOil field servicesOil field explorationEliminationsConsolidatedUSDFor the six months ended June 30,
2007For the six months ended June 30,
2007For the six months ended June 30,
2007For the six months ended June 30,
2007RevenuesSales to third parties5,693,535--5,693,535Inter-segment sales1,344,568-(1,344,568)-Total sales7,038,103-(1,344,568)5,693,535ExpensesInvestment income18,699--18,699Production and operating expenses(7,775,853)-1,250,962(6,524,891)General and administrative expenses(2,187,742)(294,269)-(2,482,011)Accretion expenses-(116,564)-(116,564)Interest expense(366,600)(48,846)-(415,446)Foreign currency exchange gain, net187,140117,970305,110Other non-operating income, net90,150--90,150Income tax (expense)/benefit548,781--548,781Net income/(loss)(2,433,124)(355,907)(27,098)(2,816,129)Total assets24,551,3555,677,652(4,534,527)25,694,480            25  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements      20 Segment reporting (continued)  Business segmentsOil field servicesOil field explorationEliminationsConsolidatedUSDFor the six months ended
June 30,
2006For the six months
ended
June 30,
2006For the six months
ended
June 30,
2006For the six months
ended
June 30,
2006RevenuesSales to third parties11,246,903--11,246,903Inter-segment sales576,440-(576,440)-Total sales11,823,343(576,440)11,246,903ExpensesProduction and operating expenses(7,852,348)-570,639(7,281,709)General and administrative expenses(1,534,126)(50,691)104,715(1,480,102)Accretion expenses-(106,191)-(106,191)Interest expense(462,437)--(462,437)Foreign currency exchange gain, net736,134229,299-965,433Income tax expense(903,316)--(903,316)Net income1,753,47161,827(5,161)1,810,137Total assets20,913,3813,663,450(3,701,468)20,875,363          26  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   21 Commitments and Contingencies Capital Commitments Under the terms of the subsurface contract, Kor-Tazh is required to spend a total of USD 14.6 million in exploration and development activities on the oilfield during twenty years.  The failure to make these minimum capital expenditures could result in the loss of the subsoil contract. In accordance with the subsurface contract, the Company is committed to contribute to social sphere development in the total amount of USD 844,000 for all oilfields during the twenty years.  During the six months ended June 30, 2007, the Company had not made any payments.  Management believes that the Company will meet this obligation within the exploration phase. In accordance with the subsurface contract, the Company is committed to finance professional training in the total amount of USD 146,000 for all oilfields during the twenty years.  During six months ended June 30, 2007, the Company had not made any payments.  Management believes that the Company will meet this obligation within the exploration phase. The following table lists our significant commitments at June 30, 2007, excluding current liabilities as listed on our balance sheet:  Payments Due By PeriodContractual obligationsTotalLess than 1 year1-3 years4-5 yearsAfter 5 yearsCapital Expenditure 
   Commitment$ 14,483,000$2,983,154$  7,900,000$  500,000$  3,100,000Historical cost Due to the Government of 
   Kazakhstan$  6,267,860-$  417,860$  835,700$  5,014,300Social sphere development commitment$  844,000$  94,000$  126,000$  85,000$  539,000Obligation to finance professional training$ 131,555$  16,555$  79,000$  5,000$  31,000Asset retirement obligation$  216,000---$216,000Loans$  9,044,691$ 2,961,620$ 2,996,249$ 2,350,675$ 736,147Interest expense$  1,803,936$  737,832$  744,330$  280,258$  41,516Total$ 32,791,196$  6,793,161$  12,263,436$  4,056,633$ 9,677,963 Insurance  The insurance industry in Kazakhstan is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Company does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents on Company property or relating to Company operations. Until the Company obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Companys operations and financial position. Taxation contingencies  The taxation system in Kazakhstan is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying  27  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   21 Commitments and Contingencies (continued) interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. These circumstances may create tax risks in Kazakhstan that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these financial statements, if the authorities were successful in enforcing their interpretations, could be significant.  22 Post balance sheet events  In July 2007 Dank concluded contracts with the following companies: · LLP Samek International(a sub. of Max Petroleum) for approximately 21 million USD · LLP AlgaKaspiyGas for  3.3 million USD · LLP Kazturkmunai for 2.5 million USD On July 10, 2007 Dank received Input/Output equipment for the total amount of 2,651,542 USD. In July 2007 Dank formed fourth crew, which starts working from August 1, 2007. On July 6, 2007 Dank received a loan from BankTuranAlem amounting to KZT 60 million, under the credit line agreement No. 2000/07/100/1484 for one year at 14 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 490,557. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. On July 6, 2007 Dank received a loan from BankTuranAlem amounting to KZT 20 million, under the credit line agreement No. 2000/07/100/1490 for one year at 14 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 163,519. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. On July 24, 2007 Dank received a loan from BankTuranAlem amounting to KZT 10 million, under the credit line agreement No. 2000/07/100/1603 for five years at 14.5 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 81,759. Payments under the agreement are made quarterly. The purpose of the loan is to finance the purchase of fixed assets. On July 24, 2007 Dank received a loan from BankTuranAlem amounting to KZT 20 million, under the credit line agreement No. 2000/07/100/1605 for one year at 14 % annual interest. As of June 30, 2007 the amount of the loan was equal to USD 163,519. Payments under the agreement are made quarterly. The purpose of the loan is to replenish working capital. On July 30, 2007 the Companys Board of Directors terminated J.E. Knight from his position as Caspian Internationals Chief Executive Officer. In December,2006 Mr. Knight received shares of Caspian International  common stock  and stock options for the execution of an employment agreement. No common shares or stock options issued to Mr. Knight had vested as of July 30, 2007.  28  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements  The common stock and stock options issued to Mr. Knight comprise a substantial portion of the Companys fair value calculation under SFAS 123r. The shares and options used for the Companys stock based compensation  are summarized as follows:  J.E. Knight               Total Company Common Stock Number of shares               400,000                       560,000 Fair value                          $160,000                    $284,700 Stock Options Number of shares              1,500,000                  2,075,000 Fair value                           $517,000                    $758,475  23 Related party transactions Related parties transactions, as defined by SFAS 57, are those that include transactions between the following: a) a parent company and its subsidiaries; b) subsidiaries of a common parent; c) an enterprise and trusts for the benefit of employees, such as pension and profit-sharing trusts that are     managed by or under the trusteeship of the enterprises management; d) an enterprise and its principal owners, management, or members of their immediate families; and e) affiliates. In considering each possible related party relationship, attention is directed to the sustenance of the relationship, and not merely the legal form. Management of the Company consider that the entities within the Company have appropriate procedures in place to identify and properly disclose transactions with related parties in this environment and has disclosed all of the relationships identified which it deemed to be significant. Management remuneration Key management received the following remuneration during the year, which is included in general and administrative expenses:    For six
months ended June
30, 2007For six
months ended June
30, 2006For three months ended June
30, 2007For three months ended June
30, 2006USDUSDUSDUSDSalaries and bonuses351,273208,963176,208100,630Other long-term service benefits provided----Termination benefits----  29  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   351,273208,963176,208100,630   23 Related party transactions (continued) Transactions with other related parties The Companys other related party transactions are disclosed below.     USDTransaction valueTransaction valueTransaction valueTransaction valueFor six months ended June 30, 2007For six months ended June 30, 2006For three months ended June 30, 2007For three months ended June 30, 2006Services provided:Other related partiesPGD Services LLP18,699235,032(10,813)235,032Batyr Ltd LLP-67,896-67,896
  Cost of services purchased:Other related partiesPGD Services LLP11,991---Batyr Ltd LLP134,642-67,309-165,332302,928(56,496)302,928Property, plant and equipment disposal:Other related partiesBatyr Ltd LLP-3,916-3,916Financial aid received:ShareholderTimur Bergaliyev561,193107,954548,519107,954Other related partiesKazpromgeophysics JSC304,507-180,408-Transmash Service Plus-29,335-29,335Financial aid paid:Shareholder
  30  Caspian International Oil Corporation Notes to Unaudited Consolidated Financial Statements   Timur Bergaliyev303,126-303,126-Other related partiesBatyr Ltd LLP24,708409,06024,708-Kazakhstan National Technical University-3,814-3,814Caspian Logging Services LLP32,026107,853-107,853City Lux LLP-29,294-29,294
  USDOutstanding balanceAs of June 30, 2007Financial aid received:ShareholderTimur Bergaliyev, payable587,909Other related partiesGranit Rielti Investment, payable12,002599,911Financial aid paid:Other related partiesCaspian Logging Services LLP, receivable359,742Batyr Ltd LLP, receivable31,599City Lux LLP69,414Others12,459473,214USDOutstanding
Balance As of June 30, 2007Loans received:68,107Shareholder, payable68,107





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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS  A Note Regarding Forward-Looking Statements This Report contains certain forward-looking statements regarding Caspian International Oil Corporation, its business and its financial prospects.  These statements represent Managements present intentions and its present belief regarding the Companys future.  Nevertheless, there are numerous risks and uncertainties that could cause our actual results to differ from the results suggested in this Report.  Among the more significant factors are:  Ø It will be necessary for us to incur substantial debt in order to fully implement our business plan.  If the results of our operations are insufficient to allow us to service our debt, the value of our business will be significantly impaired. Ø The success of our oil field services business will depend on our ability to overcome strong competition, much of which is better funded than we are. Ø The success of our exploration business will depend on factors over which management will have little control, including the results of exploration, world oil prices, and policies of the government of Kazakhstan.  Because these and other risks may cause Caspian Internationals actual results to differ from those anticipated by Management, the reader should not place undue reliance on any forward-looking statements that appear in this Report.  Readers should also take note that Caspian International will not necessarily make any public announcement of changes affecting these forward-looking statements, which should be considered accurate on this date only.  Results of Operations The Companys revenue for the six months ended June 30, 2007 was $5,693,535, as compared to $11,246,903 for the six months ended June 30, 2006. The lower revenues in 2007 were primarily attributable to three situations that arose in the first half of the year, two of which prevented Dank, the Companys revenue generating subsidiary, from fully utilizing its three work crews. The situations were: · Particularly harsh winter conditions experienced in Kazakhstan in early 2007, which delayed seismic crews from getting into the field. · During the first quarter of 2007, a large Dank seismic crew that had contracted to work in Uzbekistan was put on standby status while our client attempted to resolve an issue with the Uzbek government. Dank received a standby fee from that client, but the fee did not fully offset the loss of revenue caused by the delay. During the second quarter, Dank and the client agreed to defer the project and Dank moved its seismic crew to work on another contract. · During the second quarter of 2007, one of Danks seismic crews was contracted by Kor-Tazh, the Companys oil exploration and production   subsidiary, to provide 3D seismic data as part of the oil field development plan. Dank was chosen by Kor-Tazh to provide the 3-D seismic data because of the quality of service which Dank is known to   provide.


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The location of Kor-Tazhs oil field is in rough terrain and many other  seismic companies would not attempt the project. Acquiring this 3D seismic data is a critical part of Kor-Tazhs development plan .    Under US GAAP, the Company, in its consolidated results, is precluded from recognizing revenue and profit on this inter company transaction. On a consolidated basis, the costs incurred by Dank to acquire the seismic data were capitalized as part of the oil exploration and production assets. Currently, Dank has contracts to perform services for revenue that significantly exceed the contracts it held at this point in 2006.   Dank recently finalized three contracts to provide seismic services in Kazakhstan. The total revenue from these contracts will be approximately $26.8 million, including  a contract with Max Petroleum for $20.9 million to be performed in 2007 and 2008. Danks seismic crews are currently engaged in Kazakhstan on the following contracts: Ø 2D survey on Block E, Dossor territory for Max Petroleum Ø 2D survey for Sagiz Petroleum in Sarly, Kaganay and Sarykumak territories Ø 3D survey on Astrakhansky Block for Max Petroleum Because of the high demand for Danks seismic services, the Company has added a fourth seismic crew. The crew is currently being mobilized and should begin work in August, 2007. In addition, the Company continues to evaluate the possibility of adding additional seismic crews for work in Kazakhstan as well as in other countries. As a result of the weather delays experienced earlier in the year and the standby status of one crew extending into the second quarter, the Company experienced a $3,429,931 loss from operations for the first six months of 2007. This compares to operating income of $2,378,901 for the comparable period in 2006. Barring any unforeseen events that prevent Dank from fulfilling its contracts on schedule, the Company expects to return to positive income from operations for the remainder of 2007. Production and operating expenses for the six months ended June 30, 2007 were $6,524,891 as compared to $7,281,709 for the comparable period in 2006. The lower expenses in 2007 are primarily a result of the use of one of our three seismic crews to perform a  seismic survey  for Kor-Tazh, the Companys oil exploration and production subsidiary.  The expenses that we incurred in connection with that crew were capitalized, and added to the Oil and Gas Exploration Assets on our balance sheet. General and administrative expenses for the first six months of 2007 were $2,482,011 as compared to $1,480,102 for the first six months of 2006. The increase in general and administrative expense is due to the approximate $1.2 million in  costs  associated with being a U.S. public company, following the August 2006 reverse merger of our Kazakhstan subsidiaries. The cost of being a U.S. public company will continue to be a significant part of our general and administrative operating expense. Included in general and administrative expense is the cost of the Companys stock based compensation, as required by FAS 123(r), which was adopted by the Company in 2006. Certain employees of the Company resident in our U.S. office, in compensation for the execution of


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employment agreements, were issued an aggregate of 560,000 shares of common stock and 2,075,000 stock options. The shares of common stock, which are subject to a one year vesting period, have a fair value of $284,700. The stock options, which vest over three years, have an estimated fair value of $758, 475. The fair value of both the shares and the options is being amortized as compensation expense on a straight line basis over the respective vesting periods. For the six months ended June 30, 2007 the amount recorded as compensation expense was $230,207. There was no comparable amount for 2006 as the employment agreements were not executed until late in 2006 and in the second quarter 2007. On July 30, 2007 the Companys Board of Directors terminated J.E. Knight from his position as Caspian Internationals Chief Executive Officer. Mr. Knight had received shares of common stock and stock options  in December 2006, specifically 400,000 common shares  with a fair value of $160,000 and 1,500,000 stock options  with an estimated fair value of $517,500. Upon the termination, those shares and options were cancelled, and no amortization expense has been recorded in the 2nd quarter on account of Mr. Knights compensation. We realized a gain of $305,110 on foreign currency exchange in the six months ended June 30, 2007 as compared to a $965,433 gain for the six months ended June 30, 2006. These gains and losses relate to balances which require settlement in U.S. dollars, principally from obligations arising from equipment purchases. Income tax benefits of $548,781 were recorded in the six months ended June 30, 2007, compared to $903,316 of income tax expense recorded for the six months ended June 30, 2006. We are recording a tax benefits from the loss incurred in the first six months of 2007, since we expect to be able to offset that loss against taxable net income earned in the second half of 2007. For the first half of 2007 we recorded a net loss of $2,816,129,  compared to net income of $1,810,137 for the comparable period in 2006. The lower revenues from not being able to fully utilize our work crews and the higher general and administrative expenses , including the cost of being a U.S. public company, were the principal reasons for the net loss. Revenues for the three months ended June 30, 2007 were $2,852,566 as compared to $6,093,096 for the three months ended June 30, 2006. The lower revenues were due to one of Danks  seismic crews remaining on stand by status well into the second quarter, thus not being able to fully generate revenues. Also during the entire second quarter 2007 another of  Danks  seismic crews was  contracted by Kor-Tazh, the Companys oil exploration and production subsidiary, for a 3D seismic project. Under US GAAP, the Company is precluded from recognizing revenues on this inter company transaction. The costs incurred by Dank to acquire the 3D seismic data were capitalized as oil exploration and production costs, This is the principal reason why production and operating expenses for the three months ended June 30, 2007 were lower than the comparable period for 2006. For the three months ended June 30, 2007 we recorded a loss of $960, 281 as compared to net income of $786, 959 for the three months ended June 30, 2006. The principal reasons for the loss in 2007 were the lower revenues from not being able to fully utilize our work crews and the higher general and administrative expense associated with being a U.S. public company ($619, 517 for the three months ended June 30, 2007) .


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Liquidity and Capital Resources During the first half of 2007, the Companys liquidity improved considerably as we obtained a substantial increase in our capital resources. First, our primary lender, Bank Turan Alem (BTA), awarded Dank an increase in its credit line to $17,900,000. As evidenced by the recent addition of a 4th seismic crew and the signing of substantial new contracts, the increased credit facility has allowed Dank to expand its operations and bid more aggressively for business.  During the first half of 2007 Dank borrowed $2,866,423 from BTA, primarily pursuant to the credit line, which it used for the acquisition of equipment.  The loans have a term of five years with interest at 14% or 14.5%. At the same time, BTA approved a $5,000,000 credit line for Kor-Tazh, our oil exploration and production subsidiary. To secure this financing, Dank issued a $2,000,000 guaranty in favor of BTA. Kor-Tazh has received approval of its work plan for 2007 and has borrowed on the credit line to commence development activities at its North-West Zhetybai oil field. The loans have a term of five years with interest at 14% or 14.5%.  A 3D seismic survey was completed during the second quarter and the results will be analyzed to help determine the best location for future development wells in the field.   The Companys aggregated debt service obligations at June 30, 2007 are shown in the following table:  Contractual
ObligationTotalLess Than
1 Year1-3 Years4-5 YearsOver
5 YearsBank TuranAlem$8,853,945$2,770,874$2,996,249$2,350,675$736,147Other$190,746$190,746Sub-Total$9,044,691$2,961,620$2,996,249$2,350,675$736,147Interest$1,803,936$737,832$  744,330$  280,258$41,516Total$10,848,627$3,699,452$3,740,579$2,630,933$777,663  On March 28, 2007 the Company purchased an irrevocable letter of credit in the amount of $5,314,500 for the purpose of purchasing seismic equipment. This equipment, provided by Input/Output, is needed for Dank to meet the competitive environment in Kazakhstan. Upon delivery of the equipment, the investment will increase Danks depreciation expense and interest expense in future periods.  In the absence of the unusual situations experienced by the Company in the first half of 2007 and considering the recent contracts signed by Dank along with the addition of a fourth seismic  crew, the Companys revenue and operating cash flow should improve considerably over the remainder of the year. In addition, the Company has available approximately $6.7 million of available credit under its lines of credit with Bank TuranAlem.


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It is anticipated that the Companys level of debt will increase as Dank continues to expand its operations and Kor-Tazh continues with the development of its oil field. In particular, the contract between Kor-Tazh and the Government of Kazakhstan, which awarded to Kor-Tazh the right and obligation to conduct hydrocarbon exploration and production in the North-West Zhetybai Field, obliges Kor-Tazh to invest at least $14,600,000 in the project prior to the end of 2009.  All of these debt obligations will impose a substantial debt service burden on the Company. Our ability to service the debt will determine our prospects for success.    Off-Balance Sheet Arrangement  The Company and its subsidiaries do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.  Risk Factors That May Affect Future Results  You should carefully consider the risks described below before buying our common stock.  If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.     I.  Risks attendant to our oil services business  Cyclical declines in oil and natural gas prices may result in reduced use of our services, affecting our business, financial condition and results of operation and our ability to meet our capital expenditure obligations and financial commitments.  The oil and natural gas exploration and drilling business is highly cyclical. Generally, as oil and natural gas prices decrease, exploration and drilling activity declines as marginally profitable projects become uneconomic and are either delayed or eliminated. Declines in the number of operating drilling rigs result in reduced use of and prices for our services. Accordingly, when oil and natural gas prices are relatively low, our revenues and income will suffer. Oil and natural gas prices depend on many factors beyond our control, including the following: · worldwide economic conditions; · changes in global supply and demand for oil and natural gas; · the level of production of the Organization of Petroleum Exporting Countries; · the level of production of non-OPEC countries; · political conditions, including embargoes, affective oil and gas production; · global petroleum inventories; and · advances in exploration and production techniques.


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Depending on the market prices of oil and natural gas, companies exploring for oil and natural gas may cancel or curtail their drilling programs, thereby reducing demand for drilling services. Our contracts are generally short-term, and oil and natural gas companies tend to respond quickly to upward or downward changes in prices. Any reduction in the demand for drilling services may materially erode both pricing and utilization rates for our services and adversely affect our financial results. As a result, we may suffer losses, be unable to make necessary capital expenditures and be unable to meet our financial obligations.  Our industry is highly competitive. The markets in which we operate are highly competitive. Contracts are traditionally awarded on a competitive bid basis. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment has intensified as recent mergers among oil and natural gas companies have reduced the number of available customers. In Kazakhstan, the general upturn in economic conditions in this decade has attracted a large number of new competitors.  Some of them are equipped with state-of-the-art vehicles, drilling equipment and technology, yet bid for contracts at highly competitive prices.  Some of them are also substantially larger than we are and have resources that are significantly greater than our resources. These competitors are better able to withstand industry downturns, compete on the basis of price and acquire new equipment and technologies, all of which could affect our revenues and profitability. These competitors compete with us both for customers and for acquisitions of other businesses. This competition may cause our business to suffer. We believe that competition for contracts will continue to be intense in the foreseeable future.   Suppliers The equipment utilized in our business is generally available new from manufacturers or at auction.  Currently, due to the high level of activity in the oilfield services industry, there is a high demand for new and used equipment.  Consequently, there is a limited amount of many types of equipment available at auction and significant backlogs on new equipment.  Our business plan contemplates that we will follow a program of acquiring capital equipment as needed to maintain our competitive position in the Kazakhstan oil industry.  We have already contracted for our immediate equipment needs.  However, the cost of acquiring new equipment to expand our business could increase as a result of the high demand for equipment in the industry.  Severe weather conditions may affect our operations.  Our business may be materially affected by severe weather conditions in the areas in which we operate.  In particular, severe winter weather has in the past, and may in the future require us to suspend our surveying operations, which is likely to result in loss of revenue and inefficient use of our resources.  Moreover, as our oil exploration subsidiary, Kor-Tazh, will soon be commencing exploration and development activities, we face the risk that severe weather conditions may delay drilling and, under certain circumstances, result in damage to our equipment.  Any of these situations would have an adverse effect on our financial results.


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High interest rates may have a negative effect on our operations. Dank has financed its recent growth by borrowing from a Kazakh bank.  Currently we carry over $9 million in debt.  On approximately half of our debt we pay interest at LIBOR+5.65% per annum.  On most of the remaining debt we pay interest at 14% to 16%.  These high interest rates are a function of the relative volatility of the Kazakh economy and the difficulty of obtaining investment capital in Kazakhstan.  We hope to utilize our status as a publicly-held company to attract equity financing including convertible debt.  To some extent, however, we may still depend on debt financing to fund our expansion.  Although we will attempt to obtain future debt financing at more reasonable rates, there is no assurance that we will be successful in doing so.  If we are unsuccessful in these efforts, the resulting interest expense will have an adverse effect on our profitability.  Currency fluctuations may adversely affect our operating results. Dank generates revenues and incurs expenses and liabilities in Tenge, the currency of the Republic of Kazakhstan.  However, as subsidiaries of CIOC, they will report their financial results in the United States in U.S. Dollars.  As a result, our financial results will be subject to the effects of exchange rate fluctuations between these currencies.  From time to time, the government of Kazakhstan may take action to stimulate the Kazakh economy that will have the effect of reducing the value of Tenge.  In addition, international currency markets may cause significant adjustments to occur in the value of the Tenge.  Any such events that result in a devaluation of the Tenge versus the U.S. Dollar will have an adverse effect on our reported results.  We have not entered into agreements or purchased instruments to hedge our exchange rate risks.   Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand. Our future success depends on our ability to attract and retain highly skilled geophysicists, geologists, engineers, and technicians.  Qualified individuals are in high demand in Kazakhstan, and there are insufficient experienced personnel to fill the demand.  Therefore we may not be able to successfully attract or retain the personnel we need to succeed.  Government regulation may hinder our ability to function efficiently. The Republic of Kazakhstan is supportive of its oil and gas exploration industry.  Nevertheless, the government of Kazakhstan is highly bureaucratized, and the day-to-day operations of our business require frequent interaction with representatives of the Kazakh government institutions.  The effort to obtain the registrations, licenses and permits necessary to carry out our business plans can be daunting.  Significant delays can result from the need to obtain governmental approval of our activities.  These delays can have an adverse effect on the profitability of our operations.  In addition, future legislation, particularly legislation aimed at protecting the environment of Kazakhstan and legislation aimed at protecting the workers of Kazakhstan may increase the cost of our operations, which would adversely affect our profitability.


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We may have difficulty establishing adequate management and financial controls in Kazakhstan. The Republic of Kazakhstan has only recently begun to adopt the management and financial reporting concepts and practices with which investors in the United States are familiar.  We may have difficulty in hiring and retaining employees in Kazakhstan who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.  Capital outflow policies in Kazakhstan may hamper our ability to pay dividends to shareholders in the United States. The Republic of Kazakhstan has adopted currency and capital transfer regulations. These regulations require that Dank comply with complex regulations for the movement of capital. The current regulations require notification to the National Bank of Kazakhstan of all significant currency transactions, impose registration and licensing requirements on entities involved in currency exchange, and limit the ability of entities operating in Kazakhstan to expatriate funds.  Moreover, Kazakhstan changes its currency regulations frequently.  We may be unable to obtain all of the required conversion approvals for our operations, and Kazakh regulatory authorities may impose greater restrictions on the convertibility of the Tenge in the future. Because all of our future revenues will be in Tenge, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund business activities outside Kazakhstan.  Moreover, although we do not expect that the company will pay dividends in the foreseeable future, our ability to pay dividends to our shareholders in the future could be hampered by Kazakhstan currency regulations.   II. Risks attendant to our oil exploration business  Kor-Tazh will require significant financing in order to carry out its exploration and development activities and such financing may not be available. We anticipate that full development of Kor-Tazhs oil field will take several years and require significant capital expenditures. If CIOC is unable to timely obtain adequate funds to finance these activities, Kor-Tazhs ability to develop its oil reserves may be severely limited or substantially delayed. Such limitations or delay would likely result in substantial losses being reflected in our statements of operations. We anticipate that amounts required to fund Kor-Tazhs activities will be funded from operating cash flows, third-party financing and from joint venture partners.  Kor-Tazh currently has a $5 million credit line.  Additional funds will be required, however, as our contract with the Government of Kazakhstan requires that at least $14,600,000 be committed to development of Kor-Tazhs oil field.  No commitments of additional funds have been received, however, and there can be no assurance that Kor-Tazh will have adequate funds available to finance its operations.


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The operations of Kor-Tazh will require significant expenditures of capital that may not be recovered. We require significant expenditures of capital in order to locate and acquire producing properties and to drill exploratory and exploitation wells. In conducting exploration, exploitation and development activities from a particular well, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, exploitation, development and production activities to be unsuccessful, potentially resulting in abandoning the well. This could result in a total loss of our investment. In addition, the cost and timing of drilling, completing and operating wells is difficult to predict. Oil and gas price fluctuations in the market may adversely affect the results of our operations. The results of our oil exploration and production  activities will be highly dependent upon the worldwide  prices received for our oil production. Substantially all of our sales of oil will be made in the spot market, or pursuant to contracts based on spot market prices, and not pursuant to long-term, fixed-price contracts. Accordingly, the prices received for our oil production will be dependent upon numerous factors beyond our control. These factors include the level of consumer product demand, governmental regulations and taxes, the price and availability of alternative fuels, the level of foreign imports of oil and natural gas and the overall economic environment. Significant declines in world wide  prices for oil could have a material adverse effect on our financial condition, results of operations and quantities of reserves recoverable on an economic basis.  Reserve Estimates Depend On Many Assumptions That May Turn Out To Be Inaccurate. Any material inaccuracies in our reserve estimates or underlying assumptions could materially affect the quantities and present values of our reserves. The process of estimating oil reserves is complex. It requires interpretations of available technical data and various assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this Report.  In order to prepare these estimates, we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. The process also requires economic assumptions relating to matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates. A significant variance could materially affect the estimated quantities and pre-tax present value of reserves shown in this report. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.


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We may encounter operating hazards that may result in substantial losses. Kor-Tazh will be subject to operating hazards normally associated with the exploration and production of oil, including blowouts, explosions, oil spills, cratering, pollution, earthquakes, labor disruptions and fires. The occurrence of any such operating hazards could result in substantial losses to us due to injury or loss of life and damage to or destruction of oil and gas wells, formations, production facilities or other properties. We intend to maintain insurance coverage limiting financial loss resulting from certain of these operating hazards. We may not, however, maintain full insurance coverage for all matters that may adversely affect our operations, including war, terrorism, nuclear reactions, government fines, treatment of waste, blowout expenses and business interruptions. Losses and liabilities arising from uninsured or underinsured events could reduce our revenues or increase our costs. There can be no assurance that any insurance will be adequate to cover losses or liabilities associated with operational hazards. We cannot predict the availability of insurance, or its availability at premium levels that justify its purchase.  ITEM 3. CONTROLS AND PROCEDURES.  (a) Evaluation of disclosure controls and procedures.  The term disclosure controls and procedures (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within required time periods. The Companys management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this quarterly report (the Evaluation Date). As a start-up company, the Company has insufficient personnel resources within its reporting functions, which constitutes a material weakness in internal controls over financial reporting.  As a result, management concluded its disclosure controls and procedures were not effective.  The Company is reviewing ways to improve the effectiveness, including the addition of an audit committee financial expert.  (b) Changes in internal controls.  The term internal control over financial reporting (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Companys management, with the participation of the Chief Executive Officer and Chief Financial Officer has evaluated any changes in the Companys internal control over financial reporting that occurred during the quarterly period covered by this report, and they have concluded that there was no change to the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.


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PART II   -   OTHER INFORMATION  Item 1. Legal Proceedings  None.  Item 2.       Unregistered Sale of Equity Securities and Use of Proceeds  None.  Item 3.        Default Upon Senior Securities  None.  Item 4.       Submission of Matters to a Vote of Security Holders  None.  Item 5.       Other Information  None.  Item 6. Exhibits  31.1 Rule 13a-14(a) Certification  CEO 31.2 Rule 13a-14(a) Certification  CFO  32 Rule 13a-14(b) Certification  SIGNATURES  Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the undersigned thereunto duly authorized.   CASPIAN INTERNATIONAL OIL CORPORATION  Date: August 12, 2007 By: /s/ Nurlan Janseitov  Nurlan Janseitov, Chief Executive Officer  By: /s/ David Fulton  David Fulton, Chief Financial Officer


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