Final Results

RNS Number:2240R
Caspian Energy Inc
31 March 2008


                              CASPIAN ENERGY INC.

                     ANNOUNCES FULL YEAR FINANCIAL RESULTS

TORONTO, March 31, 2008 -- Caspian Energy Inc. (the "Company" or "CEK") (TSX and
AIM: CEK) announced today its financial results for the year ending December 31,
2007.

2007 highlights include:

* Sales volumes of oil and gas increased to an average of 414 boe /
  day in 2007 (2006 - 291 boe / day)

* The Company's work program extension, with the Republic of
  Kazakhstan ("ROK"), was extended for an additional two-year period;

* Identification of a number of post-salt drilling prospects in the
  Triassic and Upper Permian formations in the western side of the North Block

* Discussions on the potential farm-in to one of the Company's blocks
  are continuing and are making good progress;

* Petroleum revenues before transportation costs for the year ending
  December 31st 2007 were $6,269,118 (2006: $4,196,238); and

* For the year ending December 31st 2007, CEK's net loss was
  $13,208,688 (2006: $6,437,812)

* Cash position at 31st December 2007 of $4,373,919 (2006:
  $17,022,285)

Its audited financial statements for the period and related management's
discussion and analysis have been filed with Canadian securities regulatory
authorities and are available for viewing at www.sedar.com.

2008 outlook:

* Drilling commenced on 20th March 2008 on the first exploration well,
  Baktygaryn #703, in the Company's post-salt drilling program,

* A second well will be drilled following the release of the rig from #703

* Average daily production from Wells #301 and #213 over the past three months 
  has been 608 BOPD and 329 BOPD respectively, a total of 937 BOPD

* CEK, through its 50% ownership of Aral Petroleum Capital, has work programme
  commitments of US$7.85m in 2008 on its licence area in Kazakhstan

* The Board of CEK note its auditors statement with respect to CEK's ability to 
  meet its 2008 work programme commitments and is currently reviewing strategic 
  options in this regard, including the ongoing discussions regarding a 
  potential farm-in and, or, a potential capital increase. William Ramsay, 
  Chairman and Chief Executive Officer, Caspian Energy, Inc. commented:

"We are pleased to report on 2007, a year which saw marked operational
improvement on the previous period with production restarting from Well #301 and
improved flow rates from Well #213 following the work-over in late 2006

Looking forward to 2008, we are excited about our drilling in the Baktygaryn
area, it is the first of a number of opportunities we have identified in this
area of the North Block and should we be successful in both targets, we believe
we have the potential for highly significant recoverable reserves, relative to
those we have already. This is also our first chance to pursue a new strategy
which we believe offers a more attractive risk profile, and at a fraction of the
deep carbonate drilling costs."

                                     -ENDS-

For further information contact:

Caspian Energy Inc.
William Ramsay
President and Chief Executive Officer
020 7861 3232

Bell Pottinger Corporate and Financial
Ann-Marie Wilkinson/Sarah Williams
020 7861 3232

Jefferies International Limited
Toby Hayward/ Oliver Griffiths

00 44 (0) 20 7029 8000
The Company is an oil exploration and development corporation operating in the 
Republic of Kazakhstan.


CAUTIONARY NOTE

Some of the statements and information contained in this news release may
include certain estimates, assumptions and other forward-looking information.
The actual performance, developments and/or results of the Company may differ
materially from any or all of the forward-looking statements, which include
current expectations, estimates and projections, in all or in part attributable
to general economic conditions, and other risks, uncertainties and circumstances
partly or totally outside the control of the Company, including oil prices,
imprecision of reserve estimates, drilling risks, future production of gas and
oil, rates of inflation, changes in future costs and expenses related to the
activities involving the exploration, development, production and transportation
of oil, hedging, financing availability and other risks related to financial
activities, and environmental and geopolitical risks. Further information which
may cause results to differ materially from those projected in the
forward-looking statements is contained in the Company's filings with Canadian
securities regulatory authorities. The Company disclaims any intention or
obligation to update or revise forward-looking information, whether as a result
of new information, future events or otherwise, except in accordance with
applicable securities laws.

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN
THE UNITED STATES.

BUSINESS PROSPECTS AND OUTLOOK

The Company has been successful in establishing itself as an operating entity in
the ROK and expects to continue to experience future growth as work develops
there.

Prior to the end of the fourth quarter 2005, EZ#301 was drilled to a total depth
of 4,846 metres and logged. The well was completed with the drilling rig before
the rig was moved to the EZ#302 location. EZ#301 was matrix acidized and the two
potentially productive hydrocarbon bearing zones were flow-tested. The lower
zone (KT-2) was tested at 2,532 Bopd. The upper zone (KT-1) had difficulty
maintaining an independent flow, so it was commingled with the lower zone and
the well was tied-in to the Zhagabulak production facility. Subsequently,
productions logs were run and it was determined that the KT-1 was producing 100
Bopd. Well 301 was undergoing a government mandated pressure survey in November
2006, when a production logging tool and cable were lost in the hole. During the
second quarter, the tool and wire were recovered and the well has resumed
production. Well 301 is currently producing 588 BOPD, 14 BWPD, 837 MCFD with a
FTP (flowing tubing pressure) of 382 psig and a shut in casing pressure of 1,838
psig on a 12 mm choke. A pressure build-up was successfully completed in August
2007 and a xylene cleanout was pumped in November 2007 to clean out the
suspected asphaltene build-up in the production tubing.

The second exploration effort, EZ#302, was spud on December 25, 2005. Acidizing
and testing of the well were performed following removal of the drilling rig.
The well showed indications of hydrocarbons while drilling and logging; however,
the stimulation efforts failed to cause the well to flow naturally. In well 302,
a workover is being evaluated to isolate the KT-2 and the lower portions of the
KT-1 that exhibit higher water saturations on the logs.

The third location, EZ#303 is about 5.2 km southwest of EZ#302. EZ#303 spud on
May 28, 2006. The well was permitted to a depth of 5,700 metres. EZ#303 reached
a total depth of 4,630 metres in a sidetrack wellbore after the initial wellbore
reached a depth of 5,430 metres, but was lost due to a drill string parting,
while pulling out of the hole for logging. A total of 70 meters were perforated
and acidized in both the KT-1 and KT-2 intervals. A combined test of both
intervals yielded water with small amounts of oil, while the separate test on
the KT-1 yielded water. In well 303 a workover is being evaluated to isolate
intervals and test separately to identify which perforations are producing
water.

The original producing well, EZ#213, drilled and completed during the Soviet
period, was re-entered in November 2006 and perforations were added in the KT-1
reservoir. Due to different casing weights, problems were encountered with
packer setting for the acid operation and consequently, only one-half of the
productive zones were acidized. Despite the limits on the acidization, a
significant improvement of daily production over the pre-workover rates was
achieved. . Well 213 is currently producing 300 BOPD, 43 BWPD, 428 MCFD with a
flowing tubing pressure of 375 psig and a shut-in casing pressure of 1,705 psig
on an 8.7 mm choke. A production survey to determine the reservoir pressures and
production contribution from the KT-1 and KT-2 intervals was completed during
October 2007 that showed approximately 30 BOPD from the KT-1 with the remaining
production from the KT-2.

The Company has initiated the development process for East Zhagabulak. Caspian
has made initial contacts with Kazakhstan design institutes for the preparation
of the development program report for the development of the East Zhagabulak
field.

Ongoing petrophysical analyses of all wells penetrating the below salt
reservoirs is being completed and correlations of these wells will aid in the
identification of future drilling locations in the North Block. Identification
and acquisition of well data within the extended territory is also be evaluated
for inclusion into this process.

The Baktygaryn 3-D seismic program was completed in early November 2005.
PGS-GIS, in Almaty, ROK was awarded the processing contract. Due to the presence
of large salt bodies in the Baktygaryn Area, the 3-D data set was processed
through PSDM (Pre-Stack Depth Migration) and interpretation of this data has
been completed. PSTM (Pre-Stack Time Migration) analysis, for the above salt
section has also been conducted. The acquisition of the 367 kilometre regional
2-D seismic survey covering the west and north areas of the North Block and
tying into the Zhagabulak and Baktygaryn 3-D seismic surveys that was completed
in March 2007 has also been processed and interpreted. The Baktygaryn 3-D
program and the regional 2-D program were fully interpreted at the end of
October 2006. The interpreted data from all new seismic data acquired and from
the earlier reprocessed Soviet-era 2-D seismic is being combined to create a
geological model and identify additional leads and prospects across the North
Block territory.

The Baktygaryn Area presents drilling targets in both the below salt Lower
Permian and Carboniferous sections and the above salt Upper Permian and Mesozoic
sections with depths ranging from approximately 400 to 2,500 metres and provides
a second tier of exploration to the Company's drilling portfolio. These targets
are recognized in the forms of channel sands, traps against the Kungurian salt
ridges and underneath salt overhangs.

Interpretation work on the Baktygaryn 3-D and North Block regional 2-D seismic
data identified several post-salt drilling targets in the Triassic and Permian
formations. Four of these targets have been permitted and locations prepared.
Problems with rig preparation have delayed drilling, however, the first of these
wells, located in the Baktygaryn area, spud on March 20, 2008, and will target
both the Triassic and Upper Permian clastics in structures related to a salt
diaper, with a total depth of 2,500 meters.

The remaining permitted locations will be drilled on schedule as the rig is
released from each well. The identified locations are located in two areas in
the western portion of the North Block, known as Aransay and West Kozdesay.
Ongoing interpretation of the seismic data is creating a growing list of other
drillable prospects and leads.

Soviet-era seismic data interpretation, mapping and the associated shallow well
drilling in the Itisay, Kozdesay and West Kozdesay areas, located in the
southwestern portion of the North Block, yielded minor positive tests and shows
of oil associated with the post-salt sediments of Jurassic, Triassic and Upper
Permian ages. A review of this data has resulted in the identification of
several prospects and leads ranging from 600 to 1,800 metres in trapping
positions against Permian salt ridges and under-salt overhangs. Several lines
from the Company's 2006 2-D seismic program were shot across certain of these
leads and prospects to verify this premise. Interpretation of most of the
regional 2006 2-D seismic survey covering the west and north areas of the North
Block has been completed. The interpreted data from all new seismic data
acquired and from the earlier reprocessed Soviet-era 2-D seismic was combined to
create a geological model and identify additional leads and prospects across the
North Block territory. As a result of this work, some of the earlier leads and
prospects in the post-salt sediments identified on vintage maps and seismic in
three areas in the south western portion of the North Block, known as Itisay,
Kozdesay and West Kozdesay have been confirmed and in addition several new leads
and drillable prospects have been identified in trapping positions against
Permian salt ridges and under salt overhangs. Drilling for these targets is
expected to begin in 2008.

Future seismic activity includes a third 3-D seismic acquisition, pending the
results of the upcoming drilling campaign and further ongoing 2-D seismic
interpretation.

The relatively shallow post salt targets at Baktygaryn offer a completely new
series of opportunities for the Company. The 3-D and 2-D seismic data have
enabled several new prospects to be identified and the Company is now in the
process of selecting additional drilling locations.

Following the release of the rig from well #703, the first exploration well
located in Baktygaryn, the Company intends to move drilling efforts to the
eastern side of the Baktygaryn, West Kozdesay, and Aransay areas in the western
part of the North Block where it will drill for Triassic and Upper Permian
targets ranging from 700 to 1,400 metres. The Company is awaiting the outcome of
permitting constraints and current weather conditions before it confirms the
precise location of the second well.

The Company's work program extension, with the ROK, to December 2007 has now
been extended for an additional two-year period, subject to the terms of the
original exploration contract. The 2008 work program commits the Company to
undertake US$8.6 million of exploration expenditures prior to the close of the
calendar year and the 2009 work program - US$10.5 million of exploration
expenditures. Additionally, during 2008, Aral is obligated to make-up an
additional US$ 7.1 million in cumulative shortfalls under the contract.


Consolidated Balance Sheet
                                                                2007              2006
                                                                   $                 $
Assets

Current assets
Cash and cash equivalents                                  4,373,919        17,022,285
Accounts receivable                                          935,773           672,879
Prepaids and other deposits                                2,310,302         2,713,994
Inventory (note 3)                                           454,302           177,055

                                                           8,074,296        20,586,213

Restricted cash (note 5)                                     253,132           194,412

Property, plant and equipment (note 4)                   124,795,793       118,323,038

                                                         133,123,221       139,103,663

Liabilities

Current liabilities
Accounts payable and accrued liabilities                   3,458,427         5,305,085

Asset retirement obligation (note 5)                         252,279           156,255

Loan payable (note 6)                                      6,947,055                 -

Future income taxes (note 8)                                 967,400           358,848

Convertible debentures (note 7)                           17,669,238        18,683,004

                                                          29,294,399        24,503,192

Shareholders' Equity

Share capital (note 9)                                   121,470,892       121,470,892

Warrants to purchase common shares (note 9)                  946,508           946,508

Contributed surplus (note 11)                             14,467,311        12,030,272

Deficit                                                 (33,055,889)      (19,847,201)

                                                         103,828,822       114,600,471

                                                         133,123,221       139,103,663
Going concern (note 1)

See accompanying notes to consolidated financial statements.


Consolidated Statements of Loss, Comprehensive Loss and Deficit
                                                                2007           2006
                                                                   $              $

Revenue
Oil and gas revenue, net                                   6,269,118      4,196,238
Interest                                                     282,139      1,216,890
Other                                                         15,614          9,401

                                                           6,566,871      5,422,529

Expenses
General and administrative                                 3,584,285      3,274,410
Accretion of convertible debentures (note 7)                 393,312        281,168
Interest (note 7)                                          1,777,641      1,532,103
Operating                                                  2,163,997      2,509,396
Transportation                                               487,257        205,704
Stock-based compensation (notes 10 and 11)                 2,437,039      2,384,901
Foreign exchange loss (gain)                               5,780,432      (813,575)
Depletion, depreciation and accretion                      2,411,418      2,265,810
Gain on disposal of mining interest (note 14)                      -       (83,332)

                                                           19,035,381    11,556,585

Loss before income taxes                                 (12,468,510)   (6,134,056)

Future income taxes                                           740,178       303,756

Net loss and comprehensive loss for the year             (13,208,688)   (6,437,812)
 
Deficit - Beginning of year                              (19,847,201)  (13,409,389)

Deficit - End of year                                    (33,055,889)  (19,847,201)

Basic and diluted loss per share (note 9)                      (0.13)        (0.07)

Going concern (note 1)

See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows
                                                                 2007             2006
                                                                    $                $
Cash provided by (used in)

Operating activities
Net loss and comprehensive loss for the year             (13,208,688)      (6,437,812)
Items not affecting cash
Stock-based compensation                                    2,437,039        2,384,901
Unrealized foreign exchange (gain) loss                   (3,113,236)          194,061
Depletion, depreciation and accretion                       2,411,418        2,265,810
Interest on convertible debentures                          1,777,641        1,522,534
Accretion of convertible debentures                           393,312          281,168
Future income taxes                                           740,178          303,756
Gain on disposal of mining interest                                 -         (83,332)
Loss on disposal of fixed assets                                    -           11,087

                                                          (8,562,336)          442,173
Changes in non-cash working capital balances                (262,893)        (167,064)

                                                          (8,825,229)          275,109

Financing activities
Convertible debentures                                              -       18,240,640
Loan payable                                                6,947,055      (6,872,279)
Restricted cash                                              (58,720)         (57,528)
Issuance of common shares and warrants                              -       50,804,650
Share issue expenses                                                -      (3,782,317)

                                                            6,888,335       58,333,166

Investing activities
Acquisition of property, plant and equipment              (8,991,257)     (52,154,798)
Proceeds on disposal of mining interest                             -           81,219
Changes in non-cash working capital balances              (1,720,215)          393,503

                                                         (10,711,472)     (51,680,076)

(Decrease) increase in cash and cash equivalents         (12,648,366)        6,928,199

Cash and cash equivalents - Beginning of year*             17,022,285       10,094,086

Cash and cash equivalents - End of year*                    4,373,919       17,022,285

Interest received                                             385,076        1,216,890

*Cash and cash equivalents consist of cash and short term investments with a
maturity date of less than three months.

See accompanying notes to consolidated financial statements.



Notes to the Consolidated Financial Statements December 31, 2007

1           Nature of operations and going concern

Caspian Energy Inc. ("Caspian" or the "Company") is engaged in the exploration
for and development and production of oil and gas in the Republic of Kazakhstan.
Its primary operating activities are carried out through its wholly-owned
subsidiary, Caspian Energy Ltd. ("Caspian Ltd.").

Caspian's principal assets are a 50% interest in Aral Petroleum Capital LLP
("Aral"), held by Caspian Ltd. Through its interest in Aral, Caspian has the
right to explore and develop certain oil and gas properties in Kazakhstan, known
as the North Block, a 3,458 square kilometre area located in the vicinity of the
Kazakh pre-Caspian basin. The Company also has minor resource interests in
Canada.

Aral's exploration and development rights to the North Block were granted
pursuant to the terms of an exploration contract between the government of
Kazakhstan and Aral (the "Exploration Contract"). The initial three-year term of
the Exploration Contract was extended for a two-year period (expiring in
December 2007) and a further extension of two years to December 31, 2009 with a
minimum work commitment of US $19.1 million has now been placed into effect.

Under the terms of the Exploration Contract, Aral was obligated to spend at
least US $20.8 million under a minimum work program in respect of the North
Block during the initial three-year term of the contract. The expenditures
include processing and reinterpretation of geological and geophysical data of
prior years, two dimensional and three dimensional seismic shoots and surveys,
drilling exploration wells, well reactivations and well surveys and testing. The
minimum work program matured at the end of calendar 2005. As of December 31,
2005, Aral's financial obligation under the minimum work program had been
discharged. The work program extension to December 2008 includes drilling three
wells to a combined total of 8,500 metres with a monetary obligation of US
$20.15 million. At December 31, 2007, Aral had contract shortfalls aggregating
US $7.1 million. Management of Aral believes the Company is in compliance with
its commitments under the Minimum Working Program and has received authorization
from the Ministry of Energy and Natural Resources and other competent bodies to
carry over fulfillment of the above shortfalls to the year ending December 31,
2008.

Under terms of a shareholders' agreement dated June 25, 2004, among Caspian
Ltd., Azden Management Limited ("Azden") and Aral, Caspian was committed to fund
Aral's US $20.8 million obligation under the initial work program. This
financial commitment was satisfied, in full, by the Company. In addition,
Caspian Ltd. has undertaken, on a best efforts basis, to raise financing of US
$84.0 million to fund Aral's operations pursuant to the Exploration Contract. At
March 31, 2007, Caspian Ltd. had discharged this undertaking.

Going concern

These financial statements have been prepared in accordance with Canadian
generally accepted accounting policies ("GAAP") applicable to a going concern,
which contemplates the realization of assets and the payment of liabilities in
the ordinary course of business. Should the Company be unable to continue as a
going concern, it may be unable to realize the carrying value of its assets and
to meet its liabilities as they become due.


The Company reported a net loss of $13,208,688 and negative funds generated from
operations of $8,825,229 for the year ended December 31, 2007. The Company had
net working capital of $4,615,869. As a result, there is substantial doubt about
the Company's ability to continue as a going concern. The Company's continuation
is dependent upon the ability to raise capital and the success of its drilling
and exploration program. The Company plans a potential rights offering, however,
there can be no assurance that the Company will be successful with this offering
or other initiatives it undertakes.

The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence. Such adjustments could be material.

2           Significant accounting policies

The consolidated financial statements of Caspian are stated in Canadian dollars
and have been prepared in accordance with Canadian GAAP.

The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents are comprised of cash and short-term investments with
an initial maturity date of three months or less.

Inventory

Inventory is recorded at the lower of cost calculated using the weighted average
method, and net realizable value. Cost comprises direct materials and where
applicable direct labour costs and those overheads which have been incurred in
bringing the inventories to their present location and condition. Net realizable
value represents the estimated selling price less all estimated costs of
completion and costs to be incurred in marketing, selling and distribution.

Joint ventures

The Company's oil and gas exploration and development activities are conducted
mainly in Kazakhstan through its 50% interest in Aral and, accordingly, these
consolidated financial statements reflect only the Company's proportionate
interest in such activities.

Property, plant and equipment

a)         Capitalized costs

The Company follows the full cost method of accounting for oil and natural gas
operations, whereby all costs related to the acquisition, exploration and
development of petroleum and natural gas reserves are capitalized. Such costs
include lease acquisition costs, geological and geophysical costs, carrying
charges on non-producing properties, costs of drilling both productive and
non-productive wells, the cost of petroleum and natural gas production equipment
and overhead charges directly related to exploration and development activities.
Proceeds from the sale of oil and gas properties are applied against capital
costs, with no gain or loss recognized, unless such a sale would change the rate
of depletion and depreciation by 20% or more, in which case, a gain or loss
would be recorded.

b)         Depletion, depreciation and amortization

The capitalized costs are depleted and depreciated using the unit-of-production
method based on proven petroleum and natural gas reserves, as determined by
independent consulting engineers. Oil and natural gas liquids reserves and
production are converted into equivalent units of natural gas based on relative
energy content on a ratio of six thousand cubic feet of gas to one barrel of
oil. Significant development projects and expenditures on exploration properties
are excluded from calculation of depletion prior to assessment of the existence
of proved reserves.

Other property, machinery and equipment are recorded at historical cost.
Depreciation is calculated on a straight-line basis at the following annual
rates:

Buildings 8%

Machinery and equipment 8%

Vehicles 7%

Other fixed assets 10%

c)         Ceiling test

The Company follows the Canadian accounting guideline on full cost accounting.
In applying the full cost guideline, Caspian calculates its ceiling test for
each cost centre by comparing the carrying value of oil and natural gas
properties and production equipment to the sum of undiscounted cash flows
expected to result from Caspian's proved reserves. If the carrying value is not
fully recoverable, the amount of impairment is measured by comparing the
carrying value of oil and gas properties and production and equipment to the
estimated net present value of future cash flows from proved plus probable
reserves using a risk-free interest rate and expected future prices. Any excess
carrying value above the net present value of the future cash flows is recorded
as a permanent impairment.


d)         Unproved property

Costs of acquiring and evaluating unproven properties are initially excluded
from costs subject to depletion, until it is determined whether or not proved
reserves are attributable to the properties or, in the case of major development
projects, commercial production has commenced, or impairment has occurred.
Impairment occurs whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. When proven reserves are determined or
the property is considered to be impaired, the cost of the property or the
amount of the impairment is added to the costs subject to depletion for that
country's cost centre.

e)         Asset retirement obligation

Caspian records the fair value of asset retirement obligations ("ARO") as a
liability in the period in which it incurs a legal obligation to restore an oil
and gas property, typically when a well is drilled or other equipment is put in
place. The associated asset retirement costs are capitalized as part of the
carrying amount of the related asset and depleted using a unit-of-production
method over the life of the proved reserves. Subsequent to initial measurement
of the obligations, the obligations are adjusted at the end of each reporting
period to reflect the passage of time and changes in estimated future cash flows
underlying the obligation. Actual costs incurred on settlement of the ARO are
charged against the ARO.

Income taxes

Income taxes are calculated using the liability method of tax accounting.
Temporary differences arising from the difference between the tax basis of an
asset or liability and its carrying value amount on the balance sheet are used
to calculate future income tax assets and liabilities. Future income tax assets
and liabilities are calculated using tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse.

Stock-based compensation

The Company grants options to purchase common shares to employees and directors
under its stock option plan. Under this standard, future awards are accounted
for using the fair value of accounting for stock-based compensation. Under the
fair value method, an estimate of the value of the option is determined at the
time of grant using a Black-Scholes option-pricing model. The fair value of the
option is recognized as an expense and contributed surplus over the vesting
period of the option. Proceeds received on exercise of stock options, along with
amounts previously included in contributed surplus, are credited to share
capital.

Revenue recognition

Revenue from the sale of oil and natural gas is recognized based on volumes
delivered to customers at contractual delivery points and rates. The costs
associated with the delivery, including operating and maintenance costs,
transportation, and production-based royalty expenses will be recognized in the
same period in which the related revenue is earned and recorded.

Measurement uncertainty

The amounts recorded for depletion and depreciation of property, plant and
equipment, the provision for asset retirement obligations and the amounts used
for ceiling test calculations are based on estimates of reserves and future
costs. The Company's reserve estimates are reviewed annually by an independent
engineering firm. The amounts disclosed relating to fair values of stock options
issued are based on estimates of future volatility of the Company's share price,
expected lives of options, and other relevant assumptions. By their nature,
these estimates are subject to measurement uncertainty.

Loss per share

Basic per share amounts are calculated using the weighted average number of
shares outstanding during the period. Diluted per share amounts are calculated
based on the treasury stock method whereby the weighted average number of shares
is adjusted for the dilutive effect of options. The Company applies the treasury
stock method for the calculation of diluted net loss per share whereby the
effect of the "in the money" instruments such as stock options and warrants
affect the calculation. The treasury stock method assumes that the proceeds from
the exercise are used to repurchase common shares of the Company at the weighted
average market price during the year.

Financial instruments

Fair values

The fair values of accounts receivable, accounts payable and accrued
liabilities, and loan payable approximate their carrying values due to their
short-term maturity.

Credit risk

Substantially all of the Company's accounts receivable are due from companies in
the oil and gas industry and are subject to the normal industry credit risks.
The carrying value of accounts receivable reflects management's assessment of
the associated credit risks.

Foreign currency

All operations are considered financially and operationally integrated. Results
of operations are translated to Canadian dollars, using average rates for
revenues and expenses, except depreciation which is translated at the rate of
exchange applicable to the related assets. Monetary items denominated in foreign
currency are translated to Canadian dollars at exchange rates in effect at the
balance sheet date and non-monetary items are translated at rates of exchange in
effect when the assets were acquired or obligations incurred. Foreign exchange
gains and losses are recorded in the statement of loss.


Adoption of new accounting policies

On January 1, 2007, the Company adopted the Canadian Institute of Chartered
Accountants (CICA) handbook Sections 1506 "Accounting Changes", 1530
"Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial
Instruments - Recognition and Measurement", Section 3861 "Financial Instruments
- Disclosure and Presentation" and Section 3865 "Hedges".

CICA Section 1530, "Comprehensive Income" - Comprehensive income is comprised of
net earnings or loss and other comprehensive income (OCI). OCI is the change in
a company's net assets that results from transactions, events and circumstances
from non owner sources and includes items that would not normally be included in
net earnings such as unrealized gains and losses on available-for-sale
investments. The Company currently does not have any OCI.

CICA Section 3251, "Equity" establishes new standards for presentation of equity
and changes in equity during the period. Application of this section did not
result in changes to the presentation of equity for the Company.

CICA Section 3855, "Financial Instruments - Recognition and Measurement",
prescribes when a financial instrument is to be recognized on the balance sheet
and at what amount. It also specifies how financial instrument gains and losses
are to be presented. All financial instruments are classified into one of the
following five categories: held for trading, held-to-maturity, loans and
receivables, available-for-sale financial assets and other financial
liabilities. Initial and subsequent measurement and recognition of changes in
the value of financial instruments depends on their classification.

a)         Held for trading financial instruments are measured at fair value.
All gains and losses are included in net earnings in the period in which they
arise.

b)         Loans and receivables are accounted for at amortized cost using the
effective interest method. Any gain or loss on the realization of the loans and
receivables are recorded into earnings.

Future accounting changes

The CICA issued three new accounting standards: Section 1535, Capital
Disclosures, Section 3862, Financial Instruments - Disclosures, and Section
3863, Financial Instruments - Presentation. These new standards will be
effective for fiscal years beginning on or after October 1, 2007 and the Company
will adopt them on January 1, 2008. The Company is in the process of evaluating
the disclosure and presentation requirements of the new standards, however it is
not anticipated that the earnings or financial position of the Company will be
affected.

Section 1535 establishes disclosure requirements about an entity's capital and
how it is managed. The purpose will be to enable the users of the financial
statements to evaluate the entity's objectives, policies and processes for
management capital.


Sections 3862 and 3863 will replace Section 3861, Financial Instruments -
Disclosure and Presentation, revising and enhancing its disclosure requirements,
and carrying forward unchanged its presentation requirements. These new sections
will place increased emphasis on disclosures about the nature and extent of
risks arising from financial instruments and how the entity manages those risks.

In March 2006, the Accounting Standards Board of the CICA released its new
strategic plan which proposes to abandon Canadian GAAP for public companies and
effect a complete convergence to the International Financial Reporting
Standards, at the end of a transitional period Canadian GAAP will cease to exist
as a separate distinct basis of financial reporting for public companies. The
Company will convert to these new standards according to the timetable set with
these new rules. The Company will closely monitor changes arising from this
convergence.

3           Inventory
                                                           2007             2006
                                                              $                $

Oil inventory                                           187,300           24,742
Fuel                                                     25,748            3,522
Construction materials                                    2,742            4,342
Spare parts                                               5,004            3,425
Other materials                                         233,508          141,024

                                                        454,302          177,055

4           Property, plant and equipment
                                                               2007             2006
                                                                  $                $

Petroleum and natural gas assets                        126,806,121      118,334,595
Other assets                                              3,122,928        2,508,707

                                                        129,929,049      120,843,302
Accumulated depletion and depreciation                  (5,133,256)      (2,520,264)

                                                        124,795,793      118,323,038

Excluded from the depletable base of oil and gas assets at December 31, 2007 are
unproved properties of $72,049,847 (2006 - $65,707,839).


The Company applied the ceiling test to its capitalized assets at December 31,
2007 and 2006 and determined that there was no impairment of such carrying
costs.
                               WTI Crude oil
                               price $US/bbl

2008                           90.00
2009                           86.70
2010                           83.20
2011                           79.60
2012                           78.50

The prices increase by 2% for years thereafter.

During the year ended December 31, 2007, the Company capitalized $269,548 (2006
- $506,317) of general and administrative expenses related directly to
exploration and development activities.

5           Asset retirement obligation

The Company records the fair value of asset retirement obligations as a
liability in the period in which it incurs the legal obligation.

The asset retirement obligation results from net ownership interests in
petroleum and natural gas assets including well sites, gathering systems and
processing facilities. The Company estimates the total undiscounted amount of
cash flows required to settle its asset retirement obligations at December 31,
2007 is $261,394, which will be incurred between 2014 and 2019. A
credit-adjusted risk-free rate of 16.5% was used to calculate the fair value of
the asset retirement obligations, and an inflation factor of 19.0%.

A reconciliation of the asset retirement obligation is provided below:
                                                            2007            2006
                                                               $               $

Opening balance                                          156,255          88,900
Liabilities incurred                                      94,490          38,382
Accretion                                                 19,574           4,760
Change in estimate                                      (18,040)          24,213

Closing balance                                          252,279         156,255

Under the terms of the Exploration Contract (note 1), the Company is required to
create a fund to finance actual future restoration costs, equal to 1% of the
capital costs of exploration. At December 31, 2007 and 2006, $253,132 and
$194,412, respectively have been placed in a restricted bank account related to
the funding requirement.

6           Loan payable

Pursuant to the Participants Agreement By and Among Azden Management Limited and
Caspian Energy Ltd. and Aral Petroleum Capital Limited Liability Partnership,
subsequent to reaching the US $84 million threshold on advances by Caspian to
Aral, Caspian and Azden shall jointly finance, in equal proportions, the next
stages of exploration by Aral. As at December 31, 2007, $6,947,055 had been
advanced by Azden to Aral and is recorded as a loan payable in Aral's accounts.

7           Convertible debentures

On March 1, 2006, the Company received US $16 million and issued 10% per annum,
convertible debentures in a like amount secured with Caspian Ltd. shares. The
debentures mature on March 2, 2011 and are convertible at any time and from time
to time into common shares of the Company at a conversion price of $2.45 per
share. The Company may repay the principal amount of the debentures, in whole or
in part, or require conversion into common shares of the Company if the
volume-weighted average trading price of the common shares, for 40 consecutive
trading days, is at least $4.08.

                          Face amount    Fair value   Accretion    Interest      Carrying
                                    $            of           $           $         value
                                         conversion                                     $
                                             option                                     
                                                  $

Debentures issued,        
opening balance           18,320,884    (1,483,805)     281,168   1,564,757   18,683,004
Accretion of discount              -              -     393,312           -      393,312
Translation adjustment   (2,608,884)              -           -   1,201,806  (1,407,078)

Balance - December 31,    
2007                      15,712,000    (1,483,805)     674,480   2,766,563   17,669,238

8           Income taxes

Future income taxes reflect the net tax effects of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for tax purposes. The Company has provided for certain
taxes based upon statutory regulations of Kazakhstan. The Company is subject to
permanent tax differences due to the fact that certain expenses are not
deductible for income tax purposes under Kazakh laws.


The provision for taxes differs from that computed using the combined Canadian
federal and provincial statutory rate as follows:
                                                                   2007            2006
                                                                      $               $

Loss before income taxes                                   (12,468,510)     (6,134,056)

Expected recovery at statutory tax rate of 32.10% (        
2006 - 34.50%)                                              (4,002,392)     (2,116,249)
Tax rate difference of foreign jurisdiction                     261,839         291,699
Non-deductible stock-based compensation                         782,290         822,791
Losses for which no benefit is being recognized               3,698,441       1,128,924
Non-deductible expenses                                               -         176,591

Future income taxes                                             740,178         303,756

The tax effects on major temporary differences that give rise to the future tax
liability are as follows:
                                                                   2007             2006
                                                                      $                $

Future tax asset
Tax losses available for carry forward                          307,790          936,012
Other                                                            47,244            8,562
Difference in the tax bases and carrying values of              904,103          143,939
property, plant and equipment

                                                              1,259,137        1,088,513

Future tax liability
Geological and geophysical expense                          (2,226,537)      (1,433,712)
Other                                                                 -         (13,649)

Net future tax liability                                    (2,226,537)      (1,447,361)

                                                              (967,400)        (358,848)


9           Share capital

Authorized

Unlimited number of voting common shares, without stated par value

Issued
                                                              Number of           Amount
                                                                 shares                $                                
Issued and outstanding as at December 31, 2005               84,327,163       75,220,762

Exercise of warrants (i)                                        357,100          888,505
Private placement (ii)                                       19,609,000       49,056,442
Exercise of options (iii)                                        50,000           87,500
Share issue costs (iv)                                                -      (3,782,317)

Issued and outstanding as at December 31, 2007 and          104,343,263      121,470,892
2006

i)    During the year, 357,100 broker warrants were exercised. The warrants 
      had an exercise price of $2.00 per common share.

ii)   On April 5, 2006 a private placement of 19,609,000 common shares
      were issued at $2.55 per share.

iii)  On April 10, 2006, 50,000 common shares at $1.75 per were issued
      pursuant to the Company's stock option plan.

iv)   Share issue costs have not been tax-effected.


Stock options

The Company has a stock option plan (the "Plan") under which it may grant
options to directors, officers and employees for the purchase of up to 15% of
the number of common shares from time to time. Options are granted at the
discretion of the board of directors. The exercise price, vesting period and
expiration period are also fixed at the time of grant at the discretion of the
Board of Directors in accordance with terms of the Plan.


Changes to the Company's stock options are summarized as follows:

                                                            Number of         Weighted
                                                              options          average
                                                                          option price
                                                                                     $

Balance - December 31, 2005                                 9,166,499             1.72
Granted                                                     1,943,433             1.29
Exercised                                                    (50,000)             1.75

Balance - December 31, 2006                                11,059,932             1.64
Granted                                                     2,668,845             0.88
Expired                                                     (400,000)             2.15

Balance - December 31, 2007                                13,328,777             1.47

Exercisable - December 31, 2007                            12,895,444             1.48

The following is a summary of stock options outstanding and exercisable as at
December 31, 2007:
                            Options outstanding               Options exercisable

 Range of exercise       Options          Weighted         Weighted          Options
             price   outstanding           average          average      exercisable
                                         remaining         exercise
                                       contractual            price
                                     life in years

             $0.75     2,079,090               1.7            $0.75        2,079,090
             $0.86       800,000               4.1            $0.86          666,667
             $0.89     1,868,845               4.3            $0.89        1,868,845
             $1.25     1,043,433               3.7            $1.25        1,043,433
             $1.34       900,000               4.0            $1.34          600,000
             $1.61       843,271               2.5            $1.61          843,271
             $1.75     1,100,000               2.5            $1.75        1,100,000
             $2.00     1,050,000               2.0            $2.00        1,050,000
             $2.15     3,644,138               1.7            $2.15        3,644,138

                      13,328,777                              $1.48       12,895,444

Per share amounts

The weighted average number of common shares outstanding during the period ended
December 31, 2007 of 104,343,263 (2006 - 99,146,605 shares) was used to
calculate loss per share amounts.

In computing diluted loss per share, no shares were added to the weighted
average number of common shares outstanding during the year ended December 31,
2007 (2006 - nil) as they are anti-dilutive.


Warrants

588,270 broker warrants are outstanding at December 31, 2007 and all have
vested. These warrants entitle the holder to purchase one common share at a
price of $2.77 until April 5, 2008. The fair value of the outstanding warrants
using the Black-Scholes method was $946,508 (2006 - $946,508).

10       Stock-based compensation

Options granted to both employees and non-employees are accounted for using the
fair value method. The fair value of common share options granted in the year
ended December 31, 2007 was estimated to be $1,638,489 as at the grant date
using a Black-Scholes option-pricing model and the following assumptions:

Risk free interest rate                                  4.11 - 4.27%
Expected life                                            5 year average                                                 
Expected volatility                                      84 - 89%
Expected dividend yield                                  0%

The estimated fair value of the options is amortized to expense and credited to
contributed surplus over the option vesting period on a straight-line basis.

11       Contributed surplus
                                                                 2007             2006
                                                                    $                $

Balance - Beginning of year                                12,030,272        7,668,133

Stock options issued to employees, officers and             2,437,039         2,384,901
directors
Fair value of debentures conversion option                          -         1,483,805
Fair value of warrants expired                                      -           493,433

Balance - End of year                                      14,467,311        12,030,272

The term and vesting conditions of each option may be fixed by the board when
the option is granted, but the term cannot exceed 5 years from the date upon
which the option is granted.

The options granted to directors, officers and employees may be exercised over
five years from the date of granting and expire from time to time to April 2012.

The debentures are convertible into common shares of the Company at a price of
$2.45 per share and mature on March 31, 2011.


12       Commitments

In accordance with the shareholders' agreement in respect of Aral, Caspian was
obligated to fund the initial work program of Aral pursuant to the Exploration
Contract. The minimum work program was US $20.8 million and matured at the end
of calendar 2005. As at December 31, 2005, this obligation was fully discharged.
The work program extension to December 2007 includes drilling three wells to a
combined total of 8,500 metres with a monetary obligation of US $20.15 million.
No additional seismic is required. The work program extension to December 2009
includes drilling seven wells to a combined total of 8,500 metres with a
monetary obligation of US $19.085 million. The Company's calendar 2006 minimum
work program with the Republic of Kazakhstan was approved for US $12.2 million
and was discharged during 2006. The Company's calendar 2007 work program was
approved for US $8.4 million with amendment for another US $23.7 million). At
December 31, 2007, Aral had contract shortfalls aggregating US $7.1 million.
Management of Aral believes the Company is in compliance with its commitments
under the Minimum Working Program and has received authorization from the
Ministry of Energy and Natural Resources and other competent bodies to carry
over fulfillment of the above shortfalls to the year ending December 31, 2008.

13       Financial instruments

Caspian's financial instruments included in the consolidated balance sheet are
comprised of cash and cash equivalents, accounts receivable, other deposits and,
accounts payable. The fair values of these financial instruments approximate
their carrying amounts due to the short-term nature of the instruments. A
substantial portion of Caspian's accounts receivable are with customers in the
oil and gas industry and are subject to normal industry credit risks.

A substantial portion of Caspian's activities are settled in foreign currencies
and consequently, the Company is subject to fluctuations in currency translation
rates.

The liability and equity components of the convertible debentures are presented
separately in accordance with their substance. The liability component is
accreted to the amount payable at maturity by way of a charge to earnings using
the effective interest method.

14       Disposal of mining interest

On November 1, 2006, the Company executed a Letter of Intent to dispose of its
interest in a mining property located in Noyon Township, Quebec, Canada for
consideration of $150,000. The property was not consistent with the Company's
business objective. The transaction was completed in December 2006 and resulted
in a book gain of $83,332.


15       Segmented information

The Company's activities are conducted in two geographic segments: Canada and
Kazakhstan. All activities relate to exploration for and development of
petroleum and natural gas.
                                             Canada      Kazakhstan            Total
                                                  $               $                $

Revenue
Oil and gas revenue, net                     40,249       6,228,869        6,269,118
Interest                                    282,139               -          282,139
Other                                             -          15,614           15,614

                                            322,388       6,244,483        6,566,871

Expenses
General and administrative                2,910,834         673,451        3,584,285
Accretion of convertible debentures         393,312               -          393,312
Interest                                  1,777,641               -        1,777,641
Operating                                    12,075       2,151,922        2,163,997
Transportation                                  342         486,915          487,257
Stock-based compensation                  2,437,039               -        2,437,039
Foreign exchange loss (gain)             14,763,369     (8,982,937)        5,780,432
Depletion, depreciation and accretion         5,000       2,406,418        2,411,418
Future income taxes                               -         740,178          740,178

                                         22,299,612     (2,524,053)       19,775,559

Net (loss) income for the year         (21,977,224)       8,768,536     (13,208,688)

Assets
Current assets                            3,557,712       4,516,584        8,074,296
Restricted cash                                   -         253,132          253,132
Property, plant and equipment, net           29,173     124,766,620      124,795,793

                                          3,586,885     129,536,336      133,123,221

Liabilities                              18,130,131      10,720,986       28,851,117


16       Reconciliation of International Financial Reporting Standards

Accounting practices under Canadian GAAP and International Financial Reporting
Standards ("IFRS") are, as they affect these financial statements, substantially
the same except for the following:

Property and equipment

Under Canadian GAAP, an impairment loss should be recognized when the carrying
amount of a cost centre is not recoverable and exceeds its fair value. The
carrying amount is not recoverable if the carrying amount exceeds the sum of the
undiscounted cash flows expected to result from its use and eventual
disposition. Unproved properties and major development projects are included in
this recoverability test. A cost centre impairment loss should be measured as
the amount by which the carrying amount of assets capitalized in a cost centre
exceeds the sum of:

   *  the fair value of proved and probable reserves; and

   *  the costs (less any impairment) of unproved properties that have been 
      subject to a separate test for impairment and contain no probable reserves

For costs beyond the exploration and evaluation stage, IFRS requires (i) an
impairment to be recognized when the recoverable amount of an asset (cash
generating unit) is less than the carrying amount; (ii) the impairment loss to
be determined as the excess of the carrying amount above the recoverable amount
(the higher of fair value less costs to sell and value in use, calculated as the
present value of future cash flows from the asset), rather than the excess of
the carrying amount above the undiscounted future cash flows of the asset; and
(iii) the reversal of an impairment loss when the recoverable amount changes. A
ceiling test based on cash generating units did not reveal the need for an
impairment charge.

For exploration and evaluation costs, IFRS 6 has been adopted effective January
1, 2005. IFRS 6 allows for continued application of an entity's existing policy
with respect to accounting for exploration and evaluation costs.

Impairment of long-lived assets

Under Canadian GAAP, a long-lived asset should be tested for recoverability
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. An impairment loss should be recognized when the
carrying amount of a long-lived asset is not recoverable and exceeds its fair
value. Under IFRS, the carrying amounts of the Company's assets, other than oil
and gas properties, inventories and deferred tax assets, are reviewed at each
balance sheet date to determine whether there is any indication of impairment.
If any such indication exists, the assets' recoverable amounts are estimated. An
impairment loss is recognized when the carrying amount of an asset exceeds its
recoverable amount. Impairment losses, if any, are recognized in the income
statement. This difference in accounting policy has no impact on these financial
statements.


Under Canadian GAAP, the carrying amount of a long-lived asset is not
recoverable if the carrying amount exceeds the sum of the undiscounted cash
flows expected to result from its use and eventual disposition. This assessment
is based on the carrying amount of the asset at the date it is tested for
recoverability, whether it is in use or under development. Under IFRS, the
recoverable amount of the Company's assets other than oil and gas properties is
the greater of their net selling price and value in use. In assessing value in
use, the estimated future cash flows are discounted to their present value using
a pre-tax discount rate that reflect current market assessments of the time
value of money and the risks specific to the asset. For an asset that does not
generate cash inflows largely independent of those from other assets, the
recoverable amount is determined for the cash-generating unit to which the asset
belongs. This difference in accounting policy has no impact on these financial
statements.

In respect of impairment of assets other than oil and gas properties, under
Canadian GAAP, an impairment loss is not reversed if the fair value subsequently
increases. For IFRS, an impairment loss may be reversed if there has been a
change in the estimates used to determine the recoverable value.

An impairment loss, on assets other than oil and gas properties, is only
reversed to the extent that the asset's carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. This difference in
accounting policy has no impact on these financial statements.

Asset retirement obligation

In re-measuring an asset retirement obligation for the passage of time, Canadian
GAAP requires re-measurement based on the risk-free rate that existed when the
liability was initially measured. IFRS requires the use of current market
assessed interest rates in each estimate. This difference did not result in a
material reconciling item.

Inventory

Under Canadian GAAP, the Company measures its supplies inventory at the lower of
historical cost or net replacement cost. Under IFRS, the lower of cost or net
realizable value principle would apply. This difference did not result in a
material reconciling item.

Auditors' Report

To the Shareholders of Caspian Energy Inc.

We have audited the consolidated balance sheets of Caspian Energy Inc. (the
"Company") as at December 31, 2007 and 2006 and the consolidated statements of
loss, comprehensive loss and deficit and cash flows for the each of the years in
the two year period ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2007
and 2006 and the results of its operations and its cash flows for each of the
years in the two year period ended December 31, 2007 in accordance with Canadian
generally accepted accounting principles.

Pricewaterhousecoopers, Chartered Accountants

Calgary, Alberta

28 March 2008




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