UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K


(Mark
One)





[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934





For the
fiscal year ended December 31, 2008





[  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





For the
transition period from __________ to __________





Commission
file number: 333-118902





SIBERIAN ENERGY GROUP
INC.


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





NEVADA
                52-2207080(State
      or other jurisdiction of
                (IRS
      Employer Identification No.)incorporation
      or organization)





275 Madison Ave, 6th Floor,
New York, NY 10016


(Address
of principal executive offices)





(212)
828-3011


(Registrant's
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:





NONE





Securities
registered under Section 12(g) of the Exchange Act:





NONE





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes [  ]  No
[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes [  ] No
[X]





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 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 [X]  No [  ]





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer  [ ]
            Accelerated
      filer[ ]Non-accelerated
      filer   [ ]
            Smaller
      reporting company  [X]


(Do not
check if a smaller  reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [   ] No [X].





The
issuer's revenues for the most recent fiscal year ended December 31, 2008 were
$0.





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the closing value of the Registrant's
common stock on June 30, 2008, was approximately $4,374,198.





As of
March 31, 2009, the issuer had 18,645,585 shares of common stock, $.001 par
value per share outstanding.




Documents
Incorporated by Reference: NONE





Transitional
Small Business Disclosure Format: Yes [   ] No [X]





SIBERIAN
ENERGY GROUP INC.


FORM
10-K


YEAR
ENDED DECEMBER 31, 2008


INDEX





Part
I





Item
      1. Business
            4Item
      1A. Risk Factors
            13Item
      2. Properties
            19Item
      3. Legal Proceedings
            20Item
      4. Submission of Matters to a Vote of Security Holders
            20





Part
II





Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
            21Item
      6. Selected Financial Data
            22Item
      7. Management's Discussion and Analysis or Plan of
    Operation
            22Item
      8. Financial Statements and Supplementary Data
            F-1Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            28Item
      9A. Controls and Procedures
            28Item
      9B. Other Information
            29





Part
III





Item
      10. Directors, Executive Officers and Corporate Governance
            30Item
      11. Executive Compensation
            36Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
            48Item
      13. Certain Relationships and Related Transactions
            50Item
      14. Principal Accountant Fees and Services
            52




Part
IV





Item
      15. Exhibits, Financial Statement Schedules
            53





PART
I





ITEM 1.
BUSINESS





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





CERTAIN
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K"), INCLUDING
STATEMENTS UNDER "ITEM 1. BUSINESS," AND "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS", CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT
NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD",
OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND
UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF SIBERIAN ENERGY GROUP INC. AND KONDANEFTEGAZ, LLC, A RUSSIAN
LIMITED LIABILITY, THE REGISTRANT’S 44% OWNED SUBSIDIARY, AND ZAURALNEFTEGAZ
LIMITED, A COMPANY ORGANIZED UNDER THE LAWS OF THE COUNTRY OF ENGLAND, WHICH THE
REGISTRANT OWNS 50% OF (COLLECTIVELY "SIBERIAN", THE "COMPANY", "WE", "US" OR
"OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES
IN THIS FORM 10-K, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31,
2008.





Investors
should also take note of the fact that some of the more technical terms relating
to the Company's operations as described below are explained in greater detail
under exhibit 99.1, incorporated by reference hereto.





BUSINESS
DEVELOPMENT:





Siberian
Energy Group Inc. was formed as a Nevada corporation on August 13, 1997, as
Advanced Rehab Technology Corporation. Subsequently, on March 9, 2001, the
Company changed its name to Talking Cards, Inc.; on February 12, 2002, the
Company changed its name to Oysterking Incorporated; on December 3, 2002, the
Company changed its name to 17388 Corporation Inc., at which point the
controlling interest of the Company was sold and a new board of directors was
appointed; on May 5, 2003, the Company changed its name to Trans Energy Group
Inc.; and on December 3, 2003, the Company changed its name to Siberian Energy
Group Inc.





On
September 17, 1999, the Company affected a 1-for-30 reverse stock split. A
subsequent 3-for-1 forward split was consummated on October 2, 2000 and a
further 1:2 reverse stock split was affected on May 2, 2005 (collectively the
“Stock Splits”). All share amounts subsequently listed are retroactively
adjusted to reflect these stock splits unless otherwise provided.





In the
spring of 2003, a majority of the Company's shares were purchased by new
shareholders who stepped into the management of the Company and defined its new
business direction as an oil and gas exploration company.





On May 9,
2003, the Company entered into an Acquisition Agreement (the "Acquisition
Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation
("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant
to the Acquisition Agreement, the Company acquired a 51% interest in ZNG by
issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004, the
Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares of
the Company's common stock, making ZNG a wholly owned subsidiary of the Company.
The Company had no affiliation with ZNG prior to the acquisition in May
2003.


-4-


Currently,
the operating activities of ZNG are carried out through the Joint Venture
Shareholders' Agreement ("Joint Venture") entered into on October 14, 2005 with
Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and Zauralneftegaz
Limited, the joint venture company ("ZNG, Ltd."), as contemplated by the Option
Agreement, as amended (the "Option"). The Company closed the Joint Venture and
transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in connection with
the terms and conditions of the Joint Venture. As a result of such transfer, the
Company holds 50% of the outstanding stock of ZNG, Ltd., which holds 100% of the
outstanding stock of the Company's former wholly owned subsidiary,
ZNG.  ZNG, Ltd. operates through ZNG and is engaged in the exploration
and development of, production and sale of, oil and gas assets in the Western
Siberian region of the Russian Federation and the former Soviet
Union.





On
December 13, 2006, we entered into an Interest Purchase Agreement (the "Purchase
Agreement") with Key Brokerage LLC ("Key Brokerage"), pursuant to which we
purchased 100% of the stock of Kondaneftegaz LLC ("KNG"), a Russian limited
liability company, which was created in 2004 for the purpose of oil and gas
exploration in the Khanty-Mansiysk district of Western Siberia, Russia. In
addition to acquiring 100% of the stock of KNG, we received the geological
information package on the Karabashski zone of Khanty-Mansiysk Autonomous
district (Tuymen region of Russian Federation) ("Geological Data").





On or
about September 30, 2008, we entered into an Agreement of Purchase and Sale with
Limited Liability Company Neftebitum, a Russian limited liability company, and
two Russian individuals, pursuant to which we sold fifty-six percent (56%) of
the ownership interest of KNG, as described in greater detail
below.





All
dollar amounts used throughout this Report are in United States dollars, unless
otherwise stated. All amounts in Canadian dollars used throughout this Report
are preceded by CDN, for example CDN $500, is referring to $500 Canadian
dollars.





BUSINESS
OPERATIONS:





We are a
development stage company, which is seeking opportunities for investment in
and/or acquisition of small to medium companies in Russia, specifically in the
oil and gas industry.





We
currently hold investments in ZNG, Ltd. and KNG.  Both companies are
operating in the Western Siberia region of Russia and are involved in oil and
gas exploration.





Moving
forward the Company plans to focus on those assets that involve less exploration
risk and is also actively seeking and negotiating the acquisition of production
or close-to-production assets in Russia and countries of the former Soviet
Union; however, the Company has not entered into any definitive agreements to
date, and there can be no assurance that any such agreements will be entered
into on favorable terms, if at all.





Description of
KNG





KNG was
created in 2004 for the purpose of oil and gas exploration in the
Khanty-Mansiysk district of Western Siberia, Russia. In October 2007, KNG was
awarded two oil and gas exploration licenses in Khanty-Mansiysk region in West
Siberia, Russia for the Karabashsky-61 and Karabashsky-67 blocks located in the
Khanty-Mansiysk Autonomous Region, Russian Federation.  The license areas
together cover 166,000 acres and are situated in the territory of the Urals oil
and gas bearing area.  KNG also has eight more outstanding
applications for exploration licenses filed with the Russian authorities, which
auctions have not occurred to date.


-5-


The right
to use the subsurface resources of the Karabashsky-61 and Karabashky-67 Fields
is granted for the term of validity of the license (five (5) years), from the
date of its state registration (October 22, 2007), subject to the completion of
certain exploration activities on the license blocks. The term of use of the
subsurface resources can be extended to finish exploration and estimation of
deposit or for liquidation work, if the terms of usage of the subsurface
resources are not breached.





KNG has
prepared and coordinated with the Russian authorities an exploration works
program on the Karabashski 61 and Karabashski 67 license areas to stay in
compliance with the license agreements requirements described below in further
detail:




o
            to
      begin 2D seismic works during the 2009-2010 fieldwork season and to
      perform not less than 176.26 linear kilometers of seismic profiles on
      Karabashky-61 and 158 linear km on Karabashky-67 (minimal density of the
      profile not less than 1 linear kilometer per 1 square kilometer of license
      area), ando
            No
      later than 2011, to start drilling an exploratory well and to complete not
      less than 2 exploratory wells by April 1,
  2012.





KNG is
currently re-interpreting the existing seismic data from prior studies and is
evaluating the possibility of using this data in the current program of seismic
studies.





On or
about September 30, 2008, we entered into an Agreement of Purchase and Sale with
Limited Liability Company Neftebitum, a Russian limited liability company
(“Neftebitum”), Sergey V. Prokopiev, an individual and Russian citizen, and Oleg
G. Shelepov, an individual and Russian citizen (collectively, the “Purchasers”
and the “Sale Agreement”).  The Company’s Board of Directors approved
and ratified the Company’s entry into the Sale Agreement and the transactions
contemplated therein on our about October 30, 2008.  Pursuant to the
Sale Agreement, the Company agreed to sell to the Purchasers an aggregate of
fifty-six percent (56%) of the registered capital of KNG for aggregate
consideration of 5,600 Russian Rubles (approximately
$223).  Neftebitum agreed to purchase a 51% interest for total
consideration of 5,100 Russian Rubles (approximately $203) and Mr. Prokopiev and
Mr. Shelepov agreed to each purchase a 2.5% interest for consideration of 250
Russian Rubles each (approximately $10).





Pursuant
to the Sale Agreement, the Sellers are obligated to maintain KNG’s main priority
of performing geological studies and exploring for hydrocarbon deposits in the
Karabashsky-61 and Karabashsky-67 blocks (the “Blocks”).  Further, the
Purchasers are obligated to provide financing, by way of direct financing or
third-party loans, in the amounts necessary to comply with the licensing
agreements for the Blocks.  The Company’s and the Purchasers’
relationship is to be regulated by the Operating Agreement (as described below),
which was entered into in connection with the Sale Agreement.  Lastly,
the Sale Agreement provides that in connection with Neftebitum obtaining a
majority interest in KNG, it is obligated to be a guarantor and accept joint
responsibility with KNG for repayment of any financing the Purchasers obtain for
KNG.





On or
about November 5, 2008, and in connection with their entry into the Sale
Agreement, Neftebitum, the Company and KNG entered into an Operating Agreement
that defines the rights and responsibilities of the parties (the “Operating
Agreement”).  Pursuant to the Operating Agreement, Neftebitum is
designated the exclusive Operator of KNG and all of its current and future
mineral claims and has the right to appoint all members of KNG’s
management.  As Operator, Neftebitum has exclusive control of all
technical, management, operational and associated matters involving KNG and the
Blocks and any potential hydrocarbon exploration and production licenses (the
“Operations”).  Neftebitum must manage and conduct the Operations by
itself, its agents, independent contractors and/or servants in general
accordance with standard oil and gas field practices.  Neftebitum must
use all reasonable endeavors to:


-6-


·
            Prepare
      annual programs and budgets pursuant to the Operating Agreement and the
      licensing agreements for the
Blocks;





·
            Begin
      2D seismic works on the Blocks during the 2009-2010 fieldwork season and
      perform not less than 176.26 linear kilometers of seismic profiles on the
      Karabashky-61 Block and not less than 158 linear kilometers of seismic
      works on the Karabashky-67 Block;





·
            Start
      drilling an exploratory well no later than 2011, and complete no less than
      2 exploratory wells by April 1,
2012;





·
            Provide
      adequate financing to carry out KNG’s planned activities;
    and





·
            Supervise
      implementation of all programs and budgets and provide written progress
      reports on a quarterly basis relating to KNG’s activities and
      programs.





Further,
as Operator, Neftebitum may enter into and negotiate contracts on behalf of KNG
and the Company and represent KNG or the Company in all dealings with
governmental and regulatory bodies.  Neftebitum must guarantee any
financial obligations entered into on KNG’s behalf.  Neftebitum may be
reimbursed for expenses incurred in its role as Operator, and if KNG has
inadequate resources to reimburse such expenses, these unreimbursed expenses may
be accounted for at the time of the distribution of profits from KNG’s
operations, if any.  Neftebitum, however, will not charge operator’s
management fees in connection with its role as
Operator.  Additionally, the Company made available all geological
data to the operator to be used in the program of geological studies in the
region and will not charge fees for the use of geological data it
provides.  Neftebitum must also use its best efforts to maintain
insurance for the Company.  Lastly, Neftebitum’s responsibilities as
Operator under the Operating Agreement may not be assigned or
transferred.




As of
December 31, 2008, the Company owned a 44% interest in KNG. Operating results of
KNG were included in the consolidated financial statements contained herein for
the year ended December 31, 2007, and the nine months ended September 30, 2008.
After September 30, 2008, the Company’s investment in KNG is accounted for on
the equity method of accounting. Accordingly, the assets, liabilities and equity
of KNG are no longer presented on the Company’s balance sheet.





After
careful consideration of the current financial position of KNG, the Company has
applied an impairment charge to the value of investment in KNG which resulted in
carrying it at zero value.





Description of
ZNG





ZNG has
been involved in the oil and gas research activities in the Kurgan region of the
Russian Federation. During 2003-2008 it has completed seismic studies and
drilling program in the Kurgan region of Siberia, Russia. The Company believes
ZNG, Ltd. has created value through the geological results of the two
exploratory wells and other data gathered in the area and ZNG, Ltd. is
considering its options with regard to realizing this value by either farming
out or more likely, a direct sale of geophysical and seismic data to a third
party operating in the area.





Between
2003 and 2007, ZNG carried out extensive seismic and gas seismotomographic
studies on its 4 licensed blocks acquired in 2003 through a government tender:
the Privolny, Mokrousovsky, West-Suersky and Orlovo-Pashkovsky blocks, and
drilled 2 exploratory wells on the Privolny and Mokrousovsky blocks. Based on
the interpretation of seismic and seismotomographic surveys and analysis of
samples from the wells, ZNG prepared a comprehensive analysis of geological
resources of the Kurgan region.  Both the Privolny-1 and
Mokrousovsky-1 studies confirmed the presence of hydrocarbons and contributed
greatly to the understanding of geological resources in the region. However, a
substantial amount of further exploration studies and work is required before a
conclusion on the future potential of the blocks can be drawn. Decision on
potential further exploration on these blocks has not been reached yet, as this
decision has to take into account general market conditions and specifically the
trend of oil prices. Upon the expiration of the license terms of these blocks in
March 2008, ZNG kept the preferential right to re-apply for the licenses to
continue exploration works on these blocks in the event it decides to continue
exploration. In the case of further exploration on ZNG’s licensed areas, the
Joint Venture will seek to “farm out” its interest in the
acreage.


-7-


The
Company’s investment in the Joint Venture is recorded on the equity method of
accounting.  Since cumulative losses of Joint Venture exceed the
Company’s investment, the investment asset is carried at zero value as of and
through December 31, 2008.




Joint
Venture





The
operations of the Joint Venture are funded via loans provided to ZNG, Ltd. and
ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly owned by
Baltic.  Loans are guaranteed by ZNG, Ltd.’s holdings in
ZNG.  As of December 31, 2008, the total funding provided to ZNG, Ltd.
and ZNG by Baltic was equal to approximately $23.5 million plus accrued interest
of approximately $5 million. The loans are not dilutive to the Company's
ownership in ZNG.





Agreement With Alternative
Energy Finance, Ltd.





We
previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which Tim
Peara is the Managing Director as well as a Director of the Company, certain
warrants in connection with Mr. Peara introducing the parties who formed the
joint venture. Pursuant to an agreement between AEF and the Company, AEF will
receive compensation based on the total investment made by Baltic Petroleum Ltd.
in the Joint Venture.





In
connection with that agreement, the following warrants were granted to AEF:
17,561 warrants to purchase shares of our common stock at $0.67 per share, which
were granted to Mr. Peara on March 31, 2006; 20,412 warrants to purchase shares
of our common stock at an exercise price of $2.02 per share, granted effective
June 30, 2006; 20,952 warrants to purchase shares of our common stock at an
exercise price of $1.53 per share effective September 30, 2006; and 38,648
warrants to purchase shares of our common stock at an exercise price of $1.44
per share effective December 31, 2006.  All of the warrants are
exercisable for three years from the date of issuance and contain a cashless
exercise provision.





From
January 1, 2007 to December 31, 2007, we accrued approximately $108,827 in fees
payable to AEF in connection with the AEF agreement, which funds have not been
paid to date, and we also issued AEF the following securities pursuant to the
agreement: 48,925 warrants to purchase shares of our common stock at an exercise
price of $1.10 per share effective March 31, 2007; 55,233 warrants to purchase
shares of our common stock at an exercise price of $1.14 per share, effective
June 30, 2007; 51,352 warrants to purchase shares of our common stock at an
exercise price of $0.74 per share, effective September 30, 2007; and 78,130
warrants to purchase shares of our common stock at an exercise price of $0.46
per share, effective December 31, 2007.  All of the warrants are
exercisable for three years from the date of issuance and contain a cashless
exercise provision.





On March
13, 2007, Mr. Peara personally, and on behalf of AEF agreed to accept 58,134
shares of our restricted common stock in consideration for the forgiveness of
$45,626 owed personally to Mr. Peara in Director’s fees and accrued expenses and
$47,969 owed to AEF in connection with our agreement with AEF for fees due from
the period from March 31, 2006 to December 31, 2006, which shares have been
issued to date and which debt has been forgiven by Mr. Peara and
AEF.





We have
not been required to pay AEF any additional consideration and/or issue AEF any
additional warrants since December 31, 2007, as Baltic has not invested any
additional funds into the Joint Venture since the end of that
period.


-8-


ZNG
Loans





To date,
Caspian has provided ZNG various loans, as described below:





·
            On
      November 9, 2005, ZNG entered into a New Loan with Caspian (the "New
      Loan"). Under the loan agreement, Caspian agreed to provide a loan of up
      to $6,874,325 representing the assumed commitment under a prior loan and a
      new commitment, to be used for operations in the Kurgan region in 2005 and
      through the first half of 2006. The New Loan is available to ZNG until the
      sixth anniversary of the date of the New Loan, or November 9, 2011 (the
      "Term");




·
            On
      January 16, 2007, ZNG and Caspian entered into a Deed of Variation of the
      Loan Agreement, whereby, inter alia, the Lender agreed to make available
      to ZNG an additional loan facility of
  US$2,000,000;





·
            On
      April 23, 2007, ZNG and Caspian further entered into a Deed of Variation
      of the Loan Agreement whereby, inter alia, the Lender agreed to make
      available to ZNG an additional loan facility of US$300,000;
      and




·
            On
      June 18, 2007, ZNG and Caspian entered into another Deed of Variation to
      the Loan Agreement, whereby Caspian agreed to make available to ZNG an
      additional loan facility of US$7,359,190 (the “June 2007 Deed of
      Variation”).





Funding
to ZNG, Ltd. is provided by Caspian on the same terms as to ZNG, through the
mechanism of intercompany billing within Baltic and certain companies affiliated
with Baltic. As of December 31, 2008, the total loan to ZNG, Ltd. from Caspian
totaled $10,235,000, including $9,380,000 of principal and accrued interest of
$855,000. In addition, ZNG, Ltd. owes $1,482,000 directly to Baltic for unpaid
management fees and accrued interest through December 31, 2008.





The loans
will not be dilutive to the Company's ownership in ZNG. In connection with the
funding provided by Baltic, ZNG entered into a gross override royalty agreement
with Baltic, as described below under "Deed of Agreement," and “Gross Override
Royalty Agreement.”





Terms of loans to ZNG, Ltd.
and ZNG:





Interest
on any amounts loaned under the New Loan bears interest at the following rates,
calculated and compounded on a daily basis, 14% per annum during the first two
years of the Term, 13% per annum during the third year of the Term; and 12%
thereafter until the end of the Term.





Additionally,
under the terms of the June 2007 Deed of Variation, interest on the loans made
by Baltic to ZNG is payable on:




a)
            the
      earlier of (i) the date on which ZNG’s monthly turnover as shown by its
      monthly management accounts exceeds US $200,000 and (ii) the fifth
      anniversary of the Deed of Variation dated June 18, 2007;
    and




b)
            thereafter,
      on a monthly basis on the final day of each calendar month using all
      available turnover, provided that in the event the interest due thereafter
      exceeds the monthly turnover of ZNG then all of the turnover except for
      the direct budgeted operating expenses of ZNG and management fees agreed
      to be paid to Siberian Energy Group Inc. under the Joint Venture Agreement
      will be allocated prior to the payment of such interest and any interest
      not able to be paid will accrue and be payable as soon as the level of
      turnover (less the fees payable to us) permits (collectively the
      “Interest Payments”).


-9-


In the
event that ZNG does not make the Interest Payments when due, interest on the
unpaid amounts shall be payable from the due date to the date paid at the rate
of 6% per annum, calculated and accrued on a daily basis. The New Loan is
unsecured by ZNG, but Caspian reserved the right to request security over all or
some of the assets and/or undertaking of ZNG at any time prior to any drawdown
of the New Loan, or while any money is outstanding under the New
Loan.





On
November 9, 2005, ZNG, Ltd. and Caspian entered into a Debenture, whereby ZNG,
Ltd. granted Caspian a security interest in substantially all of its assets,
including its 100% ownership of ZNG, to secure the repayment of the New Loan
Agreement. Pursuant to the Debenture, ZNG, Ltd. granted Caspian a continuing
security interest for the payment, performance and discharge of all of the
liabilities owing to Caspian by ZNG, Ltd., in the following assets, both present
and future, from time to time to the extent owned by ZNG, Ltd., or to the extent
in which it has an interest.





Additionally,
on November 9, 2005, ZNG, Ltd. and Caspian entered into an "Agreement for the
Pledge of the Participatory Interest in OOO Zauralneftegaz" (the "Pledge
Agreement"). Pursuant to the Pledge Agreement, ZNG, Ltd., pledged its 100%
ownership interest in ZNG to Caspian, which included any proceeds, dividends,
distributions or income deriving from ZNG and any compensation, whether monetary
or in-kind, deriving from ZNG, received due to the liquidation or reorganization
of ZNG. The Pledge Agreement shall remain in effect until all amounts owed to
Caspian by ZNG, Ltd. are repaid. Pursuant to the Pledge Agreement, ZNG, Ltd.,
agreed to hold all dividends, interest and other income deriving from and by it
for the account of Caspian, and agreed to pay such dividends, interest and other
income to Caspian upon Caspian's request.




If ZNG,
Ltd. fails to pay the amounts owed to Caspian pursuant to the Pledge Agreement,
Caspian can sell the 100% interest in ZNG at public auction, in one or several
sales, with an opening bid price of seventy five percent (75%) of the value set
forth for the value of ZNG in the Pledge Agreement ($7,705,079) at the first
public auction and fifty percent (50%) of the value set forth in the Pledge
Agreement at the second public auction. If the opening bid for ZNG is not met at
either the first or second public auction, Caspian shall have the right to
retain ZNG, with its value equal to 90% of the value set at the second auction,
and set-off its claims secured by ZNG, Ltd. by such value. If ZNG is sold at
public auction, any and all proceeds from such sale received by Caspian shall be
applied towards the discharge of the amounts owed by ZNG, Ltd. to
Caspian.





Gross Overriding Royalty
Agreement





In
December 2006, ZNG entered into a Gross Overriding Royalty Agreement (the
“Royalty Agreement”) with Baltic, which was contemplated by the Deed of
Agreement dated July 26, 2006, described above and entered into in connection
with the addition to the New Loan, described above. The Royalty Agreement
provided that ZNG would grant Baltic a gross overriding royalty interest equal
to 3% of ZNG’s interest in any and all of the hydrocarbons found in, produced,
marketed and/or extracted from ZNG’s licensed blocks (the “Royalty”). Pursuant
to the Royalty Agreement, the Royalty shall be paid free and clear of any
expenses associated with the exploration and/or production of any hydrocarbons
discovered on the licensed blocks. The Royalty will apply until ZNG has received
an aggregate of $20,000,000 from the gross sales of any hydrocarbon production
produced or occurring on any wells owned or operated by ZNG. The Royalty
Agreement also provides that Baltic may at any time, upon not less than one (1)
week prior notice, take the Royalty in oil and/or gas production, instead of in
cash. ZNG also granted Baltic a security interest on any and all of its future
hydrocarbon production to secure the payment of the Royalty.





Estimate
of Amount of Time Spent On Research and Development





An
initial business plan was developed over the course of three months in 2003.
During that time period, market research was conducted. Research and development
activities on the licensed blocks in the Kurgan Region were directly borne by
the Company up to the time the Joint Venture was closed in October 2005. As a
result of the closing of the Joint Venture, these research and development costs
are now paid by both by ZNG, Ltd. (as described above) and ZNG. Research
activities include gravimetric, seismic works and seismotomography studies on
the previously licensed areas. Costs incurred by ZNG and ZNG Ltd. in connection
with these studies as of December 31, 2008 totaled approximately $18
million.


-10-


Moving
forward we expect additional research and development costs will be paid by
Neftebitum in connection with KNG’s exploration of KNG’s blocks and any of the
blocks that KNG may obtain at auction in the future, of which there can be no
assurance.





Employees





Siberian
Energy Group Inc. currently employs two (2) employees in management. KNG, which
we own a 44% interest in, has two (2) part-time employees. Zauralneftegaz
("ZNG"), which is 50% owned by the Company through its joint venture ZNG, Ltd.,
employs nineteen (19) full-time employees and one (1) part-time employee;
however, ZNG has suspended its employment contracts with its employees until
such time as the decision on further exploration is reached.





Critical
Accounting Policies and Estimates





The
Company prepares its consolidated financial statements in accordance with
accounting principals generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of any contingent assets and liabilities. On an on-going
basis, we evaluate our estimates. We base our estimates on various assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.




We
believe the following critical accounting policy affects our more significant
judgments and estimates used in the preparation of our financial
statements:





Going
Concern





The
Company's financial statements have been prepared assuming that the Company will
continue as a going concern; however, since inception of its current endeavors
in 2003, the Company has not earned any revenues from production of hydrocarbons
and is considered to be in the development stage, which raises substantial doubt
about its ability to continue as a going concern. The Company is of the opinion
that sufficient financing will be obtained from external sources to provide the
Company with the ability to continue the process of development to achieve
commercial production and sales of products. Since inception, the Company has
obtained cash financing from organizing stockholders and employees in the form
of loans, advances and deferred salaries, as well as through financing
previously received $25,000 to $85,000 per month in management fees from its
Joint Venture, which management fees the Company has not received since October
2007, and which the Company can provide no assurances will ever resume. There
can be no certainty as to availability of continued financing in the future.
Failure to obtain sufficient financing may require the Company to reduce its
operating activities. A failure to continue as a going concern would require
stated amounts of assets and liabilities to be reflected on a liquidation basis
which could differ from the going concern basis.





Competition





Competition
among Russian producers occurs in two distinct tiers. The first tier includes
large corporations such as Surgutneftegaz, LUKoil, Sibneft, Tatneft, Slaveft,
YUKOS, TNK, Bashneft, Rosneft and Sidanco which together control more than 90%
of the Russian oil and gas market. These companies operate large-scale fields
and are primarily oriented towards exportation. The second tier, so called
junior players, includes a large number of smaller companies that operate small
and medium sized oil and gas fields. These companies enjoy a limited but stable
range of customers within Russia's domestic market, and their customers include
the larger companies which purchase this product for export. Like other junior
players, the Company believes it has potential to succeed given the continued
high demand for oil both domestically and internationally.


-11-


A healthy
level of competition currently exists among local oil service companies and
recent reductions in demand for their services are leading to a surplus of
supply. The Company believes that having the wide range of service companies
within such close proximity creates an opportunity for ZNG and KNG to choose the
best combination of price and quality while signing the service contract, due to
the fact that service companies may compete with each other for providing
exploration, drilling and other services to ZNG and/or KNG.





Additionally,
the Company believes ZNG's geographic location presents a significant
competitive advantage that should provide for cost reductions in the development
of its fields and the necessary support infrastructure. The specific factors
contributing to this competitive advantage include:





-
            The
      relatively flat topography which is dry and bog free;-
            Non
      permafrost lands which reduce drilling costs;-
            Significantly
      short distances to major pipelines which reduce the time and cost of
      installing the collector infrastructure from the wells to the main
      pipelines; and-
            Proximity
      to main railroads and highways which allow for greater and easier access
      to the producing site as well as for initial delivery of
      product.





We
believe that KNG’s license areas, and those which KNG has applied for, have the
following advantages:





-
            the
      licenses are within existing oil deposits;-
            the
      licenses are close to a previously developed river transportation system
      on the Ob river and the North Sosva river, close to the river port of
      Igrim, through which KNG will be able to deliver equipment for the
      wells;-
            the
      licensed blocks for which KNG applied are close to other developed
      deposits; and-
            the
      blocks are close to major oil and gas
pipelines.





Another
type of competition, which ZNG and KNG expect to face is competition in the
process of acquisition of new licenses. The Company expects that competitive
pressures will further increase if hydrocarbon reservoirs are found in the
Kurgan province and/or Khanty-Mansiysk district of Western Siberia, Russia.
However, the Company believes that by the time new parcels become available for
distribution in this region, the Company will have an advantage over companies
with less experience in the region. The Company believes this will be due to its
acquired experience and through the expertise of its employees, of which there
can be no assurance. Many of the Company’s directors and officers have many
years of experience in the oil and gas industry, specifically in the
West-Siberian Basin. Additionally, the Company feels that it will have a
competitive advantage because many of its Directors and employees reside in the
West-Siberian Basin and are dedicated to developing the local
infrastructure.


-12-


Dependence
on One or A Few Major Customers





The
nature of the oil industry is not based on individual customers. Crude and
refined products are sold to local and international brokers as well as to
refineries.





Patents,
Trademarks and Licenses





KNG
currently holds two five-year oil and gas exploration licenses, awarded in
October 2007. KNG has also applied for 8 other licenses in Western Siberia,
Russia, with no date currently planned for the remaining auctions as
of the date of this filing.





Need
For Government Approval





Federal
and local government approval will not be required for conversion of exploration
licenses to production licenses and for extension of licenses beyond their
initial term. The Company has already received approval for its exploration
licenses, however, additional approval is required if the Company is to deliver
its crude or refined products on the national pipeline system. These approvals
can only be guaranteed once the Company has proved reserves. Alternatively, the
Company has also developed plans to deliver crude and product by truck and via
rail transport for the early years if there are any delays in gaining pipeline
approval, and the Company finds hydrocarbon reserves, of which there can be no
assurance.





Additionally,
under new federal laws the Company does not require the approval of state and/or
federal agencies for conversion of the Company's exploration licenses to
production licenses and extension of production licenses beyond their initial
term as they automatically convert to 25 year production licenses upon the
discovery of oil and gas, of which the Company provides no
assurance.




Costs and Effects of Compliance with
Environmental Laws





According
to the laws and regulations of the Russian Federation, organizations are
permitted to carry out seismic and other development activities on licensed
fields, provided the companies conform to ecological standards. Accordingly, ZNG
and KNG have encountered two costs associated with environmental law compliance:
costs associated with obtaining licenses and costs associated with obtaining
permission from the Russian Ministry of Natural Resources (the "Ministry").
ZNG’s costs have totaled approximately $186,900, which includes $2,000 relating
to the ecological review by the Ministry and $184,900 in legal costs and fees to
obtain the Company's licenses. ZNG has also previously successfully passed a
review by the Ministry and KNG will need to pass an ecological review at the
drilling stage of activities, which has not yet started.





The
Company will face additional costs to comply with environmental laws, which may
be significant. In addition, the Ministry imposes certain environmental
obligations on the Company, such as clean-up procedures.





ITEM 1A. RISK
FACTORS





Our
securities are highly speculative and should only be purchased by persons who
can afford to lose their entire investment in our Company. If any of the
following risks actually occur, our business and financial results could be
negatively affected to a significant extent. The Company's business is subject
to many risk factors, including the following:





RISK OF CONTINUING OUR BUSINESS PLAN
WITHOUT ADDITIONAL FINANCING.





We depend
to a great degree on the ability to attract external financing in order to
conduct future exploratory and development activities. The Company believes it
can satisfy its cash requirements during the next twelve months, estimated at
approximately $300,000, through funding provided by existing stockholders. As of
December 31, 2008, the total funding provided to ZNG, Ltd. and ZNG by Baltic was
equal to $23.5 million plus accrued interest of approximately $5 million, which
has been spent on various purposes, including seismic and gas seismotomography
surveys, drilling of two exploratory wells, and paying consultants for services
performed in connection with surveys performed on the licensed area. The Joint
Venture is responsible for the funding of the operations of ZNG.
However, if the Joint Venture is unable to raise the additional funds
required for the planned activities of ZNG or attract interest from external
parties and we are unable to raise financing for additional activities, separate
from the Joint Venture, our Company may be forced to abandon its current
business plan.


-13-


The
Company’s partner in KNG, Neftebitum, is responsible for financing the research
work of KNG. Neftebitum is currently attempting to raise external funds;
however, no significant amounts have been raised to date. If you invest in our
Company and we are unable to raise the required funds, your investment could
become worthless.





RISK
OF FUNDING PARTNER NOT MOVING FORWARD WITH JOINT VENTURE





Our
revenues have been generated from a monthly management fee received from ZNG,
which management fees have not been received since October 2007, in connection
with the “transition period” of Kurgan activities.  In the event that
our funding partner does not move forward with the joint venture and/or
continues to not pay us management fees, this will hurt our financial condition
and the Company may be forced to abandon or curtail its business plan which
could cause the value of the Company’s common stock to decline in value or
become worthless.




WE WILL NEED SUBSTANTIAL FINANCING
AND SUBSTANTIAL TIME BEFORE WE ANTICIPATE GENERATING
REVENUES THROUGH OUR OWNERSHIP OF ZNG, LTD., IF ANY.





The
Company does not expect to generate any revenues through the operations of
ZNG.   Therefore, investors should keep in mind that even if ZNG
is able to raise the substantial amounts of additional financing it requires for
its operations, it could still be years before ZNG generates any revenue, if
ever. Even if generated, such revenues will likely not be great enough to
sustain ZNG. If no revenues are generated and hydrocarbon reserves are not
located, we may be forced to abandon or curtail our current business plan. If
ZNG, which is 100% owned by the Company’s 50/50 joint venture ownership of ZNG,
Ltd., were forced to abandon its business plan, the Company could be forced to
abandon or curtail its business plan as well, which could cause the value of the
Company's common stock to substantially decline or become
worthless.





KNG
WILL NEED SUBSTANTIAL FINANCING AND SUBSTANTIAL TIME BEFORE WE ANTICIPATE
GENERATING REVENUES THROUGH KNG, IF ANY.





The
Company anticipates the need for approximately $15,000,000 prior to KNG's
expected generation of any revenues. In connection with the Agreement of
Purchase and Sale, as described in more detail above, the Company sold a 56%
interest in KNG to Neftebitum and various individuals in September
2008.  Pursuant to this agreement and the related Operating Agreement,
Neftebitum is responsible for providing financing for the operations of KNG.
Currently, the Company is not aware of Neftebitum raising any of this financing
and the Company can make no assurances that this financing will ever be raised.
The Company also does not expect to generate any revenues through the operations
of KNG, until such financing can be raised, of which there can be no assurance.
Therefore, investors should keep in mind that even if Neftebitum is able to
raise the substantial amounts of additional financing that KNG requires for its
operations, it could still be years before KNG generates any revenue, if ever.
If Neftebitum does not raise the $15,000,000 which the Company anticipates KNG
needs to generate revenues, which, even if generated, will likely not be great
enough to sustain KNG if no revenues are generated and hydrocarbon reserves are
not discovered, KNG may be forced to abandon its business plan, and the Company
could be forced to abandon or curtail its business plan as well, which could
cause the value of the Company's common stock to substantially decline or become
worthless.


-14-


OUR AUDITORS HAVE EXPRESSED
SUBSTANTIAL DOUBT AS TO WHETHER OUR COMPANY CAN CONTINUE AS A GOING
CONCERN.





Our
Company is in its early development stage, as planned principal activities have
not begun. We have generated only minimal revenues since inception and have
incurred substantial losses including a net loss of $5,863,560 for the year
ended December 31, 2008, and had a total accumulated deficit of $14,856,389 as
of December 31, 2008. These factors among others indicate that the Company may
be unable to continue as a going concern, particularly in the event that it
cannot generate sufficient cash flow to conduct its operations and/or obtain
additional sources of capital and financing.





WE LACK AN OPERATING HISTORY WHICH
YOU CAN USE TO EVALUATE US, MAKING ANY INVESTMENT IN OUR
COMPANY RISKY.





Our
Company lacks a long standing operating history which investors can use to
evaluate our Company's previous earnings. Therefore, an investment in our
Company is risky because we have no business history and it is hard to predict
what the outcome of our business operations will be in the future.





WE MAY CONTINUE TO BE UNPROFITABLE
AND MAY NOT GENERATE PROFITS TO CONTINUE OUR BUSINESS
PLAN.





As a
development stage company, we have had limited revenues and no profits to date
and our net cumulative deficit attributable to our development stage as of
December 31, 2008, was $14,406,604, and our total cumulative deficit was
$14,856,389 which included $449,785 of pre-development stage deficit. We had
$824,744 in accrued and unpaid salaries and a working capital deficit of
$1,743,957 as of December 31, 2008. The Company is currently being funded by
existing shareholders, but there can be no assurance this amount will be
sufficient to continue our planned operations or that we will have enough money
to repay our outstanding debts. There is a risk that ZNG will never begin
production and our Company will never generate any revenues through our
ownership of 50% of ZNG, Ltd. If throughout ZNG's and KNG’s oil exploration no
viable wells are found, and consequently, we generate only minimal revenues
through ZNG, Ltd. (and/or through KNG), we will likely be forced to curtail or
abandon our business plan. If this happens, you could lose your investment in
our Company. If we are unable to generate profits, we will be forced to rely on
external financing, of which there is no guarantee, to continue with our
business plan.





LICENSES
TO A TOTAL OF FOUR OF ZNG’S LICENSED BLOCKS EXPIRED IN MARCH 2008 AND THREE
ADDITIONAL LICENSES HAVE SINCE EXPIRED, AND THERE IS A RISK THAT THE RIGHTS TO
SUCH LICENSED BLOCKS MAY NOT BE RENEWED.




In or
around March 2008, ZNG’s rights to four licensed blocks acquired in 2003, the
Privolny, Mokrousovsky, West-Suersky and Orlovo-Pashkovsky blocks, expired and
since that time, additional rights to three license blocks have expired. Between
2003 and 2007, ZNG carried out extensive seismic and gas seismotomographic
studies on the four licensed blocks, and drilled 2 exploratory wells on the
Privolny and Mokrousovsky blocks. Based on the interpretation of seismic and
seismotomographic surveys and analysis of samples from the wells, ZNG prepared a
comprehensive analysis of geological resources of the Kurgan region. Both the
Privolny and Mokrousovsky studies confirmed the presence of hydrocarbons;
however, a substantial amount of further exploration studies and work is
required before a conclusion on the future potential of the blocks can be drawn.
The licenses to four of the blocks expired in March 2008 and an additional three
licenses have expired since then, and although ZNG kept the preferential right
to re-apply for the licenses to continue exploration works on these blocks in
the event it decides to continue exploration, there can be no assurance that
such blocks will be able to be re-licensed by ZNG and/or that they will not be
re-auctioned and awarded to alternative parties. If ZNG were to decide to
re-license the blocks and they had already been auctioned off to other parties
and/or were not eligible to be re-licensed, all of ZNG’s exploration work and
studies performed on the licensed areas may become worthless and any exploration
expenditures made by ZNG for exploration wells and other expenditures will
likely not be able to be recouped by ZNG. Additionally, if ZNG were unable to
re-license the blocks, the value of the Company’s securities could decline in
value and/or become worthless.


-15-


WE HAVE A POOR FINANCIAL POSITION AND
IF WE DO NOT GENERATE REVENUES, WE MAY BE FORCED TO ABANDON
OUR BUSINESS PLAN.





Our
Company currently has a poor financial position. We have generated only minimal
revenues to date, and we have not discovered any hydrocarbon reserves or begun
production on any wells. There is a risk that we will not find enough, or even
any, viable wells which we require to generate enough profits for your
investment in our Company to appreciate. If we never generate any revenues, our
Company may be forced to curtail or abandon its business plan and your shares
may become worthless.





OUR BUSINESS IS SPECULATIVE AND RISKY
AND IF ZNG OR KNG DOES NOT FIND HYDROCARBON RESERVES, WE MAY BE
FORCED TO CURTAIL OUR BUSINESS PLAN.





There is
a risk that ZNG and KNG will not find any hydrocarbon reserves and the cost of
exploration will become too high for ZNG, Ltd. to continue ZNG's business plan
and/or us to continue KNG’s business plan. As our only current operations are
through our 50% ownership of ZNG, Ltd. which in turn owns 100% of ZNG, and
through our 44% ownership of KNG, if ZNG, ZNG, Ltd. or KNG were to cease
operations, your investment in our Company could become devalued or could become
worthless.





OUR INDUSTRY IS COMPETITIVE AND AS
SUCH, COMPETITIVE PRESSURES COULD PREVENT US FROM OBTAINING
PROFITS.





The main
factor determining success in the oil exploration and extraction industry is
finding viable wells. If our Company, through ZNG, Ltd., KNG or other joint
ventures we may enter into in the future, are unable to find producing wells and
our competition is, it is likely that our Company will be driven out of
business. Additionally, our industry is subject to significant capital
requirements and as such, larger companies may have an advantage should they
compete with us for exploration licenses, because they may have resources
substantially greater than ours. Investors should take into account the above
factors and understand that if we are unable to raise additional capital or
generate the profits, the Company may be forced to liquidate its assets and an
investment in our Company could become worthless.





OUR
GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.





The
Company's growth is expected to place a significant strain on the Company's
managerial, operational and financial resources. Furthermore, as the Company
receives contracts, the Company will be required to manage multiple
relationships with various customers and other third parties. These requirements
will be exacerbated in the event of further growth of the Company or in the
number of its contracts. There can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's operations or
that the Company will be able to achieve the rapid execution necessary to
succeed and implement its business plan. The Company's future operating results
will also depend on its ability to add additional personnel commensurate with
the growth of its business. If the Company is unable to manage growth
effectively, the Company's business, results of operations and financial
condition will be adversely affected.





WE
RELY ON KEY PERSONNEL AND IF THEY LEAVE OUR COMPANY OUR BUSINESS PLAN COULD BE
ADVERSELY AFFECTED.





We rely
on the Company's Chief Executive Officer and Chief Financial Officer, David
Zaikin and Elena Pochapski, for the success of our Company, who are performing
their duties, but did not finalize new employment agreements after expiration of
their previous agreements on December 31, 2008, and are therefore not bound to
the Company by employment agreements. Their experience and input create the
foundation for our business and they are responsible for the directorship and
control over the Company's development activities. The Company does not hold
"key man" insurance on either member of management. Moving forward, should they
be lost for any reason, the Company will incur costs associated with recruiting
replacement personnel and any potential delays in operations. If we are unable
to replace Mr. Zaikin and/or Ms. Pochapski, or if Mr. Zaikin or Ms. Pochapski
are unable to spend a sufficient amount of time on Company matters, the Company
may be forced to scale back or curtail its business plan. As a result of this,
any securities you hold in our Company could become devalued.


-16-


ZNG’S
OR KNG’S PROJECTIONS, ESTIMATES AND STATISTICAL ANALYSIS MAY BE INACCURATE OR
SUBSTANTIALLY WRONG, WHICH MAY PREVENT ZNG AND/OR KNG FROM EXECUTING THEIR
BUSINESS PLANS.





Projections
on future revenues as well as costs and required capital expenditures are based
on estimates. Business statistical analysis is used in projection of drilling
success ratios, average production costs, world oil price fluctuations and their
correspondence to Russian domestic market. If ZNG’s or KNG’s projections or
estimates are wrong or our statistical analysis faulty, ZNG's or KNG’s revenues
may be adversely affected which could prevent ZNG and/or KNG from executing
their business strategy. As an investor, if this happens your securities in our
Company could be adversely affected and you could lose your investment in our
Company due to the fact that our only current oil and gas operations are through
our 50% ownership of ZNG, Ltd., which in turn owns 100% of ZNG and through our
44% ownership of KNG, which has been awarded two exploration oil and
gas licenses to date.





THERE
IS UNCERTAINTY AS TO OUR ABILITY TO ENFORCE CIVIL LIABILITIES BOTH IN AND
OUTSIDE OF THE UNITED STATES DUE TO THE FACT THAT OUR OFFICERS, DIRECTORS AND
ASSETS ARE NOT LOCATED IN THE UNITED STATES.





Our
officers and Directors, our properties and licenses, and the majority of our
assets are located in countries other than the United States, including Canada
and Russia. As a result, it may be difficult for shareholders to effect service
of process within the United States on our officer and Director. In addition,
investors may have difficulty enforcing judgments based upon the civil liability
provisions of the securities laws of the United States or any state thereof,
both in and outside of the United States.





WE
FACE RISKS ASSOCIATED WITH THE FACT THAT THE MAJORITY OF OUR OPERATIONS THROUGH
OUR HOLDINGS ARE CONDUCTED IN RUSSIA, AND THE LICENSES OWNED THROUGH OUR
HOLDINGS ARE IN RUSSIA.





Zauralneftegaz,
Ltd. which we own 50% of through our Joint Venture and KNG, which we own 44% of,
hold certain licenses and rights to reapply for licenses to certain oil and gas
properties in the Kurgan Region of Russia.  As a result, we are
subject to various risks associated with doing business in Russia relating to
Russia's economic and political environment. As is typical of an emerging
market, Russia does not possess a well-developed business, legal and regulatory
infrastructure that would generally exist in a more mature free market economy
and, in recent years, Russia has undergone substantial political, economic and
social change. Furthermore, in recent years the Russian government has
unilaterally annexed certain oil and gas properties and companies for the
government, and there can be no assurance that if commercially exploitable oil
and gas reserves are found on our properties, that such properties will not be
annexed or otherwise claimed by the Russian government.  Our failure
to manage the risks associated with doing business in Russia could have a
material adverse effect upon our results of operations.





IF
WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.





Under
Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of
periodic reports with the SEC, any OTCBB issuer who fails to file a periodic
report (Form 10-Q's or 10-K's) by the due date of such report (not withstanding
any extension granted to the issuer by the filing of a Form 12b-25), three (3)
times during any twenty-four (24) month period are de-listed from the OTCBB.
Such removed issuer would not be re-eligible to be listed on the OTCBB for a
period of one-year, during which time any subsequent late filing would reset the
one-year period of de-listing. Therefore, if we are late in filing a periodic
report three times in any twenty-four (24) month period and are de-listed from
the OTCBB, our securities may become worthless and we may be forced to curtail
or abandon our business plan.


-17-


WE
INCUR SIGNIFICANT COSTS AS A RESULT OF OPERATING AS A FULLY REPORTING COMPANY IN
CONNECTION WITH SECTION 404 OF THE SARBANES OXLEY ACT, AND OUR MANAGEMENT IS
REQUIRED TO DEVOTE SUBSTANTIAL TIME TO NEW COMPLIANCE INITIATIVES.





We
anticipate incurring significant legal, accounting and other expenses in
connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, for fiscal year 2009, Section 404 will require us to obtain a report
from our independent registered public accounting firm attesting to the
assessment made by management.  Our testing, or the subsequent testing
by our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we may need to hire
additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.




AS
THERE IS CURRENTLY ONLY A LIMITED MARKET FOR OUR COMMON STOCK, THE MARKET FOR
OUR COMMON STOCK MAY CONTINUE TO BE ILLIQUID, SPORADIC AND
VOLATILE.





There is
currently only a limited market for our common stock, and as such, we anticipate
that such market will be illiquid, sporadic and subject to wide fluctuations in
response to several factors moving forward, including, but not limited
to:





(1)
            actual
      or anticipated variations in our results of operations;(2)
            our
      ability or inability to generate new revenues;(3)
            the
      number of shares in our public
float;





(4)
            increased
      competition;(5)
            the
      political atmosphere in Russia; and(6)
            conditions
      and trends in the oil, gas, and energy industries in
    general.





Furthermore,
because our common stock is traded on the Over-The-Counter Bulletin Board, our
stock price may be impacted by factors that are unrelated or disproportionate to
our operating performance. These market fluctuations, as well as general
economic, political and market conditions, such as recessions, interest rates or
international currency fluctuations may adversely affect the market price of our
common stock. Additionally, at present, we have a limited number of shares in
our public float, and as a result, there could be extreme fluctuations in the
price of our common stock. Further, due to the limited volume of our shares
which trade and our limited public float, we believe that our stock prices (bid,
ask and closing prices) are entirely arbitrary, are not related to the actual
value of the Company, and do not reflect the actual value of our common stock
(and in fact reflect a value that is much higher than the actual value of our
common stock). Shareholders and potential investors in our common stock should
exercise caution before making an investment in the Company, and should not rely
on the publicly quoted or traded stock prices in determining our common stock
value, but should instead determine value of our common stock based on the
information contained in the Company's public reports, industry information, and
those business valuation methods commonly used to value private
companies.


-18-


INVESTORS
FACE A RISK THAT THE COMPANY WILL NOT BE SUBJECT TO THE REPORTING REQUIREMENTS
OR WILL ENTER INTO A TRANSACTION THAT RESULTS IN NEW MANAGEMENT AND A NEW
OPERATING BUSINESS OF THE COMPANY





Management
of the Company is analyzing steps to no longer be subject to the reporting
requirements of the Securities and Exchange Commission (the “SEC”) and/or
considering entering into a reverse merger transaction.  In the event
that the Company is no longer subject to the reporting requirements of the SEC,
the Company’s stock would likely trade on the Pinksheets and would likely have
less liquidity on such market and may trade at a lower share price than it
currently trades.  In the event that the Company enters into a reverse
merger transaction, new management would run the Company and would likely
operate a new business which may result in a loss on your
investment.





INVESTORS
MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK DUE TO
FEDERAL REGULATIONS OF PENNY STOCKS.





Our
common stock will be subject to the requirements of Rule 15(g)9, promulgated
under the Securities Exchange Act as long as the price of our common stock is
below $5.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
additional disclosure in connection with any trades involving a stock defined as
a penny stock.





Generally,
the Commission defines a penny stock as any equity security not traded on an
exchange or quoted on NASDAQ that has a market price of less than $5.00 per
share. The required penny stock disclosures include the delivery, prior to any
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated with it. Such requirements could severely limit the market
liquidity of the securities and the ability of purchasers to sell their
securities in the secondary market.





In
addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in the common stock may have their
ability to sell their shares of the common stock impaired.





ITEM 2.
PROPERTIES





The
Company's United States office is located at 275 Madison Avenue, 6th Floor, New
York, New York 10016, USA. The lease is at a monthly rate of $250 and is on a
month to month basis. This space is leased from Office Escape, an operator of
business centers in New York and other United States cities. The Company is not
the sole occupant of the space and consequently the cost of the rental is shared
with other occupants. The Company does not use the office for any purposes
falling outside of its business needs.


-19-


KNG
currently rents office space in Khanty-Mansiysk City, Russia, under a one year
lease expiring in December 2009, at a monthly rental cost of approximately $650
per month.




ITEM 3. LEGAL
PROCEEDINGS





In
January 2007, we learned that certain of our former officers, Directors and
shareholders, had attempted to transfer shares of our common stock, which those
individuals had agreed to cancel in connection with the purchase of a majority
of the Company’s outstanding shares from those individuals by our current
officers, Directors and majority shareholders in April 2003. In February 2007,
we filed for a Temporary Restraining Order and Motion for Preliminary Injunction
against those individuals in the District Court of Clark County,
Nevada.





On
February 20, 2007, our Temporary Restraining Order and Motion for Preliminary
Injunction was heard by the District Court of Clark County, Nevada, and we were
granted an indefinite injunction without a hearing by the court. As such, those
individuals who previously attempted to transfer and sell the shares which they
held will be prevented from transferring or selling such shares until they can
show good cause with the court why such indefinite injunction should be
lifted.





From time
to time, we may become party to other litigation or other legal proceedings that
we consider to be a part of the ordinary course of our business. We are not
currently involved in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations, other than the proceeding described above. We may
become involved in material legal proceedings in the future.





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





The
Company had no matters submitted to a vote of security holders during the fiscal
quarter ended December 31, 2008.


-20-


PART
II





ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES





On March
22, 2005, the Company's common stock began trading on the OTC Bulletin Board
under the symbol "SIBE." Effective May 2, 2005, in connection with the Company's
1:2 reverse stock split, the Company's common stock began trading under the
symbol "SIBN." We had 2,600,781 shares of common stock subject to outstanding
options and warrants to purchase, or securities convertible into, the Company's
common stock as of December 31, 2008. We have no outstanding shares of preferred
stock. As of March 31, 2009, there were 18,645,585 shares of common stock
outstanding, held by approximately 125 shareholders of record.





The
following table sets forth the high and low closing prices for the Company's
common stock for the periods indicated as reported by the NASDAQ OTC-Bulletin
Board. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.





Closing
      PricesQuarter
      Ended
              
              High
              
              LowMarch
      31, 2009
              
              $0.07
              
              $0.03December
      31, 2008
              
              $0.19
              
              $0.04September
      30, 2008
              
              $0.39
              
              $0.10June
      30, 2008
              
              $0.50
              
              $0.25March
      31, 2008
              
              $0.61
              
              $0.25December
      31, 2007
              
              $0.84
              
              $0.36September
      30, 2007
              
              $1.65
              
              $0.65June
      30, 2007
              
              $2.00
              
              $1.26March
      31, 2007
              
              $1.90
              
              $1.25





RECENT
SALES OF UNREGISTERED SECURITIES





In June
2007, we issued 70,000 shares of restricted common stock to our President, Helen
Teplitskaia, of which 50,000 shares were a sign-on bonus in connection with her
agreeing to be an officer of the Company in May 2007, and 20,000 shares were
part of her compensation package with the Company, whereby she is to be paid
10,000 shares per month for her service to the Company, which shares were issued
for services rendered in May and June 2007. During the period from July to
December 2007, 50,000 shares were issued for services rendered in July through
November 2007.  In June 2008, we issued an aggregate of 70,000
restricted shares of common stock to Ms. Teplitskaia in consideration for
services rendered during the months of December 2007, and January through June
2008.  Ms. Teplitskaia was subsequently issued the shares she was due
for the months ended July 2008 through December 2008 in November
2008.  The Company claims an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended (the “Act”) since the
foregoing issuances did not involve a public offering, the recipient took the
shares for investment and not resale and the Company took appropriate measures
to restrict transfer. No underwriters or agents were involved in the foregoing
issuance and no underwriting discounts or commissions were paid by the
Company.


-21-


In
November 2008, the Company agreed to issue 107,520 shares of restricted common
stock to a related party of Amir Rosenfeld, an individual, which shares were
agreed to be issued to Mr. Rosenfeld in lieu of repayment of a $10,753 debt owed
by the Company to Mr. Rosenfeld.  The debt was in connection with a
$10,000 loan Mr. Rosenfeld provided to the Company in November 2007, which loan
had accrued $753 of interest as of September 30, 2008.   The Company
claims an exemption from registration afforded by Section 4(2) of the Act since
the foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and the Company took appropriate measures
to restrict transfer. No underwriters or agents were involved in the foregoing
issuance and no underwriting discounts or commissions were paid by the
Company.





ITEM 6. SELECTED FINANCIAL
DATA





Not
required.





ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





THIS
REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION
AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.





PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS





In
coordination with Neftebitum, the Company plans to focus on the exploration
activities of KNG in the Khanty-Mansiysk region of Russia, to satisfy the
requirements of the licensing agreements and to conduct preparatory work for the
seismic surveys on these areas, funding permitting (which funding is the
responsibility of Neftebitum), of which there can be no assurance.





The
operations of ZNG in the Kurgan region of Russia, conducted through the Joint
Venture, are currently in the “transition period” awaiting the decision on the
feasibility of further exploration and potential steps moving forward for
further exploration in the Kurgan region.




Moving
forward, we anticipate targeting other potential long term investments in Russia
and countries in the former Soviet Union, separate from our involvement in the
Joint Venture and KNG, funding permitting, of which there can be no assurance.
Additionally, the Company currently plans to change its business focus from
targeting early stage exploration projects to acquiring assets in producing
fields, funding permitting, of which there can be no assurance, in order to
decrease its exploration risks.





Currently
we are evaluating different business opportunities in the oil and gas industry,
including advanced development stage and revenue-producing enterprises and are
in preliminary discussions with a potential partner which owns several oil and
gas producing properties in Western Siberia; however, as no definitive agreement
has been reached, we can provide no assurances that the discussions will result
in any definitive understandings or partnerships, and it is likely that any
agreement would be conditioned on us raising substantial additional funding,
which we can provide no assurances will be available on favorable terms, if at
all.


-22-


Historically,
we have obtained cash financing from organizing stockholders in the form of
loans and advances. Additionally, during the fourth quarter of 2005, we
restructured much of our debt through the issuance of shares of our common
stock to our creditors and obtained waiver letters, postponing certain of
our liabilities until such time as we have generated sufficient profits to pay
such debts. These waiver letters related to the payment of certain trade debts
as well as shareholder loans and accrued salaries.




In
connection with the Joint Venture, the Company previously received
monthly management fees, which varied from $25,000 to $85,000 per month.
Due to the “transition period” of the Joint Venture’s exploration
activities, no management fees have been paid since October 2007, and there
is no assurance that the Joint Venture will pay any management fees or that fees
received will be adequate to pay its upcoming expenses and liabilities in the
future.  If the Company does not receive any management fees moving
forward, the Company plans that its organizing stockholders will continue to
provide financing for the Company, of which there can be no
assurance.





In the
past, we have obtained cash financing from organizing stockholders in the form
of loans and advances, as a result, amounts totaling $447,663 and $370,500 were
payable to the stockholders as of December 31, 2008 and December 31, 2007,
respectively. However, there can be no certainty as to the availability of
continued financing in the future. Failure to obtain sufficient financing may
require us to reduce our operating activities. A failure to continue as a going
concern would then require stated amounts of assets and liabilities to be
reflected on a liquidation basis which could differ from the going concern
basis.





COMPARISON
OF OPERATING RESULTS




RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008, COMPARED TO THE YEAR ENDED
DECEMBER 31, 2007





We had no
management fees from joint venture for the year ended December 31, 2008,
compared to management fees from joint venture of $700,000 for the year ended
December 31, 2007, a decrease of $700,000 from the prior
period.  During year ended December 31, 2007, the Company received
monthly management fees of $55,000 during the three months ended March 31, 2007,
$65,000 during the three months ended June 30, 2007, and $85,000 during the
three months ended September 30, 2007 and for the month ended October 30, 2007,
pursuant to our Joint Venture.  However, the Company has not received
any monthly management fees since October 2007, as a result of the restructuring
of the Company’s Kurgan operations.





We have
not generated any revenues to date through the sale of oil and/or
gas.





We had
total expenses of $740,043 for the year ended December 31, 2008, compared to
total expenses of $2,760,487 for the year ended December 31, 2007, a decrease of
$2,020,444 or 73.2% from the prior period.





The main
reason for the decrease in expenses for the year ended December 31, 2008,
compared to the year ended December 31, 2007, was a decrease of $486,747 or
58.4% in salaries to $346,710 for the year ended December 31, 2008, compared to
salaries of $833,457 for the year ended December 31, 2007, which decrease is
largely attributable to the fact that the Company issued a significant amount of
shares to its officers and Directors during the year ended December 31, 2007,
which issuances were not represented in such significant amounts, and which
shares had a lower fair market value due to decreases in the trading prices of
the Company’s common stock, for the year ended December 31, 2008, compared to
the year ended December 31, 2007; a decrease of $913,610 or 74.3% in
professional and consulting fees, to $315,983 for the year ended December 31,
2008, compared to professional and consulting fees of $1,229,593 for the year
ended December 31, 2007, which decrease is largely attributable to the fact that
the Company used less third party consultants and advisors and used less stock
based compensation during the year ended December 31, 2008, compared to the same
period of 2007; a decrease of $32,781 or 69.9% in rent and occupancy to $14,101
for the year ended December 31, 2008, compared to rent and occupancy of $46,882
for the year ended December 31, 2007, mainly due to the fact that the Company
discontinued its office space lease in Toronto (Canada) and Moscow (Russia); and
a decrease of $588,747 or 91.6% in marketing and other expenses, to $54,225 for
the year ended December 31, 2008, compared to marketing and other expenses of
$642,972 for the year ended December 31, 2007, mainly attributable to the
discontinuance of certain marketing contracts and less travel performed by
management for marketing purposes for the year ended December 31, 2008, compared
to the year ended December 31, 2007.


-23-


We had
loss from sale of investment of $669,570 for the year ended December 31, 2008,
compared to no loss from sale of investment for the year ended December 31,
2007, an increase of $669,570 from the prior period. The $669,570 of loss from
sale of investment can be attributed to our sale of a controlling interest in
KNG, as described above.





We had
loss on deemed disposition of oil and gas properties, unproved of $3,928,000 for
the year ended December 31, 2008, which was not present during the year ended
December 31, 2007.  The $3,928,000 loss on deemed disposition of oil
and gas properties, unproved, for the year ended December 31, 2008, can be
attributed to the fact that the Company no longer has any plans to utilize the
geological data, valued at $3,928,000, other than through KNG’s activities, and
no consideration was received for the use of such geological data in connection
with the sale of the controlling interest in KNG, although the Company has
committed to providing such information to Neftebitum.





We had
impairment charge on investment of $525,947 for the year ended December 31,
2008, which was not present during the year ended December 31,
2007.  Since 56% of KNG was sold for a nominal amount, a non-cash
impairment charge of $525,947 was recorded to reduce the carrying value of the
44% investment in KNG to zero. The sale of KNG is described in greater detail
above..





We had
net loss of $5,863,560 for the year ended December 31, 2008, compared to net
loss of $2,060,487 for the year ended December 31, 2007, an increase of
$3,803,073 or 184.6% from the prior period.  The increase in net loss
was mainly attributable to the $3,928,000 increase in loss on deemed disposition
of oil and gas properties, unproved, the $669,570 increase in loss from sale of
investment, the $525,947 increase in impairment charge on investment and the
$700,000 decrease in management fees received, offset by the $2,020,444 or 73.2%
decrease in total expenses for the year ended December 31, 2008, compared to the
year ended December 31, 2007.





LIQUIDITY
AND CAPITAL RESOURCES





We had
current assets of $1,260 as of December 31, 2008, which included cash of $739;
and prepaid expenses and other current assets of $521.





We had
total assets of $32,543 as of December 31, 2008, which included current assets
of $1,260 and non-current assets of $31,283. Non-current assets included
a $29,500 loan receivable from affiliate in connection with amounts
previously loaned to KNG, which, because of the sale of majority control of KNG,
it is no longer eliminated in consolidation and has been presented
separately in our financial statements, and $1,783 of property and
equipment, net.  Total assets of $32,543 as of December 31, 2008, were
$5,224,933 or 99.4% less than total assets of $5,257,476 as of December 31,
2007.  Total assets decreased mainly due to a $5,248,000 decrease in
oil and gas properties, unproved, due to our sale of 56% of KNG as described
above.




We had
total liabilities of $1,745,217 as of December 31, 2008, which were solely
current liabilities and which included $447,663 of accounts payable to related
party stockholders in connection with those shareholders paying certain of our
expenses from the period between January 1, 2003 to December 31, 2008; $62,771
of accounts payable to Baltic in connection with a $29,000 loan advanced to the
Company from Baltic and certain other expenses owed to Baltic; $410,039 of
accounts payable to others for advisory and professional services rendered; and
$824,744 of accrued payroll, which included $472,500 payable to our Chief
Executive Officer, David Zaikin, of which $360,000 was accrued in 2007 and 2008,
and $112,500 which was owed to Mr. Zaikin for services rendered prior to
September 2005, at which time he agreed to stop accruing salary until January
2007, when he provided us notice of his intent to once again begin accruing
salary until such time as we have sufficient funds to pay such accrued salary,
$156,019 payable to our Chief Financial Officer, Elena Pochapski, and
$69,242 of accrued salary payable to our former Chief Executive Officer, Shakeel
Adam.  Total liabilities increased $552,802 or 46.4% to $1,745,217 as
of December 31, 2008, from $1,192,415 as of December 31, 2007, which increase
was mainly due to increased accounts payable and additional accrued payroll from
the period from December 31, 2007 to December 31, 2008.


-24-


We had
negative working capital of $1,743,957 and a total pre-development and
development stage accumulated deficit of $14,856,389 as of December 31,
2008.





Because
our cumulative losses associated with the operations of ZNG exceeded our
investment as of the date of the Joint Venture, ZNG, Ltd. is carried on our
balance sheet at $-0- as of December 31, 2008. Our investment in ZNG,
Ltd. will exceed $-0- at such time as ZNG, Ltd. has cumulative
earnings sufficient to repay all loans to Baltic as provided in the Joint
Venture, if ever.





As of
December 31, 2008, the Company owns a 44% interest in KNG. The Company’s
investment in KNG is recorded on the equity method of accounting
effective October 1, 2008. After careful consideration of the current financial
position of KNG, the Company applied an impairment charge to the value of the
investment in KNG which resulted in carrying it at zero value.




We had
$1,865 of net cash flows from operating activities for the year ended December
31, 2008, which is attributable to adjustments to reconcile $3,928,000 of loss
on deemed disposition of oil and gas properties, unproved, $794,192 of loss on
sale of investment, $525,947 impairment charge on investment, $563,555 of
increase in accounts payable and accrued expenses, $48,053 of common stock and
warrants granted for professional services and in connection with the
issuance of shares and options to employees for salaries, $3,764 of prepaid
expenses and other assets and $885 of depreciation and amortization, offset by
$5,863,560 of net loss.





For the
year ended December 31, 2008, we had net cash flows for investing activities of
$29,393, primarily due to loan to an affiliate in connection with amounts
previously loaned to KNG, which, because of the sale of majority control of KNG,
is required to be unconsolidated in our financial statements.





In
connection with the Joint Venture (described under "Joint Venture Agreement,"
above), the Company historically received management fees, which varied from
$25,000 to $85,000 per month. Due to the “transition period” of the Joint
Venture’s exploration activities, no management fees were paid during the
year ended December 31, 2008, and there is no assurance that the Joint Venture
will pay any management fees or that fees received will be adequate to pay our
upcoming expenses and liabilities in the future.  If the Company does
not receive any management fees moving forward, the Company anticipates that its
stockholders and management will continue to provide financing for the Company,
of which there can be no assurance.





In
connection with the activities of KNG, we are currently not receiving
compensation for the use of the Company’s geological data. According to the
Operating agreement with Neftebitum, such fees may be paid to us in future years
depending on the financial position of KNG, of which there can be no
assurance.





We are
taking steps in an attempt to raise equity capital and/or to borrow additional
funds. There can be no assurance that any new capital will be available to us or
that adequate funds for our operations, whether from our financial markets, or
other arrangements will be available when needed or on terms satisfactory to us,
if at all. We have no commitments from officers, directors or affiliates to
provide funding. Our failure to obtain adequate financing may require us to
delay, curtail or scale back some or all of our operations. Additionally, any
additional financing may involve dilution to our then-existing
shareholders.


-25-


Further,
we are currently reviewing our status as a U.S. reporting company, and our
management may decide it is more advantageous for us to go private, cease our
public reporting in the future, and/or trade our common stock on alternative
markets or exchanges in Europe in the future (or to dual list our stock on
multiple exchanges), which could cause any investment in the Company to become
illiquid or worthless if such transaction were to occur (see also “Risk Factors”
below”).





Critical
Accounting Policies





Use
of Estimates:





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.





Principles
of Consolidation:





The
accompanying consolidated financial statements include the accounts of the
Company and its then wholly-owned subsidiaries, ZNG (through October 14, 2005),
Siberian Energy Group (Canada) and KNG (December 31, 2006 through September 30,
2008).  All intercompany transactions and balances have been
eliminated.  After October 14, 2005, the Company’s investment in ZNG
is accounted for on the equity method of accounting.  After September
30, 2008, the Company’s investment in KNG is accounted for on the equity method
of accounting. Accordingly, the assets, liabilities and equity are no longer
presented on the Company’s balance sheet.





Foreign
Currency Translation:





The
Russian subsidiaries ZNG and KNG use the Ruble as their functional currency;
Siberian Energy Group (Canada) uses the Canadian dollar as its functional
currency.  The books and records of ZNG, KNG and Siberian Energy Group
(Canada) are kept in their functional currencies.  The Company
translates to U.S. dollars the assets and liabilities of ZNG, KNG, and Siberian
Energy Group (Canada) at the year-end exchange rates; income statement amounts
are converted at the average rates of exchange for the
year.  Translation gains and losses are included within other
comprehensive income (loss).





Oil
and Gas Properties:





The
Company follows the full cost method of accounting for oil and gas
properties.  Accordingly, all costs associated with acquisition,
exploration, and development of oil and gas reserves, including directly related
overhead costs, are capitalized.





All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, will be amortized on the unit-of production
method using estimates of proved reserves.  Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs.  When applicable, if the results of an assessment indicate
that the properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.





In
addition, the capitalized costs are subject to a “ceiling test,” which basically
limits such costs to the aggregate of the “estimated present value,” discounted
at a 10-percent interest rate of future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.





Sales of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.  Abandonments of properties are accounted for as adjustments
of capitalized costs with no loss recognized.


-26-


Property
and Equipment:





Property
and equipment is stated at cost, net of accumulated
depreciation.  Depreciation is provided using the straight-line
method.





Long-Lived
Assets:





Long
lived assets to be held and used or disposed of other than by sale are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.  When required, impairment
losses on assets to be held and used or disposed of other than by sale are
recognized based on the fair value of the asset.  Long-lived assets to
be disposed of by sale are reported at the lower of its carrying amount or fair
value less cost to sell.


-27-


ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA










REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM








The Board
of Directors and Stockholders


Siberian
Energy Group Inc.








We have
audited the accompanying consolidated balance sheets of Siberian Energy Group
Inc. (a development stage company) as of December 31, 2008 and 2007 and the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years then ended, and the cumulative period of Development Stage
Activity – January 1, 2003 through December 31, 2008.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Siberian Energy Group Inc.
as of December 31, 2008 and 2007 and the results of its operations and its cash
flows for the years then ended and the cumulative period of Development Stage
Activity – January 1, 2003 through December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying financial statements have been prepared assuming that Siberian
Energy Group Inc. will continue as a going concern.  As discussed in
Note 11 to the financial statements, Siberian Energy Group Inc. has not earned
significant revenue since inception of its current endeavor, and is considered
to be in the development stage which raises substantial doubt about its ability
to continue as a going concern.  Management’s plans relative to these
matters are also described in Note 11 and throughout the financial
statements.  The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.











Lumsden
& McCormick, LLP


Buffalo,
New York


March 31,
2009


F-1




SIBERIAN ENERGY
      GROUP INC. (A Development Stage Company)Consolidated
      Balance SheetsDecember
      31,
                        
                        
                        December
      31,2008
                        
                        
                        2007AssetsCurrent
      assets:Cash
                        
                        $
                        739
                        
                        
                        $
                        1,248Prepaid
      expenses and other
                        
                        
                        521
                        
                        
                        
                        4,2851,260
                        
                        
                        
                        5,533Investment
      in joint venture, at equity
                        
                        
                        -
                        
                        
                        
                        -Investment
      in KNG, at equity
                        
                        
                        -
                        
                        
                        
                        -Oil
      and gas properties, unproved
                        
                        
                        -
                        
                        
                        
                        5,248,000Loan
      receivable - affiliate
                        
                        
                        29,500
                        
                        
                        
                        -Property
      and equipment, net
                        
                        
                        1,783
                        
                        
                        
                        3,943$
                        32,543
                        
                        
                        $
                        5,257,476Liabilities
      and Stockholders' EquityCurrent
      liabilities:Demand
      loan from stockholder, interest at 9%
                        
                        $
                        -
                        
                        
                        $
                        10,000Accounts
      payable:Related party - stockholders
                        
                        
                        447,663
                        
                        
                        
                        370,500Related
      party - Baltic Petroleum, interest at 14%
                        
                        
                        62,771
                        
                        
                        
                        56,693Others
                        
                        
                        410,039
                        
                        
                        
                        213,854Accrued
      payroll
                        
                        
                        824,744
                        
                        
                        
                        541,3681,745,217
                        
                        
                        
                        1,192,415Stockholders'
      equity:Common
      stock - authorized 100,000,000 shares, $.001 par value,18,645,550
      and 18,383,030 issued and outstanding
                        
                        
                        18,646
                        
                        
                        
                        18,383Additional
      paid-in capital
                        
                        
                        13,112,299
                        
                        
                        
                        13,053,756Accumulated
      deficit:Pre-development
      stage
                        
                        
                        (449,785
                        )
                        
                        
                        (449,785
                        )Development
      stage
                        
                        
                        (14,406,604
                        )
                        
                        
                        (8,543,044
                        )Accumulated
      other comprehensive income (loss)
                        
                        
                        12,770
                        
                        
                        
                        (14,249
                        )(1,712,674
                        )
                        
                        
                        4,065,061$
                        32,543
                        
                        
                        $
                        5,257,476See
      accompanying notes.


F-2





SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theConsolidated
      Statements of Operations
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            cumulativeperiod
      ofDevelopmentStage
      Activity-January
      1, 2003throughDecember
      31,For
      the years ended December 31,
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            2008
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            2007
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            2008Revenues
      and other income:Management
      fees from joint venture
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            700,000
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            1,135,000Gain
      from entrance into joint venture
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            364,479Other
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            6,382Total
      revenues and other income
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            700,000
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            1,505,861Expenses:Salaries
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            346,710
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            833,457
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            3,437,605Professional
      and consulting fees
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            315,983
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            1,229,593
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            4,862,809Rent
      and occupancy
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            14,101
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            46,882
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            237,226Depreciation
      and amortization
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            885
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            635
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            104,237Finance
      charges and interest
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            8,139
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            6,948
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            112,063Marketing
      and other
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            54,225
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            642,972
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            2,035,008Total
      expenses
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            740,043
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            2,760,487
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            10,788,948Loss
      from sale of investment
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            669,570
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            669,570Loss
      on deemed disposition of oil andgas
      properties, unproved
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            3,928,000
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            3,928,000Impairment
      charge on investment
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            525,947
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            525,947Loss
      before income taxes
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            5,863,560
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            2,060,487
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            14,406,604Provision
      for income taxes (benefit)
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            -Net
      loss (development stage)
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            5,863,560
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            2,060,487
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            14,406,604Basic
      and diluted loss per common share
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            (0.32
                                                                                                                                                                                                                                                                            )
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            (0.13
                                                                                                                                                                                                                                                                            )
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                                                            (1.25
                                                                                                                                                                                                                                                                            )Weighted
      average number of basic anddiluted
      common shares outstanding
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            18,437,156
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            15,766,523
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            11,519,398See
      accompanying notes.
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                            3


F-3





SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Consolidated
      Statements of Stockholders' EquityFor
      the cumulative period of Development Stage Activity - January 1, 2003
      through December 31, 2008AccumulatedCommon
      Stock
                                                                      
                                                                      
                                                                      Additional
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      OtherNumber
      of
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      Paid-In
                                                                      
                                                                      
                                                                      Accumulated
                                                                      
                                                                      
                                                                      Comprehensive
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      ComprehensiveShares
                                                                      
                                                                      
                                                                      Par
      Value
                                                                      
                                                                      
                                                                      Capital
                                                                      
                                                                      
                                                                      Deficit
                                                                      
                                                                      
                                                                      Income
      (Loss)
                                                                      
                                                                      
                                                                      Total
                                                                      
                                                                      
                                                                      LossBalance,
      January 1, 2003 (pre-development stage)
                                                                      
                                                                      
                                                                      4,902,886
                                                                      
                                                                      
                                                                      $
                                                                      4,903
                                                                      
                                                                      
                                                                      $
                                                                      430,195
                                                                      
                                                                      
                                                                      $
                                                                      (449,785
                                                                      )
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      (14,687
                                                                      )Loss
      for the year - 2003
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (422,516
                                                                      )
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (422,516
                                                                      )
                                                                      
                                                                      $
                                                                      (422,516
                                                                      )Shares
      issued in acquisition (ZNG)
                                                                      
                                                                      
                                                                      1,000,000
                                                                      
                                                                      
                                                                      
                                                                      1,000
                                                                      
                                                                      
                                                                      
                                                                      (1,000
                                                                      )
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Balance,
      December 31, 2003
                                                                      
                                                                      
                                                                      5,902,886
                                                                      
                                                                      
                                                                      $
                                                                      5,903
                                                                      
                                                                      
                                                                      $
                                                                      429,195
                                                                      
                                                                      
                                                                      $
                                                                      (872,301
                                                                      )
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      (437,203
                                                                      )Loss
      for the year - 2004
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (833,567
                                                                      )
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (833,567
                                                                      )Foreign
      currency translation adjustment
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (53,120
                                                                      )
                                                                      
                                                                      
                                                                      (53,120
                                                                      )
                                                                      
                                                                      $
                                                                      (886,687
                                                                      )Shares
      issued in acquisition (ZNG)
                                                                      
                                                                      
                                                                      3,450,000
                                                                      
                                                                      
                                                                      
                                                                      3,450
                                                                      
                                                                      
                                                                      
                                                                      746,550
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      750,000Shares
      issued for professional services
                                                                      
                                                                      
                                                                      50,000
                                                                      
                                                                      
                                                                      
                                                                      50
                                                                      
                                                                      
                                                                      
                                                                      9,950
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      10,000Other
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      34,426
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      34,426Balance,
      December 31, 2004
                                                                      
                                                                      
                                                                      9,402,886
                                                                      
                                                                      
                                                                      $
                                                                      9,403
                                                                      
                                                                      
                                                                      $
                                                                      1,220,121
                                                                      
                                                                      
                                                                      $
                                                                      (1,705,868
                                                                      )
                                                                      
                                                                      $
                                                                      (53,120
                                                                      )
                                                                      
                                                                      $
                                                                      (529,464
                                                                      )
  F-4
   Common
      StockNumber
      of Shares
                        
                        
                        
                        Par
      Value
                        
                        
                        
                        Additional
                          Paid
      -In Capital
                        
                        
                        
                        Accumulated
      Deficit
                        
                        
                        
                        Accumulated
      Other Comprehensive Income (Loss)
                        
                        
                        
                        Total
                        
                        
                        
                        Comprehensive
      LossLoss
      for the year - 2005
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,153,686
                        )
                        
                        
                        -
                        
                        
                        
                        (1,153,686
                        )Foreign
      currency translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        50,614
                        
                        
                        
                        50,614
                        
                        
                        $
                        (1,103,072
                        )Shares
      issued for professional services
                        
                        
                        385,000
                        
                        
                        
                        385
                        
                        
                        
                        197,829
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        198,214Shares
      issued for accrued salaries
                        
                        
                        1,700,000
                        
                        
                        
                        1,700
                        
                        
                        
                        301,871
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        303,571Warrants
      granted for professional services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        310,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        310,000Balance,
      December 31, 2005
                        
                        
                        11,487,886
                        
                        
                        $
                        11,488
                        
                        
                        $
                        2,029,821
                        
                        
                        $
                        (2,859,554
                        )
                        
                        $
                        (2,506
                        )
                        
                        $
                        (820,751
                        )Loss
      for the year - 2006
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,072,788
                        )
                        
                        
                        -
                        
                        
                        
                        (4,072,788
                        )Foreign
      currency translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,939
                        )
                        
                        
                        (1,939
                        )
                        
                        $
                        (4,074,727
                        )Shares
      issued for employee stock option plan and warrants
                        
                        
                        195,000
                        
                        
                        
                        195
                        
                        
                        
                        45,305
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        45,500Shares
      issued for geological data
                        
                        
                        1,900,000
                        
                        
                        
                        1,900
                        
                        
                        
                        3,323,100
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,325,000Shares
      issued for professional services
                        
                        
                        1,139,499
                        
                        
                        
                        1,140
                        
                        
                        
                        2,120,320
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,121,460Warrants
      granted for professional services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,201,960
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,201,960Shares
      cancelled
                        
                        
                        (609,424
                        )
                        
                        
                        (610
                        )
                        
                        
                        610
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance,
      December 31, 2006
                        
                        
                        14,112,961
                        
                        
                        $
                        14,113
                        
                        
                        $
                        8,721,116
                        
                        
                        $
                        (6,932,342
                        )
                        
                        $
                        (4,445
                        )
                        
                        $
                        1,798,442
  F-5
  Common
      StockNumber
      of Shares
                          
                          
                          
                          Par
      Value
                          
                          
                          
                          Additional
                            Paid
      -In Capital
                          
                          
                          
                          Accumulated
      Deficit
                          
                          
                          
                          Accumulated
      Other Comprehensive Income (Loss)
                          
                          
                          
                          Total
                          
                          
                          
                          Comprehensive
      Loss
 Loss
      for the year - 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,060,487
                  )
                  
                  
                  -
                  
                  
                  
                  (2,060,487
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,804
                  )
                  
                  
                  (9,804
                  )
                  
                  $
                  (2,070,291
                  )Shares
      issued for employee stock option plan and warrants
                  
                  
                  566,935
                  
                  
                  
                  567
                  
                  
                  
                  (567
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Shares
      issued for geological data
                  
                  
                  200,000
                  
                  
                  
                  200
                  
                  
                  
                  349,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  350,000Shares
      issued for accrued salaries
                  
                  
                  788,000
                  
                  
                  
                  788
                  
                  
                  
                  1,444,618
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,445,406Shares
      issued for licenses
                  
                  
                  2,000,000
                  
                  
                  
                  2,000
                  
                  
                  
                  1,318,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,320,000Shares
      issued for professional services
                  
                  
                  715,134
                  
                  
                  
                  715
                  
                  
                  
                  1,070,395
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,071,110Warrants
      granted for professional services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  150,394
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  150,394Balance,
      December 31, 2007
                  
                  
                  18,383,030
                  
                  
                  $
                  18,383
                  
                  
                  $
                  13,053,756
                  
                  
                  $
                  (8,992,829
                  )
                  
                  $
                  (14,249
                  )
                  
                  $
                  4,065,061Loss
      for the year - 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,863,560
                  )
                  
                  
                  -
                  
                  
                  
                  (5,863,560
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  27,019
                  
                  
                  
                  27,019
                  
                  
                  $
                  (5,836,541
                  )Shares
      issued for professional services and accrued salaries
                  
                  
                  155,000
                  
                  
                  
                  155
                  
                  
                  
                  41,595
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41,750Warrants
      granted for professional services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,303
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,303Shares
      issued for loan repayment and related interest
                  
                  
                  107,520
                  
                  
                  
                  108
                  
                  
                  
                  10,645
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,753Balance,
      December 31, 2008
                  
                  
                  18,645,550
                  
                  
                  $
                  18,646
                  
                  
                  $
                  13,112,299
                  
                  
                  $
                  (14,856,389
                  )
                  
                  $
                  12,770
                  
                  
                  $
                  (1,712,674
                  )See
      accompanying notes.




F-6


SIBERIAN ENERGY
      GROUP INC. (A Development Stage Company)For
      theConsolidated
      Statements of Cash Flows
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        cumulativeperiod
      ofDevelopmentStage
      Activity-January
      1, 2003throughDecember
      31,For
      the years ended December 31,
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        2008
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        2007
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        2008Cash
      flows from operating activities:Net
      loss (development stage)
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        $
                                                                                                                                                                                                                                                                                                                                                                                                                        (5,863,560
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        $
                                                                                                                                                                                                                                                                                                                                                                                                                        (2,060,487
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        $
                                                                                                                                                                                                                                                                                                                                                                                                                        (14,406,604
                                                                                                                                                                                                                                                                                                                                                                                                                        )Depreciation
      and amortization
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        885
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        635
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        104,237Common
      stock and warrants issuedfor
      professional services and salaries and geological data
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        48,053
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        3,016,910
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        7,182,481Gain
      from entrance into joint venture
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (364,479
                                                                                                                                                                                                                                                                                                                                                                                                                        )Loss
      on disposition of office furniture
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        1,029
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        1,029Loss
      on sale of investment, including deconsolidation of subsidiary
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        794,192
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        794,192Loss
      on deemed disposition of oil and gas properties, unproved
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        3,928,000
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        3,928,000Impairment
      charge on investment
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        525,947
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        525,947Changes
      in other current assets andcurrent
      liabilities:Management
      fee receivable
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        110,000
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        110,000Prepaid
      expenses and other assets
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        3,764
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        987
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (263,913
                                                                                                                                                                                                                                                                                                                                                                                                                        )Accounts
      payable and accrued expenses
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        563,555
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (1,066,415
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        3,384,995Net
      cash flows from operating activities
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        1,865
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        1,630
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        995,885Cash
      flows from investing activities:Expenditures
      for licenses and related
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (528,961
                                                                                                                                                                                                                                                                                                                                                                                                                        )Expenditures
      for oil and gas properties
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (770,750
                                                                                                                                                                                                                                                                                                                                                                                                                        )Expenditures
      for property and equipment
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (2,013
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (6,244
                                                                                                                                                                                                                                                                                                                                                                                                                        )Proceeds
      of disposition of office furniture
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        107
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        107Loan
      to affiliate
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (29,500
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (29,500
                                                                                                                                                                                                                                                                                                                                                                                                                        )Cash
      received in acquisition
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        6Cash
      received from entrance into joint venture
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        175,000Net
      cash flows for investing activities
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (29,393
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (2,013
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (1,160,342
                                                                                                                                                                                                                                                                                                                                                                                                                        )Cash
      flows from financing activities:Net
      proceeds from demand loans
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        10,000
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        72,500Common
      stock issued for employee stock option plan
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        45,500Additional
      paid-in capital
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        34,426Net
      cash flows from financing activities
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        10,000
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        152,426Effect
      of exchange rates on cash
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        27,019
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (9,804
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        12,770Net
      increase (decrease) in cash
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (509
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        (187
                                                                                                                                                                                                                                                                                                                                                                                                                        )
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        739Cash
      - beginning
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        1,248
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        1,435
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        -Cash
      - ending
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        $
                                                                                                                                                                                                                                                                                                                                                                                                                        739
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        $
                                                                                                                                                                                                                                                                                                                                                                                                                        1,248
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                                                                                                        $
                                                                                                                                                                                                                                                                                                                                                                                                                        739See
      accompanying notes.
 F-7


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)





Notes
      to Consolidated Financial Statements





1.  Summary
of Significant Accounting Policies:





The
Company and Description of Business:





Kondaneftegaz





The
Company, through its subsidiary Kondaneftegaz, LLC (KNG), has been engaged in
the business of exploiting and developing certain oil and gas and other
petroleum products licenses issued for a period of five years by Russia’s
subsurface management authorities in October 2007. The two licensed areas lie in
the Karabashsky zone in the Khanty-Mansiysk Autonomous area of the Russian
Federation.  KNG has its principal place of business in the city of
Khanty-Mansiysk, Russia.  KNG has prepared and coordinated with
Russian authorities the Program of exploration works on the Karabashski 61 and
Karabashski 67 license areas.  KNG is evaluating the possibility of
using prior seismic data in the current exploration program.





KNG was
acquired together with the vast collection of geological information data (oil
and gas properties, unproved) on the Karabashski zone of Khanty-Mansiysk
Autonomous district of the Tuymen region of the Russian Federation through the
issuance of shares and warrants as follows:




Restricted
      common shares issued foroil
      and gas properties, unproved in 2006
                  
                  
                  1,900,000Restricted
      common shares issued inconnection
      with license acquisition by KNG in 2007
                  
                  
                  2,000,000Restricted
      common shares issued in 2006
                  
                  
                  200,000Total
      restricted common shares issued
                  
                  
                  4,100,000Stock
      warrants issued in 2006for
      purchase option
                  
                  
                  250,000





As a
result of the purchase, a calculated acquisition value of $3,928,000 was
assigned to the oil and gas properties, unproved that considered the approximate
market value of the stock issued ($1.75) on the transaction date including
$3,675,000 assigned to 2,100,000 shares issued in 2006 and $253,000 assigned to
warrants to purchase 250,000 shares.  A value of $1,320,000 was
assigned to the acquisition of licenses by KNG based on the market value of the
2,000,000 shares on the date of issue.





On
September 30, 2008 the Company sold a 51% interest in KNG to a Russian oil and
gas company, and a 5% interest to two Russian individuals for $223. This Russian
company has committed to lead the exploration works on the licensed areas by
accepting the operator’s role and agreeing to provide funding for KNG’s
activities. Simultaneously with the sale of 56% of KNG, the Company made
available all geological data to the operator to be used in the program of
geological studies in the region. Since no consideration was received and the
Company has no intent to further utilize this geological data, a loss on the
deemed disposition of these unproven oil and gas properties of $3,928,000 has
been recorded.  Operations of KNG prior to September 30, 2008 are
included in the consolidated accounts of the Company in the accompanying
financial statements.  Effective September 30, 2008, the Company's 44%
investment in KNG is recorded on the equity method of accounting.  At
September 30, 2008, KNG’s assets were $13,572 and liabilities were
$135,740.  Since 56% of the Company was sold for a nominal amount, a
non-cash impairment charge of $525,947 has been recorded to reduce the carrying
value of the 44% investment in KNG to zero.


F-8


Zauralneftegaz





Zauralneftegaz
Limited (ZNG, Ltd.) is the Company’s 50% owned joint venture with Baltic
Petroleum Limited, UK created in 2005, which operates through its Russian
subsidiary Zaural Neftegaz (ZNG).  ZNG has been involved in oil and
gas research activities in the Kurgan region of the Russian Federation. During
2003 through 2008 it has completed seismic studies and drilling program in the
Kurgan region. The Company believes ZNG, Ltd. has created value through the
geological results of the two exploratory wells and other data gathered in the
area and ZNG, Ltd. is considering its options with regard to realizing this
value by either a farm out or a direct sale of geophysical and seismic data to a
third party operating in the area.





Activities
of ZNG for the period March 2003 through October 2005 are included in the
consolidated accounts of the Company in the accompanying financial
statements.  Effective October 14, 2005, the Company’s investment in
Joint Venture has been recorded on the equity method of
accounting.  Since the cumulative losses of the Joint Venture exceed
the Company’s investment, the investment asset is carried at zero value as of
and through December 31, 2008.





Both
equity investments are recorded at zero on the accompanying balance
sheets.  Although management is hopeful, the Company is uncertain when
and if any income will be realized from these investments.  On a
moving forward basis, the Company anticipates further business
expansion.  It is constantly evaluating new mineral resource assets,
both explored and unexplored, as part of its growth strategy.





The
Company was incorporated in the State of Nevada on August 13, 1997, and
previously provided comprehensive outpatient rehabilitation services to patients
suffering from work, sports and accident related injuries.  All
activities related to the Company’s previous business ventures were essentially
discontinued prior to January 1, 2000.  Predecessor names of the
Company since its inception include Trans Energy Group, Inc., King Incorporated
and Advanced Rehab Technology Corporation.





Use
of Estimates:





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.





Principles of
Consolidation:





The
accompanying consolidated financial statements include the accounts of the
Company and its then wholly-owned subsidiaries, ZNG (through October 14, 2005),
Siberian Energy Group (Canada) and KNG (December 31, 2006 through September 30,
2008).  All intercompany transactions and balances have been
eliminated.  After October 14, 2005, the Company’s investment in ZNG
is accounted for on the equity method of accounting.  After September
30, 2008, the Company’s investment in KNG is accounted for on the equity method
of accounting. Accordingly, the assets, liabilities and equity are no longer
presented on the Company’s balance sheet.





Foreign
Currency Translation:





The
Russian subsidiaries ZNG and KNG use the Ruble as their functional currency;
Siberian Energy Group (Canada) uses the Canadian dollar as its functional
currency.  The books and records of ZNG, KNG and Siberian Energy Group
(Canada) are kept in their functional currencies.  The Company
translates to U.S. dollars the assets and liabilities of ZNG, KNG, and Siberian
Energy Group (Canada) at the year-end exchange rates; income statement amounts
are converted at the average rates of exchange for the
year.  Translation gains and losses are included within other
comprehensive income (loss).





Cash:





Cash in
financial institutions may exceed insured limits at various times throughout the
year, and subject the Company to concentrations of credit risk.





Oil
and Gas Properties:





The
Company follows the full cost method of accounting for oil and gas
properties.  Accordingly, all costs associated with acquisition,
exploration, and development of oil and gas reserves, including directly related
overhead costs, are capitalized.


F-9


All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, will be amortized on the unit-of production
method using estimates of proved reserves.  Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs.  When applicable, if the results of an assessment indicate
that the properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.





In
addition, the capitalized costs are subject to a “ceiling test,” which basically
limits such costs to the aggregate of the “estimated present value,” discounted
at a 10-percent interest rate of future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.





Sales of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.  Abandonments of properties are accounted for as adjustments
of capitalized costs with no loss recognized.





Licenses:





Costs
incurred during 2003 to register and formalize ZNG’s exploration licenses with
the Russian Ministry of Natural Resources were amortized over the terms of the
licenses.  Amortization expense for 2005 and 2004 was $27,124 and
$36,160.   All licenses became the responsibility of the Joint
Venture effective October 14, 2005 and expired in 2008.





Licenses
of KNG granted for oil and gas exploration in the Khanty-Mansiysk Autonomous
area of the Russian Federation are the responsibility of the new operator of KNG
following the sale of 56% interest in September 2008.





Property
and Equipment:





Property
and equipment is stated at cost, net of accumulated
depreciation.  Depreciation is provided using the straight-line
method.





Long-Lived
Assets:





Long
lived assets to be held and used or disposed of other than by sale are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.  When required, impairment
losses on assets to be held and used or disposed of other than by sale are
recognized based on the fair value of the asset.  Long-lived assets to
be disposed of by sale are reported at the lower of its carrying amount or fair
value less cost to sell.





Income
Taxes:





The
provision for income taxes is based on pretax financial accounting
income.  There are no significant differences between financial and
tax accounting that would otherwise give rise to deferred income taxes on the
accompanying financial statements.  The Company, however, recognizes
future tax benefits of net operating loss carryforwards to the extent that
realization of such benefits is more likely than not.





New
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157 “Fair Value Measurement” (SFAS 157).
This Statement defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value
measurements.  The Company adopted the provisions of SFAS 157 during
2008 which did not have an impact on the Company’s consolidated financial
statements or disclosures.  In February of 2008, the FASB issued FASB
Staff Position 157-2 which delays the effective date of SFAS 157 for
non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008.  The Company is currently evaluating the impact, if any, of
adopting the provisions of SFAS 157 for the non-financial assets and liabilities
on the Company’s consolidated financial statements.


F-10


In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159).  SFAS 159 permits
companies to elect to follow fair value accounting for certain financial assets
and liabilities in an effort to mitigate volatility in earnings without having
to apply complex hedge accounting provisions.  The standard also
establishes presentation and disclosure requirements designed to facilitate
comparison between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007.  The Company elected not to apply
the fair value measurement option for any of their financial assets or
liabilities.





Management
does not believe that any other recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on the
accompanying consolidated financial statements.





2.  Investments:





Investment inKNG:





Following
is a summary of KNG’s unaudited financial position at December 31, 2008 and
results of development stage activity for the year ended December 31,
2008:




2008Current
      assets
                    
                    $
                    16,755Oil
      and gas property,unproved
                    
                    
                    96,068$
                    112,823Current
      liabilities
                    
                    $
                    122,001Long-term
      debt and othernoncurrent
      liabilities
                    
                    
                    54,047176,048Stockholders'
      equity (deficit)
                    
                    
                    (63,225
                    )$
                    112,823Revenues
                    
                    $
                    -Net
      loss (development stage)
                    
                    $
                    (18,805
                    )Cumulative
      net loss
                    
                    $
                    (69,346
                    )





The
Company’s investment asset will begin to exceed zero if KNG starts generating
income.





There is
no market for the common stock of KNG and accordingly, no quoted market price is
available.





Investment
in Joint Venture:





As of
December 31, 2008, the Joint venture generated an unaudited cumulative loss of
over $22 million as a result of exploration activities in the Kurgan region
during 2003-2008. Since cumulative losses of Joint Venture exceed the Company’s
investment, the investment is carried at zero value.  The Company has
no liability to guarantee the debts of the Joint Venture.





3.  Income
Taxes:





At
December 31, 2008, the Company effectively has U.S. tax net operating loss
carryforwards totaling approximately $13,125,000.  These carryforwards
may be used to offset future taxable income, and expire in varying amounts
through 2028.  No tax benefit has been reported in the financial
statements, however, because the Company believes there is at least a 50% chance
that the carryforwards will expire unused.  Accordingly, the
$2,625,000 estimated cumulative tax benefit of the loss carryforwards have been
offset by a valuation allowance of the same amount.


F-11


4.  Leases:





Office
rent expense for the years ended December 31, 2008 and 2007 was $14,101 and
$46,882.  There currently are no long-term lease arrangements that the
Company is committed to.





5.  Related
Party Transactions:





During
the development stage period from January 1, 2003 through December 31, 2008, a
variety of expenses were paid for by organizing stockholders.  As a
result, amounts totaling $447,663 and $370,500 are payable to stockholders from
the Company as of December 31, 2008 and 2007.





6.  Employment
Contracts:





The
Company had entered into employment contracts with certain senior management
employees that provided for minimum annual salary, adjusted for capital levels
raised by the Company.  These agreements have expired as of December
31, 2008.





At
December 31, 2008, accrued and unpaid salaries for all employees totaled
$824,744.  These amounts are expected to be paid when sufficient cash
flows are generated by the Company or by the issuance of restricted stock of the
Company.





7.  Stock
Option Plan:





In 2003,
the Company granted stock options under a plan for the benefit of employees and
directors of the Company.  All granted stock options are for
acquisition of restricted shares, meaning that there are substantial
restrictions on the transferability and sale of such shares.  Pursuant
to plan terms and related employment agreements, shares of common stock granted
vest as follows:




Shares ReservedVest
                  
                  December
      31,
                  
                  
                  December
      31,
                  
                  
                  ExerciseYear
                  
                  2008
                  
                  
                  2007
                  
                  
                  Price2003
                  
                  
                  200,000
                  
                  
                  
                  200,000
                  
                  
                  
                  $0.142004
                  
                  
                  468,000
                  
                  
                  
                  468,000
                  
                  
                  
                  $0.202004
                  
                  
                  75,000
                  
                  
                  
                  75,000
                  
                  
                  
                  $0.322005
                  
                  
                  468,000
                  
                  
                  
                  468,000
                  
                  
                  
                  $0.602006
                  
                  
                  468,000
                  
                  
                  
                  468,000
                  
                  
                  
                  $0.602007
                  
                  
                  468,000
                  
                  
                  
                  468,000
                  
                  
                  110%
      of the average2008
                  
                  
                  468,000
                  
                  
                  
                  
                  
                  
                  closing
      stock pricefor
      the three monthsprior
      to grant date





The
options generally expire four years from the date of vesting.


F-12


The
following summarizes stock option activity:


Number
                
                
                Exerciseof
      Shares
                
                
                PriceOutstanding
      and exercisable atJanuary
      1, 2003
                
                
                -
                
                
                $
                -Vested
      - 2003
                
                
                300,000
                
                
                
                0.14Outstanding
      and exercisable atDecember
      31, 2003
                
                
                300,000Vested
      - 2004
                
                
                518,000
                
                
                
                0.20Vested
      - 2004
                
                
                75,000
                
                
                
                0.32Expired
      - 2004
                
                
                (100,000
                )
                
                
                0.14Expired
      - 2004
                
                
                (50,000
                )
                
                
                0.20Outstanding
      and exercisable atDecember
      31, 2004
                
                
                743,000Vested
      - 2005
                
                
                468,000
                
                
                
                0.60Outstanding
      and exercisable atDecember
      31, 2005
                
                
                1,211,000Vested
      - 2006
                
                
                468,000
                
                
                
                0.60Exercised
      - 2006
                
                
                (152,500
                )Outstanding
      and exercisableat
      December 31, 2006
                
                
                1,526,500Cancelled
      - 2007
                
                
                (75,000
                )Vested
      - 2007
                
                
                468,000
                
                
                variousOutstanding
      and excercisable atDecember
      31, 2007
                
                
                1,919,500Expired
      - 2008
                
                
                (568,000
                )Vested
      - 2008
                
                
                468,000
                
                
                variousOutstanding
      and excercisable atDecember
      31, 2008
                
                
                1,819,500


F-13


The
following tables summarize information about stock options outstanding and
exercisable:





December 31, 2008Weighted
      AverageExercise
                    
                    
                    Number
      of
                    
                    
                    Remaining
      Years ofPrice
                    
                    
                    Options
                    
                    
                    Contractual
      Life$
                    0.60
                    
                    
                    
                    415,500
                    
                    
                    
                    10.60
                    
                    
                    
                    468,000
                    
                    
                    
                    22.26
                    
                    
                    
                    66,500
                    
                    
                    
                    32.14
                    
                    
                    
                    36,500
                    
                    
                    
                    31.94
                    
                    
                    
                    36,500
                    
                    
                    
                    31.62
                    
                    
                    
                    36,500
                    
                    
                    
                    31.69
                    
                    
                    
                    36,500
                    
                    
                    
                    31.82
                    
                    
                    
                    36,500
                    
                    
                    
                    31.79
                    
                    
                    
                    36,500
                    
                    
                    
                    31.77
                    
                    
                    
                    36,500
                    
                    
                    
                    31.46
                    
                    
                    
                    36,500
                    
                    
                    
                    31.16
                    
                    
                    
                    36,500
                    
                    
                    
                    30.86
                    
                    
                    
                    36,500
                    
                    
                    
                    30.76
                    
                    
                    
                    36,500
                    
                    
                    
                    30.72
                    
                    
                    
                    66,500
                    
                    
                    
                    40.63
                    
                    
                    
                    36,500
                    
                    
                    
                    40.49
                    
                    
                    
                    36,500
                    
                    
                    
                    40.38
                    
                    
                    
                    36,500
                    
                    
                    
                    40.31
                    
                    
                    
                    73,000
                    
                    
                    
                    40.34
                    
                    
                    
                    36,500
                    
                    
                    
                    40.32
                    
                    
                    
                    36,500
                    
                    
                    
                    40.33
                    
                    
                    
                    36,500
                    
                    
                    
                    40.26
                    
                    
                    
                    36,500
                    
                    
                    
                    40.21
                    
                    
                    
                    36,500
                    
                    
                    
                    40.14
                    
                    
                    
                    36,500
                    
                    
                    
                    41,819,500
  December 31, 2007Weighted
      AverageExercise
                          
                          
                          Number
      of
                          
                          
                          Remaining
      Years ofPrice
                          
                          
                          Options
                          
                          
                          Contractual
      Life$
                          0.14
                          
                          
                          
                          100,000
                          
                          
                          
                          00.20
                          
                          
                          
                          468,000
                          
                          
                          
                          10.60
                          
                          
                          
                          415,500
                          
                          
                          
                          20.60
                          
                          
                          
                          468,000
                          
                          
                          
                          32.26
                          
                          
                          
                          66,500
                          
                          
                          
                          42.14
                          
                          
                          
                          36,500
                          
                          
                          
                          41.94
                          
                          
                          
                          36,500
                          
                          
                          
                          41.62
                          
                          
                          
                          36,500
                          
                          
                          
                          41.69
                          
                          
                          
                          36,500
                          
                          
                          
                          41.82
                          
                          
                          
                          36,500
                          
                          
                          
                          41.79
                          
                          
                          
                          36,500
                          
                          
                          
                          41.77
                          
                          
                          
                          36,500
                          
                          
                          
                          41.46
                          
                          
                          
                          36,500
                          
                          
                          
                          41.16
                          
                          
                          
                          36,500
                          
                          
                          
                          40.86
                          
                          
                          
                          36,500
                          
                          
                          
                          40.76
                          
                          
                          
                          36,500
                          
                          
                          
                          41,919,500


F-14


The
Company recognizes compensation based on the fair value method prescribed by
Financial Accounting Standards Board Statement No. 123R, “Accounting for Stock
Based Compensation.”  No compensation expense has been recognized
through December 31, 2008 because management had determined the initial fair
value of its stock options granted were minimal in light of the startup nature
of the organization.





8.  Stock
Warrants:





In 2005,
2006, 2007, and 2008, the Company granted warrants to purchase restricted common
shares to certain consultants and non-employees for services rendered to the
Company as follows:





2008OriginalGrant
                  
                  Number
      of
                  
                  
                  Exercise
                  
                  ExerciseDate
                  
                  Shares
                  
                  
                  Price
                  
                  TermJanuary
      1, 2008
                  
                  
                  17,500
                  
                  
                  $
                  0.72
                  
                  4
      yearsFebruary
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.63
                  
                  4
      yearsMarch
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.49
                  
                  4
      yearsApril
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.38
                  
                  4
      yearsMay
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.31
                  
                  4
      yearsJune
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.31
                  
                  4
      yearsJuly
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.34
                  
                  4
      yearsAugust
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.33
                  
                  4
      yearsSeptember
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.32
                  
                  4
      yearsOctober
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.26
                  
                  4
      yearsNovember
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.21
                  
                  4
      yearsDecember
      1, 2008
                  
                  
                  7,500
                  
                  
                  
                  0.14
                  
                  4
      years100,0002007OriginalGrant
                  
                  Number
      of
                  
                  
                  Exercise
                  
                  ExerciseDate
                  
                  Shares
                  
                  
                  Price
                  
                  TermJanuary
      1, 2007
                  
                  
                  17,500
                  
                  
                  $
                  2.26
                  
                  4
      yearsFebruary
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  2.14
                  
                  4
      yearsMarch
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  1.94
                  
                  4
      yearsMarch
      31, 2007
                  
                  
                  48,925
                  
                  
                  
                  1.10
                  
                  3
      yearsApril
      1, 2007
                  
                  
                  17,500
                  
                  
                  
                  1.72
                  
                  4
      yearsMay
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  1.69
                  
                  4
      yearsJune
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  1.82
                  
                  4
      yearsJune
      30, 2007
                  
                  
                  55,233
                  
                  
                  
                  1.14
                  
                  3
      yearsJuly
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  1.79
                  
                  4
      yearsAugust
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  1.77
                  
                  4
      yearsSeptember
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  1.46
                  
                  4
      yearsSeptember
      30, 2007
                  
                  
                  51,352
                  
                  
                  
                  0.74
                  
                  3
      yearsOctober
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  1.16
                  
                  4
      yearsNovember
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  0.87
                  
                  4
      yearsDecember
      1, 2007
                  
                  
                  7,500
                  
                  
                  
                  0.76
                  
                  4
      yearsDecember
      31, 2007
                  
                  
                  78,130
                  
                  
                  
                  0.46
                  
                  3
      years343,640


F-15




2006OriginalGrant
                  
                  Number
      of
                  
                  
                  Exercise
                  
                  ExerciseDate
                  
                  Shares
                  
                  
                  Price
                  
                  TermMarch
      31, 2006      *
                  
                  
                  800,000
                  
                  
                  $
                  1.05
                  
                  4
      yearsApril
      1,
      2006           *
                  
                  
                  400,000
                  
                  
                  
                  1.05
                  
                  4
      yearsMarch
      6, 2006
                  
                  
                  50,068
                  
                  
                  
                  0.63
                  
                  3
      yearsMarch
      31, 2006
                  
                  
                  17,561
                  
                  
                  
                  0.67
                  
                  3
      yearsJune
      30, 2006
                  
                  
                  20,412
                  
                  
                  
                  2.02
                  
                  3
      yearsSeptember
      14, 2006 **
                  
                  
                  250,000
                  
                  
                  
                  2.20
                  
                  2
      yearsSeptember
      30, 2006
                  
                  
                  20,952
                  
                  
                  
                  1.53
                  
                  3
      yearsDecember
      31, 2006
                  
                  
                  38,648
                  
                  
                  
                  1.44
                  
                  3
      yearsDecember
      31, 2006
                  
                  
                  100,000
                  
                  
                  
                  0.60
                  
                  4
      years1,697,6412005OriginalGrant
                  
                  Number
      of
                  
                  
                  Exercise
                  
                  ExerciseDate
                  
                  Shares
                  
                  
                  Price
                  
                  TermApril
      1, 2005  *
                  
                  
                  100,000
                  
                  
                  $
                  0.30
                  
                  2
      yearsSeptember
      13, 2005 **
                  
                  
                  15,000
                  
                  
                  
                  0.30
                  
                  3
      yearsDecember
      22, 2005 **
                  
                  
                  100,000
                  
                  
                  
                  1.00
                  
                  3
      yearsDecember
      22, 2005 *
                  
                  
                  300,000
                  
                  
                  
                  1.00
                  
                  2
      yearsDecember
      22, 2005 **
                  
                  
                  150,000
                  
                  
                  
                  2.00
                  
                  3
      yearsDecember
      22, 2005 **
                  
                  
                  150,000
                  
                  
                  
                  2.50
                  
                  3
      yearsDecember
      22, 2005
                  
                  
                  100,000
                  
                  
                  
                  0.60
                  
                  4
      years915,000




*  Warrants
exercised  through June 2007.


**
Warrants expired as of December 31, 2008.





The fair
values of each warrant granted is estimated on the grant date using the
Black-Scholes option valuation model.  The following general
assumptions were made in estimating fair value:





2008
                      
                      2007Dividend
      yield
                      
                      0%
                      
                      
                      0%Risk
      free interest rate
                      
                      2.50%
      -4.50%
                      
                      
                      2.50%
      - 4.75%Expected
      volatility
                      
                      100%
                      
                      
                      100%




Amounts
charged to expense in 2008 and 2007 totaled $6,303 and $150,394.




9.  Fair
Value of Financial Instruments:





The
carrying values of cash, loan receivable- affiliate, accounts payable,
accrued expenses and demand loans approximates fair value due to their
short-term maturity.




10.  Loss
Per Common Share:





Basic and
diluted loss per common share is computed using the weighted average number of
common shares outstanding during the period.  Shares issuable for
common stock options and warrants may have had a dilutive effect on earnings per
share had the Company generated income during the periods through December 31,
2008.


F-16


11.  Going
Concern:





These
financial statements have been prepared assuming the Company will continue as a
going concern, however, since inception of its current endeavor in 2003, it has
not earned substantial revenues and is considered to be in the development
stage, which raises substantial doubt about its ability to continue as a going
concern.





Management
is of the opinion that its current and proposed oil and gas ventures will
successfully generate allocable profits to the Company in the near
term.





For the
cumulative period ended December 31, 2008, the Company obtained cash financing
from organizing stockholders and employees in the form of loans, advances, and
deferred salaries.  However, there can be no certainty as to
availability of continued financing in the future.  Failure to obtain
sufficient financing may require the Company to reduce its operating
activities.  A failure to continue as a going concern would then
require stated amounts of assets and liabilities be reflected on a liquidation
basis which could differ form the going concern basis.





12.  Cash
Flows Information:





Net cash
flows from operating activities include cash payments for interest and income
taxes as follows:





2008
                    
                    
                    2007Interest
      paid
                    
                    $
                    -
                    
                    
                    $
                    -Income
      taxes paid
                    
                    $
                    -
                    
                    
                    $
                    -


Noncash
investing and financing activities excluded from the statements of cash flows
includes:





2008
                    
                    
                    2007Demand
      loan payable andrelated
      accrued interest settledthrough
      the issuance of commonstock
                    
                    $
                    10,753
                    
                    
                    $
                    -Geological
      data acquired throughthe
      issuance of common stock
                    
                    $
                    -
                    
                    
                    $
                    350,000Licenses
      aquired through theissuance
      of common stock
                    
                    $
                    -
                    
                    
                    $
                    1,320,000Salaries
      and professional servicessettled
      through the issuance ofcommon
      stock and warrants
                    
                    $
                    48,053
                    
                    
                    $
                    2,666,910


F-17


ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





None.





ITEM 9A. CONTROLS AND
PROCEDURES





Evaluation
of Disclosure Control and Procedures





We
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as such term is defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) as of December 31,
2008.  This evaluation was carried out under the supervision and with
participation of our Chief Executive Officer and Chief Financial Officer. Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2008, our disclosure controls and procedures
are not effective as a result of the material weakness in internal control over
financial reporting discussed below.





Notwithstanding
the assessment that our internal control over financial reporting was not
effective and that there were material weaknesses as identified in this report,
we believe that our consolidated financial statements contained in our Annual
Report on form 10-K for the fiscal year ended December 31, 2008 fairly present
our financial position, results of operations and cash flows for the years
covered thereby in all material respects. To address the material weaknesses in
our internal control over financial reporting described below, we
performed  additional analysis and other post-closing procedures in
order to prepare the consolidated financial statements included in this
Annual Report on form 10-K.





Management’s
Annual Report on Internal Control over Financial Reporting





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act. The Company's internal control over
financial reporting is a process designed under the supervision of the Company's
Chief Executive Officer and Chief Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company's financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and includes those policies and procedures that:





-
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions  of our
      assets;-
            provide
      reasonable assurance that the transactions are recorded  as
      necessary to permit the preparation of financial statements in accordance
      with generally accepted accounting principles, and that our receipts and
      expenditures are being made only in accordance with authorizations of our
      management and directors; and-
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of our assets that could
      have a material effect on the financial
  statements.





Management
recognizes that there are inherent limitations in the effectiveness of any
system of internal control, and accordingly, even effective internal control can
provide only reasonable assurance with respect of financial statement
preparation and may not prevent or detect misstatements. In addition, effective
internal control at a point in time may become ineffective in future periods
because of changes in conditions or due to deterioration in the degree of
compliance with our established policies and procedures.





As of
December 31, 2008, management assessed the effectiveness of the Company's
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting
such assessments.


-28-


Based on
that evaluation, management concluded that, during the period covered by this
report, such internal controls and procedures were not effective to detect the
inappropriate application of US GAAP rules as more fully described below. This
was due to deficiencies that existed in the design or operation of our internal
control over financial reporting that adversely affected our internal controls
and that taken together may be considered to be a material
weakness.





A
material weakness is a deficiency, or combination of deficiencies, that results
more than a remote likelihood that a material misstatement of annual or interim
financial statements will not be prevented or detected. In connection with the
assessment described above, management identified the following
control


deficiencies
that represent material weaknesses at December 31, 2008:





(1)
            lack
      of a functioning audit committee and lack of a majority of outside
      directors on the Company's board of directors capable to perform audit
      function;(2)
            inadequate
      segregation of duties due to limited number of personnel, which makes the
      reporting process susceptible to management override;
  and(3)
            insufficient
      use of the third party specialists and independent valuators in the areas
      which involve a significant level of judgment and in complicated areas of
      accounting.





Management
believes that the material weaknesses set forth in items (1) and (2) above did
not have an affect on the Company's financial reporting in 2008. However,
management believes that the lack of a functioning audit committee and lack of a
majority of outside directors on the Company's board of directors can adversely
affect reporting in the future years, when our operations become more complex
and less transparent and require higher level of financial expertise from the
overseeing body of the Company.





We are
committed to improving our financial organization. As part of this commitment,
we will, as soon as funds are available to the Company (1) appoint one or more
outside directors to our board of directors who shall be appointed to the audit
committee of the Company resulting in a fully functioning audit committee who
will undertake the oversight in the establishment and monitoring of required
internal controls and procedures; (2) create a position to segregate duties
consistent with control objectives and will increase our personnel resources;
and (3) hire independent third parties to perform expert advice.





We will
continue to monitor and evaluate the effectiveness of our internal controls and
procedures and our internal controls over financial reporting on an ongoing
basis and are committed to taking further action and implementing additional
enhancements or improvements, as necessary and as funds allow. This annual
report does not include an attestation report of the Company's independent
registered public accounting firm regarding internal control over financial
reporting. Management's report is not subject to attestation by the Company's
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this annual report.





Changes
in internal control over financial reporting.





There
were no changes in our internal control over financial reporting during our most
recent fiscal quarter that materially affected, or were reasonably likely to
materially affect, our internal control over financial reporting.





ITEM 9B. OTHER
INFORMATION





None.


-29-


PART
III





ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





DIRECTORS
AND OFFICERS





The
following table sets forth the name, age and position of each director and
executive officer of the Company. There are no other persons who can be
classified as a promoter or controlling person of the Company. The officers and
directors of the Company are as follows:





Name
                Age
                PositionDavid
      Zaikin
                41
                Chairman
      of the Board of Directors and Chief Executive OfficerHelen
      Teplitskaia
                54
                President
      and DirectorElena
      Pochapski
                43
                Chief
      Financial Officer and DirectorOleg
      V. Zhuravlev
                48
                DirectorSergey
      Potapov
                45
                DirectorVladimir
      V. Eret
                64
                DirectorTimothy
      Peara
                48
                Director





David
Zaikin


Chairman
of the Board of Directors and Chief Executive Officer





David
Zaikin has served as Chairman of the Board of Directors since December 2002 and
as Chief Executive Officer of the Company since August 2004. Since September
1998, Mr. Zaikin has worked as Vice President of Harvey Kalles R.E. LTD, a Real
Estate Company. Since August 2006, Mr. Zaikin has served as Chief Executive
Officer and Director of ECM Asset Management, Inc. and since January 2008 as
Executive Chairman of its parent company, RAM Resources Ltd. In 2003, Mr. Zaikin
was recognized by "Who's Who" as one of the three Canadian businessmen for his
extraordinary achievements. Mr. Zaikin also has a diverse background that
includes experience in sales, marketing, channels, finance and operation. Mr.
Zaikin is currently a member of TREB (the Toronto Real Estate Board) and OREA
(the Ontario Real Estate Association). He specializes in both Financial Analysis
and Market Analysis for Commercial Real Estate.




Mr.
Zaikin also has a Bachelors Degree from Kharkov Government Pharmaceutical
Institute.





Helen
Teplitskaia


President
and Director





Helen
Teplitskaia has served as the Company’s President and Director since May
2007.  Since January 2008 Mrs. Teplitskaya serves as President and a
member of the board of directors of RAM Resources Ltd. Ms. Teplitskaia also
currently is an Adjunct Associate Professor of International Business and
Markets - Global Initiatives in Management at Northwestern University, where she
has taught since January 1998, and she has served as Executive Vice President
and Head of Eurasia Practice at Imnex International, Inc. since April
1991.  Mr. Teplitskaia serves as President of the American-Russian
Chamber of Commerce & Industry, President of the American-Eurasian Chamber
of Commerce and Director of the International Energy Advisory
Council.  Throughout her career, Ms. Teplitskaia has successfully
assisted a variety of government agencies and private sector companies,
including the United States Agency for International Development, US State
Department, Ministry of Foreign Affairs of the Republic of Uzbekistan, AT&T,
Baker & McKenzie, Case New Holland, Gazprom, Gillette, HeidelbergCement,
Ingersoll-Rand, Maytag, Motorola, Pepsi-Cola and Morgan Stanley with start-up
operations in markets, direct investment, mergers and acquisitions, joint
ventures and licensing, marketing research, political interfacing and media
relations.


-30-


Ms.
Teplitskaia received her BA/MIS from the St. Petersburg University of Culture
and MBA degree from Northwestern University Kellogg School of
Management.





Elena
Pochapski


Chief
Financial Officer and Director





Elena
Pochapski has served as Chief Financial Officer and Director of the Company
since August 1, 2003. Since August 2006, Mrs. Pochapski has served as Chief
Financial Officer and Director of ECM Asset Management, Inc. Between January
2008 and July 2008, Ms. Pochapski served as a member of the board of directors
of ECM Asset Management, Inc.’s parent company RAM Resources Ltd. (“RAM). She
currently serves as an independent contractor with RAM.  Before her
employment at the Company, Mrs. Pochapski served as a Senior Accountant at
Silver Gold Glatt & Grosman, LLP., from January 2002 to May 2004. Previous
to that, Mrs. Pochapski was employed as an accountant at Cunningham &
Associates, LLP., from September 1999 to December 2001. Previous to that, Mrs.
Pochapski worked as an accountant at Price Waterhouse Coopers in Moscow Russia
from 1997 to April 1999. Mrs. Pochapski has extensive experience in public
accounting, audits and corporate finance. She is also familiar with Russian
accounting procedures and has experience with translating Russian financial
statements into US GAAP and International Accounting Standards (IAS). Ms.
Pochapski received a Bachelor of Economics degree from Moscow State University.
She is also certified as a Certified General Accountant (CGA) in Canada and as a
Certified Public Accountant (CPA) in the State of Maine, U.S. Additionally, Mrs.
Pochapski is a member of the Certified General Accountants Association of
Ontario.





Sergey
Potapov


Director





Sergey
Potapov has served as Director of the Company since January 1, 2003, where he
works in management and acquisition of assets in the Russian oil and gas
industry. Additionally Mr. Potapov has worked as Vice President of ZNG, a
Russian oil and gas exploration company, which is owned by ZNG, Ltd., which we
currently own 50% of, since October 2002. From January 2000 through October
2002. Mr. Potapov worked as Vice General Director at Siburalresource Ltd., which
provides gas distribution throughout Kurgan Province, Russia. Previous to his
employ at Siburalresource, Mr. Potapov worked from May 1996 to January 2000, as
the Head of Sales Department of OAO Ikar. Mr. Potapov has an Engineering Degree
from The Engineering Institute of Kurgan.





Oleg V.
Zhuravlev


Director





Oleg V.
Zhuravlev has served as a Director of the Company since January 1, 2003. In
addition, since January 1, 2003, Mr. Zhuravlev has served as President and Chief
Executive Officer of ZNG, which is owned by ZNG, Ltd., which we currently own
50% of. Since October 15, 2002, Mr. Zhuravlev has worked as a general director
of ZNG. Prior to being employed by ZNG, Mr. Zhuravlev was employed as Vice
Director General in Finance in Kurganselectro Ltd, from May 31, 2002 to October
14, 2002. Before that, Mr. Zhuravlev was Vice Director General in finance and
economics at LLC Kurgan Neftegazodobivaushaya Company, from December 18, 2001
through May 30, 2002. From June 13, 2001 to December 17, 2001, Mr. Zhuravlev was
Chairman of the Board of Directors of NCO Gorodskoy Rashetny Centre. From August
1, 1998 to June 8, 2001, Mr. Zhuravlev was Director of the Kurgan branch of
Sibcontact Bank Ltd. In August 1997, Mr. Zhuravlev became Chief of the
Department of Investments and Securities Market for the Committee on Economic
Policy (Khanty-Mansysk Autonomous Area Administration), where he worked until
May 1998. From October 10, 1993 to March 11, 1997, Mr. Zhuravlev held various
positions at Sibcontact, a commercial bank, ultimately achieving the position of
Vice Chairman of the Board of Directors. Mr. Zhuravlev was professionally
trained as an engineer at the Kurgan Institute of Engineering, Motor Transport
Economics and Management Department in Kurgan, Russia.


-31-


Vladimir V.
Eret


Director





Vladimir
V. Eret has served as Technical Director and Chief Geologist of ZNG since
January 1, 2003 and as Director of the Company since July 5, 2004. Before that
time Mr. Eret was the Director General of Bentonite Inc. in Kurgan City, Russia,
from February 1, 1996 to January 31, 2002. Prior to his employment at Bentonite
Inc., Mr. Eret worked as the expert of geology at Regional Investment
Corporation, in Kurgan City, Russia, from December 1, 1994 to January 31, 1996.
From March 1985 to February 1993, Mr. Eret worked as a director of
Souzgiprovodxoz, in connection with their geological expedition of Kurgan. Prior
to that time Mr. Eret worked at various jobs as a geologist and from April 1976
to July 1978, as the chief geologist of the People's Democratic Republic of
Algeria. Mr. Eret obtained his Bachelors degree from Tomsk Government University
in Geology and Engineering in 1968. He obtained a Doctorate degree from Kurgan
University in 1990 in Economics.





Timothy
Peara


Director





Timothy
Peara has served as a Director of the Company since April 12, 2005. Since
October 2002, he has served as a Director of Emerging Markets Finance
International in London, England. From December 2001 to April 2003, he served as
Finance Director of TNG Energy AG, in Frankfurt, Germany. From August 2000 to
October 2001, he served as Vice President of UT Energy Holdings, in London,
England and Hartford, Connecticut. From December 1998 to June 2000, he served as
Vice President of PSG International, in London, England. From August 1997 to
June 1998 he served as a Senior Trader with Koch Supply & Trading, in
London, England. From June 1991 to July 1997, he served as a Director with
Lehman Brother, in London, England. From January 1989 to May 1991, he served as
Vice President of Prudential Securities, Inc. in London, England. Mr. Peara
obtained a Bachelors degree from Wesleyan University in Latin American Studies
in 1983 and a Masters degree in Business Administration from the University of
Chicago in 1988. Mr. Peara holds a Series 3 and Series 7 brokers license. Mr.
Peara is also a member of the Association of International Petroleum
Negotiators, and a member of the Oil Club in London, England.





Directors
of the Company are elected annually and hold office until the annual meeting of
the shareholders of the Company and until their successors are elected and
qualified. Officers will hold their positions at the pleasure of the Board of
Directors, absent any employment agreement. There are no family relationships
among the Company's officers and directors. Officers and directors of the
Company may receive compensation as determined by the Company from time to time
by vote of the Board of Directors. Vacancies in the Board are filled by majority
vote of the remaining directors. Such compensation might be in the form of stock
options. Directors may be reimbursed by the Company for expenses incurred in
attending meetings of the Board of Directors.


-32-


EMPLOYMENT
AND OPTION AGREEMENTS





David Zaikin, Chief
Executive Officer and Director





David
Zaikin, the Company's Chief Executive Officer, signed an employment agreement
effective as of August 1, 2004, which expired as of December 31, 2008. Under the
agreement, Mr. Zaikin is obligated to perform at least 40 hours per week of work
on behalf of the Company. Unless terminated earlier, Mr. Zaikin's employment
agreement shall be effective until December 31, 2008. Mr. Zaikin is to be paid
an annual salary of US $180,000, subject to periodic review by the Board. At the
Board's discretion, it is possible for Mr. Zaikin to receive a performance based
bonus.





Mr.
Zaikin is provided eight (8) weeks of vacation leave per year. Additionally, Mr.
Zaikin also has the right under his employment agreement to purchase stock
options in the Company. Under the 2003 plan, Mr. Zaikin had the right to
purchase 100,000 shares of the authorized and unissued $0.001 par value
restricted stock, at an exercise price of $0.14 per share, which options expired
unexercised on January 1, 2008. Under the 2004 plan, Mr. Zaikin had the right to
purchase 100,000 shares of the Company's common stock, at an exercise price of
$0.20 per share, which options expired unexercised on January 1, 2009. Under the
2005 plan, Mr. Zaikin has the right to purchase 100,000 shares of the Company's
common stock, at an exercise price of $0.60 per share. Mr. Zaikin's stock option
plan continues until his employment contract ends, giving him the right to
purchase 10,000 shares of common stock as of January 1, of each year, and 7,500
shares on the first date of each month thereafter, up to a maximum of 100,000
shares per year, with the exercise prices as follows: for the year beginning
January 1, 2007 and any subsequent year, the exercise price will be 110% of the
average closing prices for the three months prior to each grant date. All stock
options received by Mr. Zaikin will terminate at 5:00 p.m. (Eastern Standard
Time) on the fourth anniversary of December 31st of each year in which the
options were granted. All options received by Mr. Zaikin are non-transferable,
except by will or the laws of decent and distribution, and any attempt to do so
shall void the option.





Under Mr.
Zaikin's employment agreement, if he is terminated without cause by the Company
or if Mr. Zaikin himself terminates his employment for a reasonable basis,
defined as: (A) a material breach of the agreement by the Company, provided that
he gives written notice of such default to the Company and if within thirty days
after receipt of such notice, the Company has not cured such default; or (B)
termination of his employment by the Company without cause during the term of
the agreement; or (C) a reduction in his salary, except to the extent that a
majority of the other executive officers of the Company incur reductions of
salary that average no less than the percentage reduction incurred by him; or
(E) his termination of the his employment within 12 months after a "Change in
Control," of the Company, as defined in the employment agreement; the Company
shall, in exchange for an execution and general release and waiver of claims
against the Company by Mr. Zaikin, continue to pay as severance Mr. Zaikin's
salary for twelve (12) months or one half (1/2) of the remaining term of the
agreement whichever is greater.





Helen Teplitskaia, President
and Director





Helen
Teplitskaia is the Company’s President and Director.  She has not
signed a formal employment agreement with the Company.  However,
through a letter agreement, the Company agreed to provide her compensation by
issuing her 10,000 shares of restricted common stock per month, beginning May
2007 and for each month thereafter for the years ended December 31, 2007 and
2008.  The Company also issued her 50,000 shares of restricted common
stock as a signing bonus.  Continuing throughout 2009, the Company
plans to issue Ms. Teplitskaia 10,000 shares of common stock per month for her
service to the Company, however the Company has not issued any shares to date,
and as such, the 30,000 shares of common stock due to Ms. Teplitskaia as of
March 31, 2009, are not included in the number of issued and outstanding shares
disclosed throughout this report.


-33-


Elena Pochapski, Chief
Financial Officer and Director





Elena
Pochapski is employed as the Company's Chief Financial Officer. She signed an
employment contract with the Company on August 1, 2003, which is effective until
December 31, 2008. Ms. Pochapski is to be paid an annual salary of US $75,000
subject to periodic review by the Board. Ms. Pochapski is entitled to six (6)
weeks of vacation time per year.





Additionally,
Ms. Pochapski has the right under her employment agreement to receive stock
options in the Company. Under the 2003 plan, Ms. Pochapski had the right to
purchase 100,000 shares of the authorized and unissued $0.001 par value
restricted stock of the Company for an exercise price of $0.14, which options
were exercised by Ms. Pochapski in February 2006. Under the 2004 plan Ms.
Pochapski had the right to purchase 100,000 shares at an exercise price of $0.20
per share, which options expired unexercised on December 31, 2008, under the
2005 plan, Ms. Pochapski has the right to purchase 100,000 shares at an exercise
price of $0.60 per share and under the 2006 plan, Ms. Pochapski has the right to
purchase 100,000 shares at an exercise price of $0.60 per share. Ms. Pochapski's
stock option plan continues until her employment contract ends, giving her the
right to purchase 10,000 shares of common stock as of January 1, of each year,
and 7,500 shares on the first date of each month thereafter, up to a maximum of
100,000 shares per year, with exercise prices as follows: for 2007 and each
subsequent year the exercise price is 110% of the average closing prices for the
three months prior to the grant date. All stock options received by Ms.
Pochapski will terminate at 5:00 p.m. (Eastern Standard Time) on the fourth
anniversary of December 31st of each year in which the options were granted. All
options received by Ms. Pochapski are non-transferable except by will or the
laws of decent and distribution and any attempt to do so shall void the
option.





Under Ms.
Pochapski's employment agreement, if she is terminated without cause by the
Company or if Ms. Pochapski herself terminates her employment for a reasonable
basis, defined as: (A) a material breach of the agreement by the Company,
provided that she gives written notice of such default to the Company and if
within thirty days after receipt of such notice, the Company has not cured such
default; or (B) termination of her employment by the Company without cause
during the term of the agreement; or (C) a reduction in her salary, except to
the extent that a majority of the other executive officers of the Company
incur reductions of salary that average no less than the percentage reduction
incurred by her; or (E) her termination of the her employment within 12 months
after a "Change in Control," of the Company, as defined in the employment
agreement; the Company shall, in exchange for an execution and general release
and waiver of claims against the Company by Ms. Pochapski, continue to pay as
severance Ms. Pochapski's salary for twelve (12) months or one half (1/2) of the
remaining term of the agreement whichever is greater.





On
September 1, 2005, the Company entered into an "Amendment to the Employment
Agreement Dated August 1, 2003" ("Amended Employment Agreement") with Elena
Pochapski. Pursuant to the terms of the Amended Employment Agreement, Ms.
Pochapski agreed to forgive $50,000 of salary which she was owed for services
rendered under her employment agreement, in return for the Company issuing her
400,000 shares of the Company's restricted common stock. Additionally, Ms.
Pochapski agreed to postpone the payment of the remaining $84,707 which she was
owed in connection with her employment agreement from the period from August 1,
2003 to August 30, 2005, until such time as the Company has sufficient profits
to pay the amount in cash either partially or in full. The Amended Employment
Agreement also set Ms. Pochapski's annual salary for the period from September
1, 2005 until August 30, 2006 at CDN $75,000, after which time her salary
returned to the amounts listed in her August 1, 2003 employment agreement. The
Amended Employment Agreement also provided for the Company to pay Ms. Pochapski
a monthly allowance of CDN $500 in consideration for her using her personal
automobile for Company related services.


-34-


Oleg V. Zhuravlev,
Director





Oleg V.
Zhuravlev, the President and Chief Executive Officer of ZNG, the Company's
subsidiary, and a Director of the Company has the right to receive stock options
in the Company pursuant to a Stock Option Agreement, which grants him options to
purchase shares of the Company's common stock under stock plans relating to
various years of his employment. Under the 2003 stock option plan, Mr. Zhuravlev
had the right to purchase all or any part of 200,000 shares of the authorized
and unissued $.001 par value restricted common stock of the Company at an
exercise price of $0.14 per share, which options expired unexercised on December
31, 2007. Additionally under the 2004 and 2005 plans, Mr. Zhuravlev had the
right to purchase 200,000 shares of the Company's common stock at the exercise
prices of $0.20 per share and $0.60 per share, respectively. The options granted
in 2004 expired unexercised on December 31, 2008.  Under the 2006
plan, Mr. Zhuravelev has the right to purchase 200,000 shares of common stock at
an exercise price of $0.60 per share. Mr. Zhuravlev's stock option plan
continues until his employment with the Company ends, giving him the right to
purchase 20,000 shares of common stock as of January 1, of each year, and 15,000
shares on the first date of each month thereafter, up to a maximum of 200,000
shares, with exercise prices as follows: for 2007 and every subsequent year the
exercise price is 110% of the average closing prices for the three months prior
to each grant. All stock options received by Mr. Zhuravlev will terminate at
5:00 p.m. (Eastern Standard Time) on the fourth anniversary of December 31st of
each year in which the options were granted. All options received by Mr.
Zhuravlev are non-transferable except by will or the laws of decent and
distribution and any attempt to do so shall void the option.





Vladimir V. Eret,
Director





Vladimir
V. Eret is employed as the Chief Operating Officer of ZNG, and a Director of the
Company. Mr. Eret has the right to receive stock options in the Company pursuant
to a Stock Option Agreement, which grants him options to purchase shares of the
Company's common stock under stock plans relating to various years of his
employment. Under the 2004 plan, Mr. Eret had the right to purchase 84,000
shares of common stock at $0.60 per share, which options expired unexercised on
December 31, 2008. Under the 2005 plan, Mr. Eret has the right to purchase
84,000 shares of common stock at $0.60 per share. Under the 2006 plan, Mr. Eret
has the right to purchase 84,000 shares of common stock at an exercise price of
$0.60 per share. Mr. Eret's stock option plan continues until his employment
with the Company ends, giving him the right to purchase 7,000 shares of common
stock as of January 1, of each year, and 7,000 shares on the first date of each
month thereafter, up to a maximum of 84,000 options per year, with exercise
prices as follows: for 2007 and every subsequent year the exercise price is 110%
of the average closing prices for the three months prior to each grant. All
stock options received by Mr. Eret will terminate at 5:00 p.m. (Eastern Standard
Time) on the fourth anniversary of December 31st of each year in which the
options were granted. All options received by Mr. Eret are non-transferable
except by will or the laws of decent and distribution and any attempt to do so
shall void the option.





Sergey Potapov,
Director





Sergey
Potapov, the Vice President of ZNG and a Director of the Company has the right
to purchase stock options in the Company pursuant to a Stock Option Agreement,
which grants him options to purchase shares of the Company's common stock under
stock plans relating to various years of his employment. Under the 2004 plan,
Mr. Eret had the right to purchase 84,000 shares of common stock at $0.60 per
share, which options expired unexercised on December 31, 2008.  Under
the 2005 plan, Mr. Eret has the right to purchase 84,000 shares of common stock
at $0.60 per share. Under the 2006 plan, Mr. Potapov has the right to purchase
84,000 shares of common stock at an exercise price of $0.60 per share. Mr.
Potapov's stock option plan continues until his employment ends, giving him the
right to purchase 7,000 shares of common stock as of January 1, of each year,
and 7,000 shares on the first date of each month thereafter, up to a maximum of
84,000 options per year, with exercise prices as follows: for 2007 and every
subsequent year the exercise price is 110% of the average closing prices for the
three months prior to each grant. All stock options received by Mr. Potapov will
terminate at 5:00 p.m. (Eastern Standard Time) on the fourth anniversary of
December 31st of each year in which the options were granted. All options
received by Mr. Potapov are non-transferable except by will or the laws of
decent and distribution and any attempt to do so shall void the
option.


-35-


Tim Peara,
Director





Tim
Peara, a Director of the Company has the right to purchase stock options in the
Company pursuant to a Stock Option Agreement. Under his Stock Option Agreement,
Mr. Peara has the right to purchase 100,000 shares of the Company's common stock
at an exercise price of $0.60 per share during the year ended December 31, 2005.
Mr. Peara has the right to purchase 100,000 shares of the Company's common stock
at an exercise price of $0.60 per share during the year ended December 31, 2006.
Mr. Peara's stock option plan continues until his employment is terminated or
ends, giving him the right to purchase 10,000 shares of common stock as of
January 1, of each year, and 7,500 shares on the first date of each month
thereafter, up to a maximum of 100,000 shares per year, with exercise prices as
follows: for 2007 and each subsequent year the exercise price is 110% of the
average closing prices for the three months prior to the grant date. All stock
options received by Mr. Peara according to the above will terminate at 5:00 p.m.
(Eastern Standard Time) on the fourth anniversary of December 31st of each year
in which the options were granted. All options received by Mr. Peara are
non-transferable except by will or the laws of decent and distribution and any
attempt to do so shall void the option.





Additionally,
Mr. Peara was granted 100,000 options to purchase shares of the Company's common
stock at $0.30 per share in consideration for consulting services provided to
the Company prior to his election as a Director of the Company (the "Consulting
Options"). One half or 50,000 shares of the Consulting Options were to expire at
5:00 p.m. (Eastern Standard Time) on May 1, 2006, however those options were
exercised by Mr. Peara prior to expiring, and one half or 50,000 of the
Consulting Options were to expire at 5:00 p.m. (Eastern Standard Time) on May 1,
2007, but were exercised by Mr. Peara prior to their expiration
date.





Additionally,
pursuant to an agreement between Alternative Energy Finance and the Company,
Timothy Peara, our Director and the managing Director of Alternative Energy
Finance, receives compensation based on the total investment made by Baltic in
the Joint Venture described in greater detail below under “Certain Relationships
and Related Transactions.”





ITEM 11. EXECUTIVE
COMPENSATION





Compensation
paid (or payable) to Officers and Directors is set forth in the Summary
Compensation Table below. The Company may reimburse its Officers and Directors
for any and all out-of-pocket expenses incurred relating to the business of the
Company.





Name
      And
            
            
            
            All
      Other
            
            
            TotalPrincipal
            Fiscal
            
            
            Compen-
            Stock
            Option
            Compen-Position
      (1)
            Year
            Salary
            Bonus
      ($)
            sation
            Awards
            Awards
            sationDavid
      Zaikin
            2008
            $180,000*
            --
            --
            --
            (2)
            180,000CEO
      and
            2007
            $180,000
            --
            --
            $309,700
            (2)
            $489,700ChairmanHelen
      Teplitskaia
            2008
            --
            --
            --
            $27,400
            --
            $27,400President
      and
            2007
            --
            --
            --
            $110,900
            --
            $110,900DirectorElena
      Pochapski
            2008
            $62,126*
            --
            --
            -
            (3)
            $62,126CFO  and
            2007
            $86,625
            --
            --
            -
            (3)
            $86,625DirectorOleg
      V.
            2008
            $0
            --
            --
            -
            (4)
            $0Zhuravlev
            2007
            $0
            --
            --
            -
            (4)
            $0DirectorVladimir
            2008
            $0
            --
            --
            -
            (5)
            $0Eret
            2007
            $0
            --
            --
            -
            (5)
            $0DirectorSergei
            2008
            $0
            --
            --
            --
            (6)
            $0Potapov
            2007
            $0
            --
            --
            --
            (6)
            $0DirectorTimothy
            2008
            $35,000*
            --
            --
            --
            $6,304(8)
            $41,304Peara
            2007
            $35,000
            --
            --
            -
            $867(8)
            $35,867Director
      (7)


-36-


Salaries
above do not include perquisites and other personal benefits in amounts less
than an aggregate of 10% of the individuals salaries listed above.





* All
salaries listed above for fiscal 2008 were accrued and remain unpaid as of the
filing of this report.





(1) Other
than the individuals listed above, the Company has no other executive employees
who have received more than $100,000 in compensation, including bonuses and
options, during each of the last two (2) fiscal years. No executive employee
listed above received any Non-Equity Incentive Plan Compensation or Nonqualified
Deferred Compensation Earnings over the past two (2) years.





(2) Mr.
Zaikin was granted 100,000 options to purchase shares of our common during each
of the fiscal years ended 2008, 2007, 2006, 2005 and 2004, pursuant to a Stock
Option Agreement he entered into with us in 2003. The exercise price of those
options for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20
and $0.14 per share, respectively. For 2007 and 2008, the exercise price is 110%
of the average closing prices for the three months prior to the grant date. A
further description of the granted options can be found below under “Outstanding
Equity Awards At Fiscal Year-End.”  All unexercised options expire on
December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Zaikin, as we were only a start-up company, which did
not publicly trade its stock, and as such, the options granted to Mr. Zaikin
during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table above.
The value of the options were calculated pursuant to FAS
123R.





(3) Ms.
Pochapski was granted 100,000 options to purchase shares of our common during
each of the fiscal years ended 2008, 2007, 2006, 2005 and 2004, pursuant to a
Stock Option Agreement she entered into with us in 2003. The exercise price of
those options for the years ended December 31, 2006, 2005 and 2004, were $0.60,
$0.20 and $0.14 per share, respectively. For 2007 and 2008, the exercise price
is 110% of the average closing prices for the three months prior to the grant
date. A further description of the granted options can be found below under
“Outstanding Equity Awards At Fiscal Year-End.” All unexercised options expire
on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Ms. Pochapski, as we were only a start-up company, which
did not publicly trade its stock, and as such, the options granted to Ms.
Pochapski during the periods disclosed above did not represent any expense on
the Company’s financial statements and therefore have no value in the table
above. The value of the options were calculated pursuant to FAS
123R.


-37-


(4) Mr.
Zhuravlev was granted 100,000 options to purchase shares of our common during
each of the fiscal years ended 2008, 2007, 2006, 2005 and 2004, pursuant to a
Stock Option Agreement he entered into with us in 2004. The exercise price of
those options for the years ended December 31, 2006, 2005 and 2004, were $0.60,
$0.20 and $0.14 per share, respectively. For 2007 and 2008, the exercise price
is 110% of the average closing prices for the three months prior to the grant
date. A further description of the granted options can be found below under
“Outstanding Equity Awards At Fiscal Year-End.”  All unexercised
options expire on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Zhuravlev, as we were only a start-up company, which
did not publicly trade its stock, and as such, the options granted to Mr.
Zhuravlev during the periods disclosed above did not represent any expense on
the Company’s financial statements and therefore have no value in the table
above. The value of the options were calculated pursuant to FAS
123R.





(5) Mr.
Eret was granted 84,000 options to purchase shares of our common stock during
each of the fiscal years ended 2008, 2007, 2006, 2005 and 2004, pursuant to a
Stock Option Agreement he entered into with us in 2004. The exercise price of
those options for the years ended December 31, 2006, 2005 and 2004, were $0.60,
$0.20 and $0.14 per share, respectively. For 2007 and 2008, the exercise price
is 110% of the average closing prices for the three months prior to the grant
date. A further description of the granted options can be found below under
“Outstanding Equity Awards At Fiscal Year-End.” All unexercised options expire
on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Eret, as we were only a start-up company, which did
not publicly trade its stock, and as such, the options granted to Mr. Eret
during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table above.
The value of the options were calculated pursuant to FAS 123R.





(6) Mr.
Potapov was granted 84,000 options to purchase shares of our common stock during
each of the fiscal years ended 2008, 2007, 2006, 2005 and 2004, pursuant to a
Stock Option Agreement he entered into with us in 2004. The exercise price of
those options for the years ended December 31, 2006, 2005 and 2004, were $0.60,
$0.20 and $0.14 per share, respectively. For 2007 and 2008, the exercise price
is 110% of the average closing prices for the three months prior to the grant
date. A further description of the granted options can be found below under
“Outstanding Equity Awards At Fiscal Year-End.”  All unexercised
options expire on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Potapov, as we were only a start-up company, which did
not publicly trade its stock, and as such, the options granted to Mr. Potapov
during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table above.
The value of the options were calculated pursuant to FAS 123R.





(7) Mr.
Peara’s salary and option awards in the table above, do not include amounts paid
by us to Alternative Energy Finance Ltd., which Mr. Peara is the Managing
Director of, which amounts are described in greater detail herein, as those fees
and options were not paid to Mr. Peara in consideration for his services to the
Company as a Director.





(8) Mr.
Peara was granted 100,000 options to purchase shares of our common stock during
each of the fiscal years ended 2008, 2007, 2006 and 2005, pursuant to a Stock
Option Agreement he entered into with us in 2004. The exercise price of those
options for the years ended December 31, 2006 and 2005, were $0.60 and $0.20 per
share, respectively. For 2007 and 2008, the exercise price is 110% of the
average closing prices for the three months prior to the grant date. A further
description of the granted options can be found below under “Outstanding Equity
Awards At Fiscal Year-End.” The value of the options granted in 2005, which
vested during 2008 and 2007 was approximately $6,304 and $867, respectively. All
unexercised options expire on December 31st of the
fourth year after they were granted. The value of the options were calculated
pursuant to FAS 123R.


-38-





OUTSTANDING EQUITY AWARDS AT
      FISCAL YEAR-ENDOPTION
      AWARDS
                                                                    STOCK
      AWARDSName
                                                                    Number
      of Securities Underlying Unexercised Options
                                                                    Number
      of Securities Underlying Unexercised Options
                                                                    Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
                                                                    Option
      Exercise Price
                                                                    Option
      Expiration Date
                                                                    Number
      of Shares or Units of Stock That Have Not Vested
                                                                    Market
      Value of Shares or Units of Stock That Have Not Vested
                                                                    Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
                                                                    Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested(a)
                                                                    (#)
                                                                    (#)
                                                                    (#)
                                                                    ($)
                                                                    (f)
                                                                    (#)
                                                                    ($)
                                                                    (#)
                                                                    (#)Exercisable
                                                                    Unexercisable
                                                                    (d)
                                                                    (e)
                                                                    
                                                                    (g)
                                                                    (h)
                                                                    (i)
                                                                    (j)(b)
                                                                    (c)David
      Zaikin
                                                                    17,500
                                                                    -
                                                                    -
                                                                    $0.72
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.63
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.49
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.38
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.31
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.31
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.34
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.33
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.32
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.26
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.21
                                                                    December
      31, 20127,500
                                                                    -
                                                                    -
                                                                    $0.14
                                                                    December
      31, 201217,500
                                                                    -
                                                                    -
                                                                    $2.26
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $2.14
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.94
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.62
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.69
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.82
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.79
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.77
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.46
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $1.16
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $0.86
                                                                    December
      31, 20117,500
                                                                    -
                                                                    -
                                                                    $0.76
                                                                    December
      31, 201147,500
                                                                    -
                                                                    -
                                                                    $0.60
                                                                    December
      31, 2010100,000
                                                                    -
                                                                    -
                                                                    $0.60
                                                                    December
      31, 2009


-39-




Elena
      Pochapski
                                                                  17,500
                                                                  -
                                                                  -
                                                                  $0.72
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.63
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.49
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.38
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.31
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.31
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.34
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.33
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.32
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.26
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.21
                                                                  December
      31, 20127,500
                                                                  -
                                                                  -
                                                                  $0.14
                                                                  December
      31, 201217,500
                                                                  -
                                                                  -
                                                                  $2.26
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $2.14
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.94
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.62
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.69
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.82
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.79
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.77
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.46
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $1.16
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $0.86
                                                                  December
      31, 20117,500
                                                                  -
                                                                  -
                                                                  $0.76
                                                                  December
      31, 2011100,000
                                                                  -
                                                                  -
                                                                  $0.60
                                                                  December
      31, 2010100,000
                                                                  -
                                                                  -
                                                                  $0.60
                                                                  December
      31, 2009


-40-




Oleg
      V. Zhuravlev
                                                                                                            17,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.72
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.63
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.49
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.38
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.31
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.31
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.34
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.33
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.32
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.26
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.21
                                                                                                            December
      31, 20127,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.14
                                                                                                            December
      31, 201217,500
                                                                                                            -
                                                                                                            -
                                                                                                            $2.26
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $2.14
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.94
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.62
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.69
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.82
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.79
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.77
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.46
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $1.16
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.86
                                                                                                            December
      31, 20117,500
                                                                                                            -
                                                                                                            -
                                                                                                            $0.76
                                                                                                            December
      31, 2011100,000
                                                                                                            -
                                                                                                            -
                                                                                                            $0.60
                                                                                                            December
      31, 2010100,000
                                                                                                            -
                                                                                                            -
                                                                                                            $0.60
                                                                                                            December
      31, 2009




-41-




Sergey
      Potapov
                                    7,000
                                    -
                                    -
                                    $0.72
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.63
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.49
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.38
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.31
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.31
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.34
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.33
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.32
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.26
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.21
                                    December
      31, 2012


7,000
                        -
                        -
                        $0.14
                        December
      31, 20127,000
                        -
                        -
                        $2.26
                        December
      31, 20117,000
                        -
                        -
                        $2.14
                        December
      31, 20117,000
                        -
                        -
                        $1.94
                        December
      31, 20117,000
                        -
                        -
                        $1.62
                        December
      31, 2011
  -42-
  7,000
                                -
                                -
                                $1.69
                                December
      31, 20117,000
                                -
                                -
                                $1.82
                                December
      31, 20117,000
                                -
                                -
                                $1.79
                                December
      31, 20117,000
                                -
                                -
                                $1.77
                                December
      31, 20117,000
                                -
                                -
                                $1.46
                                December
      31, 20117,000
                                -
                                -
                                $1.16
                                December
      31, 20117,000
                                -
                                -
                                $0.86
                                December
      31, 20117,000
                                -
                                -
                                $0.76
                                December
      31, 201184,000
                                -
                                -
                                $0.60
                                December
      31, 201084,000
                                -
                                -
                                $0.60
                                December
      31, 2009


Vladimir
      Eret
                                    7,000
                                    -
                                    -
                                    $0.72
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.63
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.49
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.38
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.31
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.31
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.34
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.33
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.32
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.26
                                    December
      31, 20127,000
                                    -
                                    -
                                    $0.21
                                    December
      31, 2012


-43-





7,000
                                            -
                                            -
                                            $0.14
                                            December
      31, 20127,000
                                            -
                                            -
                                            $2.26
                                            December
      31, 20117,000
                                            -
                                            -
                                            $2.14
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.94
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.62
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.69
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.82
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.79
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.77
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.46
                                            December
      31, 20117,000
                                            -
                                            -
                                            $1.16
                                            December
      31, 20117,000
                                            -
                                            -
                                            $0.86
                                            December
      31, 20117,000
                                            -
                                            -
                                            $0.76
                                            December
      31, 201184,000
                                            -
                                            -
                                            $0.60
                                            December
      31, 201084,000
                                            -
                                            -
                                            $0.60
                                            December
      31, 2009


Tim
      Peara (1)
                                          17,500
                                          -
                                          -
                                          $0.72
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.63
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.49
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.38
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.31
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.31
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.34
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.33
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.32
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.26
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.21
                                          December
      31, 20127,500
                                          -
                                          -
                                          $0.14
                                          December
      31, 201217,500
                                          -
                                          -
                                          $2.26
                                          December
      31, 20117,500
                                          -
                                          -
                                          $2.14
                                          December
      31, 2011
  -44-
 7,500
                                    -
                                    -
                                    $1.94
                                    December
      31, 20117,500
                                    -
                                    -
                                    $1.62
                                    December
      31, 20117,500
                                    -
                                    -
                                    $1.69
                                    December
      31, 20117,500
                                    -
                                    -
                                    $1.82
                                    December
      31, 20117,500
                                    -
                                    -
                                    $1.79
                                    December
      31, 20117,500
                                    -
                                    -
                                    $1.77
                                    December
      31, 20117,500
                                    -
                                    -
                                    $1.46
                                    December
      31, 20117,500
                                    -
                                    -
                                    $1.16
                                    December
      31, 20117,500
                                    -
                                    -
                                    $0.86
                                    December
      31, 20117,500
                                    -
                                    -
                                    $0.76
                                    December
      31, 2011100,000
                                    -
                                    -
                                    $0.60
                                    December
      31, 2010100,000
                                    -
                                    -
                                    $0.60
                                    December
      31, 2009







(1) Mr.
Peara’s option awards in the table above, do not include option and/or warrants
issued by us to Alternative Energy Finance Ltd., which Mr. Peara is the Managing
Director of, which are described in greater detail herein, as those options
and/or warrants were not issued to Mr. Peara in consideration for his services
to the Company as a Director.





COMPENSATION
DISCUSSION AND ANALYSIS





Director
Compensation





The
members of our Board of Directors each receive yearly option grants pursuant to
Option Agreements which they entered into with us when they were appointed
Directors of the Company. The Option Agreements and yearly option grants are
described in greater detail above under “Employment and Option Agreements.” The
Board of Directors reserves the right in the future to award the members of the
Board of Directors cash or stock based consideration for their services to the
Company, which awards, if granted shall be in the sole determination of the
Board of Directors.





Executive
Compensation Philosophy





Our Board
of Directors determines the compensation provided to our executive officers in
their sole determination. Our executive compensation program is designed to
attract and retain talented executives to meet our short-term and long-term
business objectives. In doing so, we attempt to align our executives’ interests
with the interests of our shareholders by providing an adequate compensation
package to such executives. This compensation package includes a base salary,
which we believe is competitive with other companies of our relative size. Our
Board of Directors reserves the right to award incentive bonuses which are
linked to our performance, as well as to the individual executive officer’s
performance in the future. This package may also include long-term, stock based
compensation to certain executives which is intended to align the performance of
our executives with our long-term business strategies, which may be similar to
the stock option grants which our Directors receive.


-45-


Base
Salary




The base
salary of our executive officers was established by our entry into Employment
Agreements with those individuals, as describe above. The salaries of those
individuals were established by evaluating the range of responsibilities of
their positions, as well as the anticipated impact that such individuals could
have in meeting our strategic objectives. The established base salary of each
individual was then benchmarked to comparable positions with that of our
industry and similarly sized companies. Base salaries are adjusted to reflect
the varying levels of position responsibilities and individual executive
performance.





Incentive
Bonus





Along
with our executives’ base salaries, the Board of Directors reserves the right to
give incentive bonuses to our executive officers and Directors, which bonuses
the Board of Directors may grant in its sole discretion, if the Board of
Directors believes such bonuses are in the Company’s best interest, after
analyzing our current business objectives and growth, if any, which growth is a
direct result of the actions and ability of such executives in the sole
discretion of the Board of Directors.





Long-term,
Stock Based Compensation





In order
to attract, retain and motivate executive talent necessary to support the
Company’s long-term business strategy we may award certain executives with
long-term, stock based compensation in the future, in the sole discretion of our
Board of Directors, which we do not currently have any immediate plans to
award.





Criteria
for Compensation Levels





The
Company has always sought to attract and retain qualified executives and
employees able to positively contribute to the success of the Company for the
benefit of its various stakeholders, the most important of which is its
shareholders, but also including its customers, its employees, and the
communities in which the Company operates.





The Board
of Directors (in establishing compensation levels for the Chief Executive
Officer and Chief Operating Officer, as well as other executive positions) and
the Company (in establishing compensation levels for all executives of the
Company) considers many factors, which may include, but are not limited to, the
individual’s abilities and executed performance that results in: the advancement
of corporate goals of the Company, execution of the Company’s business
strategies, contributions to positive financial results, contributions to the
Company’s overall image and reputation in the Company’s industry, and
contributions to the development of the management team and other
employees.





An
officer must demonstrate his or her ability to deliver results in his or her
areas of responsibility, which can include, among other things: business
development, efficient management of operations and systems, implementation of
appropriate changes and improvements to operations and systems, personnel
management, financial management, and strategic decision making. In determining
compensation levels, the Board of Directors may also consider: competitiveness
of compensation packages relative to other comparable companies, both inside and
outside of the oil and gas exploration and development industry, and the
experience level of each particular individual.





Compensation
levels for executive officers are generally reviewed upon the expiration of such
executive’s employment and/or consulting agreements (if any), or annually, but
may be reviewed more often as deemed appropriate.


-46-


Compensation
Philosophy and Strategy





In
addition to the “Criteria for Compensation Levels” set forth above, the Company
has a “Compensation Philosophy” for all employees of the Company (set forth
below), and a “Compensation Strategy for Key Management Personnel” (set forth
below), a substantial portion of which also applies to all employees of the
Company.





Compensation
Philosophy





The
Company’s compensation philosophy is as follows:





·
            The
      Company believes that compensation is an integral component of its overall
      business and human resource strategies. The Company’s compensation plans
      will strive to promote the hiring and retention of personnel necessary to
      execute the Company’s business strategies and achieve its business
      objectives.·
            The
      Company’s compensation plans will be strategy-focused, competitive, and
      recognize and reward individual and group contributions and results. The
      Company’s compensation plans will strive to promote an alignment of the
      interests of employees with the interests of the shareholders by having a
      portion of compensation based on financial results and actions that will
      generate future shareholder value.·
            In
      order to reward financial performance over time, the Company’s
      compensation programs generally will consist of: base compensation, and
      may also consist of short-term variable incentives and long-term variable
      incentives, as appropriate.·
            The
      Company’s compensation plans will be administered consistently and fairly
      to promote equal opportunities for the Company’s
  employees.





Compensation Strategy for
Key Management Personnel





The
Company’s compensation strategy for its key management personnel is as
follows:





·
            Total
      compensation may include base salary and short-term and long-term variable
      incentives based on annual and long term performance, and long-term
      variable incentives, in each case, where appropriate.·
            Compensation
      will be comparable to general and industry-specific compensation
      practices.





·
                  Generally,
      base compensation, and targeted short and long-term variable compensation,
      if any, will be established within the range of compensation of similarly
      situated companies in the Company’s industry. The Company’s organization,
      size and complexity will be taken into account, and therefore similarly
      situated companies include companies of similar size and complexity
      whether or not such companies are in the Company’s industry or
      not.·
                  When
      determining compensation for officers, managers and consultants, the
      Company takes into account the employee’s (and/or consultant’s) knowledge,
      experience, past employment history and connections
      in the industry, including industry specific knowledge and experience, to
      the extent such knowledge and experience contributes to the Company’s
      ability to achieve its business objectives.


·
            The
      Company reserves the right to adjust annual base salaries of employees
      and/or to award performance based bonuses if individual performance is at
      or above pre-established performance
  expectations.


-47-


ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





The
following table provides the names and addresses of each person known to own
directly or beneficially more than a 5% of the outstanding common stock (as
determined in accordance with Rule 13d-3 under the Exchange Act), based on
18,645,585 shares of common stock outstanding as of March 31, 2009 and by the
officers and directors, individually and as a group. Except as otherwise
indicated, all shares are owned directly.





Name
      And Address Of Beneficial Owner
              Shares
      Of Common Stock Beneficially Owned
                (1)
              Options
      to Purchase Shares of Common Stock Exercisable Within The Next 60
      Days
              Total
      Shares Of Common Stock Beneficially Owned (2)
              Percent
                (1)Victor
      Repin Kurgan City, Klimova St. 41,  Russia
640020
              1,750,000
              -
              1,750,000
      (5)
              9.4%David
      Zaikin           275
      Madison Ave., 6th Floor, New York, New York 10016 (3)
              1,160,000
              347,500
      (4)
              1,507,500
              7.9%Elena
      Pochapski  275 Madison Ave., 6th Floor, New York, New York
      10016
              380,000
      (5)
              400,000
      (6)
              780,000
              4.1%Oleg
      V. Zhuravlev Kurgan City Lenina St. 27/X Russia 640000
              25,000
              400,000
      (7)
              425,000
              2.2%Sergey
      Potapov Kurgan City Lenina St. 27/X Russia 640000
              10,000
              336,000
      (8)
              346,000
              1.8%Valdimir
      Eret     Kurgan City Lenina St. 27/X Russia
      640000
              10,000
              336,000
      (8)
              346,000
              1.8%Tim
      Peara
                275
      Madison Ave., 6th Floor, New York, New York 10016
              117,569
              731,213
      (9)
              848,782
              4.4%Helen
      Teplitskaia
                275
      Madison Ave.
                6th
      Floor
                New
      York, New York 10016
              250,000(10)
              -
              250,000
              1.3%Svetlana
      Slepchuk
                Mosfilmovskaya
      Street 17/25
                Apt.
      17
                Moscow,
      Russai 119330
              3,900,000
              -
              3,900,000
              20.9%All
      the Officers and Directors as a group (7 persons)
              1,952,569
              2,658,915
                (4),
      (6), (7), (8), (9)
              4,611,484
              21.6%


-48-


1) The
number of shares of common stock "beneficially owned" are determined under the
rules of the Securities and Exchange Commission, and include any shares of
common stock as to which a person has sole or shared voting or investment power
and any shares of common stock which the person has the right to acquire within
sixty (60) days through the exercise of any option, warrant or right. Shares of
common stock subject to an option or warrant currently exercisable or
exercisable within sixty (60) days are deemed outstanding for computing the
percentage of the person holding such option or warrant, but are not deemed
outstanding for computing the percentage of any other person.





2)
Includes both the number of shares of common stock beneficially owned as of
March 31, 2009, and any options which will vest and be exercisable within the
next sixty days.





3) David
Zaikin holds 400,000 of his shares in the name of WCM, Ltd, which is 100% owned
by Mr. Zaikin.





4)
Includes 100,000 options to purchase shares of our common stock at $0.60 per
share, which vested throughout the fiscal year ended 2005, 47,500 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2006 (Mr. Zaikin exercised 52,500 options in December
2006), 100,000 options to purchase shares of our common stock as described
above, which vested throughout the fiscal year ended 2007, and 100,000 options
to purchase shares of our common stock at an exercise price equal to 110% of the
average closing prices for the three months prior to each grant date as
described in greater detail above under “Outstanding Equity Awards At Fiscal
Year-End”. All options are valid until 5 P.M. December 31, on the fourth
anniversary of each year that the options vest. The options are described in
greater detail under "Employment and Option Agreements" above.




5)
Includes 30,000 shares held in Mrs. Pochapski’s daughter’s name, which Mrs.
Pochapski is deemed to beneficially own.





6)
Includes 100,000 options to purchase shares of our common stock at $0.60 per
share, which vested throughout the fiscal year ended 2005, 100,000 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2006, 100,000 options to purchase shares of our common
stock as described above, which vested throughout the fiscal year ended 2007 and
100,000 options to purchase shares of our common stock at an exercise price
equal to 110% of the average closing prices for the three months prior to each
grant date as described in greater detail above under “Outstanding Equity Awards
At Fiscal Year-End”. All options are valid until 5 P.M. December 31, on the
fourth anniversary of each year that the options vest. The options are described
in greater detail under "Employment and Option Agreements" above.





7)
Includes 100,000 options to purchase shares of our common stock at $0.60 per
share, which vested throughout the fiscal year ended 2005, 100,000 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2006, 100,000 options to purchase shares of our common
stock at as described above, which vested throughout the fiscal year ended 2007
and 100,000 options to purchase shares of our common stock at an exercise price
equal to 110% of the average closing prices for the three months prior to each
grant date as described in greater detail above under “Outstanding Equity Awards
At Fiscal Year-End”. All options are valid until 5 P.M. December 31, on the
fourth anniversary of each year that the options vest. The options are described
in greater detail under "Employment and Option Agreements"
above.


-49-


8)
Includes 84,000 options to purchase shares of our common stock at $0.60 per
share, which vested throughout the fiscal year ended 2005, 84,000 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2006, 84,000 options to purchase shares of our common
stock as described above, which vested throughout the fiscal year ended 2007,
and 84,000 options to purchase shares of our common stock at an exercise price
equal to 110% of the average closing prices for the three months prior to each
grant date as described in greater detail above under “Outstanding Equity Awards
At Fiscal Year-End”. All options are valid until 5 P.M. December 31, on the
fourth anniversary of each year that the options vest. The options are described
in greater detail under "Employment and Option Agreements" above.





9)
Includes certain options issuable to AEF in connection with amounts loaned to
ZNG (as described in greater detail herein), including 17,561 options to
purchase shares of our common stock at an exercise price of $0.67 per share,
which vested on March 31, 2006; 20,412 options to purchase shares of our common
stock at an exercise price of $2.02 per share, which vested on June 30, 2006;
20,952 options to purchase shares of our common stock at an exercise price of
$1.53 per share, which vested on September 30, 2006; 38,648 options to purchase
shares of our common stock at an exercise price of $1.44 per share, which vested
on December 31, 2006, 48,925 options to purchase shares of our common stock at
an exercise price of $1.10 per share, which warrants vested on March 31, 2007,
55,233 options to purchase shares of our common stock at an exercise price of
$1.14 per share, which vested on June 30, 2007, 51,352 options to purchase
shares of our common stock at an exercise price of $0.74 per share, which
warrants vested on September 30, 2007, 78,130 options to purchase shares of our
common stock at an exercise price of $0.46 per share, which vested on December
31, 2007, which options expire if unexercised on the third anniversary of the
date they were granted. Finally, the amount listed above includes 100,000
options to purchase shares of our common stock at $0.60 per share, which vested
throughout the fiscal year ended 2005, 100,000 options to purchase shares of our
common stock at $0.60 per share, which vested throughout the fiscal year ended
2006, 100,000 options to purchase shares of our common stock as described above,
which vested throughout the fiscal year ended 2007 and 100,000 options to
purchase shares of our common stock at an exercise price equal to 110% of the
average closing prices for the three months prior to each grant date as
described in greater detail above under “Outstanding Equity Awards At Fiscal
Year-End”. All Director options are valid until 5 P.M. December 31, on the
fourth anniversary of each year that the options vest. The options are described
in greater detail under "Employment and Option Agreements" above.





10) Does
not include 30,000 shares, 10,000 each for the months ended January through
March 2009, which the Company has agreed to issue to Ms. Teplitskaia in
consideration for services rendered, which shares have not been issued to date
and have not been included in the number of issued and outstanding shares
disclosed throughout this report.





ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS





On May 1,
2006, our Director, Timothy Peara exercised his option to purchase 50,000 shares
of our common stock in accordance with the terms of his Option agreement entered
into in consideration for consulting services rendered in 2005. Mr. Peara
elected a cashless exercise of the options and he will therefore receive the
full number of shares exercised (50,000), less the number of shares that totaled
the aggregate exercise price of the 50,000 shares ($15,000 with each option
exercisable at $0.30 per share), based on the average market value of the common
stock on the five (5) trading days prior to Mr. Peara's exercise ($2.00), which
is equal to 7,500 shares. As a result, Mr. Peara was issued 42,500 shares in
connection with the exercise of his options.


-50-


We
previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which Tim
Peara is the Managing Director as well as a Director of the Company, certain
warrants in connection with Mr. Peara introducing the parties who formed the
joint venture. Pursuant to an agreement between AEF and the Company, AEF will
receive compensation based on the total investment made by Baltic Petroleum Ltd.
in the Joint Venture.





In
connection with that agreement, the following warrants were granted to AEF:
17,561 warrants to purchase shares of our common stock at $0.67 per share, which
were granted to Mr. Peara on March 31, 2006; 20,412 warrants to purchase shares
of our common stock at an exercise price of $2.02 per share, granted effective
June 30, 2006; 20,952 warrants to purchase shares of our common stock at an
exercise price of $1.53 per share effective September 30, 2006; and 38,648
warrants to purchase shares of our common stock at an exercise price of $1.44
per share effective December 31, 2006.  All of the warrants are
exercisable for three years from the date of issuance and contain a cashless
exercise provision.





From
January 1, 2007 to December 31, 2007, we accrued approximately $108,827 in fees
payable to AEF in connection with the AEF agreement, which funds have not been
paid to date, and we also issued AEF the following securities pursuant to the
agreement: 48,925 warrants to purchase shares of our common stock at an exercise
price of $1.10 per share effective March 31, 2007; 55,233 warrants to purchase
shares of our common stock at an exercise price of $1.14 per share, effective
June 30, 2007; 51,352 warrants to purchase shares of our common stock at an
exercise price of $0.74 per share, effective September 30, 2007; and 78,130
warrants to purchase shares of our common stock at an exercise price of $0.46
per share, effective December 31, 2007.  All of the warrants are
exercisable for three years from the date of issuance and contain a cashless
exercise provision.





On March
13, 2007, Mr. Peara personally, and on behalf of AEF agreed to accept 58,134
shares of our restricted common stock in consideration for the forgiveness of
$45,626 owed personally to Mr. Peara in Director’s fees and accrued expenses and
$47,969 owed to AEF in connection with our agreement with AEF for fees due from
the period from March 31, 2006 to December 31, 2006, which shares have been
issued to date and which debt has been forgiven by Mr. Peara and
AEF.





We have
not been required to pay AEF any additional consideration and/or issue AEF any
additional warrants since December 31, 2007, as Baltic has not invested any
additional funds into the Joint Venture since the end of that
period.





On
January 25, 2007, our Board of Directors approved the issuance of an aggregate
of 465,000 shares of our restricted common stock to our current officers and
Directors in consideration for services rendered to the Company during the year
ended December 31, 2006, as follows:




o
            350,000
      shares of our restricted common stock to David Zaikin, our Chief Executive
      Officer and Director, which compensation was granted by our Board of
      Directors in its sole discretion, even though Mr. Zaikin had previously
      agreed not to be paid or accrue any salary for fiscal
  2006;o
            50,000
      shares of our restricted common stock to Elena Pochapski, our Chief
      Financial Officer and Director;o
            20,000
      shares of our restricted common stock to Timothy Peara, our
      Director;o
            25,000
      shares of our restricted common stock to Oleg Zhuravlev, our
      Director;o
            10,000
      shares of our restricted common stock to Vladimir Eret, our Director;
      ando
            10,000
      shares of our restricted common stock to Sergei Potapov, our
      Director.





On
January 25, 2007, we approved an annual salary of $180,000 (plus a performance
based bonus to be determined by the Board of Directors at the end of the 2007
fiscal year, which bonus totaled 190,000 shares valued at $309,700, which shares
were issued in July 2007) for our Chief Executive Officer and Director, David
Zaikin for the 2007 fiscal year. On January 31, 2007, Mr. Zaikin notified us
that effective February 1, 2007, he was withdrawing his previous request to not
accrue any salary until we had sufficient funds to pay such salary, and instead
requested that we pay him his 2007 salary if funds were available for such
payments and/or that we accrue such salary until we have sufficient funds to
repay him any accrued amounts. In February 2007, our Board of Directors approved
the issuance of 350,000 shares of our restricted common stock to Mr. Zaikin, in
consideration for compensation for the year ended December 31, 2006, which
compensation was granted by our Board of Directors in its sole discretion, even
though Mr. Zaikin had previously agreed not to be paid or accrue any salary for
fiscal 2006.  In July 2007, we issued an aggregate of 190,000
restricted shares of common stock to Mr. Zaikin, and certain of his assigns, in
consideration for services rendered during the first two quarters of
2007.


-51-


On
January 26, 2007, the Company's Chief Executive Officer, President and Director,
David Zaikin transferred 25,000 shares of the Company's restricted common stock
which he held to the Toronto Jewish Academy Ohr Menahem (“TJA”). The shares were
transferred to the TJA as a charitable donation from Mr. Zaikin
personally.





On
January 26, 2007, the Company's Chief Financial Officer and Director, Elena
Pochapski transferred 30,000 shares of the Company's restricted common stock
which she held to her daughter, which shares she is deemed to beneficially own,
and which shares have been included in her beneficial ownership listed
throughout this report.





In June
2007, we issued 70,000 shares of restricted common stock to our President, Helen
Teplitskaia, of which 50,000 shares were a sign-on bonus in connection with her
agreeing to be an officer of the Company in May 2007, and 20,000 shares were
part of her compensation package with the Company, whereby she is to be paid
10,000 shares per month for her service to the Company, which shares were issued
for services rendered in May and June 2007. During the period from July to
December 2007, 50,000 shares were issued for services rendered in July through
November 2007.  In June 2008, we issued an aggregate of 70,000
restricted shares of common stock to Ms. Teplitskaia in consideration for
services rendered during the months of December 2007, and January through June
2008.  Ms. Teplitskaia was subsequently issued the shares she was due
for the months ended July 2008 through December 2008 in November
2008.





In July
2007, Mr. Zaikin agreed to transfer 40,000 shares of the Company's restricted
common stock which he held to the Toronto Jewish Russian Academy Ohr Menahem
(the "TJRA”). The shares were transferred to the TJRA as a charitable donation
from Mr. Zaikin personally.





In July
2007, Ms. Pochapski agreed to transfer 75,000 shares of the Company's restricted
common stock which she held to the Jewish- Russian Community Center (the
"JRCC”). The shares were transferred to the JRCC as a charitable donation from
Ms. Pochapski personally.





ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES





Audit
Fees





The
aggregate fees billed for each of the fiscal years ended December 31, 2008 and
2007 for professional services rendered by the principal accountant for the
audit of the Company's annual financial statements and the review of the
Company's quarterly financial statements were $36,000 and $26,000,
respectively.





Audit
Related Fees





None.





Tax
Fees





The
aggregate fees billed for each of the fiscal years ended December 31, 2008 and
2007 for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning was $1,750 and $1,800,
respectively.




All
Other Fees





Other
fees billed by our principal accountant in 2007 included review and evaluation
of responses to SEC queries surrounding the Company’s Form 10-KSB for 2006. The
total amount billed in 2007 was $6,200 and $8,000 in 2008.


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ITEM 15. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES





(a)
Exhibits





Exhibit
      No.
              Description
      of Exhibit10.1(1)
              Option
      Agreement with Baltic Petroleum Limited dated April 28,
    200510.2(1)
              License
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.3(1)
              Loan
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.4(1)
              Guarantee
      by Siberian Energy Group, Inc. dated April 28, 200510.5(1)
              Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28, 200510.6(2)
              Option
      Agreement with Baltic Petroleum Limited dated April 28,
    200510.7(2)
              License
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.8(2)
              Loan
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.9
      (2)
              Guarantee
      by Siberian Energy Group, Inc. dated April 28, 200510.10
      (2)
              Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28, 200510.11
      (3)
              Clarification
      to the Contract of Purchase and Sale of the Share in Charter Capital of
      LLC "Zauralneftegaz" dated 15 May 200410.12
      (3)
              Agreement
      with Business - Standard (translated from Russian version)10.13
      (3)
              Supplementary
      Agreement to Business - Standard Agreement (translated from Russian
      version)10.14
      (3)
              Supplementary
      Agreement No. 2 to Business - Standard Agreement (translated from Russian
      version)10.15
      (3)
              Deed
      of Amendment between ZNG and BP10.16
      (3)
              Deed
      of Amendment between the Company and BP10.17
      (4)
              Joint
      Venture Shareholders' Agreement with Baltic Petroleum (E&P) Limited
      and Zauralneftegaz Limited dated October 14, 200510.18
      (5)
              Amendment
      to the Employment Agreement Dated August 1, 2003, with Elena
      Pochapski10.19
      (5)
              Form
      of Waiver Agreement10.20(6)
              Loan
      Agreement between OOO Zauralneftegaz and Caspian Finance
      Limited                                           -53-
  10.21(6)
                Deed
      of Novation between Baltic Petroleum Limited, Caspian Finance Limited and
      OOO Zauralneftegaz10.22(6)
                Deed
      of Release10.23(6)
                Release
      of Pledge10.24(6)
                Guarantee10.25(6)
                Debenture10.26(6)
                Agreement
      for the Pledge of the Participatory Interest in OOO Zauralneftegaz
      (Russian translation removed)10.27(6)
                Sale
      and Purchase Agreement





10.28(8)
            Option
      Agreement with Key Brokerage10.29(8)
            Warrant
      Agreement with Key Brokerage10.30(9)
            July
      26, 2006 Deed of Agreement10.31(10)
            Consulting
      Agreement with Business Standard10.32(11)
            Addition
      to the Loan Agreement of November 9, 200510.33(11)
            Gross
      Overriding Royalty Agreement10.34(12)
            Amendment
      No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
      Pochapski10.35(13)
            Deed
      of Variation to the Loan Agreement Dated 9th
      of November 2005, Entered into in June 200710.36(14)
            Agreement
      of Purchase and Sale10.37(14)
            Operating
      Agreement21.1*
            Subsidiaries31.1*
            Certificate
      of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
      Act of 200231.2*
            Certificate
      of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
            Certificate
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2*
            Certificate
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200299.1(7)
            Glossary


-54-


* Filed
herein.





(1) Filed
as Exhibit 10.1, 10.2, 10.3, 10.4 and 10.5 to the Company's Form 8-K filed with
the Commission on May 20, 2005, and incorporated herein by
reference.





(2) Filed
as Exhibits to the Company's Form 8-K filed with the Commission on May 20, 2005,
and incorporated herein by reference.





(3) Filed
as Exhibits to the Company's Report on Form 10-QSB, filed with the Commission on
August 22, 2005, and incorporated herein by reference.





(4) Filed
as Exhibits to the Company's Report on Form 8-K, filed with the Commission on
October 28, 2005, and incorporated herein by reference.





(5) Filed
as Exhibits to our Report on Form 10-QSB for the period ending September 31,
2005, which was filed with the Commission on November 21, 2005, and is
incorporated herein by reference.





(6) Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on December 2,
2005, and incorporated herein by reference.




(7) Filed
as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December 31,
2005, and incorporated herein by reference.





(8) Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on September
19, 2006, and incorporated herein by reference.





(9) Filed
as an Exhibit to our Report on Form 10-QSB, filed with the Commission on
November 14, 2006, and incorporated herein by reference.





(10)
Filed as an Exhibit to our Form 8-K filed with the Commission on February 20,
2007, and incorporated herein by reference.





(11)
Filed as Exhibits to our Report on Form 10-KSB filed with the Commission on
February 2, 2007, and incorporated herein by reference.





(12)
Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission on
May 15, 2007, and incorporated herein by reference.





(13)
Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission on
August 14, 2007, and incorporated herein by reference.





(14)
Filed as an Exhibit to our Report on Form 8-K filed with the Commission on
November 14, 2008, and incorporated herein by reference.


-55-


SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




SIBERIAN ENERGY GROUP
INC.





DATED: 
      April 14, 2009
                By: /s/
      David ZaikinDavid
      ZaikinChief
      Executive Officer(Principal
      Executive Officer)DATED:
      April 14, 2009
                By: /s/
      Elena PochapskiElena
      PochapskiChief
      Financial Officer(Principal
      Accounting Officer)





In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.





NAME
                                        TITLE
                                        DATE/s/ David Zaikin
                                        Chief
      Executive Officer
                                        April
      14, 2009David
      Zaikin
                                        and
      Chairman of the Board of Directors(Principal
      Executive Officer)/s/ Elena
      Pochapski
                                        Chief
      Financial Officer (Principal Accounting Officer)
                                        April
      14, 2009Elena
      Pochapski
                                          (Principal Financial Officer)
                                        and
      Director/s/
      Helen Teplitskaia
                                        President
      and Director
                                        April
      14, 2009Helen
      Teplitskaia/s/ Oleg V. Zhuravlev
                                        Director
                                        April
      14, 2009Oleg
      V. Zhuravlev/s/ Sergey Potapov
                                        Director
                                        April
      14, 2009Sergey
      Potapov


-56-