UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

_________________________







FORM 10-QSB/A



|[X]  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | OR                                                                                                                                                                     
|[  ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ______________________.



Commission file number 000-28345



Big Sky Energy Corporation

(Exact name of small business issuer as specified in its charter)



|NEVADA                                                                           |  | 72-1381282                          
|-------------------------------------------------------------------------------- |  | ------------------------------------
|(Jurisdiction of incorporation)                                                  |  | (I.R.S. Employer Identification No.)
|                                                                                 |  |                                     
|Suite 750, 440  2nd Avenue SW Calgary, Alberta, Canada T2P 5E9                 
|(Address of principal place of business or intended principal place of business)



(403) 234-8282 (Issuers telephone number)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



Check whether the issuer:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  Ö    No



The number of outstanding common shares, with $0.001 par value, of the registrant at June 30, 2005 was 98,458,565 and 97,963,400 on August 15, 2005.



Transitional Small Business Disclosure Format (check one): Yes      No  Ö

The interim financial statements for the period ended June 30, 2005 included in Big Sky Energy Corporations Form 10-QSB that was filed with the Securities and Exchange Commission on Monday, August 22, 2005 had not undergone complete review by Big Sky Energys independent registered public accounting firm prior to filing. Big Sky Energy Corporation, at the time of the filing, had understood that the independent registered public accounting firm had completed their review of such financials, but such understanding was based on mistaken communications.  Big Sky has been informed by its independent registered public accounting firm that it is now in the process of completing its review of Big Skys June 30, 2005 financial statements and that a review report will be issued on Wednesday August 31, 2005.  Big Sky intends to file a second amendment to its Form 10-QSB on Wednesday, August 31, 2005, to include the review report from its independent registered public accounting firm.

#





Big Sky Energy Corporation



INDEX TO THE FORM 10-QSB

For the quarterly period ended June 30, 2005



|        |                       |                                                                                       | PAGE
|------- | --------------------- | ------------------------------------------------------------------------------------- | ----
|        |                       |                                                                                       |     
|PART I  | FINANCIAL INFORMATION | 3                                                                                    
|        | ITEM 1.               | FINANCIAL STATEMENTS (unaudited)                                                      | 3   
|        |                       | Condensed Consolidated Balance Sheets                                                 | 3   
|        |                       | Condensed Consolidated Statements of Operations and Deficit                           | 4   
|        |                       | Condensed Consolidated Statements of Stockholders Equity                             | 5   
|        |                       | Condensed Consolidated Statements of Cash Flows                                       | 8   
|        |                       | Notes to the Condensed Consolidated Financial Statements                              | 10  
|        | ITEM 2.               | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 26  
|        | ITEM 3.               | CONTROLS AND PROCEDURES                                                               | 33  
|Part II | OTHER INFORMATION     | 34                                                                                   
|        | ITEM 1.               | LEGAL PROCEEDINGS                                                                     | 34  
|        | ITEM 2.               | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           | 34  
|        | ITEM 3.               | DEFAULTS UPON SENIOR SECURITIES                                                       | 35  
|        | ITEM 4.               | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   | 35  
|        | ITEM 5.               | OTHER INFORMATION                                                                     | 35  
|        | ITEM 6.               | EXHIBITS                                                                              | 35  
|        |                       | SIGNATURES                                                                            | 39  









PART I

ITEM 1.  FINANCIAL STATEMENTS



|BIG SKY ENERGY CORPORATION                        |                                                                                  
|------------------------------------------------- | ---------------------------------------------------------------------------------
|(a Development Stage Enterprise)                  |                                                                                  
|Condensed Consolidated Balance Sheets (unaudited) |                                                                                  
|(Expressed in United States Dollars)              |                                                                                  
|                                                  |                                                                                  
|                                                  |                                                                                  
|ASSETS                                            |                                                                                  
|CURRENT                                           |                                                                                  
|                                                  | Cash and cash equivalents                                                        
|                                                  | Restricted cash                                                                  
|                                                  | Advances to related parties                                                      
|                                                  | Interest and other receivables                                                   
|                                                  | Prepaid expenses                                                                 
|                                                  |                                                                                  
|CAPITAL ASSETS                                    |                                                                                  
|                                                  | Long-term advances                                                               
|                                                  | Advances to related parties                                                      
|                                                  | Property and equipment (Note 6)                                                  
|                                                  | Oil and gas properties (Note 5, 7)                                               
|                                                  |                                                                                  
|LIABILITIES                                       |                                                                                  
|CURRENT                                           |                                                                                  
|                                                  | Obligations for social sphere development (Note 9)                               
|                                                  | Obligations for professional training of personnel (Note 10)                     
|                                                  | Obligations for acquisition of the right for geological
information use (Note 11)
|                                                  | Accounts payable and accrued liabilities (Note 8, 13)                            
|                                                  | Short-term interest free loan from ABT LTD (Note 8)                              
|                                                  | Due to related parties (Note 20)                                                 
|                                                  |                                                                                  
|LONG-TERM                                         |                                                                                  
|                                                  | Obligations for social sphere development (Note 9)                               
|                                                  | Obligations for professional training of personnel    (Note 10)                  
|                                                  | Obligations for historical cost reimbursement (Note 12)                          
|                                                  | Asset retirement obligation (Note 13)                                            
|                                                  | Deferred income tax liability (Note 14)                                          
|                                                  | 11,903,584                                                                       
|                                                  |                                                                                  
|COMMITMENTS AND CONTINGENCIES (NOTE 16)           |                                                                                  
|                                                  |                                                                                  
|STOCKHOLDERS' EQUITY                              |                                                                                  
|                                                  | Common stock (Note 16)                                                           
|                                                  |                                                                                  
|                                                  |                                                                                  
|                                                  |                                                                                  
|                                                  | Additional paid in capital                                                       
|                                                  | Deferred compensation                                                            
|                                                  | Deficit accumulated during development stage                                     
|                                                  |                                                                                  
|                                                  |                                                                                  



The accompanying notes are an integral part of these condensed consolidated financial statements.

|BIG SKY ENERGY CORPORATION                                           
|---------------------------------------------------------------------
|(a Development Stage Enterprise)                                     
|Condensed Consolidated Statements of Operations & Deficit (unaudited)
|(Expressed in United States Dollars)                                 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|GENERAL AND ADMINISTRATIVE EXPENSES                                  
|                                                                     
|AMORTIZATION                                                         
|ACCRETION                                                            
|                                                                     
|                                                                     
|FOREIGN EXCHANGE GAIN (LOSS)                                         
|INTEREST INCOME                                                      
|LOSS FROM CONTINUING OPERATIONS                                      
|                                                                     
|DISCONTINUED OPERATIONS (NOTE 2)                                     
|IMPAIRMENT OF ASSETS                                                 
|LOSS IN BIG SKY NETWORK CANADA LTD.                                  
|LOSS IN SHEKOU JOINT VENTURE                                         
|LOSS IN CHENGDU JOINT VENTURE (Note 4)                               
|GAIN ON SALE OF SHEKOU                                               
|GAIN ON SALE OF BIG SKY NETWORK CANADA LTD.                          
|INCOME (LOSS) ON DISCONTINUED OPERATIONS                             
|                                                                     
|NET LOSS                                                             
|                                                                     
|DEFICIT, BEGINNING OF PERIOD                                         
|                                                                     
|DEFICIT, END OF PERIOD                                               
|                                                                     
|LOSS PER SHARE                                                       
|                                                                     
|                                                                     
|SHARES USED IN COMPUTATION                                           
|                                                                     





|BIG SKY ENERGY CORPORATION
(a Development Stage Enterprise)
Condensed Consolidated Statements of Stockholders Equity (unaudited)
(Expressed in United States Dollars)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Balance,                                                                                                                                                              
|                                                                                                                                                                      
|                                                                                                                                                                      
|Issue of common stock                                                                                                                                                 
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Stock issued pursuant to                                                                                                                                              
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Stock issued pursuant to                                                                                                                                              
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Stock issued pursuant to                                                                                                                                              
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Acquisition of the shares                                                                                                                                             
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Issuance of warrants                                                                                                                                                  
|                                                                                                                                                                      
|Non-cash compensation                                                                                                                                                 
|                                                                                                                                                                      
|Deferred compensation                                                                                                                                                 
|                                                                                                                                                                      
|Amortization of deferred                                                                                                                                              
|                                                                                                                                                                      
|                                                                                                                                                                      
|Net loss                                                                                                                                                              
|Balance,                                                                                                                                                              
|                                                                                                                                                                      
|                                                                                                                                                                      
|Deferred compensation                                                                                                                                                 

|                         |                       |            |           |             |              |             
|------------------------ | --------------------- | ---------- | --------- | ----------- | ------------ | ------------
|Issuance of warrants     | -                     | -          | 277,775   | -           | -            | 277,775     
|Amortization of deferred |                       |            |           |             |              |             
|                         | compensation          | -          | -         | -           | 369,037      | -           
|                         |                       |            |           |             |              |             
|Net loss                 | -                     | -          | -         | -           | (14,074,665) | (14,074,665)
|Balance,                 |                       |            |           |             |              |             
|                         | December 31, 2001     | 19,474,517 | 77,936    | 21,939,827  | (719,666)    | (17,671,845)
|                         |                       |            |           |             |              |             
|Amortization of deferred |                       |            |           |             |              |             
|                         | compensation          | -          | -         | -           | 326,191      | -           
|                         |                       |            |           |             |              |             
|Deferred compensation    | -                     | -          | 139,289   | (139,289)   | -            | -           
|                         |                       |            |           |             |              |             
|Alternative              |                       |            |           |             |              |             
|                         | Compensation Plan     | -          | -         | 163,463     | -            | -           
|                         |                       |            |           |             |              |             
|                         |                       |            |           |             |              |             
|Issuance of common       |                       |            |           |             |              |             
|                         | stock to settle legal |            |           |             |              |             
|                         | fees                  | 42,124     | -         | 21,062      | -            | -           
|                         |                       |            |           |             |              |             
|Stock issued pursuant to |                       |            |           |             |              |             
|                         | private placement     |            |           |             |              |             
|                         | agreements at $0.25   |            |           |             |              |             
|                         | per share             | 2,997,160  | 2,997     | 644,364     | -            | -           
|                         |                       |            |           |             |              |             
|Net loss                 | -                     | -          | -         | -           | (2,591,480)  | (2,591,480) 
|Balance,                 |                       |            |           |             |              |             
|                         | December 31, 2002     | 22,513,801 | 80,933    | 22,908,005  | (532,764)    | (20,263,325)
|                         |                       |            |           |             |              |             
|Amortization of deferred |                       |            |           |             |              |             
|                         | compensation          | -          | -         | -           | 1,541,174    | -           
|                         |                       |            |           |             |              |             
|Deferred compensation    | -                     | -          | 2,016,920 | (2,016,920) | -            | -           
|                         |                       |            |           |             |              |             
|Alternative              |                       |            |           |             |              |             
|                         | Compensation Plan     | 682,802    | 683       | (683)       | -            | -           
|                         |                       |            |           |             |              |             
|Stock issued pursuant to |                       |            |           |             |              |             
|                         | private placement     |            |           |             |              |             
|                         | agreements at $0.25   |            |           |             |              |             
|                         | per share             | 7,900,000  | 7,900     | 1,916,232   | -            | -           
|                         |                       |            |           |             |              |             
|Net loss                 |                       |            |           |             | (3,129,762)  | (3,129,762) 
|Balance,                 |                       |            |           |             |              |             
|                         | December 31, 2003     | 31,096,603 | 89,516    | 26,840,474  | (1,008,510)  | (23,393,087)
|                         |                       |            |           |             |              |             
|Amortization of deferred |                       |            |           |             |              |             
|                         | compensation          | -          | -         | -           | 758,264      | -           
|                         |                       |            |           |             |              |             
|Deferred compensation    | -                     | -          | (46,500)  | 46,500      | -            | -           

|                         |                     |            |           |             |             |             
|------------------------ | ------------------- | ---------- | --------- | ----------- | ----------- | ------------
|Stock issued pursuant to |                     |            |           |             |             |             
|                         | private placement   |            |           |             |             |             
|                         | agreements at $0.25 |            |           |             |             |             
|                         | per share           | 100,000    | 100       | 24,900      | -           | -           
|                         |                     |            |           |             |             |             
|Stock issued pursuant to |                     |            |           |             |             |             
|                         | private placement   |            |           |             |             |             
|                         | agreements at $0.50 |            |           |             |             |             
|                         | per share           | 24,340,000 | 24,340    | 11,515,168  | -           | -           
|                         |                     |            |           |             |             |             
|Stock issued pursuant to |                     |            |           |             |             |             
|                         | purchase of BSEK    | 8,000,000  | 8,000     | 2,280,000   | -           | -           
|                         |                     |            |           |             |             |             
|Stock issued pursuant to |                     |            |           |             |             |             
|                         | acquisition of BSEK |            |           |             |             |             
|                         | royalty interest    | 681,475    | 681       | 415,019     | -           | -           
|                         |                     |            |           |             |             |             
|Stock issued pursuant to |                     |            |           |             |             |             
|                         | acquisition of BSEK |            |           |             |             |             
|                         | minority interest   | 3,500,000  | 3,500     | 2,551,500   | -           | -           
|                         |                     |            |           |             |             |             
|Options exercised        | 101,666             | 102        | 4,982     | -           | -           | 5,084       
|Options cancelled        | -                   | -          | (175,820) | 175,820     | -           | -           
|Warrants exercised       | 299,716             | 299        | 74,629    | -           | -           | 74,928      
|                         |                     |            |           |             |             |             
|Net loss                 | -                   | -          | -         | -           | (6,792,048) | (6,792,048) 
|Balance,                 |                     |            |           |             |             |             
|                         | December 31, 2004   | 68,119,460 | 126,538   | 43,484,352  | (27,926)    | (30,185,135)
|                         |                     |            |           |             |             |             
|Amortization of deferred |                     |            |           |             |             |             
|                         | compensation        | -          | -         | -           | 5,050       | -           
|                         |                     |            |           |             |             |             
|Deferred compensation    | -                   | -          | 5,564,910 | (5,564,910) | -           | -           
|                         |                     |            |           |             |             |             
|Stock issued pursuant to |                     |            |           |             |             |             
|                         | private placement   |            |           |             |             |             
|                         | agreements at $0.50 | 27,250,000 | 27,250    | 12,716,145  | -           | -           
|                         |                     |            |           |             |             |             
|Stock issued pursuant to |                     |            |           |             |             |             
|                         | stock awards        | 750,000    | 750       | 374,250     | -           | -           
|                         |                     |            |           |             |             |             
|Options exercised        | 1,700,000           | 1,700      | 83,300    | -           | -           | 85,000      
|                         |                     |            |           |             |             |             
|Warrants Exercised       | 9,600               | 10         | 4,790     | -           | -           | 4,800       
|                         |                     |            |           |             |             |             
|Net loss                 | -                   | -          | -         | -           | (2,035,476) | (2,035,476) 
|Balance,                 |                     |            |           |             |             |             
|                         | March 31, 2005      | 97,829,060 | 156,248   | 62,227,747  | (5,587,786) | (32,220,611)
|                         |                     |            |           |             |             |             
|Amortization of deferred |                     |            |           |             |             |             
|                         | compensation        | -          | -         | -           | 493,100     | -           
|                         |                     |            |           |             |             |             
|Deferred compensation    | -                   | -          | (390,000) | 390,000     | -           | -           





|                   |               |            |           |            |             |             
|------------------ | ------------- | ---------- | --------- | ---------- | ----------- | ------------
|Options exercised  | 150,000       | 150        | 7,350     | -          | -           | 7,500       
|Options cancelled  |               |            | (363,444) | 363,444    |             | -           
|Warrants Exercised | 479,505       | 480        | 239,273   | -          | -           | 239,753     
|                   |               |            |           |            |             |             
|Net loss           | -             | -          | -         | -          | (2,852,054) | (2,852,054) 
|Balance,           |               |            |           |            |             |             
|                   | June 30, 2005 | 98,458,565 | 156,878   | 61,720,926 | (4,341,242) | (35,072,665)
|                   |               |            |           |            |             |             



The accompanying notes are an integral part of these condensed consolidated financial statements.

|BIG SKY ENERGY CORPORATION                                                    
|------------------------------------------------------------------------------
|(a Development Stage Enterprise)                                              
|Condensed Consolidated Statements of Cash Flows (unaudited)                   
|(Expressed in United States Dollars)                                          
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|CASH FLOWS RELATED TO THE                                                     
|                                                                              
|                                                                              
|OPERATIONS                                                                    
|Net loss from continuing operations                                           
|Income from discontinued operations                                           
|Adjustment for:                                                               
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Changes in operating assets and liabilities, net of the
effect of acquisitions
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|INVESTING                                                                     
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              

|                                | Acquisition of Vector Energy West LLP, net of
cash acquired |   |             | (4,506,502) |   |             | (4,506,502) |   | (4,506,502) 
|------------------------------- | ----------------------------------------------------------- | - | ----------- | ----------- | - | ----------- | ----------- | - | ------------
|                                |                                                             |   | (2,109,788) | (5,034,961) |   | (2,580,421) | (4,824,351) |   | (12,059,523)
|                                |                                                             |   |             |             |   |             |             |  
|FINANCING                       |                                                             |   |             |             |   |             |             |  
|                                | Issue of common stock for cash                              |   | 247,253     | 6,851,676   |   | 13,962,029  | 6,880,009   |   | 40,853,989  
|                                | Stock issuance costs                                        |   |             | (215,512)   |   | (881,606)   | (215,512)   |   | (1,698,777) 
|                                | Proceeds from ABT loan                                      |   | 172,319     | --          |   | 172,319     | --          |   | 338,319     
|                                | Repayment of advances for share subscriptions               |   |             | (250,000)   |   |             | (250,000)   |   | (250,000)   
|                                | Repayment of debt                                           |   |             | (570,000)   |   |             | (570,000)   |   | (570,000)   
|                                |                                                             |   | 419,572     | 5,816,164   |   | 13,252,742  | 5,844,497   |   | 38,673,531  
|                                |                                                             |   |             |             |   |             |             |   |             
|                                |                                                             |   |             |             |   |             |             |   |             
|NET DECREASE (INCREASE) IN CASH |                                                             |   |             |             |   |             |             |  
|                                | AND CASH EQUIVALANTS                                        |   | (5,484,828) | 151,853     |   | 4,843,475   | (404,345)   |   | 5,827,209   
|                                |                                                             |   |             |             |   |             |             |   |             
|CASH AND CASH EQUIVALENTS,      |                                                             |   |             |             |   |             |             |  
|                                | BEGINNING OF PERIOD                                         |   | 11,312,037  | 512,253     |   | 983,734     | 1,068,451   |   | -           
|                                |                                                             |   |             |             |   |             |             |   |             
|CASH AND CASH EQUIVALENTS,      |                                                             |   |             |             |   |             |             |  
|                                | END OF PERIOD                                               | $ | 5,827,209   | 664,106     | $ | 5,827,209   | 664,106     | $ | 5,827,209   
|                                |                                                             |   |             |             |   |             |             |   |             



The accompanying notes are an integral part of these condensed consolidated financial statements.

















|BIG SKY ENERGY CORPORATION
1
(a Development Stage Enterprise)
Notes to the Condensed Consolidated Financial Statements (unaudited)
(Expressed in United States Dollars) | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

1.

BASIS OF PRESENTATION



The condensed consolidated financial statements included herein have been prepared by Big Sky Energy Corporation  (the Corporation) without audit in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the United States Securities and Exchange Commission, except for the December 31, 2004 Balance Sheet which has been derived from the audited financial statements filed with the Corporations Annual Report on Form 10-KSB.  These financial statements are condensed and do not include all disclosures required for annual financial statements and accordingly, these financial statements and the notes thereto should be read in conjunction with the Corporations Annual Report on Form 10-KSB for the year ended December 31, 2004.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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 amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, considered necessary to present fairly the Corporations condensed financial position at June 30, 2005 and the condensed consolidated results of operations and cash flows for the three-month and six month periods ended June 30, 2005 and 2004.



2.

NATURE OF OPERATIONS



Late in 2003, the Corporation began investing in oil and gas assets in preparation for transition from its Internet service business in China, a transition which concluded December 9, 2004 with the sale of Big Sky Network Canada Ltd. to Big Sky Energy Canada Ltd., to become an oil and gas exploration and production company.  During 2004, the Corporation acquired KoZhaN LLP (KoZhaN) and Vector Energy West LLP (Vector).  By acquiring these companies the Corporation gained a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan, located close to infrastructure and transportation..  In the fourth quarter of 2004, the Corporation spudded its first well, Morskoe # 10. The drilling completion and the testing of Morskoe #10 will be followed by the drilling or working over of additional wells offsetting Morskoe #10.



The Corporation is also intent on farming out selected high risk exploration targets.  Initially, the Corporation focused its partnership initiatives on Chinas major national oil and gas production and service companies and since has expanded its farm-out discussions to include established multinational energy companies.   The Corporations strategy is a broad spectrum low risk approach to risk management in an inherently high risk business sector.



The Corporation believes that these activities will lead to a sustainable platform on which to build the Corporation in Kazakhstan.  In addition to building a base in Kazakhstan, the Corporation is trying to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.



The Corporation raised over US$12 million of new common equity in 2004 and an additional $13.7 million in February 2005. While access to the capital markets is always subjective, the current levels of energy prices support investor interest in financing new projects. The Corporation is basing its growth strategies on attaining a sustainable level of cash flow from low risk energy development of existing licenses while securing additional licenses subject to available financing on economic terms.



On March 18, 2005, our former auditors noted that the Corporations operating losses since inception raised substantial doubts about its ability to continue as a going concern.



3.

ACCOUNTING POLICIES



Accounting policies as disclosed in the Corporations Annual Report on Form 10-KSB for the year ended December 31, 2004 have not changed.







Basis of Presentation

These consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, Big Sky Energy Kazakhstan (BSEK) and Big Sky Energy Atyrau (BSEA).  The equity method of accounting is used for companies in which the Corporation has significant influence, which generally means common stock ownership of at least 20% and not more than 50%. The Corporation used the equity method to account for its joint venture investments in the Shekou JV (which was sold in 2002) and the Chengdu JV (sold in 2004). Big Sky Network Canada Ltd. (BSN) was accounted for as a majority-controlled subsidiary until April 25, 2000. For the period April 26, 2000 to September 28, 2000, while the Corporation owned 50% of BSN, BSN was accounted for using the equity method.  For the period since September 29, 2000, BSN has been accounted for as a wholly owned subsidiary and all inter-company accounts and transactions have been eliminated. On December 9, 2004 BSN was sold.



Restricted Cash



The amount of $76,040 is maintained on deposit to secure corporate credit card balances and as a deposit on oil and gas operations.



Stock-based compensation



The Company applies the intrinsic value method allowed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") in accounting for its stock option plans. Under APB 25, compensation expense resulting from awards under variable plans is measured at each reporting period as the difference between the quoted market price and the exercise price; the cost is recognized over the period the employee performs related services.



The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                       |                                                  | Three Months Ended
June 30, | Six Months Ended
June 30,
|-------------------------------------- | ------------------------------------------------ | --------------------------- | -------------------------
|                                       |                                                  | 2005                        | 2004                     
|                                       | $                                                | $                           | $                        
|Net loss, as reported                  | (2,852,054)                                      | (937,355)                   | (4,887,530)              
|Add: Stock-based employee compensation |                                                  |                             |                          
|                                       | recovery (expense) included in reported          |                             |                          
|                                       | net loss, net of related tax effects             | 475,500                     | 195,011                  
|Deduct: Total stock-based employee     |                                                  |                             |                          
|                                       | compensation recovery (expense) determined under |                             |                          
|                                       | fair value based method for all awards,          |                             |                          
|                                       | net of related tax effects                       | (819,080)                   | (5,209)                  
|                                       |                                                  |                             |                          
|Pro forma net loss                     | (3,195,634)                                      | (747,553)                   | (5,227,210)              
|                                       |                                                  |                             |                          
|Loss per share:                        |                                                  |                             |                          
|                                       | Basic and diluted  as reported                  | (0.03)                      | (0.02)                   
|                                       | Basic and diluted  pro forma                    | (0.03)                      | (0.02)                   



The fair value of stock options used in computing the pro forma net loss and basic loss per common share was estimated at grant date, determined by the Black-Scholes option pricing model with the following assumptions:







|                        | 2005    | 2004    | 
|----------------------- | ------- | ------- | 
|                        |         |         | 
|Dividend yield          | 0%      | 0%      | 
|Expected volatility     | 150%    | 200%    | 
|Risk free interest rate | 3.5%    | 3.93%   | 
|Expected option life    | 3 years | 5 years | 



Net loss per share



Basic loss per share ("EPS") excludes dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (warrants to purchase common stock and common stock options) were exercised or converted into common stock, using the treasury stock method.



Potential shares of common stock in the diluted EPS computation are excluded in net loss periods, as their effect would be anti-dilutive. In 2005, 14,914,610 options and warrants were excluded in the calculation of net loss per share.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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 amounts of revenues and expenses during the reporting period. Such estimates could include the allowance for potentially uncollectible accounts receivable and a valuation allowance for deferred tax assets. Actual results could differ from those estimates.



Impact of Recent and Pending Accounting Pronouncements



In November 2004, the EITF ratified Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations. The EITF reached a consensus that classification of a disposed of or held-for-sale component as a discontinued operation is only appropriate if the ongoing entity (i) expects to have no continuing direct cash flows, and (ii) does not retain or expect to retain an interest, contract or other arrangement sufficient to enable it to exert significant influence over the disposed components operating and financial policies after the disposal transaction. Application of this consensus did not have a material impact on the Corporations consolidated financial statements.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, that will require compensation costs related to share-based payment transactions to be recognized in financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. The standard replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. It is effective for small business issuers for the first interim or annual reporting period beginning after December 15, 2005, meaning that the Corporation will apply the guidance to all employee awards of share-based payment granted, modified or settled in the first quarter of 2006. The Corporation is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.



In December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion 29, Accounting for Non-monetary Transactions.  This amendment eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance.  Under Statement 153, if a non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss.  This statement is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005.  The Corporation is reviewing the guidance to determine the potential impact, if any, on its consolidated financial statements.







In May of 2005, the FASB issued Statement 154, Accounting Changes and Error Corrections.  This statement changes the method of accounting for accounting changes and error corrections by requiring that the cumulative effect of the change to assets and liabilities is recorded in retained earnings and not included in the current period income statement.  The Corporation is reviewing the guidance to determine the potential impact, if any, on its consolidated financial statements



4.

CONTINUING OPERATIONS



These consolidated financial statements have been prepared on a going concern basis.  The Corporation has acquired an oil and gas business and must make certain capital expenditures during the course of the next year and future years (see Note 22).  The Corporation's ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  The outcome of these matters cannot be predicted with any certainty at this time.  These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Corporation be unable to continue as a going concern.



During 2004, the Corporation utilized cash for management and corporate administrative activities of approximately $200,000 per month. In 2005, corporate and administrative costs will be higher due to increased business activity in Kazakhstan.  Taking into account prepaid lease rentals for office space, monthly expenditures for corporate and administrative costs are estimated at $450,000 per month. Management anticipates that the Corporation currently has sufficient working capital to fund this level of operations through December 2006. Current cash resources are not anticipated to be sufficient to fund the next phase of the Corporations development, including its expansion in the oil and gas business, and it will consider seeking additional private equity or debt financing. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Corporations objective, or result in commercial success. The Corporation cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subsidiaries will be commercially successful.



The ability of the Corporation to survive will depend on its ability to finance, acquire, explore for and produce oil and natural gas on a profitable basis.  The Corporation's operations may also be adversely affected by significant political, economic and social uncertainties in Kazakhstan and in other countries in which it may acquire oil and gas operations. Kazakhstan has emerged from the former Soviet Union with a viable, independent economy and is open to foreign investment.  Kazakhstan is rich in a variety of minerals and raw materials.  The economy is evolving from centrally planned towards a free market.  Government policies favoring foreign investment may change, commodity prices may decline and political disruptions may occur in the region.  These factors may impact the Corporations ability to conduct its business, the results of its operations and its financial condition and its right to pay dividends.



5.

BUSINESS COMBINATION



Big Sky Energy Kazakhstan Ltd.



On January 12, 2004, the Corporation acquired 100% of the issued and outstanding share capital of BSEK.  The Corporation issued 8,000,000 shares of common stock at a deemed price of $0.286 per share, being the trading price of the Corporations shares at the date of announcing the transaction, for total consideration including transaction costs of $2,288,000.  Among the sellers of the BSEK shares was a company which held 80% of those shares and which was wholly-owned by Kai Yang, the brother of the Corporations President, and of which Matthew Heysel, the Chairman and Chief Executive Officer of the Corporation, and Daming Yang, President of the Corporation, were directors and senior officers.  BSEK holds a 90% interest in KoZhaN, which holds the rights to explore for and produce oil and natural gas from three properties in the Republic of Kazakhstan.  The acquired net assets at fair value of BSEK and consideration given were as follows:







|Oil and gas properties                        | $ | 6,341,710  
|--------------------------------------------- | - | -----------
|Other capital assets                          |   | 3,424      
|Current assets, including cash of $339,353    |   | 342,431    
|Loan receivable from BSEK                     |   | (1,154,941)
|Other current liabilities                     |   | (968,753)  
|Non-current liabilities                       |   | (2,275,871)
|Net assets acquired                           | $ | 2,288,000  
|                                              |   |            
|Consideration, 8,000,000 common shares issued | $ | 2,288,000  



The oil and gas properties consist of subsurface use rights to previously-discovered proved non-producing oil reserves.



Results of operations of BSEK have been included in the consolidated statement of operations of the Corporation from the period January 12, 2004.  On January 30, 2004, BSEK entered into a subscription and escrow agreement with a third-party to issue common shares from treasury to this third-party.  The shares were being held in escrow pending receipt of the full amount of the subscription proceeds totaling $2,300,000.  On June 28, 2004, the subscription agreement was cancelled and the $250,000 deposit, which had been received in the third quarter of 2003, was refunded.



Vector Energy West LLP



On May 11, 2004, the Corporation, through its 75% owned subsidiary, BSEA, completed the acquisition of 100% of the issued and outstanding charter capital of Vector (a Kazakhstan limited liability partnership). BSEA was incorporated under the laws of Alberta on April 8, 2004 with the Corporation subscribing to 75% of the total shares issued on incorporation. The acquired net assets at fair value of Vector and consideration given would be as follows:



|Oil and gas properties                 | $ | 11,112,756 
|-------------------------------------- | - | -----------
|Current assets, including cash of $109 |   | 5,123      
|Loan payable                           |   | (548,076)  
|Other current liabilities              |   | (1,308,250)
|Non-current liabilities                |   | (4,754,942)
|Net assets acquired                    | $ | 4,506,611  
|                                       |   |            
|Consideration, paid in cash            | $ | 4,506,611  



The oil and gas properties include previously discovered proved non-producing oil reserves as well as subsurface use rights over the remainder of the acreage.



Big Sky Energy Atyrau Ltd.



On November 10, 2004 the Corporation purchased the 25% minority interest in BSEA. The Corporation issued 3,500,000 shares of common stock at a deemed price of $0.73 per share, being the trading price of the Corporations shares at the date the transaction was announced, for total consideration of $2,550,000. BSEA holds 100% of the charter capital of Vector, a Kazakhstan limited liability partnership.  The purchase price of $2,550,000 and a related deferred income tax liability of $894,250 has been ascribed to oil and gas properties.



Pro-forma disclosure



SFAS 141 requires disclosure on a pro-forma basis as though the business combination had occurred at the beginning of the period.  There were no material transactions for the period from January 1, 2004 through June 30, 2004 in BSEK and there were no material transactions for the period from January 1, 2004 through June 30, 2004 in Vector, other than accretion expense of $75,665.



For the three months ended June 30, 2004, the Company has determined the following pro-forma information for the BSEK and BSEA business combination:







|June 30, 2004  | As reported | Adjustments | Pro-forma  
|-------------- | ----------- | ----------- | -----------
|Revenue        | $ 33,185    | $ -         | $ 33,185   
|Net loss       | $ (937,359) | $ (25,000)  | $ (962,355)
|Loss per share | $ (0.02)    | $ -         | $ (0.02)   



For the six months ended June 30, 2004 , the Company has determined the following pro-forma information for the BSEK and BSEA business combination:



|June 30, 2004  | As reported   | Adjustments | Pro-forma    
|-------------- | ------------- | ----------- | -------------
|Revenue        | $ 64,548      | $ -         | $ 64,548     
|Net loss       | $ (1,744,314) | $ (80,000)  | $ (1,824,314)
|Loss per share | $ (0.04)      | $ -         | $ (0.04)     



6.

PROPERTY AND EQUIPMENT



Property and equipment consist of:



|                               | June 30,
2005 |  | December 31, 2004
|------------------------------ | ------------- |  | -----------------
|                               | $             |  | $                
|Vehicles                       | 83,054        |  | -                
|Furniture and fixtures         | 262,681       |  | 325,297          
|Computer hardware and software | 139,224       |  | 46,382           
|Leasehold improvements         | 178,042       |  | 178,041          
|                               | 663,001       |  | 549,720          
|Accumulated amortization       | (216,988)     |  | (165,643)        
|                               | 446,013       |  | 384,077          



7.

OIL AND GAS PROPERTIES



Oil and gas properties are comprised of the following:



|                                   | June 30, 2005 |  | December 31, 2004
|---------------------------------- | ------------- |  | -----------------
|                                   | $             |  | $                
|                                   |               |  |                  
|Subsurface use rights and expenses | 25,506,261    |  | 21,742,382       
|Royalty interest                   | 415,700       |  | 415,700          
|Oil and gas properties             | 25,921,961    |  | 22,158,082       



8.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES



The following amounts are included in accounts payable and accrued liabilities:

|                       | June 30, 2005 |  | December 31, 2004
|---------------------- | ------------- |  | -----------------
|                       | $             |  | $                
|                       |               |  |                  
|Trade accounts payable | 918,012       |  | 413,271          
|Professional fees      | 106,565       |  | 98,802           
|Office lease           | 53,356        |  | 80,323           
|Withholding taxes      | 9,044         |  | 114,363          
|Other                  | -             |  | 54,399           
|                       | $1,086,977    |  | $761,158         



On October 12, 2004 KoZhaN signed a Farmout Agreement, the intent of which is to transfer 45% of the subsurface rights of the Morskoe license to ABT Ltd., an unrelated construction company. This transfer of 45% is subject to approval by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan, which is still pending. Under the terms of this Farmout Agreement, ABT Ltd., agreed to pay for the cost of lease access and lease construction





(Construction Works) and loan up to $650,000 towards the cost of drilling, completion and testing of Morskoe #10 well (Drilling Works).  KoZhaN agreed to contribute $150,000 to the Drilling Works.  Both companies will equally share future costs associated with the development of the Morskoe license.



As of December 31, 2004, ABT Ltd. had incurred $798,915 worth of Construction Works.  An interest-free loan of $500,000 to KoZhaN LLP was made for Drilling Works of Well # 10 and had a remaining available balance of $166,000.  Neither the Construction Works nor the loan advanced for Drilling Works are part of Big Skys oil and gas propertiesand are not reflected in Big Skys accounts.  As the ABT loan funds are spent on the well costs, the loan balance is reduced accordingly.  Neither the Construction Works costs nor Drilling Works costs have been recorded as oil and gas property expenses by Big Sky as they relate strictly to ABTs working interest in the properties.  At June 30, 2005, the Company owed $338,319 to ABT for Drilling Works.



It should be noted that this Farmout Agreement is success based and should no production result from the Morskoe license, the Corporation has no obligation to repay ABT its expenditures relating to the cost of the Construction Works  and/or Drilling Works.



9.

OBLIGATIONS ON SOCIAL SPHERE DEVELOPMENT



In accordance with the Subsurface Use Contracts, the Corporation is committed to contribute to social sphere development of Astana and Atyrau cities in the total amount of $3,030,000 for all oilfields during the exploration phase.  All Subsurface Use Contracts establish the exploration phase as 6 years from 2003 to 2009, and the production phase as 25 years from 2009 to 2034. During the term ended, June 30, 2005, the Corporation had not made any payments. These payments are due over the period from 2003 to 2008.  Management believes that the Corporation will meet this obligation within the exploration phase and payment timing will not terminate or deteriorate terms of the Subsurface Use Contracts.



Payment of these obligations is to be made according to a payment schedule agreed to between the Corporation and the Government. The non-current portion of these obligations is discounted at 15% being the estimated credit-adjusted risk free discount rate, giving a total discounted obligation of $2,700,961. The accretion expense for the three month period ended June 30, 2005 was $46,226 (2004 -$330) and the six month period ended June 30, 2005 was $90,862 (2004 -$21,781).



10.

OBLIGATIONS FOR PROFESSIONAL TRAINING OF PERSONNEL



|                                                                    |   | June 30, 2005 |   | December 31, 2004
|------------------------------------------------------------------- | - | ------------- | - | -----------------
|                                                                    |   |               |   |                  
|Within one year                                                     | $ | 289,200       | $ | 289,200          
|In the second to the fifth inclusive                                |   | 389,800       |   | 389,800          
|Total obligations                                                   |   | 679,000       |   | 679,000          
|                                                                    |   |               |   |                  
|Less: discount on obligations on professional training of personnel |   | (65,108)      |   | (85,159)         
|Present value of obligations on professional training of personnel  |   | 613,892       |   | 593,841          
|                                                                    |   |               |   |                  
|Amount due for settlement within one year                           |   | 289,200       |   | 289,200          
|Amount due for settlement after one year                            |   | 324,692       |   | 304,641          
|                                                                    |   |               |   |                  
|Total                                                               | $ | 613,892       | $ | 593,841          
|                                                                    |   |               |   |                  



The Company recorded obligations on professional training of personnel as prescribed by the Subsurface Use Contracts.  In accordance with the Subsurface Use Contracts, the Corporation is obliged to finance professional training of Kazakhstani personnel recruited for the Subsurface Use Contracts operations at the rate of not less than 1% of the total amount of minimal investments.  Under the Subsurface Use Contracts, the total amount of minimal investments was established at $53,900,000 during their exploration phase.







These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate.  The accretion expense for the three month period ended June 30, 2005 was $11,149 (2004 -$6,994) and the six month period ended June 30, 2005 was $20,051 (2004 -$6,994).



11.

OBLIGATIONS FOR ACQUISITION OF THE RIGHT FOR THE GEOLOGICAL INFORMATION USE



In accordance with the Agreements on acquisition of the right on the geological information use # 710 and # 711 dated January 21, 2002, the Corporation is obliged to pay an additional amount for the right of geological information use if KoZhaN attracts foreign investors.  On May 11, 2004, BSEA acquired 100% of the shares in Vectors charter fund. Accordingly, Vector recognized additional obligations on acquisition of the right on the geological information use as at June 30, 2005 in the amount of $758,265 (December 31, 2004, $758,265).



12.

OBLIGATIONS FOR HISTORICAL COSTS REIMBURSEMENT



The Corporation through its purchase of Vector is unavoidably obliged to reimburse $7,784,034, which represents historical costs incurred by the Republic of Kazakhstan for the Liman-2 oilfield pursuant to the terms of the Subsurface Use Contract # 1076 dated December 28, 2002 and the Agreement on acquisition of the right on the geological information use # 711 dated January 21, 2002. Payment of these obligations should be made according to a payment schedule agreed between Vector and the Government. These payments are due from 2012 to 2027 and should be paid quarterly in equal installments.



These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate, giving a present value of obligation of $1,014,386 as at June 30, 2005.  The accretion expense for the three month period ended June 30, 2005 was $44,480 (2004 -$4,964) and the six month period ended June 30, 2005 was $77,192 (2004 -$4,964).



13.

SIGNATURE BONUSES AND PENALTY PAYABLE



In accordance with the Subsurface Use Contracts there was an obligation to pay signature bonuses in total of $1,000,000 for acquiring the subsurface use rights for all three fields. These bonuses were due for payment within 30 days after signing the Subsurface Use Contracts.



Penalties accrued on delaying the payment of the signature bonuses for those oilfields amounted to $61,739. These penalties are included in trade accounts payable.



14.

ASSET RETIREMENT OBLIGATION



Management determined that an asset retirement obligation should be recognized for future abandonment costs of 93 wells drilled at Morskoe, Liman -2 and Atyrau  fields  before the Corporation signed the Subsurface Use Contracts, but which were not properly plugged and abandoned by the previous leaseholders .  Management believes that this obligation is likely to be settled at the end of the exploration phase.



As at December 31, 2004, undiscounted future cash flows that will be required to satisfy the Corporations liability by 2009 and 2028 for the Liman-2 field is $930,000.  After application of a 15% credit-adjusted risk free discount rate, the present value of the Corporations liability at June 30, 2005 is $467,607.  During the three months ended June 30, 2005, the Corporation recorded an accretion expense of $16,056 (2004 - $Nil) and for the six months ended June 30, 2005 $31,739 (2004 - $704) was recorded.



15.

INCOME TAX



The Corporation did not provide any current or deferred U.S. federal or foreign income tax provision or benefit because it has experienced operating losses since inception. The Corporation is not liable for any state taxes.







|                                    | June 30, 2005 | December 31, 2004
|----------------------------------- | ------------- | -----------------
|                                    |               |                  
|Loss before income taxes            | $             | 4,887,530        
|                                    |               |                  
|Composite statutory income tax rate |               | 35.0%            
|Expected income tax recovery        | $             | (1,710,635)      
|Tax benefit not recognized          |               | 1,710,635        
|                                    |               |                  
|Income tax expense (recovery)       | $             | -                



Deferred taxation reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for statutory tax purposes in the respective countries.



The deferred income tax liability is comprised of the following:

|                            | June 30, 2005 |  | December 31, 2004
|--------------------------- | ------------- |  | -----------------
|                            | $             |  | $                
|Temporary differences       |               |  |                  
|Oil and gas property values | 13,734,017    |  | 13,734,017       
|Total temporary differences | 13,734,017    |  | 13,734,017       
|                            |               |  |                  
|Statutory tax rate          | 35%           |  | 35%              
|Total                       | 4,806,906     |  | 4,806,906        
|                            |               |  |                  
|Current  portion            | -             |  | -                
|Non-current portion         | 4,806,906     |  | 4,806,906        
|Total                       | 4,806,906     |  | 4,806,906        



At June 30, 2005, the Corporation had a net operating loss of approximately $19,410,000 (December 31, 2004 - $15,650,000) for U.S. federal purposes. Utilization of the net operating loss, which expires on various dates starting in 2007, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended.  Due to the uncertainty of utilizing these net operating losses, the Corporation has made a valuation allowance of an amount equal to the related deferred tax asset.



|                                         | June 30, 2005 | December 31, 2004
|---------------------------------------- | ------------- | -----------------
|                                         | $             | $                
|                                         |               |                  
|Net operating loss carry forward balance | 19,410,000    | 15,650,000       
|                                         |               |                  
|Composite statutory tax rate             | 35.0%         | 35.0%            
|Deferred tax asset                       | 6,793,500     | 5,477,800        
|Valuation allowance                      | (6,793,500)   | (5,477,800)      
|                                         | -             | -                



16.

COMMON STOCK



In February of 2005, the Corporation issued 27,250,000 shares of common stock in connection with a private placement for gross proceeds of $13,625,000. The costs associated with the private placement includes a finders fee of 6% of the gross proceeds received by the Corporation and warrants with an exercise price of $0.50 issued to the finders that equal 6% of the shares issued under the private placement. The total share issue costs were $1,955,180.



In March of 2005, the Corporation issued 750,000 shares of common stock under the Stock Awards Plan to the Chief Executive Officer (500,000 shares) and the Chief Financial Officer (250,000 shares) at a deemed price of $0.50 per share for net compensation costs of $375,000.



In March of 2005, the Corporation issued 1,700,000 shares of common stock to four option holders who exercised their options under the Corporations 2002 Stock Awards Plan. The Corporation realized proceeds of $85,000.









In March of 2005, 9,600 shares of common stock were issued for the exercise of 9,600 warrants. The Corporation realized proceeds of $4,800.



In April of 2005, the Corporation issued 150,000 shares of common stock to one option holder who exercised the  options under the Corporations 2002 Stock Awards Plan. The Corporation realized proceeds of $7,500.



In April of 2005, 479,505 shares of common stock were issued for the exercise of 479,505 warrants. The Corporation realized proceeds of $239,753.



17.

STOCK AWARD PLAN



Under the Stock Option Plan (the Plan), the Corporation has reserved 15,000,000 shares of common stock for issuance under options granted to eligible persons.  As at June 30, 2005, 10,650,000 are issued and outstanding with a further 4,000,000 granted subject to an increase in the allocation of shares to the 2000 Stock Award Plan to be presented to the shareholders at the next Annual Meeting.



Under the Plan, options to purchase common stock may be granted to employees, directors, officers and certain consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 110% of fair market value for incentive stock options where the employee who, at the time of grant, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Corporation.  These options expire three to five years from the date of grant and may be fully exercisable immediately, or may be exercisable according to a schedule or conditions specified by the Nominating and Compensation Committee.



Option activity under the Plan is as follows:

|                                    | 2005
Number of
Options
|----------------------------------- | ----------------------
|                                   
|                                    |                       
|Opening Balance  December 31, 2004 | 6,175,000             
|                                    |                       
|Granted                             | 9,150,000             
|Expired                             | -                     
|Exercised                           | (1,850,000)           
|Cancelled                           | (725,000)             
|                                    |                       
|Closing Balance, June 30, 2005      | 12,750,000            
|                                    |                       
|Options available for granting      | 298,334               
|                                    |                       
|Options exercised                   | 1,951,666             
|                                    |                       
|Option Plan Total                   | 15,000,000            



Additional information regarding options outstanding as of June 30, 2005 is as follows:



|Options Outstanding and Exercisable
|-----------------------------------
|Range of
Exercise Prices           
|0.15                               
|0.05                               
|0.56                               
|0.89                               
|0.50                               
|                                   







For the three months ended June 30, 2005, $17,600 of compensation expense has been recognized (2004 - $17,470) in the consolidated financial statements for non-employee stock option grants.  For the six months ended June 30, 2005, $22,650 of compensation expense has been recognized (2004 - $57,087).  For the three months ended $475,500 (2004  $195,011) of compensation awards has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.   For the six months ended $475,500 (2004  $42,908) of compensation awards has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.



18.

WARRANTS



The Corporation has previously issued the following warrants.  Each warrant can be exchanged for 1 common share at the exercise price noted.



|Date of Grant  | Number of Warrants | Exercise Price | Expiry Date  
|-------------- | ------------------ | -------------- | -------------
|               |                    |                |              
|May 2004       | 69,000             | $0.50          | May 2007     
|July 2004      | 2,210              | $0.50          | January 2006 
|September 2004 | 134,400            | $0.50          | January 2006 
|November 2004  | 348,000            | $0.50          | January 2006 
|February 2005  | 1,611,000          | $0.50          | February 2007
|               | 2,164,610          | $0.50          |              



During 2005, 1,61 (2004  1,042,715) warrants were granted at a price of $0.50 per share under the terms of an agency agreement in connection with a private placement. In February 2005, 9,600 warrants were exercised for cash proceeds of $4,800. In April 2005, 479,505 warrants were exercised for cash proceeds of $239,753 and 50,000 warrants expired.



19.

ALTERNATIVE COMPENSATION PLAN



On March 22, 2002 the Board of Directors approved the Alternative Compensation Plan to provide opportunities for officers, directors, employees and contractors to receive all or a portion of their compensation in the form of shares of common stock instead of cash. The Alternative Compensation Plan was approved at our Annual Shareholders Meeting held on June 14, 2002. The Plan allowed for maximum compensation of 2,000,000 shares.  This maximum was reached in the third quarter of 2002 and an expense in the amount of $163,463, relating to the future issuance of 2,000,000 shares of common stock, was accrued under the Alternative Compensation Plan in 2002.  Shares are issued upon request of the beneficiaries and no further compensation cost is recorded at that time.  During 2005, no shares were issued under the Alternative Compensation Plan, leaving a balance of 1,317,198 shares still to be issued at June 30, 2005.



20.

RELATED PARTY TRANSACTION



On June 30, 2005, the Corporation owed $134,349 to Matthew Heysel, the Chairman and Chief Executive Officer arising from business travel expenditures paid personally.



On June 30, 2005 the Corporation owed $10,000 to Glenn Van Doorne, the former Executive Vice President, for a consulting service contract.



The Corporation has been unable to establish a bank account in Beijing.  Each month, the Corporation transfers funds to Kai Yang, the brother of the President and a consultant to BSN, who is resident in Beijing, to cover the costs of maintaining an office in Beijing.  During the period, the Corporation advanced $180,000 to Kai Yang and he disbursed the full amount for salaries, office rental, professional fees, travel, and other office administration expenses of the Corporation.  Kai Yang retained no part of these funds.



Big Sky Energy Canada Ltd.



At the time of the acquisition of BSEK, Matthew Heysel and Daming Yang were directors and officers of Big Sky Energy Canada Ltd. and the Corporation and Mr. Kai Yang held all the outstanding shares of Big Sky Energy Canada Ltd.  As at December 31, 2004, Matthew Heysel and Daming Yang were no longer directors nor officers of Big Sky Energy Canada Ltd. On March 10, 2004, Daming Yangs brother, Wei Yang, was appointed to the board and was given full voting and dispositive control over all shares held by Big Sky Energy Canada Ltd.







During the period ended June 30, 2005 the Corporation advanced $10,000 to Big Sky Energy Canada for a balance of $32,767 owing to the Corporation.



During the period ended June 30, 2005 the Corporation advanced $28,398 to Big Sky Energy Aral, a corporation with common directors.



In March 2005, $80,000 was paid to a company affiliated with Mr. Bruce Gaston , a director since December 3, 2004 for introductions to potential investors who subsequently participated in the $13.7 million raised by the Corporation in February 2005.



21.

FAIR VALUE OF FINANCIAL INSTRUMENTS



As at June 30, 2005 the related method of determining fair value and carrying value of the Corporations financial instruments were as follows: the fair value of current assets and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments. The Corporation is exposed to market, credit and currency risks arises in the normal course of the Corporations business. Derivative financial instruments are not used to reduce exposure to the above risks.



Concentration of credit risk  Financial instruments that potentially expose the Corporation to concentrations of credit risk consist primarily of cash and cash equivalent. Management of the Corporation believes the likelihood of incurring material losses due to concentration of credit risk is remote.



Interest rate risk  The Corporations potential interest rate risk is minimal and management considers the risk insignificant.



Foreign currency risk  The Corporation undertakes transactions denominated in foreign currencies. Accordingly, these activities may result in foreign currency exposure. The Corporation does not hedge its foreign currency risk.



22.

COMMITMENTS AND CONTINGENCIES



The Corporation recorded expenses for rental payments under operating leases, net of amounts recovered from sub-lessees, totaling $72,688 for the three months ended June 30, 2005 and $135,241  for the six months ended June 30, 2005. Minimum lease payments under operating leases for the period ending June 30 are as follows:



|     | $      
|---- | -------
|2005 | 174,900
|2006 | 125,650
|2007 | 48,250 
|     | 348,800



The Corporation is subject to potential litigation in the normal course of operations.  There are no claims currently pending that management considers would materially affect the Corporations financial position or results of operations.



Operating environment  The Corporations principal business activities are within the Republic of Kazakhstan. Laws and regulations affecting businesses operating in the Republic of Kazakhstan are subject to rapid changes and KoZhaNs assets and operations could be at risk due to negative changes in the political and business environment.



Taxation  The taxation system in the Republic of Kazakhstan is constantly changing and subject to inconsistent application, interpretation and enforcement. There have been many new tax and foreign currency laws and related regulations introduced in recent years, which are not always clearly written and whose interpretation and application is subject to the opinions of the local tax authorities. Non-compliance with Kazakhstan laws and regulations can potentially lead to the imposition of penalties and fines, the amounts of which can be significant.



Environmental matters  The Corporation believes it is currently in compliance with all existing Kazakhstan environmental laws and regulations. However, Kazakhstan environmental laws and regulations may change in the future. The Corporation is unable to predict the timing or extent to which these environmental laws and regulations may change. Such change, if it occurs, may require KoZhaN to modernize technology to meet more stringent standards.







Financial Commitments and Contingencies  KoZhaN



The Corporation, through its interest in KoZhaN, has the following commitments and contingencies.  As these commitments and contingencies are subject to the commencement of commercial production and the Corporation can not determine at this time when it will commence commercial oil and gas production operations, the likelihood of payment of the following commitments and contingencies is currently indeterminable. Consequently no amounts have been recorded as provisions in these financial statements for the following commitments and contingencies:



|a) | Commitment to repay historical costs of the Government  In accordance with the Subsurface Use Contracts the Corporation is obliged to reimburse to the Government for historical costs incurred during preparation of certain geological information on the Morskoe, Karatal and Dauletaly oilfields.  The total amount reimbursable is $3,756,422. Of this amount, $116,178 was paid in 2002-2003. The remaining amount of $3,640,244 is expected to be settled by equal quarterly installments during 20 years after the Corporation enters into the production phase on these oilfields. If commercial production does not commence, no further payments become due in this respect.                                                                                                                                                                             
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | Commitments to contribute to social development of Astana and Atyrau  In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest an equivalent of $850,000 during the production phase for the development of the social sector of Atyrau and Astana cities in the Republic of Kazakhstan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|c) | Commitment to develop local personnel In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest not less than 1% of total investments for professional development of the local personnel involved in works under the Subsurface Use Contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|d) | Liquidation fund  In accordance with the Subsurface Use Contracts, the Corporation is obliged to establish a liquidation fund to finance the adequate disposal of the Corporations oil and gas operations in the amount of 1% of operating costs.  The Corporation is also obliged to apply for approval of this fund with the Government under the contracts, including budget of disposal costs, no later than 2 years before the end of the exploration phase and start of the production phase. Although the Corporation has not yet carried out major exploration activities to date, the Corporation has recorded an asset retirement obligation for certain wells in these financial statements. Upon achieving an agreement with the Government, this asset retirement obligation may be considered as part of the contractually required liquidation fund.
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|e) | Contingencies related to purchase of geological information from the Government  In accordance with the Purchase Agreements concluded with the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan on July 10, 2002, the Corporation may incur a penalty for delaying payment for the geological information purchases from the Government relating to the Morskoe, Karatal and Dauletaly oilfields at a rate of 10% per annum. Payments for the geological information purchase for the Karatal and Dauletaly oilfields were made by the Corporation with a significant delay. Management believes that the obligation for the penalty is not probable and thus no provision has been recognized in the financial statements for this amount.                                                                                                   
|f) | Commitment to make payments based on production  Arising from BSEKs acquisition of KoZhaN interest, the Corporation is committed to make the following payments to the non-controlling partners of KoZhaN, as a group, upon achieving the following production milestones, where production is calculated after deducting the governments share of production, if any, and where one tonne equals seven barrels of oil:                                                                                                                                                                                                                                                                                                                                                                                                                                           





|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $100,000 after the receipt by KoZhaN of payment in full for two sales of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN.  Each sale shall not be less than 4,000 tonnes of oil;
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $300,000 after the receipt by KoZhaN of payment in full for a cumulative production of 40,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;                        
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $400,000 after the receipt by KoZhaN of payment in full for a cumulative production of 150,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;                       
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $500,000 after the receipt by KoZhaN of payment in full for a cumulative production of 250,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | -                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | -                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | -                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | -                                                                                                                                                                                                         
|g) | Investment commitments  In accordance with the Subsurface Use Contracts KoZhaN is obliged to invest a minimum of $69,000,000 over the period covered by the Subsurface Use Contracts. An amount of $14,000,000 should be invested during the exploration phase. All three Subsurface Use Contracts establish the exploration phase as 6 years from 2003 to 2009, and the production phase as 25 years from 2009 to 2034.  The governments objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the license holder, including drilling new wells and seismic activity. The government will measure the degree to which the Corporation has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of the Corporation towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.
|h) | Commercial discovery bonus  In accordance with the Subsurface Use Contracts, the Corporation is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of proved reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan.  As at June 30, 2005, a commercial discovery has not been made as so no accrual for any bonus has been made in these financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|i) | Commitments related to transfer of 45% share in Morskoe oil field  On October 12, 2004 KoZhaN signed an agreement which states that ABT Ltd., subject to approval of the Ministry of Energy and Mineral Resources of Republic of Kazakhstan, which approval is still pending,  became the owner of 45% of any crude oil, gas and any other mineral resources (including mineral resources produced during the exploration and probation exploitation periods) and have right to dispose such mineral resources at its own discretion. In addition, KoZhaN assumed obligation to provide financing of Drilling Works of $150,000 and 50% of all other costs, not specified as Construction Works and Drilling Works.                                                                                                                                                                                                                                                                                                                                                      

Other Contingencies







|a) | Non-compliance with the Subsurface Use Contracts  The Government has the right to suspend these contracts or even cancel them if the Corporation is in material breach of obligations and commitments under the Subsurface Use Contracts.

In accordance with the Subsurface Use Contracts signed on February 17, 2003 the Corporation was obliged to commence exploration activities within 60 days after signing the Contracts. However, as at June 30, 2005, the Corporation had not started exploration activities on the Karatal and Dauletaly oilfields. In the case of failure to remedy such violations, these Subsurface Use Contracts can be terminated by the Government, which may affect recoverability of capitalized costs of approximately $1.2 million related to Dauletaly and Karatal oilfields. The corporation expects to conduct new exploration activities in the two license areas in 2005, and may farmout portions of these licenses to third parties in 2005, in order to fulfill its obligations under the Subsurface Use Contracts.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | Commitment to sell produced oil in Kazakhstan  In accordance with the Subsurface Use Contracts, the Corporation is obliged to sell 100% of oil produced during the exploration stage, and 20% of oil produced during the production stage, to oil refineries located in Kazakhstan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



Financial Commitments and Contingencies  Vector Energy West  LLP



The Corporation, through its interest in Vector, has the following commitments and contingencies.  As these commitments and contingencies are subject to the commencement of commercial production and the Corporation can not determine at this time when it will commence commercial oil and gas production operations, the likelihood of payment of the following commitments and contingencies is currently indeterminable. Consequently, no amounts have been recorded as provisions in these financial statements for the following commitments and contingencies:



|a) | Non-compliance with the Subsurface Use Contracts  The Government has the right to suspend or cancel these Subsurface Use Contracts if KoZhaN is in material breach of the obligations and commitments under the Subsurface Use Contracts.

In accordance with the letter # 14-04-38 27 dated May 26, 2004 the Corporation was notified by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (the Competent Body) that the Corporation had failed to comply with the terms of the Contract # 1076 dated December 28, 2002 on exploration of hydrocarbons in the Liman-2 oilfield, in the following way:
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | In accordance with the letter # 14-04-38 28 dated May 26, 2004 the Corporation was notified by the Competent Body that the Corporation had failed to comply with the terms of the Contract # 1077 dated December 28, 2002 on exploration of hydrocarbons in the Atyrau oilfield, in the following way:                                                                                                                                                                                                                                                                                                                            
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 





|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | To provide professional training to the personnel employed for the Subsurface Use Contracts operations;                                                                                                                                                                                                                                                                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | To contribute funds to the Atyrau region for social programs and programs on infrastructure development;                                                                                                                                                                                                                                                                      
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | To submit quarterly reports on the Subsurface Use Contracts activities to the Competent Body;                                                                                                                                                                                                                                                                                
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and                                                                                                                                                                                                                                               
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | To establish and make contributions to the Liquidation Fund.                                                                                                                                                                                                                                                                                                                  
|   | Accordingly, under both Notices the Corporation was required by July 31, 2004 to remedy these deficiencies and to submit all required documents as confirmation of fulfillment of its obligations and actions taken to remedy these deficiencies and to report on corrective and preventive actions undertaken against any further breach of contractual obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | As at June 30, 2005, Management has discharged part of commitments and is continuing remediation of certain violations of the Subsurface Use Contracts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Submit the Annual Work Program to the Competent body and report on the progress of the Minimal Work Program implementation. On June 9, 2004, the Partnerships Annual Work Program for 2004 was approved by the Competent Body for both oilfields. The Annual Work Program for 2005 will be determined in October 2004 and finalized with the Competent Body in November 2004;
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Contribute funds to Atyrau region for social programs and programs for infrastructure development. It was agreed to defer this to the end of 2004;                                                                                                                                                                                                                            
|   | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body. The Corporation has appointed AIG as its Insurance Underwriter but as at the date of these financial statements the Business, Property and Liability Risk Insurance Program has not yet been submitted to the Competent Body;                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                               
|b) | Investment commitments  In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest a minimum of $53,900,000 over the period covered by the Subsurface Use Contracts. The Subsurface Use Contract # 1076 dated December 28, 2002 establishes the exploration phase as 6 years from 2003 to 2008. The Subsurface Use Contract # 1077 dated December 28, 2002 establishes the exploration phase as 5 years from 2003 to 2007 and the production phase as 20 years from 2008 to 2028.  The governments objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the licence holder, including drilling new wells and seismic activity. The government will measure the degree to which the Corporation has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of the Corporation towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.
|c) | Commitment to reimburse historical costs of the Government  In accordance with the Subsurface Use Contract, the Corporation is obliged to reimburse to the Government for historical costs incurred at the expense of the Government on the Atyrau oilfield. The total amount reimbursable is $22,507,380. From this amount, $112,537 was paid to the Government in 2003. The remaining amount of $22,394,843 is expected to be settled according to a payment schedule to be agreed between the Corporation and the Government not later than 120 days after approval of the hydrocarbon reserves. However, in the event that no approval of the hydrocarbon reserves is received, there will be no liability upon the Corporation in respect of the remaining amount of $22,394,843. No approval of the hydrocarbon reserves has been applied for or received as at June 30, 2005 and December 31, 2004 and so no provision in respect of the remaining amount has been made in these financial statements.                                                                                                                                                





|d) | Commercial discovery bonus  In accordance with the Subsurface Use Contracts, the Corporation is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of approved recoverable reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan. However, in the event that no approval of the hydrocarbon reserves is received, there will be no liability upon the Corporation in respect of the commercial discovery bonus. No approval of the hydrocarbon reserves has been applied for or received as at June 30, 2005 and December 31, 2004 and so no provision in respect of the commercial discovery bonus has been made in these financial statements.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23.

SUBSEQUENT EVENTS



On July 4, 2005, the Corporation entered into a Master Consulting Service Agreements with Schlumberger Logelco Inc. and Landmark Consulting (a Halliburton Company) to provide geological, geophysical and engineering support for its efforts to develop its holdings in Kazakhstan.  Under these Consulting Service Agreements, the Company will present specific assignments to Schlumberger and Landmark at preferred fees and have access to their proprietary software.



On July 18, 2005, the Corporation announced a private placement of up to 25,000,000 shares of common stock at a price of $1.00 per share (or in the case of Canadian investors, potentially issue securities that are in the form of Special Warrants convertible into common shares on the filing of a prospectus in Canada). The Corporation has also agreed to grant Agents, Westwind Partners, an option, exercisable at any time up to 30 days following the closing of the offering, to increase the size of the offering by an additional 10,000,000 common shares.   Subsequent to this private placement being announced, on July 29, 2005, the Corporation, by resolution of the Board of Directors, increased the potential size of this financing to up to 42,000,000 shares of common stock (the "Shares") (or in the case of Canadian investors, securities that are in the form of Special Warrants convertible into Shares on the filing of a prospectus in Canada).  This financing is scheduled to close on August 16, 2005.



On July 28, 2005, the Board of Directors, by unanimous resolution, approved the issuance of 3,000,000 additional options to S.A. Sehsuvaroglu, our Chief Executive Officer, such additional options to be subject to the Corporation achieving 6,000 barrels of net production by the end of November, 2005.  These options are also subject to the approval by the shareholders of the Corporation of an increase in the authorized share capital of the Corporation and an increase in the number of shares allotted to the Corporations Stock Award Plan.



On August 1, 2005, the Corporation, through its wholly-owned subsidiary, Big Sky Energy Kazakhstan Ltd., entered into a Sale Purchase agreement to acquire the outstanding 10% interest in its subsidiary KoZhaN LLP for US$1.25 million. This purchase is subject to the relevant approvals of the Ministry of Energy and Mineral Resources (MEMR) of Kazakhstan, which are anticipated directly. KoZhaN owns the Morskoe, Dauletaly, and Karatal licenses, which are located in the pre-Caspian basin in western Kazakhstan.  The purchase price of US $1.25million is payable upon the approval of the Ministry being received.



On August 8, 2005, the Board of Directors, by unanimous resolution, voted to grant immediate vesting to options held by the Chief Executive Officer, the Chief Financial Officer and the Executive Chairman of the Board in recognition of their success in raising capital in the July 18th Private Placement.







ITEM 2:  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS



FORWARD-LOOKING STATEMENTS



Included in this report are various forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," "continue," "believe" or other similar words.  We have made forward-looking statements with respect to the following, among others: our goals and strategies; our ability to earn sufficient revenues; our ability to continue as a going concern; and our future revenue performance and our future results of operations.  These statements are forward-looking and reflect our current expectations.  These forward-looking statements are subject to a number of risks and uncertainties, some of which are beyond our control.  Some of the key factors that have a direct bearing on our results of operations are:



|- | Changes in general political, social, economic and business conditions in China and Kazakhstan;                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | Economic and political uncertainties affecting the capital markets;                                                                                                                                                                             
|- | Changes in technology and the Internet marketplace in China;                                                                                                                                                                                    
|- | The business of exploration, development, production and refining of oil and natural gas reserves, the levels of those reserves and the marketing of crude oil and refined products and the ability to increase the quality of refined products;
|- | Fluctuations in oil and gas and refined product prices;                                                                                                                                                                                         
|- | Our ability to manage our growth;                                                                                                                                                                                                               
|- | Changes in business strategy or development plans;                                                                                                                                                                                              
|- | Our future capital needs;                                                                                                                                                                                                                       
|- | Changes in, or failure to comply with, government regulations or changes in interpretation, application or enforcement of government regulations;                                                                                               
|- | Costs arising from environmental liability; and                                                                                                                                                                                                 
|- | Our ability to manage currency fluctuations.                                                                                                                                                                                                    



The factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements. Therefore, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.



The following financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes to such consolidated financial statements included in this report.  We have derived the statements of operations data and the information as at and for the three month period ended June 30, 2005 and 2004 from unaudited condensed consolidated financial statements and from our audited consolidated financial statements for the year ended December 31, 2004.





SUMMARY FINANCIAL DATA



Statement of Operations Data:



|                                                             | THREE MONTH PERIOD ENDED JUNE 30, 2005 | THREE MONTH PERIOD ENDED
JUNE 30, 2004 | SIX MONTH PERIOD ENDED JUNE 30, 2005 | SIX MONTH PERIOD ENDED
JUNE 30, 2004 | PERIOD FROM FEBRUARY 1, 2000 TO
JUNE 30, 2005
|------------------------------------------------------------ | -------------------------------------- | -------------------------------------- | ------------------------------------ | ------------------------------------ | ---------------------------------------------
|Loss from Continuing Operations                              | ($2,852,054)                           | ($924,040)                             | ($4,887,530)                         | ($1,718,983)                         | ($24,958,649)                                
|Loss from Discontinued Operations                            | -                                      | ($13,315)                              |                                      | $25,331                              | ($10,114,016)                                
|Net Loss                                                     | ($2,852,054)                           | ($937,355)                             | ($4,887,530)                         | ($1,744,314)                         | ($35,072,665)                                
|Basic and diluted (loss) per share                           | ($0.03)                                | ($0.02)                                | ($0.05)                              | ($0.04)                              | -                                            
|Basic and diluted weighted average common shares outstanding | 98,237,202                             | 22,513,801                             | 88,604,545                           | 22,513,801                           | -                                            



Balance Sheet Data:

|                           | June 30, 2005 | December 31, 2004
|-------------------------- | ------------- | -----------------
|Cash and cash equivalents  | $5,827,209    | $983,734         
|Working capital            | $4,099,881    | ($1,705,240)     
|Total assets               | $34,367,481   | $24,583,455      
|Total stockholders equity | $22,463,897   | $13,397,829      



NATURE OF OPERATIONS



In 2004, Big Sky began investing in oil and gas assets with the stated intention becoming an oil and gas exploration and production company.   This transition was concluded December 9, 2004 with the sale of Big Sky Network Canada Ltd.  In early 2004, we acquired KoZhaN LLP (KoZhaN) and Vector Energy West LLP (Vector) which acquisitions gained Big Sky a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan, located close to infrastructure and transportation.



In the fourth quarter of 2004, Big Sky spudded its first well, Morskoe # 10 and during the first three months of 2005, we achieved our near term objectives which included the completion of drilling and testing of Morskoe #10.  The next phase of work, the drilling or working over of additional wells offsetting Morskoe #10 is currently underway.



We are also intent on farming out selected high risk exploration targets and we are currently undertaking farm out discussions with established multinational energy companies.   We believe that these activities will lead to a sustainable platform on which to build Big Sky in Kazakhstan and enable Big Sky to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.



On April 19, 2005, Big Sky executed a Letter of Intent with Sun Drilling LLP wherein Sun Drilling LLP agreed to provide turnkey drilling services for a minimum of two wells in the Morskoe Field on behalf of KoZhaN and a minimum of 10 wells in the Atyrau Block for Vector.  The drilling schedule for Morskoe is set to commence in approximately May 2005 with the Atryau block drilling schedule projected to start in July/August 2005.



Big Sky raised over $13.7 million in equity capital in the first three months of 2005 and anticipates the completion of a private placement raising approximately $42m in Q2-Q3 2005..  During 2004, Big Sky raised US$12 million of new common equity.  While access to the capital markets is always subjective, the current levels of energy prices support investor interest in financing new projects. Big Sky is basing its growth strategies on attaining a sustainable level of cash flow from energy development of existing licenses while securing additional licenses subject to available financing on economic terms.









RESULTS OF OPERATIONS



Revenues



For the first six months of 2005 and during all of 2004, Big Sky did not earn revenues. We have added oil and gas properties through the acquisition of KoZhaN and Vector; however these properties are currently undeveloped and consequently did not provide revenue during the period.



Expenses



During the three months ended June 30, 2005 and 2004, we incurred operating expenses of $2,563,352and $817,914 respectively.  The following table provides a breakdown of operating expenses by category.



General Operating Expenses

|                       | THREE MONTH PERIOD ENDED JUNE 30, 2005 | THREE MONTH PERIOD ENDED JUNE 30, 2004 | SIX MONTH PERIOD ENDED JUNE 30, 2005 | SIX MONTH PERIOD ENDED JUNE 30 2004 | PERIOD FROM FEBRUARY 1, 2000 TO
JUNE 30, 2005
|---------------------- | -------------------------------------- | -------------------------------------- | ------------------------------------ | ----------------------------------- | ---------------------------------------------
|Office Costs           | $2,459,300                             | 724,734                                | 4,365,342                            | 1,354,095                           | 17,918,271                                   
|Professional Services  | $101,668                               | 28,606                                 | 202,431                              | 103,744                             | 2,926,881                                    
|Investor Relations     | $2,384                                 | 64,574                                 | 84,528                               | 126,607                             | 1,499,779                                    
|Extinguishment of debt | $-                                     | $-                                     | -                                    | -                                   | (1,422,225)                                  
|Miscellaneous          | $-                                     | $-                                     | -                                    | -                                   | 212,114                                      
|TOTAL                  | $2,563,352                             | 817,914                                | 4,652,301                            | 1,584,446                           | 21,134,820                                   



Office costs include the costs of executive management and administrative consultants, rent, insurance, travel, and general office costs associated with maintaining business offices in China, Canada and Kazakhstan.  For the three months ended June 30, 2005, office costs have increased over the same period in 2004 due to additional consulting costs relating to the acquisition of additional subsidiaries during the year, the substantial increase in Kazakhstan operations and additional costs of management.



Professional services include accounting, audit and legal advisory costs.  Professional costs have increased in the second  quarter of 2005 compared to the same period in 2004.  This increase is primarily due to an increase in corporate activity.



Amortization and depreciation expense recorded during the second quarter of 2005 and 2004 resulted from the depreciation of office equipment and leasehold improvements.  No depletion was recorded on oil and gas assets, and oil and gas related accretion expenses were incurred.



We record the fluctuations in the fair value of certain unexercised stock options as a deferred compensation asset (reported as a reduction of stockholders equity on the balance sheet). This asset is amortized over the life of the stock options as non-cash compensation expense. The non-cash compensation expense in the second quarter of 2005 was $493,100 (2004 - $17,470).



Summary of Non-cash Compensation Expense:

|                              | Expense
$ | Unamortized Deferred Compensation
$
|----------------------------- | --------- | -----------------------------------
|Options                       |           |                                    
|Options granted June 2004     | 3,900     | 15,532                             
|Options granted February 2005 | 489,200   | 4,325,710                          
|Total                         | $493,100  | $4,341,242                         







Losses



Since we are in the development stage, all losses accumulated since inception is considered as part of our development stage activities.



DiscontinuedOperations



In December 2004, we sold our 100% shareholding in Big Sky Network Canada Ltd., which held our remaining assets in China, Big Sky Chengdu Technology Services Ltd, 100% owned, and our interest in the Sichuan Huayu Big Sky Network Ltd. joint venture, 50% owned. With this sale, we exited the Internet business in China. The sale of Big Sky Network Canada is presented as a discontinued operation in our financial statements.



CAPITAL EXPENDITURES AND INVESTMENTS



Material Commitments for Capital Expenditures



As a result of the acquisition of KoZhaN and Vector, we have acquired significant commitments for future capital expenditure. The majority or these commitments are not required to be settled until we are in the production phase, at which time we expect to have sufficient cash-flows from production to meet these commitments and will rely primarily on production cash-flows to meet future capital expenditures. If the future cash flows from production are insufficient to meet these commitments, we will likely have to rely on additional equity financing.



Certain commitments relating to KoZhaN require capital expenditure prior to the production phase. These include investment commitments of $16.43 million.  We anticipate we will be able to meet these capital costs through a number of financing alternatives. The investment commitment of $16.43 million is required to be spent in exploration phase in the Republic of Kazakhstan during the exploration phase, which is expected to last until approximately 2009.  We plan to finance this commitment through a combination of the sale of exploration related production and future equity financing.   The governments objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the license holder, including drilling new wells and seismic activity. The government will measure the degree to which Big Sky has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of Big Sky towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure. The Vector and KoZhaN work commitments are measured by actual work undertaken and completed. The cost to complete the work can be lower, or higher, than the estimated cost. Actual cost is not the determining factor in meeting work commitment obligations. As the undertaken work commitments in 2005 are higher than those defined in the Hydrocarbon Contracts, Vector and KoZhaN expects to apply to the government to amend the commitment to the lesser amounts defined in the Hydrocarbon Contracts



Commercial discovery bonuses will be equal to 0.1% of the value of proved reserves if found.  We anticipate that any commercial discovery bonus will be small enough to be financed out of our working capital.



LIQUIDITY AND CAPITAL RESOURCES



During the second quarter of 2005, Big Sky utilized cash for management and corporate administrative activities of approximately $4690,000 per month.  Management anticipates that Big Sky currently has sufficient working capital to fund a minimum level of operations through December 2006. Current cash resources are not anticipated to be sufficient to fund the work commitment for existing licenses, acquire producing properties or additional licenses. To that end, Big Sky has sought additional private equity or debt financing. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve Big Skys objective, or result in commercial success.



In February 2005, we raised an additional $13.7 million of common equity from institutional investors and accredited private investors in Europe, Russia, USA and Canada under a private placement.  This private placement was subsequently extended to accept further investors up to a total financing of approximately $42,000,000. This private placement is tentatively scheduled to complete August 16, 2005.







As of June 30, 2005, we had cash and cash equivalents of $5,827,209 that were included in the working capital surplus of $4,099,881.  This compared to a working capital deficit of $1,705,240 at December 31, 2004.



In February 2005, Big Sky closed on a private placement which raised $13,625,000.  Big Sky issued 27,250,000 shares of common stock at a price of $0.50 per share.   We paid a finders fee of 6% in cash and warrants equal to 6% of the shares of common stock issued for a total cost of $817,140.  1,634,280 Warrants to purchase 1,634,280 shares of common stock at $0.50 per share were also issued.



On a consolidated basis, our minimum cash requirement for maintenance of operations, without conducting a drilling program or acquisitions of other potential fields, is estimated at approximately $450,000 per month in 2005.  With the acquisition of KoZhaN and Vector and our diversification into oil and natural gas exploration and production, we anticipate that we will be required to raise additional capital to fund future exploration and development programs or farm out some of our interest in various higher risk/cost projects to third parties.  Such farm-outs would be intended to cover up to 100% of project costs in return for a percentage interest in the project.



In 2004, Big Sky decided to enter into such a farm out with a local civil construction firm to defray expenses associated with higher than expected lease construction costs of the Morskoe #10 well. On October 12, 2004 KoZhaN signed a farm out agreement under which KoZhaN transfers 45% of the subsurface rights of the Morskoe license to ABT  Limited LLP (ABT).  This transfer of these rights was subject to the approval by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan, which is still pending. ABT, in turn, paid for the cost of lease access and lease construction (Construction Works) and pay up to $650,000 towards the cost of drilling, completion and testing of Morskoe #10 well (Drilling Works).  KoZhaN has contributed $150,000 to the Drilling Works.  Both companies equally share future costs associated with the development of the Morskoe license. At June 30, 2005, there is $338,319 of the ABT fund remaining to be spent.



Cash Requirements



The following aggregated information about our contractual obligations and other commitments aim to provide insight into our short and long-term liquidity and capital resource need and demands as at June 30, 2005.   Unless otherwise indicated, the majority of these contractual obligations and commitments are contingent upon our selling production.







|                                                                                      |                                                                 | Exploration phase | Production phase
|------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ----------------- | ----------------
|Time period                                                                           | Total                                                           | Within 1 year     | 1 - 3 years     
|Estimated dates                                                                       |                                                                 | 2005              | 2006  08       
|Production levels (tonnes of oil)
(One tonne of oil equals approximately 7.4 barrels) |                                                                 | 694,000           |                 
|                                                                                      |                                                                 |                   |                 
|Operating leases                                                                      | $348,800                                                        | $174,900          | $173,900        
|Historical costs (Owed to Kazakhstan Government)                                      | 11,424,278                                                      | -                 | -               
|                                                                                      | Social sphere development liability (Astana and Atyrau)         | 3,030,000         | -               
|                                                                                      | Social development commitment (Astana and Atyrau)               | 1,389,000         | -               
|                                                                                      | Investment commitment (Including investment in local personnel) | 121,900,000       | 1,500,000*      
|                                                                                      | Liquidation fund (Obligations incurred to date)                 | 40,000            | -               
|                                                                                      | Commercial production milestone payments                        | 1,300,000         | -               
|                                                                                      |                                                                 |                   |                 
|                                                                                      | Total                                                           | $139,432,078      | $1,674,900      



* As disclosed in note 13 g) to the consolidated financial statements, we are obliged to spend $14,000,000 during the exploration phase, which is expected to end in 2009. As we are entitled to make these payments at any point over the exploration period, the timing of payments presented in the table reflects managements estimate as to when these expenditures will be incurred by us.



The following commitments have been excluded based on the inability to estimate the timing

* As disclosed in Note 24 to the consolidated financial statements, we are obliged to spend $16.43 million during the exploration phase, which is expected to end in 2009. As we are entitled to make these payments at any point over the exploration period, the timing of payments presented in the table reflects managements estimate as to when these expenditures will be incurred by us.



The following commitments have been excluded based on the inability to estimate the timing of payment and or the dollar amount of the future payments:



1.

Quarterly payments to the non-controlling partners in KoZhaN  these payments will be charged based net sales of oil, in accordance with the following schedule:



|- | $0.35 per barrel if the price of oil is equal to or less than $14.00;                           
|- | ------------------------------------------------------------------------------------------------
|- | $0.75 per barrel if the price of oil is greater than $14.00 and less than or equal to $18.00;   
|- | $1.00 per barrel if the price of oil is greater than $18.00 and less than or equal to $22.00; or
|- | $1.50 per barrel if the price of oil is greater than $22.00                                     

2.

Commercial discovery bonus  these payments to the government are required within 30 days of the approval by the State Committee of Kazakhstan of proved commercial hydrocarbon reserves. Payments amounts are currently set at 0.1% of the value assigned to the proved commercial reserves.

3.

A royalty of $1 per barrel for oil produced and sold form the Atyrau and Liman 2 licences.







PLAN OF OPERATION



Currently, our management expects that we have sufficient working capital surplus to fund our operations through December 2006, without including the costs of a drilling program or acquisitions of other potential fields,.  As at June 30, 2005 Big Sky was actively engaged in a private placement with a view to raising $42million in new common equity, together with the proceeds of the financing exercise of February 2005, we expect to have sufficient working capital to fund our operations and carry out a significant portion of our annual work commitments.



Meeting our future financing requirements will be dependent on our ability to develop oil and gas farm outs or joint venture partnerships on favorable terms, our ability to access equity capital markets and, after achieving or acquiring sustainable production, our ability to maintain credit facilities from institutional lenders. We may not be able to raise additional equity when required, or we may raise the equity on terms that are dilutive to existing shareholders.



On March 18, 2005, our previous auditors noted that the Corporations operating losses since inception raised substantial doubts about the Corporations ability to continue as a going concern.



These consolidated financial statements have been prepared on a going concern basis.  The Corporation has acquired an oil and gas business and must make certain capital expenditures during the course of the next year and future years (see Note 22).  The Corporation's ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  The outcome of these matters cannot be predicted with any certainty at this time.  These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Corporation be unable to continue as a going concern.



During 2004, the Corporation utilized cash for management and corporate administrative activities of approximately $200,000 per month. In 2005, corporate and administrative costs will be higher due to increased business activity in Kazakhstan.  Taking into account prepaid lease rentals for office space, monthly expenditures for corporate and administrative costs are estimated at $450,000 per month. Management anticipates that the Corporation currently has sufficient working capital to fund this level of operations through December 2006. Current cash resources are not anticipated to be sufficient to fund the next phase of the Corporations development, including its expansion in the oil and gas business, and it will consider seeking additional private equity or debt financing. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Corporations objective, or result in commercial success. The Corporation cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subsidiaries will be commercially successful.



The ability of the Corporation to survive will depend on its ability to finance, acquire, explore for and produce oil and natural gas on a profitable basis.  The Corporation's operations may also be adversely affected by significant political, economic and social uncertainties in Kazakhstan and in other countries in which it may acquire oil and gas operations. Kazakhstan has emerged from the former Soviet Union with a viable, independent economy and is open to foreign investment.  Kazakhstan is rich in a variety of minerals and raw materials.  The economy is evolving from centrally planned towards a free market.  Government policies favoring foreign investment may change, commodity prices may decline and political disruptions may occur in the region.  These factors may impact the Corporations ability to conduct its business, the results of its operations and its financial condition and its right to pay dividends.



CRITICAL ACCOUNTING ESTIMATES

Oil and Gas Properties



We follow successful efforts accounting for our oil and gas properties.  All property acquisition costs are initially capitalized to property, plant and equipment as unproved property costs.  Once proved reserves are discovered, the acquisition costs are reclassified to proved property acquisition costs.  Exploration drilling costs are capitalized pending evaluation as to whether sufficient quantities of reserves have been found to justify commercial production.  If commercial quantities of reserves are not found, exploration drilling costs are expensed.  All exploratory wells that discover potentially commercial quantities of reserves in areas requiring major capital expenditures before the commencement of production and where commercial viability requires the drilling of additional exploratory wells, remain capitalized as long as the drilling of additional exploratory wells is under way or firmly planned.  All other exploration costs, including geological and geophysical and annual lease rentals are expensed to earnings as incurred.  All development costs are capitalized as proved property costs.





Impairment of Oil and Gas Properties



Big Sky evaluates its long-lived assets, including oil and gas properties, for possible impairment by comparing the carrying values with the undiscounted future net before-tax cash flows. Among other things, this might be caused by falling oil and gas prices, a significant revision to reserve estimates, adverse changes in operating costs, tax or political environment. Asset impairment may occur if a field discovers lower than anticipated reserves, write downs of proved reserves based on field performance, significant changes in commodity prices, significant decreases in the market value of an asset, and significant change in the extent or manner of use or physical change in an asset. Impaired assets will be written down to their estimated fair values, generally their discounted future net before-tax cash flows. For proved oil and gas properties, Big Sky performs the impairment test on an individual field basis. Unproved properties are reviewed periodically to determine if there has been impairment of the carrying value with any such impairment charged to expense in the current period. We assessed our oil and gas properties for impairment at the end of 2004 and found no impairments were required based on our assumptions.



Stock Based Compensation



We account for stock-based awards to employees using the intrinsic method in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees.  Under APB 25, compensation expense is accounted for in accordance with the intrinsic method where the expense is recognized upon either the grant date, if immediately vesting; upon vesting if options vest over a period of time, as being the difference between the quoted market price and the exercise price, or if resulting from awards under variable plans, the expense is measured at each reporting period as the difference between the quoted market price and the exercise price.  We account for stock-based awards to non-employees in accordance with the Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.  SFAS No. 123 requires that stock options awarded to non-employees be valued at fair value on the date of the award.  Management estimates the fair value of the stock options using the Black-Scholes option-pricing model and makes assumptions for the applicable interest rates, volatility and dividend yield.  In all cases, the calculated compensation is recognized as an expense over the period that the employee performs the related services.  For the three month period ended June 30, 2005, an amount of $493,100was recorded as non-cash stock compensation expense in respect of employee and non-employee-stock based compensation (2004 - $191,721)



OFF-BALANCE SHEET ARRANGEMENTS



We did not have any off-balance sheet arrangements at June 30, 2005.



SUBSEQUENT EVENTS



On June 30, 2005, the Board of Directors accepted the resignation of Mr. Ruslan Tsarni as Corporate Secretary and confirmed Bruce H. Gaston, our Chief Financial Officer in role of Corporate Secretary.



Reference Footnote 23 of Condensed Consolidated Financials Statements incorporated in this filing.



ITEM 3. CONTROLS AND PROCEDURES



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports Big Sky files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.







Changes in Internal Controls



There were no changes in the Companys internal controls over financial reporting identified in connection with the evaluation above that occurred during the reporting period covered by this filing that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



PART II



ITEM 1.  LEGAL PROCEEDINGS



Not Applicable



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



a)  Sales of Unregistered Securities



In February 2005, Big Sky raised additional common equity in a series of private placement transactions, which raised $13,625,000. Big Sky issued 27,250,000 shares of common stock at a price of $0.50 per share.  Big Sky paid a finders fee of 6% in cash and warrants equal to 6% of the shares of common stock issued. Finders fees of $817,140 were paid and 1,634,280 Warrants to purchase 1,634,280 shares of common stock at $0.50 per share were issued.



In April 2005, Big Sky issued 150,000 shares to an option holder, who exercised options previously granted and fully vested at an exercise price of $0.05 per common share for proceeds of $7,500.



On May 5, 2005, Big Sky signed a convertible debenture to secure a US$17.5 million facility from Sun Drilling LLP ("Sun Drilling") to finance the 2005 drilling program of its two subsidiaries, KoZhaN and Vector. KoZhaN plans to drill two wells in its Morskoe field, and Vector plans to drill ten wells in its Atyrau block in 2005, commencing approximately in May and July respectively. Sun Drilling has agreed to provide full well construction services for these wells on a turnkey basis, specified under formal drilling contracts, finalized on May 5th. The Companys operating subsidiaries, KoZhaN and Vector, will pay 20% of Sun Drilling's pre-agreed well construction cost in cash as each well is completed and the 80% balance within one year carrying an interest charge of LIBOR plus 4% per annum.  The payment of the 80% balance is secured by convertible debentures.  Sun Drilling will have the right to convert to the Company's shares of common stock after 365 days from issue of each invoice, with the conversion price not to exceed two dollars per share.  There is an additional optional conversion clause that permits Sun Drilling LLP, upon 30 days notice, on or before the Maturity Date, to redeem the convertible debentures, in whole or from time to time in part at the option of Sun Drilling LLP, at a redemption price equal to the Conversion Price plus accrued and unpaid interest.



Each of the foregoing issuances of securities was exempt from registration due to the exemption found in Regulation S promulgated by the Securities and Exchange Commission under the Securities Act of 1933. These sales were offshore transactions since all of the offerees were not in the United States and the purchasers were outside the United States at the time of the purchase. Moreover, there were no directed selling efforts of any kind made in the Untied States neither by us nor by any affiliate or any person acting on our behalf in connection with any of these offerings. All offering materials and documents used in connection with the offers and sales of the securities included statements to the effect that the securities have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons unless the securities are registered under the Act or an exemption therefrom is available and that no hedging transactions involving those securities may not be conducted unless in compliance with the Act. Each purchaser under Regulation S certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from and we are required to refuse to register any transfer that does not comply with such requirements.



In March 2005 Big Sky issued 1,750,000 restricted shares of common stock to four option holders who exercised their options under Big Skys 2000 Stock Award Plan.







As of July 18, 2005 and still ongoing, Big Sky commenced a private placement with a view to raising $25m in new equity.  Under this private placement, up to 25,000,000 shares of common stock (or in the case of Canadian investors, potentially issue securities that are in the form of Special Warrants convertible into common shares on the filing of a prospectus in Canada) is offered to potential investors. The common shares and special warrants will be offered on a best efforts basis through a syndicate of agents led by Westwind Partners Inc. (the "Agents").  The Corporation has also agreed to grant the Agents an option, exercisable at any time up to 30 days following the closing of the offering, to increase the size of the offering by an additional 10,000,000 common shares.



This offering was scheduled to close on or about July 30, 2005, however on July 29, 2005, the Corporation announced an extension to this private placement so as to offer up to 42m shares and the private placement is tentatively scheduled to complete on or about August 16, 2005



Where appropriate, the foregoing issuances of securities was exempt from registration due to the exemption found in Regulation S promulgated by the Securities and Exchange Commission under the Securities Act of 1933. These sales were offshore transactions since all of the offerees were not in the United States and the purchasers were outside the United States at the time of the purchase. Moreover, there were no directed selling efforts of any kind made in the Untied States neither by us nor by any affiliate or any person acting on our behalf in connection with any of these offerings. All offering materials and documents used in connection with the offers and sales of the securities included statements to the effect that the securities have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons unless the securities are registered under the Act or an exemption therefrom is available and that no hedging transactions involving those securities may not be conducted unless in compliance with the Act. Each purchaser under Regulation S certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from and we are required to refuse to register any transfer that does not comply with such requirements.



Where appropriate, the foregoing issuances of securities were exempt from registration pursuant to Rule 506 of Regulation D. Neither we nor any person acting on our behalf offered or sold these securities by any form of general solicitation or general advertising. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom. Each purchaser represented to us that he was purchasing the securities for his own account and not for the account of any other persons. Each purchaser was provided with written disclosure that the securities have not been registered under the Securities Act of 1933 and therefore cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.



b)  Use of Proceeds from Sales of Registered Securities



Not Applicable.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not Applicable



ITEM 5.  OTHER INFORMATION



Not Applicable



ITEM 6.  EXHIBITS



a) Exhibits.







Except for contracts made in the ordinary course of business, the following are the material contracts that have been entered into by Big Sky:



|Exhibit No. | Description                                                                                                                                                                                 
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 (1)     | Certificate of Amendment to Articles of Incorporation of China Broadband Corp. filed with the Secretary of State of Nevada on December 29, 2003                                             
|3.2 (1)     | Amended and Restated By-Laws of Big Sky, dated December 3, 2004.                                                                                                                            
|            |                                                                                                                                                                                             
|10.1(2)     | Share Exchange Agreement, dated October 27, 2003, between China Broadband Corp., Big Sky Energy Kazakhstan Ltd. and its shareholders.                                                       
|10.2 (3)    | Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Richard Lam                                                                                            
|10.3 (3)    | Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Daming Yang                                                                                            
|10.4 (3)    | Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and M.H. Financial Management Ltd.                                                                         
|10.5 (3)    | Consulting Agreement dated January 1, 2004, between China Energy Ventures Corp. and Wei Yang                                                                                                
|10.6 (4)    | Share Purchase Agreement dated October 7, 2003 between Big Sky Energy Kazakhstan Ltd. and Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd.  English Translation                 
|10.7 (4)    | Frame Agreement of Jointly Cooperation dated November 6, 2003 between Big Sky Energy Kazakhstan Ltd. and Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd.  English Translation  
|10.8 (4)    | Escrow Agreement dated January 30, 2004 between Big Sky Energy Kazakhstan Ltd., Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. and W. Scott Lawler                             
|10.9 (5)    | Asset Purchase Agreement dated February 27, 2004 between IbrizOil Inc. and China Energy Ventures Corp.                                                                                      
|10.10 (6)   | Contract for exploration and production of hydrocarbons at Dauletaly Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan        
|10.11 (6)   | Contract for exploration and production of hydrocarbons at Karatal Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan          
|10.12 (6)   | Contract for exploration and production of hydrocarbons at Morskoe Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan          
|10.13 (7)   | Audit Committee Charter, amended November 12, 2003                                                                                                                                          
|10.14 (8)   | Sale and Purchase Agreement between Big Sky Energy Atyrau Ltd., Batys Petroleum LLP and Glushich Victor Petrovich dated April 10, 2004                                                      
|10.15 (8)   | Amendment Agreement No. 1 to the Sale and Purchase Agreement Dated April 10, 2004 between Big Sky Energy Atyrau Ltd., Batys Petroleum LLP and Glushich Victor Petrovich dated April 12, 2004
|10.16 (8)   | Agreement for Assignment of the Creditors Rights between Vector Energy West LLP, Lorgate Management Inc. and Big Sky Energy Atyrau Ltd. dated April 10, 2004                               
|10.19 (11)  | Share Purchase Agreement dated December 9, 2004, by and between Big Sky Energy Corporation and Big Sky Energy Canada Ltd.                                                                   
|10.20 (10)  | Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and M.H. Financial Management Ltd.                                                                          
|10.21 (10)  | Consulting Agreement dated June 30, 2004, between Big Sky Energy Corporation and Daming Yang.                                                                                               
|10.22 (10)  | Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and Precise Details, Inc.                                                                                   
|10.23 (10)  | Consulting Agreement dated October  1, 2004, between Big Sky Energy Corporation and Suntree Ltd.                                                                                            





|10.24 (12)  | Consulting Agreement dated January 19, 2005, between Big Sky Energy Corporation and A.S. Sehsuvaroglu, together with amendment.                                                                                              
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.25 (9)   | Terms of Business Agreement dated 24 February, 2005 and executed on behalf of the Company, 7 March 2005,  between Big Sky Energy Corporation and Matrix-Regent/Matrix-Securities Limited, trading as Matrix Corporate Finance
|10.26 (11)  | 2000 Stock Award Plan, as amended by the shareholders, December 3, 2004                                                                                                                                                      
|10.27 (13)  | Master contract - Vector Energy West LLP and Sun Drilling                                                                                                                                                                    
|10.28 (13)  | Power of Attorney for William Duncan - English translation                                                                                                                                                                   
|10.29 (13)  | Master contract - KoZhaN LLP and Sun Drilling                                                                                                                                                                                
|10.30  (14) | Sun Drilling LLP Convertible Debenture Term Sheet                                                                                                                                                                            
|10.31 (14)  | BDO Kazakhstanaudit LLP Client Acceptance Letter                                                                                                                                                                             
|(1)         | Previously filed on Form 10-QSB on May 21, 2004                                                                                                                                                                              
|(2)         | Previously filed on Form 8-K on October 31, 2003.                                                                                                                                                                            
|(3)         | Previously filed on Form SB-2 on February 19, 2004                                                                                                                                                                           
|(4)         | Previously filed on Form 10-KSB on March 30, 2004.                                                                                                                                                                           
|(5)         | Previously filed on Form 8-K on May 18, 2004                                                                                                                                                                                 
|(6)         | Previously filed on Form 10-QSB on May 21, 2004                                                                                                                                                                              
|(7)         | Previously filed on Form SB-2 on July 28, 2004.                                                                                                                                                                              
|(8)         | Previously filed on Form 8-K on December 14, 2004                                                                                                                                                                            
|(9)         | Previously reported on Form 8-K on March 9, 2005                                                                                                                                                                             
|(10)        | Previously filed on Form 8-K on March 10, 2005                                                                                                                                                                               
|(11)        | Previously filed on Form 14C on October 27, 2004                                                                                                                                                                             
|(12)        | Previously filed on Form 8-K on February 3, 2005                                                                                                                                                                             
|(13)        | Previously filed on Form SB-2 on May 13, 2005                                                                                                                                                                                
|(14)        | Previously filed on Form 8-K on May 19, 2005                                                                                                                                                                                 



SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|                        | Big Sky Energy Corporation
|----------------------- | --------------------------
|Date:   August 26, 2005 | By:                       
|Date: August 26, 2005   | By: