The following information should be read in conjunction with the Company's consolidated unaudited financial statements and the notes thereto contained elsewhere in this report. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties including those discussed in the "Risk Factors" section found in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on April 15, 2009, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements in this report.

Overview

Bonanza Oil & Gas, Inc. is an independent energy company engaged primarily in the acquisition, development, production and the sale of crude oil, natural gas and natural gas liquids. The Company's production activities are located in the United States of America. The principal executive offices of the Company are located at 3417 Mercer, Suite E, Houston, TX 77027.

The Company has incurred significant losses and had negative cash flow from operations since inception on August 17, 2007, and has an accumulated deficit of $8,337,156 at June 30, 2009. Substantial portions of the losses are attributable to non-cash writedowns of oil and gas properties, with the balance attributable to primarily personnel costs, legal and professional fees, and financing costs. The Company's operating plans require additional funds that may take the form of debt or equity financings. There can be no assurance that any additional funds will be available. The Company's ability to continue as a going concern is in substantial doubt and is dependent upon achieving a profitable level of operations and obtaining additional financing.

We have undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing, if available,
(b) increasing our current production (c) continuing development drilling on our proved, undeveloped properties and (d) controlling overhead and expenses.

There can be no assurance that we will successfully accomplish these steps and it is uncertain we will achieve a profitable level of operations and/or obtain additional financing. There can be no assurance that any additional financings will be available to us on satisfactory terms and conditions, if at all. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.

Results of Operations

                                             For the Three Months Ended          For the Six Months Ended
                                                      June 30,                           June 30,
                                                2009               2008            2009             2008
REVENUES:
Crude oil sales                            $       73,340       $   10,072     $    132,817     $     29,466
                                                   73,340           10,072          132,817           29,466
OPERATING EXPENSES:
Depreciation, depletion and amortization           41,200            1,548           73,275            4,931
Lease operating expenses                           36,360           14,106           69,704           18,773
Severance and other taxes                           3,210              611            5,838            1,426
General and administrative                        505,320          716,396          828,725          954,020
Financing costs, net                              169,346          176,144          429,779          228,236
                                                  755,436          908,805        1,407,321        1,207,386
OPERATING LOSS                                   (682,096 )       (898,733 )     (1,274,504 )     (1,177,920 )
Provision for income taxes                              -                -                -                -
NET LOSS                                   $     (682,096 )     $ (898,733 )   $ (1,274,504 )   $ (1,177,920 )

Three months ended June 30, 2009 compared to the three months ended June 30, 2008

During the three months ended June 30, 2009, the Company realized gross revenue from its first two development wells drilled in the exploitation of the Apclark field in the second half of 2008. During the three months ended June 30, 2008, the Company's only production was from three of its eight wells in the Plantation field. During the three months ended June 30, 2009 and 2008, the Company had total sales, net to its interest, of 1,272 and 105 barrels of crude oil, respectively, and realized average prices of $57.66 and $126.81, respectively. During the same periods, lease operating expenses, including severance and other taxes and transportation costs, totaled $31.11 and $175.20 per barrel, respectively, resulting in netbacks to the Company of $26.55 and ($48.39) per barrel, respectively.

Depreciation, depletion and amortization expense totaled $41,200 and $1,548 for the three months ended June 30, 2009 and 2008, respectively, most of which is attributable to depletion on our Apclark field and Plantation field producing properties.

For the three months ended June 30, 2009 and 2008, general and administrative expenses totaled $505,320 and $716,396, respectively. For 2009, these expenses were comprised primarily of payroll and other personnel expenses ($109,015), stock based compensation ($262,920), audit and accounting services ($34,500), legal services ($18,000) and rent expense ($24,934). For 2008, these expenses were comprised primarily of financial consulting ($516,000), payroll and other personnel expenses ($78,000) and legal expenses ($55,500).

Financing costs, net for the three months ended June 30, 2009 and 2008, totaled $169,346 and $176,144, respectively. The Company capitalized $127,417 of interest associated with unproved properties during the three months ended June 30, 2009. No interest was capitalized during the three months ended June 30, 2008. The balance of financing costs recognized was primarily attributable to the amortization of deferred financing fees and discounts associated with the outstanding debt.

Six months ended June 30, 2009 compared to the six months ended June 30, 2008

During the six months ended June 30, 2009, the Company realized gross revenue from its first two development wells drilled in the exploitation of the Apclark field in the second half of 2008. During the six months ended June 30, 2008, the Company's only production was from three of its eight wells in the Plantation field. During the six months ended June 30, 2009 and 2008, the Company had total sales, net to its interest, of 2,847 and 289 barrels of crude oil, respectively, and realized average prices of $46.66 and $107.24, respectively. During the same periods, lease operating expenses, including severance and other taxes and transportation costs, totaled $26.33 and $88.46 per barrel, respectively, resulting in netbacks to the Company of $20.33 and $18.78 per barrel, respectively.

Depreciation, depletion and amortization expense totaled $73,275 and $4,931 for the six months ended June 30, 2009 and 2008, respectively, most of which is attributable to depletion on our Apclark field and Plantation field producing properties.

For the six months ended June 30, 2009 and 2008, general and administrative expenses totaled $828,725 and $954,020, respectively. For 2009, these expenses were comprised primarily of payroll and other personnel expenses ($231,129), stock based compensation ($327,920), audit and accounting services ($80,500), legal services ($36,000) and rent expense ($39,748). For 2008, these expenses were comprised primarily of payroll and other personnel expenses ($182,000), financial consulting ($516,000), legal expenses ($78,704) and audit and accounting services ($52,785).

Financing costs, net for the six months ended June 30, 2009 and 2008, totaled $429,779 and $228,236, respectively. The Company capitalized $211,430 of interest associated with unproved properties during the six months ended June 30, 2009. No interest was capitalized during the six months ended June 30, 2008. The balance of financing costs recognized was primarily attributable to the amortization of deferred financing fees and discounts associated with the outstanding debt.

Liquidity and Capital Resources

At June 30, 2009, we had a working capital deficit of $4,868,765 consisting primarily of $2,564,301 of short-term debt, representing $2,585,289 face value of all of our debt outstanding, less $20,988 of unamortized discount, and $1,632,075 of accrued exploration and development expenses.

We have raised net proceeds of $5,906,743 in various debt and equity financings since our inception (August 17, 2007), and have used the majority of the net proceeds to successfully begin the exploitation of our interest in the Apclark field with the completion of the first two wells to be drilled, the acquisition of our interest in the Plantation field, initial payments toward the exercise of the option on the two drilling projects acquired in the merger with Black Pearl Energy, Inc., as well as for general and administrative expenses and working capital purposes.

Net cash used in operating activities for the six months ended June 30, 2009, totaled $109,168 and consisted primarily of the net loss of $1,274,504, net of non-cash charges of $429,114 related to the amortization of deferred financing fees and discount on outstanding debt, $327,920 related to stock-based compensation, $73,275 related to depreciation, depletion and amortization expense and $15,897 related to the fair value of our common shares issued for consulting services. The Company also had $319,130 of other working capital changes. Net cash used in operating activities for the six months ended June 30, 2008, totaled $968,949 and consisted primarily of the net loss of $1,177,920, net of non-cash charges of $516,000 related to the fair value of our common share issued for consulting services, $164,244 related to the amortization of deferred financing fees and discount on outstanding debt and $4,931 related to depreciation, depletion and amortization expense. The Company also had $476,204 of other working capital changes, primarily related to drilling advances advanced.

Net cash used in investing activities for the six months ended June 30, 2009, totaled $53,027 and consisted of payment of amounts due related to the Company's activity in its Apclark field. Net cash used in investing activities for the six months ended June 30, 2008, totaled $947,205 and consisted primarily of payments made toward the drilling activity in the Apclark field.

Net cash provided by financing activities for the six months ended June 30, 2009, totaled $158,314 and consisted primarily of the issuance by the Company of the February 2009 Note and the May 2009 Note, net of issuance costs, and the partial repayment of the December 2007 Note and the complete repayment of the February 2009 Note. Net cash provided by financing activities for the six months ended June 30, 2008, totaled $2,068,746 from the issuance of our January 2008 Secured Promissory Notes and May 2009 Convertible Note, net of issuance costs, and the proceeds from the Company's equity issuances.

At June 30, 2009, the Company was in default with respect to the repayment obligation upon maturity on December 17, 2008, with respect to its December 2007 Secured Promissory Note. Pursuant to the terms of the December 2007 Secured Promissory Note, the interest rate on all amounts outstanding increased to 24% per annum, effective December 17, 2008. On February 6, 2009, the Company made a partial payment of $125,000 toward satisfaction of this obligation. As of June 10, 2009, the Company has not remitted the balance of amount due and on June 30, 2009, the lender filed suit against the Company seeking repayment of the principal balance outstanding plus all accrued interest, along with their attorney fees and court costs.

At June 30, 2009, the Company was in default with respect to the repayment obligation upon maturity on January 31, 2009, with respect to its January 2008 Secured Promissory Notes. Pursuant to the terms of the January 2008 Secured Promissory Notes, the interest rate on all amounts outstanding increased to 24% per annum, effective January 31, 2009. In addition, as the January 2008 Secured Promissory Notes was not repaid prior to July 31, 2009, the Company was obligated to issue, and did issue in August 2009, an additional 150,000 shares of its Common Stock as an additional interest payment. As of June 30, 2009, the Company has not cured its default; however the lenders have not, as of June 30, 2009, taken any further action with respect to the default.

As of June 30, 2009, the Company had not made quarterly interest payment due on March 31, 2009, with respect to its May 2008 Convertible Note. Pursuant to the terms of the May 2008 Convertible Note, the interest rate on the past due quarterly interest payment increased to 15% per annum, effective March 31, 2009. The Company had 90 days to make the scheduled quarterly interest payment before an Event of Default should occur.

As of June 30, 2009, the Company had not repaid any of the amounts due under the August 2008 Unsecured Promissory Notes or the October 2008 Unsecured Promissory Note. Pursuant to the terms of the August 2008 Unsecured Promissory Notes and the October 2008 Unsecured Promissory Note agreements, the Company is required to issue to the holders of the August 2008 Unsecured Promissory Notes and the October 2008 Unsecured Promissory Note, a total of 137,500 warrants to purchase shares of the Company's Common Stock every 30 days that amounts remain outstanding under the August 2008 Unsecured Promissory Notes and the October 2008 Unsecured Promissory Note.

As of September 21, 2009, the Company had not repaid the May 2009, which matured on August 24, 2009. In the event that the May 2009 Note was not repaid by August 24, 2009, the interest rate increased to 18% per annum and the lender, at its option, can convert all outstanding amounts in shares of the Company's Common Stock at a conversion price of $0.10 per share.

Capital Expenditures and 2009 Outlook

We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.

We will still need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the North American stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Contractual Obligations

We are subject to various financial obligations and commitments in the normal course of operations. These contractual obligations represent future cash payments that we are required to make and relate primarily to notes payable and accounts payable, all of which are due currently and which are reflected on the Company's Unaudited Consolidated Balance Sheet at June 30, 2009, found in Item 1 in this Form 10-Q. The Company does have an operating lease obligation with annual payments totaling $67,180 in 2009, $103,790 in 2010, $108,321 in 2011 and $36,610 in 2012. The Company is in default of several of these obligations, as disclosed herein, is working toward an amicable resolution and expects to fund these contractual obligations with additional financing, either in the form of equity or debt issuances, for which there is no assurance that any additional financings will be available to us on satisfactory terms and conditions, if at all.

Off-balance Sheet Arrangements

The Company does not currently utilize any off-balance sheet arrangements with unconsolidated entities to enhance liquidity and capital resource positions.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates our estimates and judgments, including those related to revenue recognition, recovery of oil and gas reserves, financing operations, and contingencies and litigation.

Oil and Gas Properties

We follow the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.

Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalizable as oil and gas property costs. Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Bonanza assesses the realizability of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred.
Impairment of unproved properties is assessed based on management's intention with regard to future exploration and development of individually significant properties and the ability of Bonanza to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

The provision for depreciation and depletion of oil and gas properties is computed on the unit-of-production method. Under this method, we compute the provision by multiplying the total unamortized costs of oil and gas properties including future development, site restoration, and dismantlement abandonment costs, but excluding costs of unproved properties by an overall rate determined by dividing the physical units of oil and gas produced during the period by the total estimated units of proved oil and gas reserves. This calculation is done on a country-by-country basis. As of June 30, 2009, all of our oil production operations are conducted in the United States of America. The cost of unevaluated properties not being amortized, to the extent there is such a cost, is assessed quarterly to determine whether the value has been impaired below the capitalized cost. The cost of any impaired property is transferred to the balance of oil and gas properties being depleted. The costs associated with unevaluated properties relate to projects which were undergoing exploration or development activities or in which we intend to commence such activities in the future. We will begin to amortize these costs when proved reserves are established or impairment is determined.

In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations," we report a liability for any legal retirement obligations on our oil and gas properties. The asset retirement obligations represent the estimated present value of the amounts expected to be incurred to plug, abandon, and remediate the producing properties at the end of their productive lives, in accordance with state laws, as well as the estimated costs associated with the reclamation of the property surrounding. The Company determines the asset retirement obligations by calculating the present value of estimated cash flows related to the liability. The asset retirement obligations are recorded as a liability at the estimated present value as of the asset's inception, with an offsetting increase to producing properties. Periodic accretion of the discount related to the estimated liability is recorded as an expense in the statement of operations. The estimated liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells, and a risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligations. Revisions to the asset retirement obligations are recorded with an offsetting change to producing properties, resulting in prospective changes to depletion and depreciation expense and accretion of the discount. Because of the subjectivity of assumptions and the relatively long lives of most of the wells, the costs to ultimately retire the Company's wells may vary significantly from prior estimates. As of June 30, 2009, the Company's Asset Retirement Obligation was not significant.

Reserve Estimates

Our estimate of proved reserves is based on the quantities of oil and gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. For example, we must estimate the amount and timing of future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results. In addition, as prices and cost levels change from year to year, the estimate of proved reserves also changes. Any significant variance in these assumptions could materially affect the estimated quantity and value of our reserves. As such, our reserve engineers review and revise the Company's reserve estimates at least annually.

Despite the inherent imprecision in these engineering estimates, our reserves are used throughout our financial statements. For example, since we use the units-of-production method to amortize our oil and gas properties, the quantity of reserves could significantly impact our DD&A expense. Our oil and gas properties are also subject to a "ceiling" limitation based in part on the quantity of our proved reserves.

Revenue Recognition

Bonanza recognizes oil and natural gas revenue under the sales method of accounting for its interests in producing wells as crude oil and natural gas is produced and sold from those wells. Crude oil and natural gas sold by Bonanza is not significantly different from Bonanza's share of production. We recognize revenue upon transfer of ownership of the product to the customer which occurs when (i) the product is physically received by the customer, (ii) an invoice is generated which evidences an arrangement between the customer and us, (iii) a fixed sales price has been included in such invoice and (iv) collection from such customer is probable.

Income Taxes

The Company uses the liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in the Company's tax returns.

The Company's estimates are based on the information available to it at the time that it prepares the income tax provision. The Company generally files its annual income tax returns several months after its fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

At Inception (August 17, 2007), the Company adopted Financial Accounting Standards Board ("FASB") Interpretation Number 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), which is intended to clarify the accounting for income taxes prescribing a minimum recognition threshold for a tax provision before being recognized in the consolidated financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result, the Company has concluded that it does not have any unrecognized tax benefits or any additional tax liabilities after applying FIN 48. The adoption of FIN 48 therefore had no impact on the Company's consolidated financial statements.