Operations

Diaz is primarily a natural gas producer with 91% of its production for the six month period ended June 30, 2007, coming from natural gas wells. Diaz owns interests in producing properties in Alberta and Saskatchewan in Canada, and in Texas in the United States.

Where meaningful, the following production information has been segmented for each of the Company’s geographic areas of operations.

United States

In the United States, normal production declines from wells on the Wilcox trend and the loss of production from the Hancock #2 well for the six month period ended June 30, 2007, has led to a 28% reduction in U.S. gas production to an average of 2.3 MMcfd compared with 3.2 MMcfd for the first half of 2006. For Q2 2007 production was 2.0
MMcfd compared with 3.3 MMcfd for the prior year period. Diaz anticipates U.S. gas production should be higher in the second half of 2007 when mechanical difficulties with the Hancock #2 well have been rectified and the well is returned to production. Also, new production could be added when the Cheney #1 well is brought online.

Cheney, Colorado County, Texas – Working Interest 20%
On July 10, 2007, drilling reached a total depth of 18,400 ft after which the well was cased. Based on the Company’s log analysis, the well has encountered 40 ft of gross pay and 30 feet of potential net gas pay, in the Wilcox #18 zone, which was the primary target horizon in the well.

Completion operations are anticipated to commence in the third quarter when Diaz plans to perform a fracture stimulation and production test of the zone.

Allen Ranch, Colorado County, Texas – Working Interest 20%
The Hancock #2 well was cased in February 2006. The well has been completed in four Wilcox gas zones. In Q2 2007, during commingling operations a hole in the production tubing was discovered at 9,500 feet. The tubing has been pulled and was sent out for inspection prior to plans to proceed with the commingling operation. Plans are underway to replace the damaged tubing and complete the commingling operation.

Canada

In Canada, natural gas production for the six month period ended June 30, 2007, declined by 10% to 2.9 MMcfd compared to production of 3.2 MMcfd in the first half of 2006. For Q2 2007, production was 2.7 MMcfd compared with 3.2 MMcfd for the prior year period. Natural declines were substantially offset by new production added from the Jaslan field.

Diaz’s oil production declined by 46% for the six month period ended June 30, 2007, to 74 Bopd compared to 136 Bopd for the first half of 2006. The primary cause of the decline was reduced output from the Parkman and Harmattan fields as higher initial field rates from 2006 have declined to the lower stabilized rates realized in the first half of 2007.

Hays, Alberta, Canada – Working Interest 80%
During the second quarter of 2007 Diaz completed installation of the battery and sales gas line. Testing of the lower zone is underway. To date the lower zone has not performed as expected as the oil rate has been declining and the gas rate increasing.

Additional development drilling will be required to properly test this structure.

Parkman, Saskatchewan, Canada – Working Interest 37.5 %
In the third quarter of 2007 Diaz drilled a horizontal Tilston oil well on its Parkman property located in South East Saskatchewan. Completion operations are underway. This well has the potential to significantly increase the Company’s current oil production.

Jaslan, Alberta – Working Interest 37.5%
In November 2006, Diaz installed a compressor station and 10 kilometres of pipeline connecting 5 gas wells (2.25 net wells). The project has added 414 Mcfd net to Diaz during the first half of 2007. Unfortunately, production from the wells have been declining at rates higher than expected.

The Company’s overall production for the first half of 2007 declined by 22% to average 942 Boed compared to the prior period average rate of 1,206 Boed.