U. S. Securities and Exchange Commission Washington, D. C. 20549  FORM 10-Q  [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008  [   ] 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 or Other Jurisdiction of
incorporation or organization)(I.R.S.  Employer
Identification No.)  4265 San Felipe,  Suite 1100 Houston, TX77027(Address of principal executive offices)(Zip Code)(713) 960-6618(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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One) Large accelerated filer Accelerated filer_ Non-accelerated filer__Small reporting company [X] 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: November 19, 2008, Common Voting Stock: 62,757,028 shares


CASPIAN INTERNATIONAL OIL CORPORATION FORM 10-Q TABLE OF CONTENTS  PART I - FINANCIAL INFORMATIONItem 1.Unaudited Consolidated Financial StatementsConsolidated Balance Sheet as of September 30, 2008 and December 31, 20072-3Consolidated Statements of Operations for the Three and Nine Month PeriodEnded September 30, 2008 and 20074Consolidated Statements of Cash Flows for Nine Months EndedSeptember 30, 2008 and 20075Notes to Consolidated Financial Statements6-37Item 2.Managements' Discussion and Analysis of Financial Condition andResults of Operations38-42Risk Factors That May Affect Future Results42-47Item 3.Quantitative and Qualitative Disclosures about Market Risk47Item 4.Controls and Procedures47PART II - OTHER INFORMATIONItem 1.Legal Proceedings48Item 2.Unregistered Sales of Equity Securities48Item 3.Default Upon Senior Securities48Item 4.Submission of Matters to a Vote of Security Holders48Item 5.Other Information48Item 6.Exhibits48Signatures49   1    Caspian International Oil CorporationConsolidated Balance Sheets  As of September
30, 2008As of December
31, 2007NoteUSD
(unaudited)USDASSETSCurrent assetsCash530,525125,031Accounts receivable, net65,167,5525,560,069Inventories7795,1761,475,137Deferred income tax assets19809,2621,393,167Total current assets6,802,5158,553,404Non-current assetsInvestments, equity method866,21649,875Oil exploration assets, full cost method97,648,2935,358,615Property, plant and equipment1016,517,98718,996,417Intangible assets11110,016164,747Restricted cash30,298441Total non-current assets24,372,81024,570,095TOTAL ASSETS31,175,32533,123,499       The accompanying notes are an integral part of these consolidated financial statements              2     Caspian International Oil CorporationConsolidated Balance Sheets  As of September
30, 2008As of December
31, 2007NoteUSD
(unaudited)USDLIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable and other liabilities128,480,8305,961,857Short-term loans134,235,8735,306,085Taxes payable141,479,3501,888,837Dividends payable prior to reverse merger6,218310,241Total current liabilities14,202,27113,467,020Non-current liabilitiesLong-term loans1310,736,25812,729,082Deferred income tax liabilities192,128,9942,368,487Obligation for historical reimbursement153,331,0853,151,916Asset retirement obligations16200,842190,032Total non-current liabilities16,397,17918,439,517Total liabilities30,599,45031,906,537Minority interest316,620277,772Stockholders equity17Common stock, $ 0.001 par value  authorized 200,000,000 shares; issued and outstanding 62,757,028 shares62,75762,757Additional paid-in capital3,822,3753,822,375Accumulated other comprehensive income466,111402,989Accumulated deficit(4,091,988)(3,348,931)Total stockholders equity259,255939,190TOTAL LIABILITIES AND STOCKHOLDERS EQUITY31,175,32533,123,499The accompanying notes are an integral part of these consolidated financialstatements.  3        Caspian International Oil CorporationConsolidated Statements of Operations
Unaudited  For the three months ended
September
30, 2008For the three months ended September
30, 2007For the nine
months ended September
30, 2008For the nine months ended September
30, 2007NoteUSDUSDUSDUSDRevenuesSales185,740,7325,255,76217,721,05710,949,2965,740,7325,255,76217,721,05710,949,296ExpensesProduction and operating expenses(4,433,705)(3,388,611)(13,232,408)(9,913,502)General and administrative expenses(1,035,965)(2,250,502)(3,695,122)(4,732,513)Accretion expenses(64,500)(59,899)(189,979)(176,463)Gain/(loss) from disposal of fixed assets(1,213)-(1,945)(5,725)Income/(loss) from operating activities205,349(443,250)601,603(3,878,906)Share of profits of associates887,322121,193181,348139,892Interest expense(341,104)(485,161)(1,180,502)(900,607)Foreign currency exchange gain/(loss), net87,713133,737(4,243)438,847Other non-operating income, net7,15213,46128,118109,336Income/(loss) before income taxes and minority interest46,432(660,020)(373,676)(4,091,438)Income tax benefit/(expense)19(161,595)(222,974)(338,547)325,807Minority interest(9,763)(27,574)(30,834)38,934Net income/(loss)(124,926)(910,568)(743,057)(3,726,697)Other comprehensive income:Foreign currency translation adjustment44,062193,99863,647406,178Comprehensive income/(loss)(80,864)(716,570)(679,410)(3,320,519)Basic and diluted earnings/(loss) per share20Basic and diluted(0.001)(0.01)(0.01)(0.05)  The accompanying notes are an integral part of these consolidated financial statements.  4   CaspianInternational Oil CorporationConsolidated Statements of Cash Flows
UnauditedOperating activities:For nine months ended September 30, 2008
USDFor nine months ended September 30, 2007
USDNet income/(loss)(743,057)(3,726,697)Adjustments for non-cash items:Depreciation, depletion and amortization2,808,6001,844,350Stock-based compensation51,062604,845Investment income(181,348)139,892Accretion expenses189,979176,463Minority interest30,834(38,934)Impairment loss on fixed assets1,9456,022Reversal of allowance for doubtful accounts-(16,647)Foreign exchange difference on long-term obligations15,262253,231Deferred income taxes338,547(325,807)Dividends received165,448-Changes in assets and liabilitiesAccounts receivable(36,282)(2,212,763)Inventories634,149(888,611)Accounts and taxes payable and other liabilities(525,859)(69,873)Net cash ( used in)/ provided by operating activities2,749,280(4,254,529)Investing activities:Acquisition of property, plant and equipment(237,670)(1,128,691)Proceeds from disposal of property, plant and equipment40,16911,730Acquisition of intangible assets(15,686)(1,336)Decrease of accounts receivable (financial aid)747,6641,012,144Increase in accounts receivable (financial aid)(515,207)-Acquisition of oil exploration assets(1,755,229)(1,955,855)Restricted cash(30,298)-Net cash used in investing activities(1,766,257)(2,062,008)Financing activities:Increase in accounts payable (financial aid)2,591,3691,059,248Proceeds from loans2,347,66410,035,736Proceeds from common stock-200Decrease of accounts payable (financial aid)(218,943)(956,961)Repayment of loans(5,496,076)(3,801,312)Distribution by subsidiary for period prior to reverse merger(303,949)(44,146)Net cash provided by/ (used in) financing activities(1,079,935)6,292,765Effect of exchange rates on cash2,406(130,437)Net increase (decrease) in cash and cash equivalents(94,506)(154,209)Cash and cash equivalents at beginning of the period125,031238,900Cash and cash equivalents at end of the period (Note 5)30,52584,691Supplemental informationInterest paid1,751,450900,607Oil and gas assets purchased as accounts payable518,2086,559,492  5     6


Caspian International Oil CorporationNotes to the Consolidated Financial Statements  1  Background (a) Organization and environment Caspian International Oil Corporation 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. 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 B.V. 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 as an 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 are presented as a 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 Articles of Merger were filed with the Division of Corporations of the Florida Department of State, according to which CRSI Group, Inc was merged with and into its subsidiary, Caspian International Oil Corporation, for the purpose of changing the companys domicile from Florida to Delaware. 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. 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 and currency exchange rates fluctuations.


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Caspian International Oil CorporationNotes to the 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 nine months ended September 30, 2008 and 2007 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, 2007.  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 nine months ended September 30, 2008 have been made. The results of operations for the nine months ended September 30, 2008 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 and 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 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.


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements  2 Basis of preparation (continued) (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. 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. 52, Foreign 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 the nine months ended September 30, 2008. 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 119.81. (e) Convertibility of the Kazakhstan Tenge (KZT) 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.


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements  (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. For the three month and nine month periods ended September 30, 2008 the Company had a net loss of $124,926 and $743,057 respectively.   As of September 30, 2008, the company had $7,399,756 of negative working capital and $30,525 of cash to satisfy any future cash requirements along with $1.4 million availability under a borrowing arrangement for Kor-Tazh which is to be used for oil development activity.  For the three months ended September 30, 2008 the Companys Dank subsidiary had positive net income but this was offset by general and administrative costs in other areas. During the third quarter 2008 Dank signed a contract to provide a significant 3D seismic survey in Kazakhstan.In October, 2008 Dank began work on a significant contract for a 3D seismic survey.  Dank continues to aggressively pursue new contracts for the remainder of 2008 and beyond. Barring any unforeseen events, especially those that prevent them from fulfilling its contracts on schedule, Dank is expected to remain profitable. In addition, the Company has significantly reduced the General and Administrative cost of its Corporate headquarters which should have a substantial favourable impact on future profits.  Also, Company anticipates that the well re-entry program currently being conducted to develop the Companys proved oil reserves (2,161,104 barrels) will be completed by year end 2008. The revenue from the oil produced is expected to a make a significant contribution to the Companys 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 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.


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements 3 Significant accounting policies (continued) (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 the extent that there is likelihood that any of the amounts due will not be obtained.  (d) Inventories Inventories, consisting primarily of spare parts are stated at the lower cost or market value. Cost is determined using the average cost method. (e) Oil exploration and production assets The Company follows the full cost method of accounting for the costs of acquisition, exploration and development of its oil properties. Under this method, all productive and non-productive costs incurred in connection with the acquisition of, exploration for and development of oil 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 wells. Capitalized costs of proved oil properties are depleted on a unit of production method using estimated proved oil 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 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. 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 $1,859,301 and $2,007,790 during the nine months ended September 30, 2008 and 2007, respectively. The Company also capitalizes a portion of interest expense on borrowed funds. Under full cost accounting rules, the net capitalized costs of evaluated oil properties shall not exceed an amount equal to the present value of future net cash flows from estimated production of proved oil reserves, based on current economic and operating conditions, including the use of oil prices as of the end of each quarter.


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements 3 Significant accounting policies (continued) (e) Oil exploration assets (continued)  Given the volatility of oil prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil reserves could change. If oil prices decline, even if only for a short period of time, it is possible that impairments of oil 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  reserves occur, or if properties are sold for proceeds less than the discounted present value of the related proved oil  reserves. The capitalized oil  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  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 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 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. (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.


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements 3 Significant accounting policies (continued) (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 recognized 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 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. There is no uncertainty in the Companys income taxes which would require recognition under FASB Interpretation No. 48. (m) Revenue recognition Revenue for oil field services companies is recognized when Company determines that following criteria are met: (i) persuasive evidence an arrangement exists; (ii) services have been rendered;


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements  3 Significant accounting policies (continued) (m) Revenue recognition (continued) (iii) the fee is fixed or determinable; and (iv) collectibility is reasonably assured. All advance client payments are classified as unearned revenues until services are provided. Services are provided subject to customer acceptance provisions. Customer acceptance provisions and the related accounting take the following form: It is based on customer-specified objective criteria. The Company does not recognize revenue until it can demonstrate that the customer-specified objective criteria have been satisfied. The Company recognizes revenue upon receipt of the act of acceptance for services provided signed and stamped by the customer.  The Company uses the sales method of accounting for crude oil revenues. Under this method, revenues are recognized based on actual volumes of oil and 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 development stage at the moment and does not generate any revenue.  (n) Rental income Rental income from rent of equipment is recognized 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


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements 3 Significant accounting policies (continued) (q) Segment reporting (continued) operating segments. The Companys business activities are conducted predominantly through two major business segments: oil field services and oil field development. Oil field services represent 2D and 3D seismic acquisitions, data processing and interpretation, reservoir modelling and topography to the oil exploration industry in Kazakhstan. Oil field development represents 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 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. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued a FASB Staff Position (FSP) on SFAS No. 157 that permits a one year delay of the effective date for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) . The Company adopted SFAS No. 157 effective January 1, 2008, with the exceptions allowed under the FSP described above and does not expect any significant impact on its consolidated financial statements. In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FAS Statement No. 115. SFAS No. 159 gives companies the option of applying at specified election dates fair value accounting to certain financial instruments and other items that are not currently required to be measured at fair value. If a company chooses to record eligible items at fair value, the company must report unrealized gains and losses on those items in earnings at each subsequent reporting date. SFAS No. 159 also prescribes presentation and disclosure requirements for assets and liabilities that are measured at fair value pursuant to this standard and pursuant to the guidance in SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (as amended). SFAS No. 159 will be effective for fiscal year 2008. As the provisions of SFAS No. 159 are applied prospectively, the impact to the Registrants will depend on the instruments selected for fair value measurement at the time of implementation. The Company is currently assessing the impact that SFAS No. 159 will have on its consolidated financial statements.


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements 3 Significant accounting policies (continued) (s) Recent accounting pronouncements (continued) 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. FSP Fin 39-1 has had no impact on the Companys consolidated financial statements as of September 30, 2008.  In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements, consolidated net income shall be adjusted to include the net income attributed to the non-controlling interest and consolidated comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact that SFAS No. 141 (R) and SFAS No. 160 will have on its consolidated financial statements.  In March, 2008 the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 requires enhanced disclosures about an entitys derivative and hedging activities and  is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. The Company is currently evaluating the impact of SFAS No. 161 on its consolidated financial statements.  In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles(SFAS No. 162), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States of America (the GAAP hierarchy).   SFAS No. 162 is effective 60 days following the SECs approval of Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect adoption of this statement to impact its consolidated financial statements or related disclosures.


16


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 3 Significant accounting policies (continued)  (t) Share-Based Compensation The Company accounts for share based compensation in accordance with the provisions of SFAS No. 123R which requires that the compensation cost relating to share based payment transactions be recognized in the financial statements. The Company has issued to certain employees shares of common stock and stock options in compensation for the execution of employment agreements.  Following is a summary of employee awarded shares of common stock and stock options for the nine months ended September 30, 2008: SharesCommon StockStock OptionsBalance at December 31, 2007150,000800,0002008 Awards002008 Cancellations0(191,667)Balance at September 30, 2008150,000608,333 The fair value of the shares of common stock and the stock options are being amortized on a straight line basis over the respective vesting periods. The shares vest after one year of service and all shares have been amortized as of September 30, 2008.   The stock options vest over three years of service.  For the three and nine months ended September 30, 2008 the Company recorded in General and Administrative Expense $14,712 and $51,062, respectively as employee share based compensation cost.  Employee stock options are valued using the Black Scholes method based on the following weighted average assumptions:  Expected Dividend Yield           0.0% Risk Free Interest Rate               5.0% Expected life (years)                   1.5 Volatility                                     110%  The weighted average fair value of the 608,333 employee stock options is $0.35 per share. As of September 30, 2008 the remaining deferred compensation cost for the employee stock options is $68,738.  The fair value of the shares of common stock is based on the market value of the stock on the dates of execution of the employment agreements. The weighted average value of the 150,000 shares is $0.79 per share. At September 30, 2008 all of the shares of common stock were fully vested and have been amortized.  There were no shares of common stock or stock options issued to third parties during the three and nine months ended September 30, 2008.


17


Caspian International Oil CorporationNotes to the Consolidated Financial Statements (u) Concentrations of Credit Risk Financial instruments that potentially subject Company to concentrations of credit risk consist primarily of accounts receivable. The Company has significant concentrations of credit risk in accounts receivable.  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.  5     Cash As of September
30, 2008As of December 31, 2007USDUSDCash  held in bank - KZT11,26058,026Cash held in bank - other currencies1,97925,879Petty cash17,28641,12630,525125,031


18


Caspian International Oil CorporationNotes to the Consolidated Financial Statements   6    Accounts receivable, net  As of September
30, 2008As of December 31, 2007,USDUSDTrade receivables3,917,6314,074,138Financial aid to related parties328,403531,468Advances paid446,307378,471Taxes prepaid99,43273,325Receivables from employees163,459277,939Loan receivable from employee115,52550,183Deferred expenses178,850284,970Other receivables-2485,249,6075,670,742Less allowance for doubtful accounts(82,055)(110,673)5,167,5525,560,069  The activity in the allowance for doubtful accounts is as follows: For nine months ended September 30,
2008For nine months ended September 30,
2007USDUSDAllowance for doubtful accounts at the beginning of the period110,673150,529Additions charged to impairment loss42,900-Recovery of bad debt allowance(71,845)(16,647)Foreign currency translation adjustment3277,743Allowance for doubtful accounts at the end of the period82,055141,625


19


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 7 Inventories As of September
30, 2008As of December 31, 2007USDUSDSpare parts628,0861,225,004Other materials167,090250,133795,1761,475,137  8 Investments Investments as of September 30, 2008 amounting to USD 66,216 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. Net income of PGDS is distributed 20% to Dank and 80% to Paradigm Geophysical in accordance with the above-mentioned agreement. PGDS provides the following services in Kazakhstan: time seismic data processing, depth imaging, structural interpretation, reservoir evaluation. Total assets of PGDS are in the amount of USD 2 million as of September 30, 2008. 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 nine months ended September 30, 2008 in the amount of USD 181,348 was recognised in the consolidated income statement for nine months ended September 30, 2008 under the equity method. Income of PGDS for nine months ended September 30, 2007 in the amount of USD 139,892 was recognised in the consolidated income statement for nine months ended September 30, 2007 under the equity method. The Companys maximum exposure to loss as a result of involvement with PDS is in the amount of USD 66,216. 9 Oil exploration assets As of
September  30,
2008As of December 31, 2007USDUSDOil exploration assetsEvaluated2,470,3991,730,833Unevaluated5,177,8943,627,782Less accumulated depletion-7,648,2935,358,615 Credit line received by Kor-Tazh LLP is secured by the oil properties.


20


Caspian International Oil CorporationNotes to the Consolidated Financial Statements  10
Property, plant and equipmentAs of September
30, 2008As of December
31, 2007USDUSDMachinery and equipment30,787,70630,754,402Vehicles1,964,9521,950,909Land and buildings1,8421,834Other property, plant and equipment318,733225,74833,073,23332,932,893Less accumulated depreciation(16,555,246)(13,936,476)16,517,98718,996,417  Total depreciation for nine months ended September 30, 2008 was USD 2,729,410, of which USD 2,670,502 (97.84%) was recorded in production expenses and USD 58,908 (2.16%) was recorded in general and administrative expenses. Total depreciation for nine months ended September 30, 2007 was USD 1,778,251, of which USD 1,729,265 (97.25 %) was recorded in production expenses and USD 48,986 (2.75 %) was recorded in general and administrative expenses. The equipment with carrying amount of USD 7,516,740 was pledged as security under bank loans as of September 30, 2008.   11 Intangible assets As of September
30, 2008As of December 31, 2007USDUSDProgram software615,283597,091Less accumulated amortization(505,267)(432,344)110,016164,747


21


Caspian International Oil CorporationNotes to the Consolidated Financial Statements  12 Accounts payable and other liabilities As of September
30, 2008As of December 31, 2007USDUSDTrade accounts payable2,305,4682,518,301Payables to employees1,646,9081,685,385Advances received393,799168,429Financial aid from related parties2,784,041396,559Payable to related parties173,999160,622Payables to pension fund stipulated by the law of the Republic of Kazakhstan378,941245,004Interest payable486,815644,140Vacation provision82,79892,677Other payables228,06150,7408,480,8305,961,857   13 Loans As of September
30, 2008As of December 30, 2007USDUSDBank TuranAlem:KZT  fixed from 15% to 18%6,036,6927,131,780USD  at Libor + 6%8,068,35710,406,52514,105,04917,538,305ShareholderUSD  fixed at 4.00%116,862116,862116,862116,862ShareholderUSD - fixed at 6.00%717,060350,000717,060350,000OtherUSD33,16030,00033,16030,00014,972,13118,035,167


22


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 13 Loans (continued) Short-term loans4,235,8735,306,085Long-term loans10,736,25812,729,082Total loans14,972,13118,035,167  Following is a summary of the Companys significant outstanding loans with BTA as of September 30, 2008: CompanyLoan agreement #Date issuedDate expiresPurpose of loanInterest rateBalance as of September 30, 2008, USDDank63May 2007March 2012Equipment9.23%3,777,20659April 2005June 2010Equipment11.03%2,109,85462May 2007May 2009Equipment11.76%797,17594-1May 2007May 2010Equipment12.90%819,30094-2August 2008August 2010Equipment12.96%110June 2007June 2010Equipment13.20%375,000131-1August 2007August 2010Equipment13.01%131,461198May 2008November 2008Working capital16.00%175,000682March 2007March 2012Equipment15.00%151,555755April 2007March 2012Equipment15.00%294,584810April 2007March 2012Equipment15.00%220,938876April 2007March 2012Equipment15.00%220,9381257June 2007March 2012Equipment15.00%182,581136April 2008October 2008Working capital16.00%292,1292146December 2007November 2008Working capital16.00%121,025363July 2008November 2008Working capital18.00%333,862460August 2008December 2008Working capital18.00%166,93181March 2008October 2008Working capital16.00%130,484Kor-Tazh747April 2007March 2012Develop oil field15.00%358,2541012May 2007March 2012Develop oil field15.00%257,7221116May 2007March 2012Develop oil field15.00%1,101,9041466July 2007March 2012Develop oil field15.00%389,980


23


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 13 Loans (continued)  1973October 2007March 2012Develop oil field15%1,018,2771468July 2007March 2012Develop oil field15%129,0001576July 2007March 2012Develop oil field15%382,222  14 Taxes Payable As of September
30, 2008As of December 31, 2007USDUSDIncome tax619,439649,202Personal income tax402,051341,087Social tax224,990288,313VAT payable108,809431,798Vehicle tax37,1947,944Property tax6,817111,344Other taxes80,05059,1491,479,3501,888,837
  15 Obligation for historical reimbursement As of September
30, 2008As of December 31, 2007USDUSDObligation for historical reimbursement as of December 31, 20073,151,9162,927,930Accretion expense179,169223,986Obligation for historical reimbursement as of September 30, 20083,331,0853,151,916  On August 4, 2004 the subsurface contract # 1483 on Zhetibay Severo-Zapadnay oil 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


24


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 15 Obligation for historical reimbursement (continued) period. Therefore no payments were made during nine months ended September 30, 2008. The obligation is discounted at 7.65%, being the estimated credit-adjusted risk free discount rate.  16 Asset retirement obligations As of September
30, 2008As of December 31, 2007USDUSDAsset retirement obligation as of December 31, 2007190,032176,535Accretion expense10,81013,497Asset retirement obligation as of September 30, 2008200,842190,032
 The Company has asset retirement obligations arising from the requirements of subsurface contract on Zhetibay Severo-Zapadnay field to abandon oil 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. The corresponding asset retirement costs are capitalised as part of the carrying amount of the related oil 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  CRSI Group, Inc. acquired CIOC B.V  (subsequently changed to CIOC) in a reverse acquisition transaction. The stockholders equity section of the consolidated balance sheet as of September 30, 2008 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.


25


Caspian International Oil CorporationNotes to the Consolidated Financial Statements  17 Stockholders equity (continued) Common Stock The number of shares of CIOC common stock issued and outstanding as of September 30, 2008 is 62,757,028. During nine months of 2008, there have been no shares of common stock issued to employees or to third parties.  The market value of shares issued in years prior to 2008 has been amortized as General and Administrative expense.  Stock Options The Companys stock option activity for the nine months ended September 30, 2008 is summarized in the following table:  Weighted Average Options                          Exercise         Fair Outstanding                     Price         Value Balance ,12/31/2007                          950,000                            0.66                0.34Awards in nine months 2008                     0Cancellations  in nine months 2008  (341,667)                           0.64               0.32Balance, 9/30/2008                             608,3330.92              0.35


26


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 18 Revenue The major customers of oil field services segment during nine months ended September 30, 2008 and 2007 were as following:  For nine months ended September 30, 2008For nine months ended September 30, 2007USDUSDSamek International10,474,9915,554,038Adai Petroleum3,271,015-Alga Caspi Gas1,418,353287,552Sagiz Petroleum-2,231,002Anako1,145,920-Jupiter Energy434,957-Institute of electrical and physical problems-741,383Kazturkmunay-1,763,516Other customers975,821371,805Total revenue17,721,05710,949,296
   19 Income tax The income tax charge in the income statement comprised of: For the three months ended September 30, 2008For the three months ended September 30, 2007For the nine months ended September 30, 2008For the nine months ended September 30, 2007USDUSDUSDUSDCurrent tax (expense)/benefit----Deferred tax (expense)/benefit(161,595)(222,974)(338,547)325,807(161,595)(222,974)(338,547)325,807


27


Caspian International Oil CorporationNotes to the Consolidated Financial Statements  19 Income Tax (continued) Relationship between tax expenses and accounting income for nine months ended September 30, 2008 and 2007 is explained as follows: For the three months ended September 30, 2008For the three months ended September 30, 2007For the nine months ended September 30, 2008For the nine months ended September 30, 2007USDUSDUSDUSDIncome/(loss) before income taxes46,432(660,020)(373,676)(4,091,438)Expected tax (provision)/benefit(13,930)198,006112,1031,227,431Add tax effect of:Permanent differences(147,665)(420,980)(450,650)(901,624)(161,595)(222,974)(338,547)325,807 The statutory tax rate of 30% is used in Kazakhstan. 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 September 30,
2008As of December 31, 2007USDUSDDeferred tax assets:Accrued tax liabilities82,615122,892Accrued vacation provision44,46931,413Deferred tax related to oil properties1,337,192779,402Tax losses carried forward682,1781,238,8622,146,4542,172,569Valuation allowance(1,337,192)(779,402)809,2621,393,167Deferred tax liabilities:Fixed assets and intangible assets2,128,9942,368,4872,128,9942,368,487Net deferred tax liability1,319,732975,320  Tax losses carried forward relate to the oil field services company located in Kazakhstan and expire in three years.


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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 changes in the deferred tax assets and deferred tax liabilities are as follows: Caspian International Oil CorporationNotes to the Consolidated Financial Statements  19 Income Tax (continued) Deferred Tax Assets
As of September 30,
2008Deferred Tax Liabilities
As of September 30,
2008USDUSDAt the beginning of the year1,393,1672,368,487Charge recognized in income(589,603)(251,056)Foreign currency translation adjustment5,69811,563At the end of the period809,2622,128,994  20 Earnings per share For
three months ended
September
30, 2008For three months ended
September
30, 2007For
nine
months ended
September
30, 2008For
nine
months ended
September
30, 2007USDUSDUSDUSDNet profit/(loss) attributable to ordinary shareholders(124,926)(910,568)(743,057)(3,726,697)Weighted average number of outstanding common shares62,757,02863,167,02862,757,02862,822,640Weighted average number of outstanding common shares after dilution62,757,02863,167,02862,757,02862,822,640Basic and diluted earnings per share(0.001)(0.01)(0.01)(0.05)   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


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Company's common stock equivalents at September 30, 2008 include 608,333 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. Caspian International Oil CorporationNotes to the Consolidated Financial Statements  21 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 development. 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 DevelopmentEliminationsConsolidatedUSDFor nine months ended September 30,
2008For nine months ended September 30,
2008For nine months ended September 30,
2008For nine months ended September 30,
2008RevenuesSales to third parties17,721,057--17,721,057Inter-segment sales----Total sales17,721,057--17,721,057ExpensesShare of profit of associates181,348--181,348Production and operating expenses(13,232,408)--(13,232,408)Gain/(loss) from disposal of fixed assets(1,945)--(1,945)General and administrative expenses, operating(2,603,721)(520,724)-(3,124,445)General and administrative expenses, corporate(285,339)(285,338)-(570,677)Accretion expenses-(189,979)-(189,979)Interest expense(1,146,666)(33,836)-(1,180,502)Foreign currency exchange gain, net(15,698)11,455-(4,243)Other non-operating income, net27,469649-28,118Income tax expense(338,547)--(338,547)Net income/(loss)305,550(1,017,773)(30,834)(743,057)Total assets25,663,97910,778,794(5,267,448)31,175,325


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements  21 Segment Reporting (continued) Business segmentsOil field servicesOil field explorationEliminationsUSDFor the nine months ended September 30,
2007For the nine months ended September 30,
2007For the nine months ended September 30,
2007For the nine months ended September 30,
2007RevenuesSales to third parties10,949,297--10,949,297Inter-segment sales1,855,422-(1,855,422)-Total sales12,804,719-(1,855,422)10,949,297ExpensesInvestment income139,892--139,892Production and operating expenses(11,564,679)-1,651,177(9,913,502)General and administrative expenses, operating(2,216,589)(230,284)-(2,446,873)General and administrative expenses, corporate(1,142,821)(1,142,819)-(2,285,640)Accretion expenses-(176,463)-(176,463)Interest expense(851,761)(48,846)-(900,607)Foreign currency exchange gain, net286,295152,552-438,847Other non-operating income, net104,175(564)-103,611Income tax (expense)/benefit325,807--325,807Net income/(loss)(2,595,083)(966,304)(165,310)(3,726,697)Total assets30,341,1456,801,594(4,976,533)32,166,206


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements  22 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 subsurface 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 year ended December 31, 2007, the Company made payment of USD 52,000.  Management believes that the Company will meet this obligation within the exploration phase. There were no payments made during nine months ended September 30 2008. 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 year ended December 31, 2007, the Company made payment of USD 24,445.  Management believes that the Company will meet this obligation within the exploration phase. There were no payments made during nine months ended September 30 2008. The following table lists the Companys significant commitments at September 30, 2008, excluding current liabilities as listed on the Companys balance sheet:  Payments Due By PeriodContractual obligationsTotalLess than 1 year1-3 years4-5 yearsAfter 5 yearsCapital Expenditure 
   Commitment$ 10,451,120$  6,551,120$  600,000$  400,000$  2,900,000Historical cost Due to the Government of 
   Kazakhstan6,267,860391,705783,410783,4104,309,335Social sphere development commitment792,00012,000104,000104,000572,000Obligation to finance professional training113,00374,0036,0004,00029,000Asset retirement obligation216,000---216,000Loans14,972,1314,235,8738,368,4782,367,780-Interest expense4,087,7881,655,1581,751,187681,443-Total$ 36,899,902$12,919,859$ 11,613,075$ 4,340,633$ 8,026,335 For interest expense computation the Company made an assumption that LIBOR rate would be consistent for the remainder of the term of the debt.


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements 22 Commitments and Contingencies (continued) 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 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 there are no significant tax uncertainties. Issued guarantee: Dank SIF issued guarantee in the amount of $2,000,000 in favour of Kor-Tazh LLP in Bank Turanalem.  23   Post balance sheet events  Dank SIF concluded a significant contract for a 3D seismic survey subsequent to September 30, 2008. Credit line issued by BTA to Dank SIF was decreased from $17.9 million to $13.2 million subsequent to September 30, 2008. Interest rates on Kor-Tazh loans were increased up to 18% subsequent to September 30, 2008.  24 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;


33


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 24 Related party transactions (continued) 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 substance 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. The relationship between the Company and the described below related parties is as following:  · PGDS  Services LLP  is a 100% subsidiary of Dank LLP, which is Variable Interest Entity; · Kazpromgeiphysics JSC  Janseitov Nurlan is one of the shareholders of the company; · Batyr LLP  Janseitov Nurlan is one of the shareholders of the company; · Nurtobe LLP  Bergaliyev Timur is a Director of the company; · Turksibstroy LLP  Bergaliyev Timur used to be a Director of the company; · City lux LLP  Bergaliyev Timur is a founder and Director of the company; · Caspian Logging LLP  related party of Kazpromgeophysics LLP.  Management remuneration Key management received the following remuneration during the year, which is included in general and administrative expenses: For three months ended September
30, 2008For three months ended September
30, 2007For nine
months ended September
30, 2008For nine
months ended September
30, 2007USDUSDUSDUSDSalaries and bonuses154,093176,688492,291527,961Other long-term service benefits provided----Termination benefits----154,093176,688492,291527,961


34


Caspian International Oil CorporationNotes to the Consolidated Financial Statements 24 Related party transactions (continued) Transactions with other related parties The Companys other related party transactions are disclosed below.  USDTransaction valueTransaction valueTransaction valueTransaction valueFor three months ended September 30, 2008For three months ended September 30, 2007For nine
months
ended September
30, 2008For nine
months
ended September 31, 2007Services provided:Other related partiesPGD Services LLP87,322121,193181,348139,892
  Cost of services purchased:Other related partiesPGD Services LLP165,448-165,448-Batyr Ltd147,04468,395289,578203,037399,814189,588636,374342,929Financial aid received:ShareholderTimur Bergaliyev727,708118,8122,577,242680,005Other related partiesBatyr Ltd3,324-3,324-Kazpromgeophysics JSC33,257-526,010-Caspian Logging Services LLP108,234-232,457-872,523118,8123,339,033680,005


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Financial aid paid:ShareholderTimur Bergaliyev-180,096-483,222Other related partiesKazpromgeophysics JSC34,358182,719734,150379,243Caspian Logging Services LLP-32,026City Lux LLP-37,762-37,762Batyr Ltd24,70834,358400,577734,150956,961


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Caspian International Oil CorporationNotes to the Consolidated Financial Statements 24 Related party transactions (continued)  Outstanding balance

As of September 30, 2008Outstanding balance
As of December  31, 2007Financial aid received:ShareholderTimur Bergaliyev, payable2,747,717155,498Kazpromgeophysics JSC7,949241,061Batyr Ltd28,375-2,784,041396,559Finacial aid paid:Other related partiesCaspian Logging Services LLP, receivable50,547282,627Turksibstroy LLP, receivable219,706216,921City Lux LLP32,05131,920Nurtobe LLP2,482-Others23,617-328,403531,468Payable to related parties:PGD Services LLP157,239156,600Nurtobe LLP16,7604,022173,999160,622Loans Received:Shareholder, payable833,922466,862833,922466,862


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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 the Companys actual results to differ from the results suggested in this Report.  Among the more significant factors are:  Ø It will be necessary for the Company to incur substantial debt in order to fully implement the Companys business plan.  If the results of the Companys operations are insufficient to allow the Company to service the debt, the value of the business will be significantly impaired. Ø The success of the Companys oil field services business will depend on the Companys ability to overcome strong competition, much of which is better funded than the Company. Ø The success of the Companys 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 is currently provided by Dank, the Companys oilfield service subsidiary. Revenues for the nine months ended September 30, 2008 were $17,721,057 as compared to $10,949,296 for the nine months ended September 30, 2007. The increase in 2008 revenues is due to better utilization of the Companys seismic crews, including a fourth crew which was added in the third quarter of 2007. In the first half of 2007 the Companys seismic crews were not fully utilized due to harsh weather conditions and one crew being placed on standby while the Companys client attempted to resolve an issue with the government of Uzbekistan.  The Companys income from operating activities for the first nine months of 2008 was $601,603 as compared to a $3,878,906 loss for the first nine  months of 2007. The Companys seismic crews have experienced only minor operating difficulties in 2008 as opposed to the severe difficulties experienced in the first half of 2007. Barring any unforeseen events that prevent Dank from fulfilling its contracts on schedule, the


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Company expects revenues and income from operating activities for 2008 to exceed those of 2007.  Production and operating expenses for the nine months ended September 30, 2008 were higher than those in the comparable 2007 period due primarily to the increased operating expenses associated with adding a fourth seismic crew including increased depreciation expense for  the additional seismic  equipment. General and administrative expenses were lower in 2008 due primarily to   lower expenses of the Corporate Office.  A significant reason for the lower Corporate Office overhead is a reduction in the cost of the Companys stock based compensation. The reduction is principally due to the cancellation of award shares and stock options held by the Companys former CEO whose contract was terminated in July, 2007.  In addition, no shares or stock options have been issued to third parties during 2008. Stock based compensation is not expected to be a significant amount of the Companys General and Administrative expense in the immediate future.  Interest expense for the nine months ended September 30, 2008 was $1,180,502 as compared to $900,607 for the nine months ended September 30, 2007. The higher interest expense was due to the increased level of borrowing by Dank, principally for equipment needed to meet the increased demand for its services. The Companys oil exploration and production subsidiary, Kor-Tazh, also incurred substantial interest costs. However the majority of interest cost incurred by Kor-Tazh in the development of its oil field is being capitalized as oil exploration and production assets on the Companys balance sheet.  Income tax expense of $338,547 was recorded for the nine   months ended September 30, 2008 compared to tax benefits of $325,807 recorded for the nine months ended September 30, 2007. The recording of income tax expense in 2008 is a reflection of Danks return to profitability during the year.  The Companys net loss for the nine months ended September 30, 2008 was $743,057 compared to a net loss of $3,726,697 for the nine   months ended September 30, 2007. Higher revenues from improved utilization of Danks seismic crews in 2008 coupled with a significant reduction in corporate overhead were the principal factors for the improvement in 2008.  For the three months ended September, 2008 the Companys operations reflected improvement over the three months ended September 30, 2007. For the third quarter of 2008 the Company had revenues of $5,740,732 and income from operating activities of $205,349 as compared to revenues of $5,255,762 and a $443,250 loss from operating activities for the third quarter of 2007. There was a net loss of $124,926 for the third quarter of 2008 compared to a net loss of $910,568 for the third quarter of 2007. Lower general and administrative expense related to the Corporate office was a significant factor in the lower net loss.


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The Company incurred foreign currency exchange gains of $87,713 and $133,737 for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30th, The Company incurred foreign currency losses of $4,243 in 2008 and foreign currency gains of $438,847 in 2007. These gains and losses relate to balances which require settlement in U.S. dollars, principally from obligations arising from equipment purchases (see footnote 2(d)). Liquidity and Capital Resources  The primary source of the Companys capital resources has been from lines of credit with Bank Turan Alem (BTA). The Companys aggregate debt service obligations at September 30, 2008 are shown in the following table:  Contractual                                      Less than                                                     OverObligation                  Total              1 year           1-3 Years       4-5 years          5 yearsBTA-Dank             $10,467,690      $ 2,850,692  $ 6,231,504   $ 1,385,494              -BTA-Kor-Tazh      $  3,637,359       $    668,121  $ 1,986,952  $ 982,286Total BTA              $ 14,105,049     $ 3,518,813  $8,218,456    $ 2,367,780               -Other                      $      867,082     $   717,060    $  150,022                    -                 -Total Loans             $14,972,131     $4,235,873    $8,368,478    $ 2,367,780                -Interest                     $ 4,087,788     $1,655,158   $1,751,187    $   681,443                  -  For the interest obligation computation the Company made an assumption that the Libor rate would remain constant for the remaining term of the debt.  During the first nine months of 2008, the debt obligation related to the Companys BTA-Dank loan was reduced by $3,237,639. The credit line issued by BTA to Dank was reduced from $17.9 million  to $13.2 million  subsequent to September 30, 2008.  The Companys BTA-Kor-Tazh loan balance was reduced by $195,617 during the first nine months of 2008, leaving approximately $1.4 million available under Kor-Tazhs $5 million credit line. Interest rates on Kor-Tazh loans were increased up to 18% subsequent to September 30, 2008 with interest payments now due quarterly instead of monthly.  The Company is currently evaluating the development capital requirements of its oilfield relative to the funds available so as to determine the most efficient use of its credit line. The funds for the oilfield development expenditures incurred during 2008 have been provided by a financial aid agreement with Timur Bergaliyev, one of the Companys shareholders (see Footnote 24-Related Party Transactions).


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Cash Flow  The Companys cash flow for the nine months ended September 30, 2008 and 2007 is summarized in the following table:     Nine months ended
September 30, 2008Nine   months ended
September 30, 2007Net Cash :(Used in)/ provided by operating activities$2,749,280$(4,254,529)(Used in)/ investing activities$(1,766,257)$(2,062,008)Provided by/ (used in) financing activities$(1,079,935)$ 6,292,765NET INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS$   ( 94,506)$ (154,209)   Net cash provided by operating activities improved for the nine  months  ended September  30, 2008 over the nine months ended September 30, 2007 due to the increased Dank revenues  from the improved  utilization of the Companys seismic crews, including the fourth crew added during the third quarter of 2007.  The cash flow of Dank at this time is adequate to satisfy its working capital requirements and its debt service. Kor-Tazh will be able to utilize the remaining balance of its credit line for the well re-entry portion of its development plan.  However the capital spending required by Dank to remain competitive and operate efficiently coupled with the funds needed by Kor-Tazh  to continue  oil development activities in the North-West Zhetybai Field will likely  result in an increase in the Companys debt.  In the past few months, concerns about the capitalization of a number of major banks has led to a significant worldwide reduction in the availability of credit.  One result of this situation has been a sharp reduction in the price of oil on the world market.  If the current global financial crisis were to continue for an extended period, it could have a significant unfavorable impact on the Company. Specifically, if the clients of Dank are unable to raise capital, that could  result in a  reduction in our clients drilling programs and their need for Danks services. At the same time, the reduction in world oil prices, if it persists, is likely to lead to a reduction in drilling activity, which could also reduce demand for Danks services.  In addition, the development of Kor-Tazhs  proved oil reserves could be delayed if, as a result of reduced bank lending activity, we are unable to raise the capital needed to continue with our development of the Northwest Zhetybai  oil field.  We are unable to determine at this time what the effect of the current banking crisis will be on our operations.


41


The Company will continue its efforts to obtain the funds needed to meet the future capital requirements of Dank and Kor-Tazh and will continue to evaluate ways to maximize the value of its assets, including possibly retiring or refinancing its existing debt. Although discussions have taken place, no commitment has been received at this time.   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 the Companys common stock.  If any of the risks described below actually occurs, that event could cause the trading price of the Companys common stock to decline, and you could lose all or part of your investment.  I.  Risks attendant to the Companys oil services business  Cyclical declines in oil and natural gas prices may result in reduced use of the Companys services, affecting the Companys business, financial condition and results of operation and the Companys ability to meet the Companys 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 the Companys services. Accordingly, when oil and natural gas prices are relatively low, the Companys revenues and income will suffer. Oil and natural gas prices depend on many factors beyond the Companys 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. 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


42


drilling services. The Companys 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 the Companys services and adversely affect the Companys financial results. As a result, the Company may suffer losses, be unable to make necessary capital expenditures and be unable to meet the Companys financial obligations.  The Companys  industry is highly competitive. The markets in which the Company operates 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 the Company and have resources that are significantly greater than the Companys 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 the Companys revenues and profitability. These competitors compete with us both for customers and for acquisitions of other businesses. This competition may cause the Companys business to suffer. The Company believes that competition for contracts will continue to be intense in the foreseeable future.  Suppliers The equipment utilized in the Companys 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.  The Companys business plan contemplates that the Company will follow a program of acquiring capital equipment as needed to maintain the Companys competitive position in the Kazakhstan oil industry.  The Company has already contracted for the Companys immediate equipment needs.  However, the cost of acquiring new equipment to expand the Companys business could increase as a result of the high demand for equipment in the industry.   Severe weather conditions may affect the Companys operations.  The Companys business may be materially affected by severe weather conditions in the areas in which the Company operates.  In particular, severe winter weather has in the past, and may in the future require us to suspend the Companys surveying operations, which is likely to result in loss of revenue and inefficient use of the Companys resources.  Moreover, as the Companys oil exploration subsidiary, Kor-Tazh, will soon be commencing exploration and development activities, the Company faces the risk that severe weather conditions may delay drilling and, under certain circumstances, result in


43


damage to the Companys equipment.  Any of these situations would have an adverse effect on the Companys financial results.  High interest rates may have a negative effect on the Companys operations. Dank has financed its recent growth by borrowing from a Kazakh bank.  Currently the Company carries almost $15 million in debt.  On approximately two-thirds of the Companys debt the Company pays interest at LIBOR+5.65% per annum.  On most of the remaining debt the Company pays 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.  The Company hopes to utilize the Companys status as a publicly-held company to attract equity financing including convertible debt.  To some extent, however, the Company may still depend on debt financing to fund the Companys expansion.  Although the Company will attempt to obtain future debt financing at more reasonable rates, there is no assurance that the Company will be successful in doing so.  If the Company is unsuccessful in these efforts, the resulting interest expense will have an adverse effect on the Companys profitability.  Currency fluctuations may adversely affect the Companys 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, the Companys 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 the Companys reported results.  The Company has not entered into agreements or purchased instruments to hedge the Companys exchange rate risks.  The Companys business and growth will suffer if the Company is unable to hire and retain key personnel that are in high demand. The Companys future success depends on the Companys 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 the Company may not be able to successfully attract or retain the personnel the Company needs to succeed.   Government regulation may hinder the Companys 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 the Companys business require frequent interaction with representatives of the Kazakh government institutions.  The effort to obtain the registrations, licenses and permits necessary to carry out the Companys business plans can be daunting.


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Significant delays can result from the need to obtain governmental approval of the Companys activities.  These delays can have an adverse effect on the profitability of the Companys 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 the Companys operations, which would adversely affect the Companys profitability.  The Company 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.  The Company 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 the Company cannot establish such controls, the Company 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 the Companys 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.  The Company may be unable to obtain all of the required conversion approvals for the Companys operations, and Kazakh regulatory authorities may impose greater restrictions on the convertibility of the Tenge in the future. Because all of the Companys future revenues will be in Tenge, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit the Companys ability to fund business activities outside Kazakhstan.  Moreover, although the Company do not expect that the company will pay dividends in the foreseeable future, the Companys ability to pay dividends to the Companys shareholders in the future could be hampered by Kazakhstan currency regulations.  II. Risks attendant to the Companys 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. The Company anticipates 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 the Companys statements of operations.


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The Company anticipates 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, on which it has drawn $3.6 million. Financial aid of $2 .5 million has been provided to Kor-Tazh by Timur Bergaliyev, a major shareholder and director of the Company.   Additional funds will be required, however, as the Companys 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. The operations of Kor-Tazh will require significant expenditures of capital that may not be recovered. The Company requires 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 the Companys exploration, exploitation, development and production activities to be unsuccessful, potentially resulting in abandoning the well. This could result in a total loss of the Companys 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 the Companys operations. The results of the Companys oil exploration and production activities will be highly dependent upon the worldwide prices received for the Companys oil production. Substantially all of the Companys 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 the Companys oil production will be dependent upon numerous factors beyond the Companys 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 the Companys 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 the Companys reserve estimates or underlying assumptions could materially affect the quantities and present values of the Companys 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, the Company must project production rates and timing of development expenditures. The Company 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


46


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 the Companys estimates. A significant variance could materially affect the estimated quantities and pre-tax present value of reserves shown in this report. In addition, the Company 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 the Companys control. The Company  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. The company intends to maintain insurance coverage limiting financial loss resulting from certain of these operating hazards. The Company may not, however, maintain full insurance coverage for all matters that may adversely affect the Companys 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 the Companys revenues or increase the Companys costs. There can be no assurance that any insurance will be adequate to cover losses or liabilities associated with operational hazards. The Company cannot predict the availability of insurance, or its availability at premium levels that justify its purchase.   ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Not applicable.    ITEM 4. 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


47


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.   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


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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: November 19, 2008 By: /s/ Nurlan Janseitov  Nurlan Janseitov, Chief Executive Officer  By: /s/ David Fulton  David Fulton, Chief Financial Officer


49