UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

_________________________







FORM 10-QSB



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

For the quarterly period ended September 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 September 30, 2005 was 116,390,215.



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

Big Sky Energy Corporation



INDEX TO THE FORM 10-QSB

For the quarterly period ended September 30, 2005



|        |                       |                                                                                       | PAGE
|------- | --------------------- | ------------------------------------------------------------------------------------- | ----
|        |                       |                                                                                       |     
|PART I  | FINANCIAL INFORMATION |                                                                                      
|        | ITEM 1.               | FINANCIAL STATEMENTS (unaudited)                                                      |     
|        |                       | 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 | 30  
|        | ITEM 3.               | CONTROLS AND PROCEDURES                                                               | 39  
|Part II | OTHER INFORMATION     |                                                                                      
|        | ITEM 1.               | LEGAL PROCEEDINGS                                                                     | 40  
|        | ITEM 2.               | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           | 41  
|        | ITEM 3.               | DEFAULTS UPON SENIOR SECURITIES                                                       | 42  
|        | ITEM 4.               | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   | 42  
|        | ITEM 5.               | OTHER INFORMATION                                                                     | 42  
|        | ITEM 6.               | EXHIBITS                                                                              | 42  
|        |                       | SIGNATURES                                                                            | 44  











As of December 8, 2005, the Corporation became aware of an error in our financials statements relating to the quarter periods ending March 31, 2005 and June 30, 2005.  This error relates to an increase in the general and administrative expenses in the amount of $450,000.   The Corporation intends to file a Form 8-K in respect of Item 4.02 together with amendments to its Forms 10-QSB/A for March 31, 2005 and June 30, 2005 within four days of the date of this filing.





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 (Note 23)                                            
|                                                  | Interest and other receivables                                                   
|                                                  | Other current asset (Note 6)                                                     
|                                                  | Prepaid expenses                                                                 
|                                                  | Funds held in trust (Note 9)                                                     
|                                                  |                                                                                  
|CAPITAL ASSETS                                    |                                                                                  
|                                                  | Long-term advances                                                               
|                                                  | Advances to related parties                                                      
|                                                  | Property and equipment (Note 7)                                                  
|                                                  | Oil and gas properties (Notes 5 and 8)                                           
|                                                  |                                                                                  
|LIABILITIES                                       |                                                                                  
|CURRENT                                           |                                                                                  
|                                                  | Accounts payable and accrued liabilities (Notes 10 and 16)                       
|                                                  | Short-term interest free loan from ABT LTD (Note 11)                             
|                                                  | Obligations for social sphere development (Note 12)                              
|                                                  | Obligations for professional training of personnel (Note 13)                     
|                                                  | Obligations for acquisition of the right for geological
information use (Note 14)
|                                                  | Due to related parties (Note 23)                                                 
|                                                  | Subscription funds received (Note 9)                                             
|                                                  |                                                                                  
|LONG-TERM                                         |                                                                                  
|                                                  | Obligations for social sphere development (Note 12)                              
|                                                  | Obligations for professional training of personnel  (Note 13)                    
|                                                  | Obligations for historical cost reimbursement (Note 15)                          
|                                                  | Asset retirement obligation (Note 17)                                            
|                                                  | Deferred income tax liability (Note 18)                                          
|                                                  | 38,841,103                                                                       
|COMMITMENTS AND CONTINGENCIES (NOTE 24)           |                                                                                  
|                                                  |                                                                                  
|STOCKHOLDERS' EQUITY                              |                                                                                  
|                                                  | Common stock (Note 19)                                                           
|                                                  |                                                                                  
|                                                  |                                                                                  
|                                                  |                                                                                  
|                                                  | Additional paid in capital                                                       
|                                                  | Deferred compensation                                                            
|                                                  | Deficit accumulated during development stage                                     
|                                                  |                                                                                  
|                                                  |                                                                                  

3







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                                              
|IMPAIRMENT OF ASSETS                                                 
|LOSS IN BIG SKY NETWORK CANADA LTD.                                  
|LOSS IN SHEKOU JOINT VENTURE                                         
|LOSS IN CHENGDU JOINT VENTURE                                        
|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                                           
|                                                                     



4





|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                                                                                                                                                 

5



|                         |                       |            |           |             |              |             
|------------------------ | --------------------- | ---------- | --------- | ----------- | ------------ | ------------
|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      | -            | -           

6



|                         |                     |             |            |             |              |              
|------------------------ | ------------------- | ----------- | ---------- | ----------- | ------------ | -------------
|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        | -           | -          | -           | 922,728      | -            
|                         |                     |             |            |             |              |              
|Deferred compensation    | -                   | -           | 5,174,910  | (5,174,910) | -            | -            
|                         |                     |             |            |             |              |              
|Stock issued pursuant to |                     |             |            |             |              |              
|                         | private placement   |             |            |             |              |              
|                         | agreements at $0.50 | 27,250,000  | 27,250     | 12,716,146  | -            | -            
|                         |                     |             |            |             |              |              
|Stock issued pursuant to |                     |             |            |             |              |              
|private placement        |                     |             |            |             |              |              
|agreements at $1.00      | 15,487,500          | 15,488      | 12,696,870 | -           | -            | 12,712,358   
|                         |                     |             |            |             |              |              
|Stock issued pursuant to |                     |             |            |             |              |              
|                         | stock awards        | 750,000     | 825        | 824,175     | -            | -            
|                         |                     |             |            |             |              |              
|Options exercised        | 4,000,000           | 4,000       | 221,500    | -           | -            | 225,500      
|                         |                     |             |            |             |              |              
|Options cancelled        | -                   | -           | (360,000)  | 360,000     | -            | -            
|                         |                     |             |            |             |              |              
|Warrants Exercised       | 783,255             | 783         | 390,845    | -           | -            | 391,628      
|                         |                     |             |            |             |              |              
|Net loss                 | -                   | -           | -          | -           | (8,099,956)  | (8,099,956)  
|Balance,                 |                     |             |            |             |              |              
|                         | September 30, 2005  | 116,390,215 | $174,884   | $75,148,798 | $(3,920,108) | $(38,285,091)
|                         |                     |             |            |             |              |              



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

7



|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                                                                     
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              

8



|                                | Acquisition of Vector Energy West LLP, net of
cash acquired |   | --          | --        |   | --          | (4,506,502) |   | (4,506,502) 
|------------------------------- | ----------------------------------------------------------- | - | ----------- | --------- | - | ----------- | ----------- | - | ------------
|                                |                                                             |   | (7,012,129) | (160,758) |   | (9,714,447) | (4,865,441) |   | (19,527,543)
|                                |                                                             |   |             |           |   |             |             |   |             
|FINANCING                       |                                                             |   |             |           |   |             |             |  
|                                | Issue of common stock for cash                              |   | 15,767,575  | 2,493,253 |   | 29,729,604  | 9,373,262   |   | 56,621,563  
|                                | Stock issuance costs                                        |   | (2,775,142) | (150,836) |   | (3,656,748) | (366,348)   |   | (4,473,919) 
|                                | Advances from ABT Ltd. (Note 10)                            |   | -           | 200,000   |   | -           | 200,000     |   | 500,000     
|                                | Repayment of advances for share subscriptions               |   |             |           |   |             | (250,000)   |   | (250,000)   
|                                | Payment of social sphere development                        |   | (395,412)   | -         |   | (395,412)   | -           |   | (395,412)   
|                                | Repayment of debt                                           |   | -           | -         |   | -           | (570,000)   |   | (570,000)   
|                                |                                                             |   | 12,597,021  | 2,542,417 |   | 25,677,444  | 8,386,914   |   | 51,432,232  
|                                |                                                             |   |             |           |   |             |             |   |             
|                                |                                                             |   |             |           |   |             |             |   |             
|NET DECREASE (INCREASE) IN CASH |                                                             |   |             |           |   |             |             |  
|                                | AND CASH EQUIVALANTS                                        |   | 4,181,852   | (10,895)  |   | 9,025,327   | (415,240)   |   | 10,009,061  
|                                |                                                             |   |             |           |   |             |             |   |             
|CASH AND CASH EQUIVALENTS,      |                                                             |   |             |           |   |             |             |  
|                                | BEGINNING OF PERIOD                                         |   | 5,827,209   | 664,106   |   | 983,734     | 1,068,451   |   | -           
|                                |                                                             |   |             |           |   |             |             |   |             
|CASH AND CASH EQUIVALENTS,      |                                                             |   |             |           |   |             |             |  
|                                | END OF PERIOD                                               | $ | 10,009,061  | 653,211   | $ | 10,009,061  | 653,211     | $ | 10,009,061  
|                                |                                                             |   |             |           |   |             |             |   |             



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





9





|BIG SKY ENERGY CORPORATION
(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 September 30, 2005 and the condensed consolidated results of operations and cash flows for the three-month and ninemonth periods ended September 30, 2005 and 2004. The consolidated results of operations for the interim period are not necessarily indicative of the consolidated results to be expected for an entire year.



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 $12 million of new common equity in 2004 and an additional $13.7 million in February 2005. In August, 2005, the Corporation Sky issued 30,925,000 shares (comprised of 15,487,500 shares of common stock together with 15,487,500 Subscription Receipts exchangeable 1:1 for shares of common stock) in connection with a private placement for gross proceeds of $30,925,000.  In addition to the shares of common stock issued to subscribers and noted for registration in this Registration Statement, additional subscriptions were received from Canadian investors who were issued 11,025,000 Special Warrants representing 1 share of common stock each, at a value of $1.00 per share for proceeds of $11.025,000 (and noted herein).The costs associated with this private placement include fees equal to 6% of the gross proceeds received by the Corporation and warrants issued to the finders that equal 6% of the shares issued under this private placement.  The total warrants issued for this private placement equaled 2,520,000.  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.

10



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.In response to such doubts, in August 2005 the Corporation has completed the private placement described in the immediately preceding paragraph and implemented the plan described in Note 4 below.



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.



Restricted Cash



The amount of $73,040 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
September 30, | Nine Months Ended
September 30,
|-------------------------------------- | --------------------------------------- | -------------------------------- | -------------------------------
|                                       |                                         | 2005                             | 2004                           
|                                       | $                                       | $                                | $                              
|Net loss, as reported                  | (2,762,426)                             | (1,896,948)                      | (8,099,956)                    
|Add: Stock-based employee compensation |                                         |                                  |                                
|                                       | expenseincluded in reported             |                                  |                                
|                                       | net loss, net of related tax effects    | 424,578                          | 324,970                        
|Deduct: Total stock-based employee     |                                         |                                  |                                
|                                       | compensation expensedetermined under    |                                  |                                
|                                       | fair value based method for all awards, |                                  |                                
|                                       | net of related tax effects              | (675,280)                        | (5,209)                        
|                                       |                                         |                                  |                                
|Pro forma net loss                     | (3,013,128)                             | (1,577,187)                      | (7,846,588)                    
|                                       |                                         |                                  |                                
|Loss per share:                        |                                         |                                  |                                
|                                       | Basic and diluted  as reported         | $(0.03)                          | $(0.03)                        
|                                       | Basic and diluted  pro forma           | $(0.03)                          | $(0.03)                        

11





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%        | 190%    | 
|Risk free interest rate   | 3.5%        | 3.93%   | 
|Expected option life      | 3 years     | 5 years | 
|Share price at grant date | $1.10       | $0.04   | 
|Option exercise price     | $0.50-$0.89 | $0.05   | 



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 the calculation of net loss per share, for the nine month period ending September 30, 2005, 11,549,768 options and warrants were excluded.  For the three month period ending September 30, 2005, 13,280,991 options and warrants were excluded and for the period ending December 31, 2004, 7,267,315 were excluded from 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(R), Share-Based Payment. This statement requires companies to measure the cost of employee services in exchange for an award of equity instruments based on a grant-date fair value of the award (with limited exceptions), and that cost must generally be recognized over the vesting period. SFAS No. 123(R) amends the original SFAS No. 123 and 95 that had allowed companies to choose between expensing stock options or showing pro forma disclosure only. This statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. We currently account for our stock-based compensation plans under the principles prescribed by APB Opinion No. 25. Accordingly, stock option compensation cost is only reflected in net income for options granted under the plan that had an exercise price below the market value of the underlying common stock on the date of grant. The adoption of SFAS No. 123(R) will impact our results of operations, but will have no impact on our overall financial position. In March 2005, the SEC issued SAB No. 107. Among other things, SAB No. 107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the SEC staffs views regarding the valuation of share-based payment

12



arrangements for public companies. SFAS No. 123(R) was to become effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, but on April 14, 2005, the SEC issued press release 2005-57, which amends the compliance date of SFAS No. 123(R) for fiscal years beginning after June 15, 2005. We anticipate adopting the provisions of SFAS No. 123(R) in the first quarter of 2006 using the modified prospective method for transition.



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 June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Application is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted. The adoption of SFAS No. 154 is not expected to have a material effect on the Companys consolidated financial position, results of operations or cash flows.



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 25).  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.

13



5.

BUSINESS COMBINATION



Big Sky Energy Kazakhstan Ltd.



On January 12, 2004, the Corporation acquired 100% of the issued and outstanding share capital of Big Sky Energy Kazakhstan (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 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, Big Sky Energy Atyrau (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 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

14



income tax liability of $894,250 has been ascribed to oil and gas properties.  As consideration for facilitation of the successful acquisition of Vector, BSEA granted a royalty to Hanani Ben Moshe of $1.00 per barrel on oil sold by Vector from the Atyrau and Liman-2 licenses.



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 September 30, 2004 in BSEK and there were no material transactions for the period from January 1, 2004 through September 30, 2004 in Vector, other than accretion expense of $75,665.



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



|September 30, 2004 | As reported   | Adjustments | Pro-forma    
|------------------ | ------------- | ----------- | -------------
|Revenue            | $ 33,789      | $ -         | $ 33,789     
|Net loss           | $ (1,896,948) | $ -         | $ (1,896,948)
|Loss per share     | $ (0.04)      | $ -         | $ (0.04)     



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



|September 30, 2004 | As reported   | Adjustments | Pro-forma    
|------------------ | ------------- | ----------- | -------------
|Revenue            | $ 98,337      | $ -         | $ 98,337     
|Net loss           | $ (3,641,262) | $ (80,000)  | $ (3,721,262)
|Loss per share     | $ (0.08)      | $ -         | $ (0.08)     
|                   |               |             |              



Revenues were from the operations in China which were discontinued in 2004.



6.

OTHER CURRENT ASSET

Other current asset represents cash advances made by the Corporation for future oil and gas exploration and development expenditures.  These funds will be charged to oil and gas properties as the funds are expended.   The December 31, 2004 balance of $86,160 was paid to ABT Ltd. to cover 50% of the costs of a dam construction related to the Morskoe oil field. The advance was made to ABT Ltd. to satisfy the terms of a farm-out agreement entered into by the Company with ABT Ltd. (see Note 11).  The balance as of September 30, 2005 is $875,347.



7.

PROPERTY AND EQUIPMENT



Property and equipment consist of:



|                               | September 30,
2005 |  | December 31, 2004
|------------------------------ | ------------------ |  | -----------------
|                               | $                  |  | $                
|Vehicles                       | 177,916            |  | -                
|Field equipment                | 48,876             |  | -                
|Furniture and fixtures         | 258,891            |  | 325,297          
|Computer hardware and software | 125,181            |  | 46,382           
|Leasehold improvements         | 196,539            |  | 178,041          
|                               | 807,403            |  | 549,720          
|Accumulated amortization       | (248,443)          |  | (165,643)        
|                               | 558,960            |  | 384,077          



15



8.

OIL AND GAS PROPERTIES



Oil and gas properties are comprised of the following:



|                                   | September 30, 2005 |  | December 31, 2004
|---------------------------------- | ------------------ |  | -----------------
|                                   | $                  |  | $                
|                                   |                    |  |                  
|Subsurface use rights and expenses | 7,607,451          |  | 6,208,911        
|Acquisitions costs                 | 14,995,627         |  | 14,145,677       
|Royalty interest                   | 415,700            |  | 415,700          
|Construction Works                 | 7,030,959          |  | 840,423          
|Drilling costs                     | 1,935,235          |  | 1,635,634        
|Oil and gas properties             | 31,984,972         |  | 23,246,345       



9.

SUBSCRIPTION FUNDS HELD IN TRUST



The Company has received $15,487,500 for share subscriptions and $11,025,000 for special warrants for a total of $26,512,500 as a result of a private placement which completed on August 24, 2005 and resulted in the Company raising a total of $42 million. The share subscriptions and special warrants are each convertible into shares of common stock on a one for one basis, subject to certain conditions.  These amounts have been recorded as a liability since the Company does not have enough authorized share capital to fulfill the commitment. The $26,512,500 will be recorded as common stock when the required shareholder and regulatory approvals have been obtained to increase the authorized amounts of common stock. The $26,512,500 proceeds relative to these Subscription Receipts and Special Warrants are being held in trust by the Companys share transfer agent. As of September 30, 2005, the subscribers to the Subscription Receipts and the Special Warrants did not have the right to cancel such subscriptions and seek a return of their investments.



On October 18, 2005, the Company notified the subscribers of the Subscription Receipts and Special Warrants that it had not yet obtained confirmation regarding the 2004 work commitments of the Corporation's subsidiaries in their licenses in the Karatal and Atyrau fields and that as a result the Corporation was providing the subscribers with the right to cancel their subscriptions at any time prior to the Election Condition being satisfied. The Election Condition was defined as the Companys receipt of an opinion, in form and substance satisfactory to the offering agent from the Companys Kazakhstan Counsel as to the rights of KoZhaN LLP and Vector Energy West LLP under the contracts for use of underground natural resources with respect to the Karatal and Atyrau fields in Kazakhstan.



The Company has the right at any time to cancel the subscribers right to elect to cancel their subscriptions, as long as the Company is of the opinion that the Election Condition is likely to be satisfied in the near future.



Subsequently, seven investors withdrew from the private placement reducing the share issuance to 34,431,100 (14,162,500 Subscription Receipts together with 15,475,000 shares) and 4,793,600 Special Warrants.



10.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES



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

|                       | September 30, 2005 |  | December 31, 2004
|---------------------- | ------------------ |  | -----------------
|                       | $                  |  | $                
|                       |                    |  |                  
|Trade accounts payable | 341,263            |  | 413,271          
|Professional fees      | 170,763            |  | 98,802           
|Office lease           | 46,687             |  | 80,323           
|Withholding taxes      | 55,974             |  | 114,363          
|Other                  | 88,710             |  | 54,399           
|                       | $703,397           |  | $761,158         

16





11.

SHORT-TERM INTEREST FREE LOAN FROM ABT LTD



On October 12, 2004, KoZhaN entered into two (2) agreements with ABT Ltd. LLP  an Agreement on Partial Transfer of the Subsoil Use Right (the Transfer Agreement) and Agreement No. 1. (Agreement No. 1). These two (2) agreements set the terms and conditions of the transfer by KoZhaN of forty-five percent (45%) of its interest in the subsoil use right in the Morskoe oil field (the Interest).



Pursuant to Agreement No. 1, ABT is providing consideration for the Interest that consists of performance of certain construction works and up to 50% of the costs incurred in connection with Well # 10 in the Morskoe oil field that are not deemed to be associated with the drilling works of such well.



Also pursuant to Agreement No. 1, ABT agreed to provide a loan of up to $550,000 for the drilling works associated with Well # 10. Drilling works was defined as all costs associated with the drilling, completing, equipping, coring, logging, perforating and test of Well # 10. This loan is required to be repaid only in the case of discovery of oil and production from the Morskoe oil field.



The transfer of the Interest is subject to approval by the Ministry of Energy and Mineral Resources of Kazakhstan (the MEMR), which has not yet been received.



The Company has recorded the amount of $840,423 paid by ABT in performance of the construction works and the amount of $86,160 paid by ABT as its 50% portion of costs incurred in connection with Well # 10 that are not deemed to be drilling works, as an amounts loaned to the Company by ABT. In the event that the transfer of the Interest is approved by the MEMR, these amounts will be converted into amounts received as consideration for the Interest transferred to ABT.



The amounts received from ABT towards the drilling works, which as of December 31, 2004, equaled $500,000, have been recorded by the Company as a loan, to be repaid from production. In the event that no oil is discovered or produced by the Company from the Morskoe oil field, this loan will be removed from the Companys records as a forgiven loan pursuant to the terms of Agreement No. 1. If the Ministry approval for the transfer of interests is not obtained, the total balance must be repaid.



As at September 30, 2005 the short-term interest free loan due to ABT consisted of the following:



|                                            | September 30,     2005 |  | December 31, 2004
|------------------------------------------- | ---------------------- |  | -----------------
|                                            | $                      |  | $                
|                                            |                        |  |                  
|Construction Works incurred by ABT          | 840,423                |  | 840,423          
|Payments for Drilling Works advanced by ABT | 500,000                |  | 500,000          
|Dam construction costs incurred by ABT      | 86,160                 |  | -                
|                                            | 1,426,583              |  | 1,340,423        



12.

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, September 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 $2,399,642 as at September 30, 2005. The accretion expense for the three month period ended September 30, 2005 was $47,867 (2004 -$74,237) and the nine month period ended September 30, 2005 was $138,729 (2004 -$99,032).

17



13.

OBLIGATIONS FOR PROFESSIONAL TRAINING OF PERSONNEL



|                                                                    |   | September 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 |   | (53,563)           |   | (85,159)         
|Present value of obligations on professional training of personnel  |   | 625,437            |   | 593,841          
|                                                                    |   |                    |   |                  
|Amount due for settlement within one year                           |   | 289,200            |   | 289,200          
|Amount due for settlement after one year                            |   | 336,237            |   | 304,641          
|                                                                    |   |                    |   |                  
|Total                                                               | $ | 625,437            | $ | 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 September 30, 2005 was $11,556 (2004 -$11,734) and the nine month period ended September 30, 2005 was $31,607 (2004 -$18,128).



14.

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 September 30, 2005 in the amount of $758,265 (December 31, 2004, $758,265).



15.

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 $1,098,573 as at September 30, 2005.  The accretion expense for the three month period ended September 30, 2005 was $39,707 (2004 -$7,919) and the nine month period ended September 30, 2005 was $116,899 (2004 -$12,883).

18



16.

SIGNATURE BONUSES AND PENALTY PAYABLE



In accordance with the Subsurface Use Contracts there was an obligation to pay signature bonuses totaling $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.   There was a delay in paying these bonuses and a further delay awaiting a Tax Committee review, therefore penalties accrued amounting to $61,739. These penalties are included in trade accounts payable.



17.

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 September 30, 2005 is $484,235.  During the three months ended September 30, 2005, the Corporation recorded an accretion expense of $16,628 (2004 - $1,494) and for the nine months ended September 30, 2005 $48,366 (2004 - $1,494) was recorded.



18.

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.



|                                    | September 30, 2005                                 $ | September  31, 2004                 $
|----------------------------------- | ---------------------------------------------------- | -------------------------------------
|Loss before income taxes            |                                                      | 8,099,956                            
|                                    |                                                      |                                      
|Composite statutory income tax rate |                                                      | 35.0%                                
|Expected income tax recovery        |                                                      | (2,834,985)                          
|Tax benefit not recognized          |                                                      | 2,834,985                            
|                                    |                                                      |                                      
|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:



|                            | September 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 September 30, 2005, the Corporation had a net operating loss of approximately $23,330,000 (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

19



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.



|                                         | September 30, 2005 | December 31, 2004
|---------------------------------------- | ------------------ | -----------------
|                                         | $                  | $                
|                                         |                    |                  
|Net operating loss carry forward balance | 23,330,000         | 15,650,000       
|                                         |                    |                  
|Composite statutory tax rate             | 35.0%              | 35.0%            
|Deferred tax asset                       | 8,165,500          | 5,477,800        
|Valuation allowance                      | (8,165,500)        | (5,477,800)      
|                                         | -                  | -                



19.

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 (881,630 cash proceeds).



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 $1.10 per share for net compensation costs of $825,000.



In March of 2005, the Corporation issued 1,750,000 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.



In July of 2005, 134,400 shares of common stock were issued for the exercise of 134,400 warrants. The Corporation realized proceeds of $67,200.  In August of 2005, the Corporation issued 2,100,000 shares of common stock to one option holder who exercised the options under the Corporations 2002 Stock Awards Plan. The Corporation realized proceeds of $105,000.



In August of 2005, the Corporation issued 15,487,500 shares of common stock in connection with a private placement for gross proceeds of $15,487,500. 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 $1.00 issued to the finders that equal 6% of the shares issued under the private placement. The total share issue costs were $3,660,761, $2,775,142 of which was paid in cash and $885,619 in warrants. Share issue costs were paid on the 15,487,500 shares issued and the 26,512,500 shares to be issued as per Note 9.



In August of 2005, 51,750 shares of common stock were issued for the exercise of 51,750 warrants. The Corporation realized proceeds of $25,875.



In September of 2005, 108,000 shares of common stock were issued for the exercise of 108,000 warrants. The Corporation realized proceeds of $54,000.

20



In September of 2005, 50,000 shares of common stock were issued upon the exercise of options at $0.56 per share for proceeds of $28,000.



|Date  | Instrument issued & No. of Common Shares                 | Gross Proceeds | Transaction Costs | Net Proceeds
|----- | -------------------------------------------------------- | -------------- | ----------------- | ------------
|02/05 | 27,250,000 shares of common stock in a private placement | $13,625,000    | $881,630          | $12,743,370 
|02/05 | Value of transaction costs warrants portion              | $1,073,576     | $1,073,576        | 0           
|03/05 | 750,000 shares of common stock - Stock Awards Plan       | $825,000       | $825,000          | 0           
|03/05 | 1,750,000 shares of common stock  options exercise      | $85,000        | 0                 | $85,000     
|03/05 | 9,600 shares of common stock  warrant exercise          | $4,800         | 0                 | $4,800      
|04/05 | 150,000 shares of common stock  options exercise        | $7,500         | 0                 | $7,500      
|04/05 | 479,505 shares of common stock  warrant exercise        | $239,753       | 0                 | $239,753    
|07/05 | 134,400 shares of common stock  warrant exercise        | $67,200        | 0                 | $67,200     
|08/05 | 2,100,000 shares of common stock  option exercise       | $105,000       | 0                 | $105,000    
|08/05 | 15,487,500 shares of common stock  - private placement   | $15,487,500    | $2,775,142        | $12,712,358 
|08/05 | Value of transactions costs warrants portion             | $885,619       | $885,619          | 0           
|08/05 | 51,750 shares of common stock  warrant exercise         | $25,875        | 0                 | $25,875     
|09/05 | 108,000 shares of common stock  warrant exercise        | $54,000        | 0                 | $54,000     
|09/05 | 50,000 shares of common stock  option exercise          | $28,000        | 0                 | $28,000     
|      |                                                          | $32,513,823    | $6,440,967        | $26,072,856 



20.

STOCK OPTION 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 September 30, 2005, 10,600,000 are issued and outstanding with a further 7,000,000 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                           | (4,050,000)           
|Cancelled                           | (725,000)             
|                                    |                       
|Closing Balance, September 30, 2005 | 10,600,000            
|                                    |                       
|Options available for granting      | 298,334               
|                                    |                       
|Options exercised                   | 4,101,666             
|                                    |                       
|Option Plan Total                   | 15,000,000            

21



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



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



For the three months ended September 30, 2005, $33,366 of compensation expense has been recognized (2004 - $21,341) in the consolidated financial statements for non-employee stock option grants.  For the nine months ended September 30, 2005, $56,016 of compensation expense has been recognized (2004 - $78,430).  For the three months ended $391,212 (2004  $324,973) of compensation awards has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.   For the nine months ended $866,712 (2004  $282,062) of compensation awards has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.



21.

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      | 17,250             | $0.50          | May 2007     
|July 2004     | 2,210              | $0.50          | January 2006 
|November 2004 | 240,000            | $0.50          | January 2006 
|February 2005 | 1,611,000          | $0.50          | February 2007
|August 2005   | 2,520,000          | $1.00          | August 2008  
|              | 4,390,460          | $0.79          |              



During 2005, 4,131,000 (2004  1,042,715) warrants were granted at a weighted average price of $0.81 per share under the terms of an agency agreement in connection with a private placement. In 2005, 783,255 warrants were exercised for cash proceeds of $391,628.



22.

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 September 30, 2005.



23.

RELATED PARTY TRANSACTIONS



On September 30, 2005, the Corporation owed $102,186 to Matthew Heysel, the Chairman and Chief Executive Officer arising from business travel expenditures paid personally.

22



The Corporation has been unable to establish a bank account in Beijing.  Each month, the Corporation transfers funds to Kai Yang, the brother of Daming Yang 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 $270,000 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 of 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 September 30, 2005 the Corporation received $32,767 from Big Sky Energy Canada for a balance of $Nil owing to the Corporation.



During the period ended September 30, 2005 the Corporation advanced $34,728 to corporations with common directors.



During the period ended September 30, 2005 the Corporation loaned $25,565 to Big Sky Holdings 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.



24.

FAIR VALUE OF FINANCIAL INSTRUMENTS



As at September 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.



25.

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 September 30, 2005 and $135,241 for the nine months ended September 30, 2005. Minimum lease payments under operating leases for the period ending September 30 are as follows:



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

23



The Corporation is subject to potential litigation in the normal course of operations.

On 18 November 2005, a subsidiary of the Company, Big Sky Energy Atyrau Ltd. (BSEC) and an indirect subsidiary of the Company, Vector Energy West LLP (VEW) filed a Statement of Claim in the Republic of Kazakhstan against Ligostrade Service LLP (Ligostrade) and Farkhad Koblandyuly Shakirov, a former employee of the Companies subsidiaries (the Group), seeking to invalidate a purported Assignment Agreement dated 28 September 2005, related to an attempt to assign the subsoil use rights arising under Subsoil Use Contract No. 1077, in respect of the Atyrau Block (Assignment Agreement).

On 22 November 2005 an Injunction was granted to VEW and BSEC, prohibiting Ligostrade Service LLP, Mr. Shakirov and the Ministry of Energy and Mineral Resources (MEMR) from doing any actions to implement the purported Assignment Agreement, including the re-registration of the subsoil use rights arising under Subsoil Use Contract No. 1077 in respect of the Atyrau Block, pending the hearing of the case and any appeals. VEW and BSEC have applied to the Court on 29th November 2005, to further extend the scope of the Injunction, and a positive decision is expected.

On 20 October 2005 and, further, on 1 November 2005, Mr Shakirov, personally, commenced two (2) actions against certain employees of the Group, and its companies, seeking compensation for moral damages, arising as a result of the termination of his employment.  On 20 October he commenced a further proceeding, claiming that his authority as President of VEW was wrongly terminated, and seeking reinstatement.

On November 23, 2005, the Company filed a Form 8-K disclosing under Section 8, Other Events, the issuing of the legal proceedings as noted above.

On December 2, 2005 the scope of the Injunction was extended to prohibit the following acts: (a) the alienation or pledging of any shares or interests in or assets of Ligostrade Service LLP or any of its affiliated or related companies, whether by such parties themselves or by their bankers, financiers, employees, officers, directors, agents, lawyers, consultants and contractors (Affiliates), including without limitation all and any rights, interests or claims such party may have in relation to the subsoil use rights to the Atyrau Block arising under Contract No. 1077; (b) the sale, transfer or assignment of any rights or assets by Ligostrade Service LLP, or any of its or of any of its affiliated or related companies, and whether by such parties themselves or by their  Affiliates, including, without limitation, all and any rights, interests or claims such party may have in relation to the subsoil use rights to the Atyrau Block howsoever arising under Contract No. 1077; and (c) the Ministry of Energy and Mineral Resources from registration or transfer of any rights they may have in regards to the subsoil use rights to the Atyrau Block arising under Contract No. 1077.



In relation to Contract No. 1104 as to the Karatal Block, Contract No.1102 as to the Dauletaly Block and Contract No. 1076 as to the Liman-2 Block (the Blocks) a Commission has been established by the MEMR in order to review the MEMRs decision communicated by a letter of 7 October 2005, purporting to cancel the Groups subsoil use rights to the Blocks.



The Company has received legal advice to the effect that, until this Commission has made and delivered its report, and the MEMR have acted pursuant thereto, only then will the actual current status of the Groups subsoil use rights, associated with these Blocks, be determined.

Furthermore, to date the Group has not received, or been provided with, any other evidence which would suggest the Group is no longer the registered subsoil users in respect of the Blocks, as would be evidenced by revised Entries in the Register of Subsoil Users maintained by the MEMR, which is the ultimate determinant of title.

We are not a party to any other material legal proceeding or litigation and we know of no additional material legal proceeding or contemplated or threatened litigation.



Financial Commitments and Contingencies  KoZhaN



The Corporation, through its interest in KoZhaN, has the following additional 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:

24



|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:                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

25



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | - | $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                                     
|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 September 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 September 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

26



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:                                                                                                                                                                                                                                                                                                                            
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 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 September 30, 2005, Management has discharged part of commitments and is continuing remediation of certain violations of the Subsurface Use Contracts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

27



|   | 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 September 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 September 30, 2005 and so no provision with respect of the commercial discovery bonus has been made in these financial statements.                                                                                                                                                                                                                                                                                                                                



26.

SUBSEQUENT EVENTS



On October 1, 2005, the Corporation granted options in the amount of 3,900,000 to several new employees.  Shares underlying such grants are to be issued at a price of $1.20. 500,000 options granted to a senior employee which vest immediately.



On October 1, 2005, the Corporation granted options in the amount of 100,000 at an exercise price of $1.20, immediately vesting, to a consultant.



On October 18, 2005,the Corporation advised its shareholders of an extension of the escrow period pursuant to its Subscription Receipt and Special Warrant Indentures, which were put in place in connection with the private placement by the Corporation of Common Stock, Subscription Receipts and Special Warrants on August 24, 2005. During the extended escrow period, a Subscription Receipt or Special Warrant holder will have the right to maintain or withdraw its investment. Pending receipt of confirmation from Subscription Receipt and Special Warrant Holders, twenty-four million and seven hundred thousand United States Dollars (US$24,700,000), will remain in the Trustee's escrow account.

28



On November 10, 2005, four former directors exercised their outstanding and fully vested options to a total of 1,050,000 shares of common stock for proceeds of $150,000.



On 22 November 2005, BSEK signed a further Sale & Purchase Contract with the holders of the remaining 10% interest in KoZhaN.  Presently, the Company is in the process of obtaining a waiver from the Government of its pre-emptive right and consent from the MEMR to the resulting partial change to the identity of the ultimate subsoil user, as required by the laws of Kazakhstan.   The consideration for the Sale/Purchase is $1.275m which funds are currently in escrow awaiting the approval of the MEMR, as noted above.

On December 1, 2005, the Corporation entered into a Heads of Agreement with SK Corporation, a Korean corporation, whereby the Corporation agreed to transfer to SK Corporation fifty percent (50%) of its interest in Vector Energy West LLP. In exchange, SK Corporation agreed to provide the following consideration: (a) pay an up-front cash payment of $3,750,000 to the Corporation in compensation of the Corporations past funding contribution to Vector; (b) as of the date immediately following the closing date, fund fifty percent (50%) of the total expenditures of Vector; (c) funding of one hundred percent (100%) of the cost of the drilling of a first deep (pre-salt) well under Vectors Atyrau and Liman-2 contracts, up to $15 million. The transaction is subject to numerous conditions, including the parties negotiating and entering into a definitive agreement, receipt of the requisite government approvals and receipt of the governments waiver of its right of first refusal.



27.

RESTATEMENT

Subsequent to the issuance of the Companys 2004 financial statements, the Companys management determined that its belief that no obligation would exist to repay ABT Ltd. for costs they incurred or advanced to KoZhaN LLP in relation to the Morskoe oil field under the farm-out agreement signed October 12, 2004 (see Note 11), should Ministry approval not be received on the transfer of 45% of the subsurface rights of the Morskoe licence to ABT Ltd., was incorrect, and that in fact an obligation would exist to repay ABT Ltd. for all costs incurred or advanced by them relating to the Morskoe oil field should Ministry approval not be received.  As a result, the Short-Term Interest Free Loan to ABT LTD liability account, the Oil and Gas Properties asset account and the Other Current Asset account were understated in the amounts of $1,174,423, $1,088,263, and $86,160 respectively as previously reported on the Consolidated Balance Sheets included in the December 31, 2004 Form 10-KSB. The Consolidated Balance as at December 31, 2004 have been restated to correct these previous misstatements.  This restatement does not impact earnings or equity.



29



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 nine month period ended September 30, 2005 and 2004 from unaudited condensed consolidated financial statements and from our audited consolidated amended and restated financial statements for the year ended December 31, 2004.

30



SUMMARY FINANCIAL DATA



Statement of Operations Data:



|                                                             | THREE MONTH PERIOD ENDED SEPTEMBER 30, 2005 | THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2004 | NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005 | NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2004 | PERIOD FROM FEBRUARY 1, 2000 TO
SEPTEMBER 30, 2005
|------------------------------------------------------------ | ------------------------------------------- | ------------------------------------------- | ------------------------------------------ | ------------------------------------------ | --------------------------------------------------
|Loss from Continuing Operations                              | (2,762,426)                                 | ($1,899,381)                                | (8,099,956)                                | ($3,618,364)                               | (28,171,075)                                      
|Income (Loss) from Discontinued Operations                   | -                                           | $2,433                                      | -                                          | ($22,898)                                  | (10,114,016)                                      
|Net Loss                                                     | (2,762,426)                                 | ($1,896,948)                                | (8,099,956)                                | ($3,641,262)                               | (38,285,091)                                      
|Basic and diluted (loss) per share                           | ($0.03)                                     | ($0.03)                                     | ($0.09)                                    | ($0.08)                                    | -                                                 
|Basic and diluted weighted average common shares outstanding | 104,293,982                                 | 56,349,052                                  | 93,536,473                                 | 47,668,361                                 | -                                                 



Balance Sheet Data:



|                           | September 30, 2005 | December 31, 2004
(As Restated)
|-------------------------- | ------------------ | -------------------------------
|Cash and cash equivalents  | $10,009,061        | $983,734                       
|Working capital            | $8,694,556         | ($2,793,503)                   
|Total assets               | $71,959,586        | $25,757,879                    
|Total stockholders equity | $33,118,483        | $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 current nine month period 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.  By October, ecological baseline studies for all five blocks have been conducted and written up by the Karaganda Ecological Museum and KazNigri Technical Institute.



On 12 July 2005, the Company, acting through its subsidiary Big Sky Energy Alakol Limited of Alberta, (BSEA) signed a binding Sale & Purchase Agreement to acquire a 50% interest in the subsoil use rights to the Alakol Block, which arise pursuant to Subsoil Use Contract No. 1766 dated 13 June 2005.  The Company is still in the process of

31



applying for and seeking a  waiver from the Government of its pre-emptive right, and consent from the MEMR to the partial change of the ultimate subsoil user, as required by Kazakhstani law.

The following operational steps have been taken in regards to the five Blocks held by Vector Energy West LLP and KoZhaN LLP as of November 2005:



Atyrau

•

285 km 2D seismic acquisition by KCS consisting of 20 km in Ongar W, and 265 km of regional profiles on the south part of Atyrau block

•

250 km 2D seismic acquisition by KazGeCo consisting of  50 km in Zhingeldy and 200 km in Baklanyi N, Daraimola, Terkobay 1, Ongar W

•

60 sq. km 3D seismic acquired by KazGeCo in Zhingelgy S-W

•

Reprocessing of 200 km of 2D seismic by Geostan plus approximately 3500 km of old 2D data scanned, 1750 km interpreted.



Liman 2

•

Reprocessed 600 km of old 2D seismic lines by the Landmark office in Moscow.



Karatal

•

67.5 km 2D seismic acquired by KCS.  350 km old seismic lines were scanned by Geostan for reprocessing

•

The supplementary exploration project and drilling project have been completed by CER

•

Well #6 work over performed by Zhasulan Co.  Logging services completed by KazPromGeophysics

•

Munai Service Co is working over wells #5 and well #9.  Work has started October 3rd of this year.

•

Turan Munai Co will build the facilities for the pilot development stage for wells #5,6, and 9.



Dauletaly

•

105 km 2D seismic acquired by KazGeCo.  200 km of old seismic lines scanned by Geostan for reprocessing

•

Supplementary exploration project and drilling projects have been completed by CER



Morskoe

•

All necessary technical design projects have been completed to allow early production

•

Well #10 drilled in March. Contractor PreCaspiBurneft - perforated and flowed on test two oil zones.  The lower Albian formation was perforated from 1,248 to 1,263 m KB and flowed 3,165 bopd at a flowing wellhead pressure of 175 psig. The upper Aptian formation was perforated from 1,170.5 to 1,176.5 m KB, co-mingled with the lower Albian formation, and flowed at a rate of 3,465 bopd of 20° API sweet crude at a flowing wellhead pressure of 250 psig and a gas oil ratio of 197 scf/bbl following a nine hour test period.  Due to the well's test equipment configuration, a lower wellhead flowing pressure was not attainable, and as a result higher flow rates were not attempted.

•

Well #11 drilled. Contractor Sun Drilling  on September 30, 2005 drilling, coring, and logging Well #11 had been completed.  Well # 11 was drilled from a pad located at its Well # 10, 284m to the north-west to a total vertical depth of 1,332m.  The well was cored from 1169m to 1175m, and 1247m to 1259m, and subsequently logged.  Based on log analysis, this well encountered the two principal sands of the Albian formation at 1167m to 1174m and 1245m to 1263m respectively, and such analysis indicated a total of 17m of net oil pay. Estimated net oil pay refers to a perceived oil bearing rock of 17.5 m thick, as interpreted by the wireline logging.  This does not, in itself, indicate any oil reserves, as the associated reserves will depend on the porosity and the aereal extent of the reservoir rock which can only be obtained by producing this well and/or further drilling.

•

Well #12 is drilling. Contractor Sun Drilling.- on October 14, 2005, the Company announced the commencement of drilling of its Well # 12 in the Morskoe Field.

•

Full fold 3D seismic minimal program of  56.62 sq.km and maximal program of 77.83 sq.km (if there will be ice on the sea) has been completed

•

The road and dyke around the drilling location was completed.

•

Design of early production facility, drilling platform pad construction was completed and topographical, geological, climatological, hydrogeological, lithological surveys were conducted in order to determine the subsoil permissible load and subsoil corrosiveness for installing the permanent production facilities.

32





RESULTS OF OPERATIONS



Revenues



For the nine month period, January to September 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 nine months ended September 30, 2005 and 2004, we incurred operating expenses of $7,836,784 and $3,310,669 respectively.  The following table provides a breakdown of operating expenses by category.



General Operating Expenses



|                       | THREE MONTH PERIOD ENDED SEPTEMBER 30, 2005 | THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2004 | NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005 | NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2004 | PERIOD FROM FEBRUARY 1, 2000 TO  SEPTEMBER                30, 2005
|---------------------- | ------------------------------------------- | ------------------------------------------- | ------------------------------------------ | ------------------------------------------ | ------------------------------------------------------------------
|Office Costs           | 2,315,037                                   | 1,392,480                                   | 7,130,379                                  | 2,746,575                                  | 20,683,308                                                        
|Professional Services  | 385,782                                     | 195,185                                     | 588,213                                    | 298,929                                    | 3,312,663                                                         
|Investor Relations     | 33,664                                      | 138,588                                     | 118,192                                    | 265,195                                    | 1,533,443                                                         
|Extinguishment of debt | -                                           | -                                           | -                                          | -                                          | (1,422,225)                                                       
|Miscellaneous          | -                                           | -                                           | -                                          | -                                          | 212,114                                                           
|TOTAL                  | $2,734,483                                  | $1,726,253                                  | $7,836,784                                 | $3,310,699                                 | $24,319,303                                                       



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 nine months ended September 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 third 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 third 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 third quarter of 2005 was $424,578 (2004 - $346,313).



Summary of Non-cash Compensation Expense:

|                              | Expense
$ | Unamortized Deferred Compensation
$
|----------------------------- | --------- | -----------------------------------
|Options                       |           |                                    
|Options granted June 2004     | 6,136     | 9,396                              
|Options granted February 2005 | 418,442   | 3,910,712                          
|Total                         | 424,578   | 3,920,108                          

33





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 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 measures the performance of Big Sky in 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 are currently in discussions with 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 third quarter of 2005, Big Sky utilized cash for management and corporate administrative activities of approximately $469,000 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, 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.

34





In August, 2005, Big Sky issued 30,925,000 shares (comprised of 15,487,500 shares of common stock together with 15,487,500 Subscription Receipts exchangeable 1:1 for shares of common stock) subsequent to a private placement for gross proceeds of $30,925,000.  In addition to the shares of common stock issued to subscribers and noted for registration in this Registration Statement, additional subscriptions were received from Canadian investors who were issued 11,025,000 Special Warrants representing 1 share of common stock each, at a value of $1.00 per share for proceeds of $11.025,000 (and noted herein).The costs associated with this private placement include fees equal to 6% of the gross proceeds received by Big Sky and warrants issued to the finders that equal 6% of the shares issued under this private placement.  The total warrants issued for this private placement equaled 2,520,000.



As of September 30, 2005, we had cash and cash equivalents of $10,009,061.



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.



On October 12, 2004, KoZhaN entered into two (2) agreements with ABT Ltd. LLP  an Agreement on Partial Transfer of the Subsoil Use Right (the Transfer Agreement) and Agreement No. 1. (Agreement No. 1). These two (2) agreements set the terms and conditions of the transfer by KoZhaN of forty-five percent (45%) of its interest in the subsoil use right in the Morskoe oil field (the Interest).



Pursuant to Agreement No. 1, ABT is providing consideration for the Interest that consists of performance of certain construction works and up to 50% of the costs incurred in connection with Well # 10 in the Morskoe oil field that are not deemed to be associated with the drilling works of such well.



Also pursuant to Agreement No. 1, ABT agreed to provide a loan of up to $550,000 for the drilling works associated with Well # 10. Drilling works was defined as all costs associated with the drilling, completing, equipping, coring, logging, perforating and test of Well # 10.



The transfer of the Interest is subject to approval by the Ministry of Energy and Mineral Resources of Kazakhstan (the MEMR), which has not yet been received.



The Company has recorded the amount of $840,423 paid by ABT in performance of the construction works and the amount of $86,160 paid by ABT as its 50% portion of costs incurred in connection with Well # 10 that are not deemed to be drilling works, as an amounts loaned to the Company by ABT. In the event that the transfer of the Interest is approved by the MEMR, these amounts will be converted into amounts received as consideration for the Interest transferred to ABT.



The amounts received from ABT towards the drilling works, which as of December 31, 2004, equaled $500,000, have been recorded by the Company as a loan.  The Company has the obligation to repay the amount of $500,000 to ABT Ltd. should the farm out agreement not be approved by the Ministry.



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 September 30, 2005.   Unless otherwise indicated, the majority of these contractual obligations and commitments are contingent upon our selling production.

35





|                                                                                      |              | 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   | -                 | -               
|Short-term interest free loan from ABT Ltd.                                           | 1,426,583    | 1,426,583         |                 
|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*        | 3,000,000*      
|Liquidation fund (Obligations incurred to date)                                       | 280,000      | -                 | -               
|Commercial production milestone payments                                              | 1,300,000    | -                 | -               
|                                                                                      |              |                   |                 
|Total                                                                                 | $140,858,661 | $3,101,483        | $3,173,900      





* As disclosed in note 25 (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 25 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.

36





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.



On March 18, 2005, our former independent registered public accounting firm 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.



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

37



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 after-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 after-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 September 30, 2005, an amount of $424,578was recorded as non-cash stock compensation expense in respect of employee and non-employee-stock based compensation (2004 - $346,313). For the nine month period ended September 30, 2005, an amount of $1,747,728was recorded as non-cash stock compensation expense in respect of employee and non-employee-stock based compensation (2004 - $360,492).



OFF-BALANCE SHEET ARRANGEMENTS



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



SUBSEQUENT EVENTS



On October 1, 2005, the Company granted options in the amount of 3,900,000 to several new employees.  Shares underlying such grants are to be issued at a price of $1.20. 500,000 options granted to a senior employee vest immediately.



On October 1, 2005, the Company granted options in the amount of 100,000 at an exercise price of $1.20, immediately vesting, to a consultant.



On October 18, 2005the Company advised its shareholders of an extension of the escrow period pursuant to its Subscription Receipt and Special Warrant Indentures, which were put in place in connection with the private placement by the Company of Common Stock, Subscription Receipts and Special Warrants on August 24, 2005. During the extended escrow period, a Subscription Receipt or Special Warrant holder will have the right to maintain or withdraw its investment. Pending receipt of confirmation from Subscription Receipt and Special Warrant Holders, twenty-four million and seven hundred thousand United States Dollars (US$24,700,000), will remain in the Trustee's escrow account.



Subsequently, seven investors withdrew from the private placement reducing the share issuance to 28,325,000 (14,162,500 shares together with 15,475,000 Subscriptions Receipts) and 4,793,600 Special Warrants.



On November 10, 2005, four former directors exercised their outstanding and fully vested options to a total of 1,050,000 shares of common stock for proceeds of $150,000.

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On 22 November 2005, BSEK signed a further Sale & Purchase Contract with the holders of the remaining 10% interest in KoZhaN.  Presently, the Company is in the process of obtaining a waiver from the Government of its pre-emptive right and consent from the MEMR to the resulting partial change to the identity of the ultimate subsoil user, as required by the laws of Kazakhstan.   The consideration for the Sale/Purchase is $1.275m which funds are currently in escrow awaiting the approval of the MEMR, as noted above.

On December 1, 2005, the Corporation entered into a Heads of Agreement with SK Corporation, a Korean corporation, whereby the Corporation agreed to transfer to SK Corporation fifty percent (50%) of its interest in Vector Energy West LLP. In exchange, SK Corporation agreed to provide the following consideration: (a) pay an up-front cash payment of $3,750,000 to the Corporation in compensation of the Corporations past funding contribution to Vector; (b) as of the date immediately following the closing date, fund fifty percent (50%) of the total expenditures of Vector; (c) funding of one hundred percent (100%) of the cost of the drilling of a first deep (pre-salt) well under Vectors Atyrau and Liman-2 contracts, up to $15 million. The transaction is subject to numerous conditions, including the parties negotiating and entering into a definitive agreement, receipt of the requisite government approvals and receipt of the governments waiver of its right of first refusal.

On July 12, 2005 and July 21, 2005, the Corporations wholly-owned subsidiary, Big Sky Energy Alakol Limited (BSE Alakol) entered into a series of agreements with Corporation Remas LLP, a Kazakhstan corporation, whereby BSE Alakol acquired a 50% interest in Alakol basin subsoil use contract #1766 dated June 15, 2005, subject to the Kazakhstan governments consent and waiver of its right of first refusal. The agreements include an Agreement on Partial Sale of the Subsoil Use Right, Agreement on Joint Activity and Establishment of Consortium, Financial Aid Agreement and Pledge Agreement Over House and Land Allotment. The purchase price for the 50% interest consists of $430,000, which is not due until after receipt of the consent of the government to the partial transfer of subsoil use rights. The agreements further provide that BSE Alakol will pay $501,000 as payment of the bonus required under the subsoil use contract #1766.

Pursuant to these agreements, BSE Alakol will finance 100% of up to $10 million (which includes the $501,000 signature bonus). $5 million will be repaid by Remas from its revenues received from this project. After the first $10 million of financing, the parties shall provide further financing of $12,600,000 by the parties, on a fifty-fifty basis. If BSE Alakol provides for Remas portion of such financing, BSE Alakol is entitled to receive an additional interest of up to 25% of the project. If the government does not approve such additional interest transfer, Remas shall such amount within 10 days after receipt of such disapproval. Further, BSE Alakol has provided Remas with an interest free loan of $501,000 which is secured by a pledge of a private residence. The loan has a term of five months.

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 SEC's 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.



Subsequent to the discovery of the accounting error which was the causation of our current restatement, we carried out an evaluation, under the supervision and with the participation of our management and Audit Committee, 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 while designed to provide reasonable assurance that information required to be disclosed in the reports the Corporation files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required, were lacking in rigor and application and disclosure controls were not functioning.  It was therefore the conclusion of our chief executive officer and chief financial officer that our disclosure controls and procedures as of the periods covered by our Form 10-KSB/A as of December 31, 2004 and Forms 10-QSB/A for the periods March 31, 2005, June 30, 2005 and September 30, 2005 were not effective.

The Corporation has adopted a policy that all contracts drafted in a foreign language must be translated into English and then reviewed and approved by the Corporations legal counsel prior to execution.  Management believes that this will ensure that specificity and clarity will be included in every contract executed by the Corporation and its subsidiaries and prevent the misinterpretation that occurred in the contracts referenced above.   These measures are to address the defect noted in the lack of a review process for translated material prior to insertion into or reflection in the accounting records of the company;

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As a first step in addressing a lack of sufficient personnel with appropriate knowledge, experience and training in US GAAP, the Audit Committee conducted a recruitment exercise which culminated in the employment of a senior accounting professional with a background in managing the accounting function within public reporting companies.



To address the lack of clear accountability structure within the accounting function and throughout the organization, our Chief Financial Officer has engaged with our Corporate Governance and Compliance Consultant to devise and implement a sub-certification program throughout the accounting function with the long-term goal of extending this program to all business processes.  It is the current intention of the Company to complete this programme in the first quarter of 2006.



In conjunction with external service providers, we will continue to identify, develop and implement remedial measures to address these inadequacies and failures and implement best practice in our internal controls over financial reporting.



Changes in Internal Controls



The Companys internal controls over financial reporting identified in connection with the evaluation above during the periods noted above changed as noted above.



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 not 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.



PART II



ITEM 1.  LEGAL PROCEEDINGS



On 18 November 2005 a subsidiary of the Company, Big Sky Energy Atyrau Ltd. (BSEA) and an indirect subsidiary of the Company, Vector Energy West LLP (VEW) filed a Statement of Claim in the Republic of Kazakhstan against Ligostrade Service LLP (Ligostrade) and Farkhad Koblandyuly Shakirov, a former employee of the Companys subsidiary, Vector Energy West LLP, seeking to invalidate a purported Assignment Agreement dated 28 September 2005, related to an attempt to assign the subsoil use rights arising under Subsoil Use Contract No. 1076, in respect of the Atyrau Block (Assignment Agreement) to Ligostrade.



On 22 November 2005 an Injunction was granted to VEW and BSEA, prohibiting Ligostrade, Mr. Shakirov and the Ministry of Energy and Mineral Resources (MEMR) from doing any actions to implement the purported Assignment Agreement including, the re-registration of the subsoil use rights arising under Subsoil Use Contract No 1076 in respect of the Atyrau Block pending the hearing of the case and any appeals.



On December 2, 2005 the scope of the Injunction was extended to prohibit the following acts: (a) the alienation or pledging of any shares or interests in or assets of Ligostrade Service LLP or any of its affiliated or related companies, whether by such parties themselves or by their bankers, financiers, employees, officers, directors, agents, lawyers, consultants and contractors (Affiliates), including without limitation all and any rights, interests or claims such party may have in relation to the subsoil use rights to the Atyrau Block arising under Contract No. 1077; (b) the sale, transfer or assignment of any rights or assets by Ligostrade Service LLP, or any of its or of any of its affiliated or related companies, and whether by such parties themselves or by their  Affiliates, including, without limitation, all and any rights, interests or claims such party may have in relation to the subsoil use rights to the Atyrau Block howsoever arising under Contract No. 1077; and (c) the Ministry of Energy and Mineral Resources from registration or transfer of any rights they may have in regards to the subsoil use rights to the Atyrau Block arising under Contract No. 1077.



On 20 October 2005 and, further, on 1 November 2005, Mr Shakirov, personally, commenced two (2) actions against certain employees of the Company and/or its subsidiaries, seeking compensation for moral damages arising as a result of the termination of his employment.  On 20 October he commenced a further proceeding claiming that his authority as President of VEW was wrongly terminated, and seeking reinstatement.  On November 23, 2005, the Company filed a Form 8-K disclosing under Section 8, Other Events, the issuing of the legal proceedings as noted above.

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In relation to Contract No. 1104 as to the Karatal Block, Contract No.1102 as to the Dauletaly Block and Contract No. 1076 as to the Liman-2 Block (the Blocks) a Commission has been established by the MEMR to review its decision of 7 October 2005 to cancel the Company's  subsidiaries (the Group) subsoil use rights to the Blocks.  The Company has received legal advice to the effect that, until this Commission has made and delivered its report, and the MEMR have acted pursuant thereto, only then will any alleged modification of the subsoil use rights associated with the Blocks be determined.  Furthermore, to date the Group has not received or been provided with any other evidence which would suggest the Group is no longer the registered subsoil users in respect of the Blocks,as evidenced by Entries in the Register of Subsoil Users maintained by the MEMR, which is the ultimate determinant of such matters.



The effect of the Commissions determination cannot, at this time,be estimated due to the fact that: (a) such determination will be with regards to three (3) Blocks, each of which could have a different result; and (b) it is possible that the determination of the Companys subsidiariessubsoil use rights with regard to each Block could involve various conditions, limitations and/or rights. At this time, due to the lack of relevant facts, any estimate of the effect of the Commissions determination would, therefore,be mere speculation.



We are not a party to any other material legal proceeding or litigation and we know of no additional material legal proceeding or contemplated or threatened litigation.  We are subject to potential litigation in the normal course of operations.  There are no claims currently pending that we consider would materially affect our operations.



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. Sun Drilling has agreed to provide full well construction services for several 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.This instrument has yet to be funded.



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.

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In August, 2005, Big Sky issued 30,925,000 shares (comprised of 15,487,500 shares of common stock together with 15,487,500 Subscription Receipts exchangeable 1:1 for shares of common stock) subsequent to a private placement for gross proceeds of $30,925,000.  In addition to the shares of common stock issued to subscribers and noted for registration in this Registration Statement, additional subscriptions were received from Canadian investors who were issued 11,025,000 Special Warrants representing 1 share of common stock each, at a value of $1.00 per share for proceeds of $11.025,000 (and noted herein).The costs associated with this private placement include fees equal to 6% of the gross proceeds received by Big Sky and warrants issued to the finders that equal 6% of the shares issued under this private placement.  The total warrants issued for this private placement equaled 2,520,000.



On October 18, 2005the Company advised its participants in the August 24, 2005 private placement of an extension of the escrow period pursuant to its Subscription Receipt and Special Warrant Indentures, which were put in place in connection with the private placement by the Company of Common Stock, Subscription Receipts and Special Warrants on August 24, 2005. During the extended escrow period, a Subscription Receipt or Special Warrant holder had the right to maintain or withdraw its investment. Pending receipt of confirmation from Subscription Receipt and Special Warrant Holders, twenty-four million and seven hundred thousand United States Dollars (US$24,700,000), will remain in the Trustee's escrow account.  As of November 18, 2005, four investors holding Special Warrants exchangeable for 2,025,000 shares of common stock had elected to withdraw and funds in the total amount of $2,025,000 is refundable to such investors and their Special Warrants cancelled.  Subsequently, seven investors withdrew from the private placement reducing the share issuance to 28,325,000 (15,487,500 shares together with 14,162,500 Subscriptions Receipts) and 4,793,600 Special Warrants.



In September, 2005, Big Sky issued 2,150,000 restricted shares of common stock to two option holders who exercised their options under Big Skys 2000 Stock Award Plan.  The Company realized $133,500 from these exercises.



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                                               

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|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                                                                                                                                                                             
|10.31 (15)  | Sale Purchase Agreement between Big Sky Energy Kazakhstan Ltd. and Mukashev; Kaschpov; Baikenov, Aranova, and Faskhutinov for the purchase of 10% of KoZhaN LLP.                                                             
|31.1        | Section 302 Certification  Chief Executive Officer                                                                                                                                                                          
|31.2        | Section 302 Certification  Chief Financial Officer                                                                                                                                                                          
|32.1        | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer                                                                             

43



|32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(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                                                                                                    
|(15) | Previously filed on Form 10-QSB June 30, 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:  December 8, 2005 | By:                       
|Date: December  8, 2005 | By:                       





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