The following discussion will assist you in understanding our financial position, liquidity, and results of operations. The information below should be read in conjunction with the consolidated financial statements, and the related notes to consolidated financial statements. Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy, and financial condition before we make any forward-looking statements, but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, exploitation, development, and acquisition expenditures as well as expense and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses, and interest costs that we believe are reasonable based on currently available information.

Critical Estimates and Accounting Policies

We prepare our consolidated financial statements in this report using accounting principles that are generally accepted in the United States ("GAAP"). GAAP represents a comprehensive set of accounting and disclosure rules and requirements. We must make judgments, estimates, and in certain circumstances, choices between acceptable GAAP alternatives as we apply these rules and requirements, which may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most critical estimate we use is the engineering estimate of proved oil and gas reserves. This estimate affects the application of the full cost method of accounting, the calculation of depreciation and depletion of oil and gas properties and the estimate of the impairment of our oil and gas properties. It also affects the estimated lives of our assets used to determine asset retirement obligations.

Full Cost Method Accounting

We use the full cost method of accounting for oil and gas producing activities. Our costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs.

Sales of Oil and Gas Properties

Proceeds from the sale of properties are applied against capitalized costs, without any gain or loss being recognized, unless such a sale would significantly alter the rate of depletion and depreciation.

Depreciation and Depletion of Oil and Gas Properties

Depletion of exploration and development costs and depreciation of production equipment is provided using the unit-of-production method based upon estimated proven oil and gas reserves. The costs of significant unevaluated properties are excluded from costs subject to depletion. For depletion and depreciation purposes, relative volumes of oil and gas production and reserves are converted at the equivalent conversion based upon relative energy content.

Ceiling Test

In applying the full cost method, we perform a ceiling test whereby the carrying value of oil and gas properties and production equipment, net of recorded future income taxes and the accumulated provision for site restoration and abandonment costs, is compared annually to an estimate of future net cash flow from the production of proven reserves. Costs related to undeveloped oil and gas properties are excluded from the ceiling tests. Discounted net cash flow, utilizing a 10% discount rate, is estimated using year end prices, less estimated future general and administrative expenses, financing costs and income taxes. Should this comparison indicate an excess carrying value, the excess is charged against earnings. For the years ended December 31, 2007 and 2006, no impairment of oil and gas properties was indicated.

Asset Retirement Obligations

We record a liability for legal obligations associated with the retirement of tangible long-lived assets in the period in which they are incurred in accordance with Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset Retirement Obligations." Under this method, when liabilities for dismantlement and abandonment costs (ARO) are initially recorded, the carrying amount of the related oil and natural gas properties are increased. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset. Revisions to such estimates are recorded as adjustments to the ARO, capitalized asset retirement costs and charges to operations during the periods in which they become known. At the time the abandonment cost is incurred, we will be required to recognize a gain or loss if the actual costs do not equal the estimated costs included in ARO.

Concentrations of Credit Risk

We sold all of our oil and natural gas production to two customers in 2007.

We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2007, we had approximately $157,000, in excess of FDIC insured limits. We have not experienced any losses in such accounts.

Revenue and Cost Recognition

We use the sales method to account for sales of crude oil and natural gas. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. The volumes sold may differ from the volumes to which we are entitled based on our interest in the properties. These differences create imbalances which are recognized as a liability only when the imbalance exceeds the estimate of remaining reserves. We had no imbalances as of December 31, 2007and December 31, 2006. Costs associated with production are expensed in the period incurred.

Cash and cash equivalents

Cash and cash equivalents include cash in banks and liquid deposit with maturities of three months or less.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts payable and accrued expenses and other liabilities approximates fair value due to the short term maturity of these instruments. The carrying value of the notes payable, convertible notes and convertible debentures approximate their fair value as December 31, 2007 and 2006.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of three to five years.

Stock-based compensation

On January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment". SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

Loss per share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

Standardized measure of discounted future net cash flows

The standardized measure of discounted future net cash flows relies on these estimates of oil and gas reserves using commodity prices and costs which existed at year-end. In our 2007 year-end reserve report, we used the December 31, 2007 WTI Cushing spot price of $96.01 per Bbl and Henry Hub spot natural gas price of $7.465 per MMbtu, adjusted by property for energy content, quality, transportation fees, and regional price differentials. The weighted average price over the lives of the properties was $88.45 per Bbl for oil and $6.00 per Mcf for gas. While we believe that future operating costs can be reasonably estimated, future prices are difficult to estimate since market prices are influenced by events beyond our control. Future global economic and political events will most likely result in significant fluctuations in future oil prices, while future U.S. natural gas prices will continue to be influenced by primarily domestic market factors, including supply and demand, weather patterns and public policy.

Income taxes

Income taxes are accounted for using the asset/liability method of income tax allocation. Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in income tax rates is included in earnings in the period that such change in income tax rates is enacted. Future income tax assets are recorded in the financial statements if realization is considered more likely than not.

Business Strategy

USA Superior Energy Holdings, Inc. (the "Company") operates in the energy industry, focusing on acquiring, owning, operating and applying enhanced oil recovery ("EOR") techniques to existing shallow fields of oil and gas. The Company performs complete workover and stimulation services in these existing fields to restart or substantially increase production. It utilizes state-of-the-art workover and shallow-well drilling techniques in these fields including new and innovative technologies under development by the Company. These new technologies include specialized shallow-well cased hole horizontal drilling ("CHHD") and nitrogen ("N2") injection which will be utilized to increase production volumes and reserve recoverability from the Company's projects. Currently, the Company is involved in developing, owning and operating energy projects and prospects in East, Central and South Texas and currently has active projects and prospects in Bastrop, Caldwell, Navarro and Zavalla counties. These fields are known as the Bateman Project in Bastrop and Caldwell Counties (comprised of the Bateman Field and part of the adjacent Dale McBride Field), the Benton Field in Navarro County and the Del Monte Prospect in Zavalla County.

Going Concern

The report of our independent registered public accounting firm on the financial statements for the year ended December 31, 2007, includes an explanatory paragraph indicating substantial doubt as to our ability to continue as a going concern. We incurred a net loss $7,146,000 for the year ended December 31, 2007 and have a working capital deficit of $484,000 at December 31, 2007. We require significant additional funding to sustain our operations and satisfy our contractual obligations for our planned oil and gas exploration and development operations. Our ability to establish the Company as a going concern is dependent upon our ability to obtain additional financing, in order to fund our planned operations and ultimately, to achieve profitable operations.

Liquidity and Capital Resources

Our main sources of liquidity and capital resources for 2008 were proceeds from issuance of debt and sales of common stock and warrants in a private placement. The principal source of such funds, in the amount of $1.0 million as of December 31, 2007, represents the proceeds from the sale of units in a private placement during the first and second quarter of 2007. The bulk of the proceeds realized from the unit offering were used to fund the purchase of proved oil and gas properties in Bastrop and Caldwell Counties, Texas and to fund the operations of these properties. We also received proceeds of $465,000 from the issuance of debt during the year ended December 31, 2007. These proceeds were used to fund our working capital requirements and to repay debt incurred in the purchase of the Bastrop and Caldwell County leases.

During 2007, net cash flow used by operating activities increased by $541,000 to $687,000, as compared to $146,000 for our 2006 fiscal year, primarily because of our increased operating and general and administrative expenses only partially offset by increased revenues received during the year. We expect our cash flow provided by operations to increase during 2008, mainly due to increased oil and natural production resulting from our existing properties. The Bastrop and Caldwell County properties were acquired in 2007 and were shut in for a portion of that year. We expect to receive a full year of revenue from these wells in 2008.

Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production rates and in commodity prices. In addition, our oil and gas production from either of our properties may be curtailed due to weather-related factors beyond our control. In addition, maintenance activities on, or damage to, major pipelines or processing facilities can also cause us to shut-in production for undetermined lengths of time.

Our realized oil and gas prices vary significantly due to world political events, supply and demand for products, product storage levels, and weather patterns, among other factors. We sell 100% of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations.

We incurred capital expenditures totaling approximately $442,000 during 2007. The capital expenditures primarily related to the expenditure of $400,000 for the purchase of the Bastrop and Caldwell County properties. We anticipate making additional capital expenditures of approximately $4,000,000 over the next several years to drill additional wells on our existing properties. The 2008 capital budget will be funded from a combination of our cash flow from operations, our cash and cash equivalents and the proceeds from offerings of debt and/or equity securities.

The required principal payments on our notes and debentures are as follows as of December 31, 2007:

2008 $   618,000
2009 $   237,000
2010 $   558,000
2011 $    37,000
     $  1,450,000

Changes in our working capital accounts from 2006 to 2007 include an increase in our cash and cash equivalents of $257,000, reflecting the borrowings under various debt agreements and the sale of stock. Accounts payable and accrued liabilities increased by $169,000 to $327,000 at December 31, 2007 due to the increase in operating activities. Current notes payable increased to $348,000 from a zero balance at December 31, 2006 due to the borrowings to finance the purchase of the Bastrop and Caldwell County properties and our working capital needs.

On December 31, 2007, our current liabilities exceeded our current assets by $484,000. While we expect to achieve positive cash flow from operations during 2008, we will require additional funding in order to complete our plans to develop additional wells on existing properties.

Results of Operations

Revenue

We produced 3,854 barrels of oil and recognized revenue of $230,000 during the year ended December 31, 2007. Because we only acquired our operating assets during fiscal year 2007, we had no comparable revenue figures for our fiscal year 2006.

Lease operating expense and production taxes

Our production costs totaled $171,000 during 2007. Because we only acquired our operating assets during fiscal year 2007, we had no comparable cost figures for 2006.

Accretion of asset retirement obligation

Accretion expense for fiscal year 2007 was $8,000, as compared to $1,000 for fiscal year 2006. This reflects our acquisition of the Bastrop and Caldwell County properties during 2007.

Depletion, depreciation and amortization (DD&A) For our fiscal year 2007, we recorded DD&A expense of $53,000, after having recorded no DD&A expense during 2006. Virtually all of this expense was attributable to depletion of our oil and gas properties, which were acquired during 2007.

General and administrative expense (G&A expense)

General and administrative expense for fiscal year 2007 increased $6,442,000 from the comparable 2006 period to $6,699,000. The largest portion of the 2007 total was comprised of stock based compensation of $5,680,000 related to the reverse merger and compensation of employees and consultants. The other major component of 2007 general and administrative costs included salaries of $361,000. During 2006, the primary components of our general and administrative expenses were salaries, contract labor and legal and professional expenses.

Other income (expense)

Other income (expense) for fiscal year 2007 totaled an expense of $481,000 primarily related to the loss on extinguishment of debt of $404,000. We also incurred interest expense of $92,000 during 2007.

Net loss

For the fiscal year 2007, our net loss increased to $7,146,000, compared to our 2006 net loss of $260,000. The major components of the 2007 loss were general and administrative expenses of $6,699,000 including stock based compensation of $5,680,000.

New Accounting Pronouncements

USA Superior does not expect the adoption of recently issued accounting pronouncements to have a significant impact on their results of operations, financial position or cash flows