UNITED
STATES
 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, 2009
 
 [  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
 For the
transition period from __________ to __________
 
 Commission
file number: 000-53766
 
 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:
 
 Common
Stock, $0.001 par value
 (Title of
Class)
 
 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 [  ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was require to submit and post such files).  Yes
[  ]  No [  ]
 
 Indicated
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is 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-K
or any amendment to this Form 10-K. [X]
 
 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, 2009 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, 2009, was approximately $657,776.
 
 As of
April 13, 2010, the issuer had 18,705,585 shares of common stock, $.001 par
value per share outstanding, which number does not include 90,000 shares which
the registrant has agreed to issue to its President, Helen Teplitskaia for
services rendered during the months of July 2009 through March 2010, which
shares have not been issued to date and have not been included in the total
number of outstanding shares disclosed throughout this report.
 
 Documents
Incorporated by Reference: NONE
 
 Transitional
Small Business Disclosure Format: Yes [   ] No [X]
 
 SIBERIAN
ENERGY GROUP INC.
 FORM
10-K
 YEAR
ENDED DECEMBER 31, 2009
 INDEX
 
 Part
I
 
 Item
      1. Business
              4Item
      1A. Risk Factors
              12Item
      2. Properties
              18Item
      3. Legal Proceedings
              18Item
      4. (Removed and Reserved)
              18
 
 Part
II
 
 Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
              19Item
      6. Selected Financial Data
              20Item
      7. Management's Discussion and Analysis or Plan of
    Operation
              21Item
      8. Financial Statements and Supplementary Data
              F-1Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
              25Item
      9A. Controls and Procedures
              25Item
      9B. Other Information
              26
 
 Part
III
 
 Item
      10. Directors, Executive Officers and Corporate Governance
              27Item
      11. Executive Compensation
              31Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
              36Item
      13. Certain Relationships and Related Transactions
              38Item
      14. Principal Accountant Fees and Services
              41
 
 Part
IV
 
 Item
      15. Exhibits, Financial Statement Schedules
              42
 
 
 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,
2009.
 
 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, and a
former Director of the Company. 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, provided however, as described below, ZNG, Ltd. has advised us
that it will no longer undertake any further exploration activities in Western
Siberia.
 
 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
Western 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 kilometers 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.
 
 As of
December 31, 2009 KNG has re-interpreted the existing seismic data from prior
studies and updated its program of seismic works. 2D seismic studies are
currently planned to start in the fourth quarter of 2010.
 
 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 or 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.
 
 -6-
 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:
 
 ·
              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 to the Operator
all of the geological data, 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 the
date of this filing, Neftebitum has raised approximately $155,000 through the
sale of debt to pay for the first stage of the seismic project and the
government fees for the subsoil use.
 
 As of December 31, 2009, the Company
owned a 44% interest in KNG. Effective September 30, 2008, the Company's 44%
investment in KNG is recorded on the equity method of accounting. The operations
of KNG prior to September 30, 2008 are included in the consolidated accounts of
the Company in the accompanying financial statements.
 
 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 a
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 in connection with a
potential 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
(which have since expired): 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. Upon the expiration of the license terms
of these blocks in March 2008, ZNG kept the preferential right to re-apply for
the licenses.
 -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, 2009.
 
 As of the
date of this filing, Baltic has advised us that Baltic and as a result, ZNG, has
withdrawn from any further exploration activities in the Kurgan region and that
they will not expend any further resources on such activities moving
forward.  Baltic has however advised us that they believe they may be
able to sell ZNG’s previously prepared seismic and geological studies and data
in the future, assuming other exploration companies in the area desire to
purchase such information, of which there is no assurance.
 
 Joint
Venture
 
 The
operations of the Joint Venture were 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, 2009, 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.
 
 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, 2009, 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, 2009.
 -8-
 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”).
 
 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.
 -9-
 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 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, 2009 totaled approximately $18
million.
 
 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 three (3) 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.,
currently employs two (2) part-time employees.
 
 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 of $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.
 -10-
 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.
 -11-
 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
EnvironmentalLaws
 
 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 ADDITIONALFINANCING.
 
 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, 2009, 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 previously licensed area.
Our partner in ZNG, Baltic has informed us that they do not plan to move forward
with any further exploration activities through ZNG. 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.
 -12-
 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 aware of Neftebitum raising only a small part of this
financing and the Company can make no assurances that sufficient 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.
 
 OUR AUDITORS HAVE EXPRESSED
SUBSTANTIAL DOUBT AS TO WHETHEROUR 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 $666,116 for the year ended
December 31, 2009, a net loss of $5,863,560 for the year ended December 31,
2008, and had a total accumulated deficit of $15,522,505 as of December 31,
2009. 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 EVALUATEUS, 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 GENERATEPROFITS 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, 2009, was $15,072,720, and our total cumulative deficit was
$15,522,505 which included $449,785 of pre-development stage deficit. We had
$1,152,054 in accrued and unpaid salaries and a working capital deficit of
$2,350,319 as of December 31, 2009. 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. If throughout KNG’s future oil exploration, if
any, no viable wells are found, and consequently, we generate only minimal
revenues 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.
 -13-
 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 restart exploration activities, 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 previously 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.
 
 WE HAVE A POOR FINANCIAL POSITION AND
IF WE DO NOT GENERATEREVENUES, 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 KNG DOES NOTFIND
HYDROCARBON RESERVES, WE MAY BE FORCED TO CURTAIL OURBUSINESS PLAN.
 
 There is
a risk that KNG will not find any hydrocarbon reserves and the cost of
exploration will become too high for us to continue KNG’s business plan. As our
only current operations are through our 44% ownership of KNG, if 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 PRESSURESCOULD 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 profits, the Company may be forced to liquidate its assets and an
investment in our Company could become worthless.
 -14-
 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 not
currently employed under 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.
 
 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.
  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 officers and Directors. 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.
 -15-
 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.
 
 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 2010, 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.
 -16-
 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.
 
 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.
 
 STATE
SECURITIES LAWS MAY LIMIT SECONDARY TRADING, WHICH MAY RESTRICT THE STATES IN
WHICH AND CONDITIONS UNDER WHICH YOU CAN SELL SHARES.
 
 Secondary
trading in our common stock may not be possible in any state until the common
stock is qualified for sale under the applicable securities laws of the state or
there is confirmation that an exemption, such as listing in certain recognized
securities manuals, is available for secondary trading in the state. If we fail
to register or qualify, or to obtain or verify an exemption for the secondary
trading of the common stock in any particular state, the common stock cannot be
offered or sold to, or purchased by, a resident of that state. In the event that
we do not apply for registration in, there is not a valid exemption for, and/or
a significant number of states refuse to permit secondary trading in our common
stock, the liquidity for the common stock could be significantly
impacted.
 -17-
 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.  The Company is currently
taking steps to move its New York office space, and as such, the Chief Executive
Officer has been personally paying the Company’s office space rent and not
billing the Company since approximately December 31, 2008, which resulted in the
Company having no rent or occupancy expense for the year ended December 31,
2009.
 
 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.
 
 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. (REMOVED AND
RESERVED)
 -18-
 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 3,025,640 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, 2009. We have no outstanding
shares of preferred stock. As of April 13, 2010, there were 18,705,585 shares of
common stock outstanding, held by approximately 125 shareholders of record,
which number does not include 90,000 shares which the Company has agreed to
issue to its President, Helen Teplitskaia for services rendered during the
months of July 2009 through March 2010, which shares have not been issued to
date and have not been included in the total number of outstanding shares
disclosed throughout this report.
 
 The
following table sets forth the high and low closing prices for the Company's
common stock, rounded to the nearest one cent, 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
      Prices
                  Quarter Ended
              
              High
              
              
              LowDecember
      31, 2009
              
              $
              0.12
              
              
              $
              0.05September
      30, 2009
              
              $
              0.25
              
              
              $
              0.05June
      30, 2009
              
              $
              0.13
              
              
              $
              0.05March
      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
              
              
              $
              0.25
 
 Dividends
 
 We have
never declared or paid any cash dividends on our common stock, and we do not
anticipate paying any dividends in the foreseeable future.  We intend
to devote any earnings to fund the operations and the development of our
business.
 
 Common
Stock
 
 Holders
of shares of common stock are entitled to one vote per share on each matter
submitted to a vote of shareholders. In the event of liquidation, holders of
common stock are entitled to share pro rata in the distribution of assets
remaining after payment of liabilities, if any. Holders of common stock have no
cumulative voting rights, and, accordingly, the holders of a majority of the
outstanding shares have the ability to elect all of the directors. Holders of
common stock have no preemptive or other rights to subscribe for shares. Holders
of common stock are entitled to such dividends as may be declared by the Board
out of funds legally available therefore. The outstanding shares of common stock
are validly issued, fully paid and non-assessable.
 -19-
 EQUITY
COMPENSATION PLAN INFORMATION
 
 The
following table provides information as of December 31, 2009 regarding
compensation plans (including individual compensation arrangements) under which
equity securities are authorized for issuance:
 
 Plan
      Category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              Weighted-average
      exercise price of outstanding options,
                warrants
      and rights
              
              Number
      of securities available for future issuance under equity compensation
      plans (excluding those in first column)Equity
      compensation plans approved by the security holders
              
              -
              
              -
              
              -Equity
      compensation plans not approved by the security holders
              
              2,492,000
              
              $0.44
              
              -Total
 
 RECENT
SALES OF UNREGISTERED SECURITIES
 
 The
Company has previously agreed to pay its President, Helen Teplitskaia, 10,000
shares of common stock per month for her service to the Company.  As
such, in June 2009, the Company issued Ms. Teplitskaia an aggregate of 60,000
shares, 10,000 shares per month from January 2009 to June 2009.  The
Company also owes Ms. Teplitskaia an additional 90,000 shares for services
rendered during the months of July, August, September, October, November and
December 2009 and the months of January, February and March 2010, which shares
the Company has agreed to issue to its President, Helen Teplitskaia for services
rendered during the months of July 2009 through March 2010, which shares have
not been issued to date and have not been included in the total number of
outstanding shares disclosed throughout this report.
  The
Company claims an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended, since the foregoing issuance did not involve
a public offering, the recipient took the securities for investment and not
resale and the Company took appropriate measures to restrict
transfer.
 
 ITEM 6. SELECTED FINANCIAL
DATA
 
 Not
required.
 
 -20-
 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.
 
 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.
 
 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 and
subsequent decision of Baltic not to pursue further exploration activities
through ZNG, no management fees have been paid since October 2007, and the
Joint Venture will not pay any management fees in the future.  As the
Company will not receive any management fees moving forward, the Company
believes 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 $523,906 and $447,663 were
payable to the stockholders as of December 31, 2009 and December 31, 2008,
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.
 -21-
 COMPARISON
OF OPERATING RESULTS
 
 RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009, COMPARED TO THE YEAR ENDED
DECEMBER 31, 2008
 
 We had no
revenues and other income for the year ended December 31, 2009 or
2008.  Until October 2007, the Company received monthly management
fees of between $25,000 and $85,000 pursuant to terms of the Joint
Venture.  However, the Company has not received any management fees
since October 2007, and does not anticipate receiving any such fees moving
forward.
 
 We have
not generated any revenues to date through the sale of oil and/or
gas.
 
 We had
total expenses of $636,616 for the year ended December 31, 2009, compared to
total expenses for the year ended December 31, 2008, of $740,043, which
represented a decrease in total expenses from the prior period of $103,427 or
14.0%.
 
 The main
reasons for the decrease in total expenses for the year ended December 31, 2009,
compared to the year ended December 31, 2008, were an $84,851 or 26.9% decrease
in professional and consulting fees to $231,132 for the year ended December 31,
2009, compared to $315,983 for the year ended December 31, 2008, which decrease
is largely attributable to the fact that the Company used less third party
consultants and advisors during the year ended December 31, 2009, compared to
the same period of 2008; a $24,656 or 45.5% decrease in marketing and other
expenses, to $29,569 for the year ended December 31, 2009, compared to $54,225
for the year ended December 31, 2008; and a $14,101 decrease in rent and
occupancy expenses to no rent and occupancy expenses for the year ended December
31, 2009, compared to $14,101 for the year ended December 31, 2008, partially
offset by a $21,543 or 6.2% increase in salaries to $368,253 for the year ended
December 31, 2009, compared to $346,710 for the year ended December 31,
2008.  The Company is currently taking steps to move its New York
office space, and as such, the Chief Executive Officer has been personally
paying the Company’s office space rent and not billing the Company since
approximately December 31, 2008, which resulted in the Company having no rent or
occupancy expense for the year ended December 31, 2009.
 
 We had
certain one-time additional expenses during the year ended December 31, 2008,
which were not represented during the year ended December 31, 2009, including
$669,570 of loss from sale of investment (described
below),  $3,928,000 of loss on deemed disposition of oil and gas
properties, unproved (described below), and $525,947 of impairment charge on
investment. 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 $669,570 of loss from sale of
investment for the year ended December 31, 2008 can be attributed to our sale of
a controlling interest in KNG as described in greater detail
above.  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
associated with KNG, 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 a
net loss of $666,116 for the year ended December 31, 2009, which included
$636,616 of operating expenses discussed above and a $29,500 loss from
disposition of a loan to KNG, since the Company is not expecting repayment of
this loan. Net loss of $666,116 represented a decrease in net loss of $5,197,444
or 88.6% from net loss of $5,863,560 for the year ended December 31, 2008, which
decrease in net loss was mainly due to the certain one-time expenses associated
with the Company’s accounting for the sale of KNG during the year ended December
31, 2008, as described above, which were not repeated during the year ended
December 31, 2009.
 -22-
 LIQUIDITY
AND CAPITAL RESOURCES
 
 We had
current assets of $1,320 as of December 31, 2009, which included cash of $751;
and prepaid expenses and other current assets of $569.
 
 We had
total assets of $2,587 as of December 31, 2009, which included current assets of
$1,320 and non-current assets of $1,267 representing property and equipment,
net.
 
 We had
total liabilities of $2,351,639 as of December 31, 2009, which were solely
current liabilities and which included $523,906 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, 2009; $68,848
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; $606,831 of
accounts payable to others for advisory and professional services rendered; and
$1,152,054 of accrued payroll, which included $652,500 payable to our Chief
Executive Officer, David Zaikin, of which $540,000 was accrued in 2007-2009, 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,
$239,529 payable to our Chief Financial Officer, Elena Pochapski, and $69,242 of
accrued salary payable to our former Chief Executive Officer, Shakeel
Adam.
 
 We had
negative working capital of $2,350,319 and a total pre-development and
development stage accumulated deficit of $15,522,505 as of December 31,
2009.
 
 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, 2009. 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, 2009, 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
$19,831 of net cash flows from operating activities for the year ended December
31, 2009, which was attributable to adjustments to reconcile $666,116 of net
loss, offset by $606,422 of accounts payable and accrued expenses, $621 of
depreciation and amortization, $49,452 of common stock and warrants issued for
services and increased by $48 of prepaid expenses and other
assets.
 
 In
connection with the Joint Venture (described under "Joint Venture," 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 years ended
December 31, 2008 and 2009, and the Company does not anticipate receiving any
such fees moving forward.  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 not currently 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 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.
 -23-
 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; and 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.
 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.
 -24-
 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, 2009 and 2008 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, 2009.  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, 2009 and 2008 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, 2009, 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


April 9,
2010


F-1


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Consolidated
      Balance SheetsDecember
      31,
            
            
            December
      31,2009
            
            
            2008AssetsCurrent
      assets:Cash
            
            $
            751
            
            
            $
            739Prepaid
      expenses and other
            
            
            569
            
            
            
            5211,320
            
            
            
            1,260Investment
      in ZNG, at equity
            
            
            -
            
            
            
            -Investment
      in KNG, at equity
            
            
            -
            
            
            
            -Oil
      and gas properties, unproved
            
            
            -
            
            
            
            -Loan
      receivable - affiliate
            
            
            -
            
            
            
            29,500Property
      and equipment, net
            
            
            1,267
            
            
            
            1,783$
            2,587
            
            
            $
            32,543Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable:Related
      party - stockholders
            
            $
            523,906
            
            
            $
            447,663Related
      party - Baltic Petroleum, interest at 14%
            
            
            68,848
            
            
            
            62,771Others
            
            
            606,831
            
            
            
            410,039Accrued
      payroll
            
            
            1,152,054
            
            
            
            824,7442,351,639
            
            
            
            1,745,217Stockholders'
      equity:Common
      stock - authorized 100,000,000 shares, $.001 par value,18,705,550
      and 18,645,550 issued and outstanding
            
            
            18,706
            
            
            
            18,646Additional
      paid-in capital
            
            
            13,161,691
            
            
            
            13,112,299Accumulated
      deficitPre-development
      stage
            
            
            (449,785
            )
            
            
            (449,785
            )Development
      stage
            
            
            (15,072,720
            )
            
            
            (14,406,604
            )Accumulated
      other comprehensive income (loss)
            
            
            (6,944
            )
            
            
            12,770(2,349,052
            )
            
            
            (1,712,674
            )$
            2,587
            
            
            $
            32,543See
      accompanying notes.




F-2


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theConsolidated
      Statements of Operations
            
            
            
            
            
            
            
            cumulativeperiod
      ofDevelopmentJanuary
      1, 2003throughDecember
      31,For
      the years ended December 31,
            
            2009
            
            
            2008
            
            
            2009Revenues
      and other income:Management
      fees from joint venture
            
            $
            -
            
            
            $
            -
            
            
            $
            1,135,000Gain
      from entrance into joint venture
            
            
            -
            
            
            
            -
            
            
            
            364,479Other
            
            
            -
            
            
            
            -
            
            
            
            6,382Total
      revenues and other income
            
            
            -
            
            
            
            -
            
            
            
            1,505,861Expenses:Salaries
            
            
            368,253
            
            
            
            346,710
            
            
            
            3,805,858Professional
      and consulting fees
            
            
            231,132
            
            
            
            315,983
            
            
            
            5,093,941Rent
      and occupancy
            
            
            -
            
            
            
            14,101
            
            
            
            237,226Depreciation
      and amortization
            
            
            621
            
            
            
            885
            
            
            
            104,858Finance
      charges and interest
            
            
            7,041
            
            
            
            8,139
            
            
            
            119,104Marketing
      and other
            
            
            29,569
            
            
            
            54,225
            
            
            
            2,064,577Total
      expenses
            
            
            636,616
            
            
            
            740,043
            
            
            
            11,425,564Loss
      from disposition of loan receivable - affiliate
            
            
            29,500
            
            
            
            -
            
            
            
            29,500Loss
      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
            
            
            666,116
            
            
            
            5,863,560
            
            
            
            15,072,720Provision
      for income taxes (benefit)
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss (development stage)
            
            $
            666,116
            
            
            $
            5,863,560
            
            
            $
            15,072,720Basic
      and diluted loss per common share
            
            $
            (0.04
            )
            
            $
            (0.32
            )
            
            $
            (1.20
            )Weighted
      average number of basic anddiluted
      common shares outstanding
            
            
            18,677,605
            
            
            
            18,437,156
            
            
            
            12,545,146See
      accompanying notes.






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, 2009Common
      StockAdditionalPaid-In
            
            
            Accumulated
            
            
            Accumulated
              Other
              Comprehensive
            
            
            ComprehensiveNumber
      of
              Shares
            
            
            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
            )Loss
      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
            )
            
            $
            1,798,442See
      accompanying notes.


F-4


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, 2009Common
      StockAdditional
              Paid-In
            
            
            Accumulated
            
            
            Accumulated
              Other
              Comprehensive
            
            
            ComprehensiveNumber
      of
              Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            Deficit
            
            
            Income
      (Loss)
            
            
            Total
            
            
            LossBalance,
      December 31, 2006
            
            
            14,112,961
            
            
            $
            14,113
            
            
            $
            8,721,116
            
            
            $
            (6,932,342
            )
            
            $
            (4,445
            )
            
            $
            1,798,442Loss
      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
            )Loss
      for the year - 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (666,116
            )
            
            
            -
            
            
            
            (666,116
            )Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (19,714
            )
            
            
            (19,714
            )
            
            $
            (685,830
            )Shares
      issued for accrued salaries
            
            
            60,000
            
            
            
            60
            
            
            
            3,540
            
            
            
            -
            
            
            
            -
            
            
            
            3,600Options
      vested to employees and directors
            
            
            -
            
            
            
            -
            
            
            
            45,852
            
            
            
            -
            
            
            
            -
            
            
            
            45,852Balance,
      December 31, 2009
            
            
            18,705,550
            
            
            $
            18,706
            
            
            $
            13,161,691
            
            
            $
            (15,522,505
            )
            
            $
            (6,944
            )
            
            $
            (2,349,052
            )





See
accompanying notes.


F-5


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,
            
            2009
            
            
            2008
            
            
            2009Cash
      flows from operating activities:Net
      loss (development stage)
            
            $
            (666,116
            )
            
            $
            (5,863,560
            )
            
            $
            (15,072,720
            )Depreciation
      and amortization
            
            
            621
            
            
            
            885
            
            
            
            104,858Common
      stock and warrants issuedfor
      professional services and salaries and geological data
            
            
            49,452
            
            
            
            48,053
            
            
            
            7,231,933Gain
      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
            
            
            29,500
            
            
            
            794,192
            
            
            
            823,692Loss
      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 and
            
            
            
            
            
            
            
            
            
            
            -current
      liabilities:
            
            
            
            
            
            
            
            
            
            
            -Management
      fee receivable
            
            
            -
            
            
            
            -
            
            
            
            110,000Prepaid
      expenses and other assets
            
            
            (48
            )
            
            
            3,764
            
            
            
            (263,961
            )Accounts
      payable and accrued expenses
            
            
            606,422
            
            
            
            563,555
            
            
            
            3,991,417Net
      cash flows from operating activities
            
            
            19,831
            
            
            
            1,865
            
            
            
            1,015,716Cash
      flows from investing activities:Expenditures
      for licenses and related
            
            
            -
            
            
            
            -
            
            
            
            (528,961
            )Expenditures
      for oil and gas properties
            
            
            -
            
            
            
            -
            
            
            
            (770,750
            )Expenditures
      for property and equipment
            
            
            -
            
            
            
            -
            
            
            
            (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
            )
            
            
            (1,160,342
            )Cash
      flows from financing activities:Net
      proceeds from demand loans
            
            
            -
            
            
            
            -
            
            
            
            72,500Common
      stock issued for employee stock option plan
            
            
            -
            
            
            
            -
            
            
            
            45,500Additional
      paid-in capital
            
            
            -
            
            
            
            -
            
            
            
            34,426Net
      cash flows from financing activities
            
            
            -
            
            
            
            -
            
            
            
            152,426Effect
      of exchange rates on cash
            
            
            (19,819
            )
            
            
            27,019
            
            
            
            (7,049
            )Net
      increase (decrease) in cash
            
            
            12
            
            
            
            (509
            )
            
            
            751Cash
      - beginning
            
            
            739
            
            
            
            1,248
            
            
            
            -Cash
      - ending
            
            $
            751
            
            
            $
            739
            
            
            $
            751See
      accompanying notes.


F-6


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
250,000 stock warrants issued.  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.





Zauralneftegaz





Zauralneftegaz
Limited (ZL) 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,
after which date Kurgan operations were put on hold until further economical
advisability is confirmed. The Company believes ZL has created value through the
geological results of the two exploratory wells and other data gathered in the
area and ZL 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, 2009.


F-7


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.





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.  Abandonment 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 a 56% interest as of September 2008.


F-8
 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





Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC") regarding Generally Accepted
Accounting Principles ("GAAP").  The guidance establishes the FASB ASC
as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP for SEC registrants.  All guidance
contained in the FASB ASC carries an equal level of authority.  The
FASB ASC supersedes all existing non-SEC accounting and reporting
standards.  The FASB now issues new standards in the form of
Accounting Standards Updates ("ASUs").  The FASB will not consider
ASUs as authoritative in their own right.  ASUs will serve only to
update the FASB ASC, provide background information about the guidance and
provide the basis for conclusions on the changes in the FASB
ASC.  References made to FASB guidance have been updated for the FASB
ASC throughout this document.





In April
2009, the FASB issued new guidance related to the disclosure of the fair value
of financial instruments.  The new guidance, which is now part of ASC
825, Financial
Instruments, requires disclosures about fair value of financial
instruments in interim financial statements, as well as in annual financial
statements.  The new guidance requires disclosure of fair value
information about financial instruments for which it is practical to estimate
such fair value and excludes certain insurance related financial assets and
liabilities and all non-financial instruments.  The adoption of the
new guidance did not have a material effect on the Company's consolidated
financial condition and results of operations.





In April
2009, the FASB issued new guidance for determining when a transaction is not
orderly and for estimating fair value when there has been a significant decrease
in the volume and level of activity for an asset or liability.  Under
the new guidance, which is now part of ASC 820, Fair Value Measurements and
Disclosures, if an entity determines that there has been a significant
decrease in the volume and level of activity for the asset or the liability in
relation to the normal market activity for the asset or liability (or similar
assets or liabilities), then transactions or quoted prices may not accurately
reflect fair value.  In addition, if there is evidence that the
transaction for the asset or liability is not orderly, the entity shall place
little, if any, weight on that transaction price as an indicator of fair
value.  The adoption of the new guidance did not have a material
effect on the Company's consolidated financial condition and results of
operations.





In May
2009, the FASB issued new guidance for accounting for subsequent
events.  The new guidance, which is now part of ASC 855, Subsequent
Events,  defines subsequent events as either recognized (events
that existed at the balance sheet date and therefore should be reflected in the
financial statements) or non-recognized (events that did not exist at the
balance sheet date and are not reflected in the financial statements); material
non-recognized subsequent events should be disclosed.  The new
guidance was effective June 15, 2009.  The adoption of the new
guidance did not have a material effect on the Company's consolidated financial
condition and results of operations.





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


F-9


2.  Investments:





Investment in
affiliate:





Following
is a summary of KNG’s unaudited financial position at December 31, 2009 and 2008
and results of development stage activity for the years ended December 31, 2009
and 2008:





2009
              
              
              2008Current
      assets
              
              $
              17,933
              
              
              $
              16,755Oil
      and gas property,unproved
              
              
              98,742
              
              
              
              96,068Other
      non-current assets
              
              
              33,667
              
              
              
              -$
              150,342
              
              
              $
              112,823Current
      liabilities
              
              $
              96,567
              
              
              $
              122,001Long-term
      debt and othernoncurrent
      liabilities
              
              
              163,200
              
              
              
              54,047259,767
              
              
              
              176,048Stockholders'
      equity (deficit)
              
              
              (109,425
              )
              
              
              (63,225
              )$
              150,342
              
              
              $
              112,823Revenues
              
              $
              -
              
              
              $
              -Net
      loss (development stage)
              
              $
              (46,195
              )
              
              $
              (18,805
              )Cumulative
      net loss
              
              $
              (115,541
              )
              
              $
              (69,346
              )


The
Company’s investment asset will begin to exceed zero once 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, 2009, the Joint venture generated an unaudited cumulative loss of
over $22 million as a result of exploration activities in the Kurgan region
during 2003-2009. 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, 2009, the Company effectively has U.S. tax net operating loss
carryforwards totaling approximately $13,790,000.  These carryforwards
may be used to offset future taxable income, and expire in varying amounts
through 2029.  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
$2,758,000 estimated cumulative tax benefit of the loss carryforwards have been
offset by a valuation allowance of the same amount.





4.  Leases:





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, 2009, a
variety of expenses were paid for by organizing stockholders.  As a
result, amounts totaling $523,906 and $447,663 are payable to stockholders from
the Company as of December 31, 2009 and 2008.





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, 2009.





At
December 31, 2009, accrued and unpaid salaries for all employees totaled
$1,152,054.  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.





F-10


7.  Stock
Option Plan:





In 2003
and in 2009, 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 ReservedDecember
      31,
              
              December
      31,
              
              ExerciseVest Year
              
              2009
              
              2008
              
              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
              
              
              468,000
              
              closing
      stock price forthe three
      months prior

                    to
      grant date2009
              
              
              1,340,000
              
              
              1,340,000
              
              $
              0.055


The
options granted in 2003 expire four years from the date of vesting. The options
granted in 2009 expire three years from the date of vesting.


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
              
              
              1,819,500Expired
      - 2009
              
              
              (667,500
              )Granted
      - 2009
              
              
              1,340,000
              
              
              
              0.055Outstanding
      and excercisable atDecember
      31, 2009
              
              
              2,492,000
 F-11
 The
following tables summarize information about stock options outstanding and
exercisable:




December
      31, 2009Price
              
              Options
              
              Contractual
      Life0.60
              
              
              384,000
              
              
              12.26
              
              
              59,500
              
              
              22.14
              
              
              29,500
              
              
              21.94
              
              
              29,500
              
              
              21.62
              
              
              29,500
              
              
              21.69
              
              
              29,500
              
              
              21.82
              
              
              29,500
              
              
              21.79
              
              
              29,500
              
              
              21.77
              
              
              29,500
              
              
              21.46
              
              
              29,500
              
              
              21.16
              
              
              29,500
              
              
              20.86
              
              
              29,500
              
              
              20.76
              
              
              29,500
              
              
              20.72
              
              
              59,500
              
              
              30.63
              
              
              29,500
              
              
              30.49
              
              
              29,500
              
              
              30.38
              
              
              29,500
              
              
              30.31
              
              
              59,000
              
              
              30.34
              
              
              29,500
              
              
              30.32
              
              
              29,500
              
              
              30.33
              
              
              29,500
              
              
              30.26
              
              
              29,500
              
              
              30.21
              
              
              29,500
              
              
              30.14
              
              
              29,500
              
              
              30.055
              
              
              1,340,000
              
              
              32,492,000


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
  The
Company recognizes compensation cost based on the fair value method prescribed
by ASC 718 Compensation –
Stock 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. The Company recorded compensation expense of
$45,852 related to stock options granted in 2009. The following key assumptions
were used in determining fair value:
  2009Dividend
      yield
                  
                  
                  0
                  %Risk
      free interest rate
                  
                  
                  1.5
                  %Expected
      volatility
                  
                  
                  100
                  %
 F-12
  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:




2008OriginalNumber
      of
              
              
              Exercise
              
              ExerciseGrant
      Date
              
              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
      years100,000


2007OriginalNumber
      of
              
              
              Exercise
              
              ExerciseGrant
      Date
              
              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
              
              
              7,500
              
              
              
              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
      years333,640








F-13







2006OriginalNumber
      of
              Exercise
              ExerciseGrant
      Date
              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
      years1,697,6412005OriginalNumber
      of
              Exercise
              ExerciseGrant
      Date
              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, 2009.  
 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:
  2008Dividend
      yield
                  
                  
                  0
                  %Risk
      free interest rate
                  
                  
                  2.50%
      - 4.50
                  %Expected
      volatility
                  
                  
                  100
                  %
  Amounts
charged to expense in 2008 totaled $6,303.





9.  Fair
Value of Financial Instruments:





The
carrying values of cash, 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,
2009.





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, 2009, 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.





F-14





12.  Cash
Flows Information:





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





2009
            
            
            2008Interest
      paid
            
            $
            -
            
            
            $
            -Income
      taxes paid
            
            $
            -
            
            
            $
            -





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





2009
              
              
              2008Demand
      loan payable andrelated
      accrued interest settledthrough
      the issuance of commonstock
              
              
              -
              
              
              $
              10,753Salaries
      and professional servicessettled
      through the issuance ofcommon
      stock and warrants
              
              $
              -
              
              
              $
              48,053






F-15


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,
2009.  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, 2009, our disclosure controls and procedures
were 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, 2009 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, 2009, 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.


-25-


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
in 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, 2009:





(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 the 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 2009. 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 provide 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.


-26-


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
            42
            Chairman
      of the Board of Directors andChief
      Executive OfficerHelen
      Teplitskaia
            55
            President
      and DirectorElena
      Pochapski
            44
            Chief
      Financial Officer and DirectorSergey
      Potapov
            46
            DirectorTimothy
      Peara
            49
            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.





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


-27-


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.





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.





Timothy
Peara


Director





Timothy
Peara has served as a Director of the Company since April 12, 2005. Since
August, 2007 he has been the Chief Operating Officer of Energy Invest Group,
London though he remains the Managing Director of Alternative Energy Finance, a
firm he founded in October, 2005 as the successor to Emerging Markets Finance
International. 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.


--------------------------------





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.


-28-


Independence
of Directors





We are
not required to have independent members of our Board of Directors, and do not
anticipate having independent Directors until such time as we are required to do
so.





Audit
Committee and Financial Expert





The
Company is not required to have an audit committee and as such, does not have
one.








EMPLOYMENT
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 (but was
extended to December 31, 2009, pursuant to the Zaikin Employment Extension
Agreement described below). Under the agreement, Mr. Zaikin was obligated to
perform at least 40 hours per week of work on behalf of the
Company.





On or
around April 30, 2009, the Company entered into a “One Year Term Extension To
The Employment Agreement of August 1, 2004” with David Zaikin, the Company’s
Chief Executive Officer (the “Zaikin Employment Extension
Agreement”).  The Zaikin Employment Extension Agreement extended the
term of the previous employment agreement entered into on August 1, 2004, for an
additional year, such that the employment agreement expired on December 31,
2009.  The salary for the year ending December 31, 2009 was
$180,000.  Additionally, Mr. Zaikin was granted additional stock
options in the Company as described below.





Mr.
Zaikin was provided eight (8) weeks of vacation leave per year. Additionally,
Mr. Zaikin also had 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 restricted stock, at an exercise price of $0.14 per
share, which options expired unexercised on December 31, 2007. 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 December 31, 2008. 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, which expired unexercised on December 31, 2009. Mr. Zaikin's
stock option plan continued until December 31, 2008, 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 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. In May 2009 (as described below) Mr. Zaikin was granted stock options to
purchase 300,000 shares of common stock at an exercise price of $0.055 per
share. The options expire on May 4, 2012.





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, 2008
and 2009.  The Company also issued her 50,000 shares of restricted
common stock as a signing bonus.  Continuing throughout 2010, 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
since June 2009, and as such, the 90,000 shares of common stock due to Ms.
Teplitskaia as of March 31, 2010 (10,000 shares per month from July 2009 to
March 2010), are not included in the number of issued and outstanding shares
disclosed throughout this report. Additionally in May 2009 Ms. Teplitskaia was
granted stock options to purchase 200,000 shares of common stock in the Company
(as described below) at an exercise price of $0.055 per share. The options
expire on May 4, 2012.


-29-


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 was effective
until December 31, 2008 and was extended for an additional year pursuant to the
“One Year Term Extension To The Employment Agreement of August 1, 2004”
described below. Ms. Pochapski was entitled to six (6) weeks of vacation time
per year.





On or
around April 30, 2009, the Company entered into a “One Year Term Extension To
The Employment Agreement of August 1, 2004” with Elena Pochapski, the Company’s
Chief Financial Officer (the “Pochapski Employment Extension
Agreement”).  The Pochapski Employment Extension Agreement extended
the term of the previous employment agreement entered into on August 1, 2003,
for an additional year, such that the employment agreement expired on December
31, 2009.  The salary for the year ending December 31, 2009 was be
$75,000.  Additionally, Mrs. Pochapski was granted additional stock
options in the Company as described below.





Ms.
Pochapski had 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 restricted stock of the Company for an exercise price of $0.14
per share, 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, which options expired
unexercised on December 31, 2009, 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 continued until December 31, 2008, 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.
In May 2009 (as described below), Ms. Pochapski was granted the right to
purchase 300,000 shares of common stock at an exercise price of $0.055 per
share. The options expire on May 4, 2012.





Previously,
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. 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.


-30-


May 2009 Stock Option
Agreements:





On May 4,
2009, the Company’s Board of Directors approved new Stock Option Agreements and
a grant of stock options to purchase an aggregate of 1,340,000 shares of the
Company’s common stock to the officers and various Directors of the Company in
consideration for their services to the Company for the year ending December 31,
2009.  David Zaikin, the Company’s Chief Executive Officer and
Director was granted stock options to purchase 300,000 shares, Elena Pochapski,
the Company’s Chief Financial Officer and Director was granted stock options to
purchase 300,000 shares, Helen Teplitskaia, the Company’s President and Director
was granted  options to purchase 200,000 shares, Timothy Peara, the
Company’s Director was granted options to purchase 200,000 shares, Oleg
Zhuravlev, the Company’s former Director was granted options to purchase 170,000
shares, and Sergey Potapov, the Company’s Director was granted options to
purchase 170,000 shares.  All of the stock options have an exercise
price of $0.055 per share, the market price of the Company’s common stock on the
grant date. Additionally, all of the stock options have the same vesting terms,
including the vesting of 1/4th of
the stock options on the grant date, and 1/4th of
the stock options vesting at the end of each of the Company’s next three fiscal
quarters.  All of the stock options expire three years from the grant
date and include a cashless exercise provision.





SECTION
16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors, executive officers and persons who own more than 10% of a class of
our equity securities which are registered under the Exchange Act of 1934, as
amended, to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes of ownership of such registered securities.
Such executive officers, directors and greater than 10% beneficial owners are
required by Commission regulation to furnish us with copies of all Section 16(a)
forms filed by such reporting persons.





To our
knowledge, based solely on a review of the copies of such reports furnished to
us Victor Repin, David Zaikin, Elena Pochapski, Sergey Potapov, Tim Peara, Helen
Teplitskaia,  and Svetlana Slepchuk are currently subject to Section
16(a) filing requirements and Svetlana Slepchuk, a greater than 5% shareholder
of the Company, has not made her required filing with the
Commission.





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
            
            2009
            
            $
            180,000
            *
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            10,266
            (4)
            
            $
            190,266CEO
      and
            
            2008
            
            $
            180,000
            *
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (2
            )
            
            $
            180,000Chairman
            
            2007
            
            $
            180,000
            
            
            
            --
            
            
            
            --
            
            
            $
            309,700
            
            
            
            (2
            )
            
            $
            489,700Helen
      Teplitskaia
            
            2009
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            8,400
            
            
            $
            6,844
            (4)
            
            $
            15,244President
      and
            
            2008
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            27,400
            
            
            
            --
            
            
            $
            27,400Director
            
            2007
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            110,900
            
            
            
            --
            
            
            $
            110,900Elena
      Pochapski
            
            2009
            
            $
            75,000
            *
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            10,266
            (4)
            
            $
            85,266CFO  and
            
            2008
            
            $
            62,126
            *
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (3
            )
            
            $
            62,126Director
            
            2007
            
            $
            86,625
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (3
            )
            
            $
            86,625





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





* All
salaries listed above for fiscal 2008 and 2009 were accrued and remain unpaid as
of the filing of this report.





-31-


(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 three (2) fiscal years. No executive employee
listed above received any Non-Equity Incentive Plan Compensation or Nonqualified
Deferred Compensation Earnings over the past three (3) years.





(2) Mr.
Zaikin was granted options to purchase 100,000  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 Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 -
Stock Compensation.





(3) Ms.
Pochapski was granted options to purchase 100,000 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 FASB ASC Topic 718 -
Stock Compensation.





(4) On
May 4, 2009, the Company’s Board of Directors approved new Stock Option
Agreements and a grant of stock options to purchase an aggregate of 1,340,000
shares of the Company’s common stock to the officers and various Directors of
the Company in consideration for their services to the Company for the year
ending December 31, 2009.  David Zaikin, the Company’s Chief Executive
Officer and Director was granted stock options to purchase 300,000 shares, Elena
Pochapski, the Company’s Chief Financial Officer and Director was granted stock
options to purchase 300,000 shares, Helen Teplitskaia, the Company’s President
and Director was granted  options to purchase 200,000 shares, Timothy
Peara, the Company’s Director was granted options to purchase 200,000 shares,
Oleg Zhuravlev, the Company’s former Director was granted options to purchase
170,000 shares, and Sergey Potapov, the Company’s Director was granted options
to purchase 170,000 shares.  All of the stock options have an exercise
price of $0.055 per share, the market price of the Company’s common stock on the
grant date. Additionally, all of the stock options have the same vesting terms,
including the vesting of 1/4th of
the stock options on the grant date, and 1/4th of
the stock options vesting at the end of each of the Company’s next three fiscal
quarters.  All of the stock options expire three years from the grant
date and include a cashless exercise provision.





-32-


Board
of Directors Compensation:





The
following table sets forth summary information concerning the compensation we
paid to directors during the year ended December 31, 2009:








NAME
      (1)
            
            FEES
      EARNED OR PAID IN CASH ($)
            
            OPTION
      AWARDS ($)
            
            TOTAL
      ($)Oleg
      V. Zhuravlev (2)
            
            --
            
            $5,817(4)
            
            $5,817Vladimir
      Eret (3)
            
            --
            
            --
            
            --Sergei
      Potapov
            
            --
            
            $5,817(4)
            
            $5,817Timothy
      Peara
            
            $35,000*
            
            $6,844(4)
            
            $41,844





*  Fees
listed above for fiscal 2009 were accrued and remain unpaid as of the filing of
this report.





No
Director received any Stock Awards, Non-Equity Incentive Plan Compensation,
Nonqualified Deferred Compensation Earnings or other compensation during the
fiscal year ended December 31, 2009.





(1) Mr.
Zaikin, Ms. Teplitskaia and Ms. Pochapski did not receive any compensation
separate from the consideration they received as an officer of the Company for
the year ended December 31, 2009 in consideration for services to the Board as a
Director of the Company.





(2)
Resigned effective January 11, 2010.





(3)
Resigned effective November 23, 2009.
















-33-


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
            75,000
            -
            -
            $0.055
            May
      4, 201275,000
            -
            -
            $0.055
            May
      4, 201275,000
            -
            -
            $0.055
            May
      4, 201275,000
            -
            -
            $0.055
            May
      4, 201217,500
            -
            -
            $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, 2010





-34-


Elena
      Pochapski
            75,000
            -
            -
            $0.055
            May
      4, 201275,000
            -
            -
            $0.055
            May
      4, 201275,000
            -
            -
            $0.055
            May
      4, 201275,000
            -
            -
            $0.055
            May
      4, 201217,500
            -
            -
            $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, 2010





Helen
      Teplitskaia
            50,000
            -
            -
            $0.055
            May
      4, 201250,000
            -
            -
            $0.055
            May
      4, 201250,000
            -
            -
            $0.055
            May
      4, 201250,000
            -
            -
            $0.055
            May
      4, 2012





-35-


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
18,705,585 shares of common stock outstanding as of April 13, 2010 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
            600,000
      (4)
            1,707,500
            8.9%Elena
      Pochapski
              275
      Madison Ave., 6th Floor, New York, New York 10016
            380,000
      (5)
            600,000
      (6)
            980,000
            5.1%Sergey
      Potapov Kurgan City Lenina St. 27/X Russia 640000
            10,000
            422,000
      (7)
            432,000
            2.3%Tim
      Peara
              275
      Madison Ave., 6th Floor, New York, New York 10016
            177,569
            684,715
      (8)
            862,284
            4.4%Helen
      Teplitskaia
              275
      Madison Ave.
              6th
      Floor
              New
      York, New York 10016
            400,000(9)
            200,000
      (10)
            600,000
            3.2%Svetlana
      Slepchuk
              Mosfilmovskaya
      Street 17/25
              Apt.
      17
              Moscow,
      Russai 119330
            3,900,000
            -
            3,900,000
            20.8%All
      the Officers and Directors as a group (5 persons)
            2,127,569
            2,506,715
              (4),
      (6), (7), (8), (9), (10)
            4,634,284
            21.8%





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.


-36-


2)
Includes both the number of shares of common stock beneficially owned as of
April 13, 2010, 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 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.
Also includes Stock Options to purchase 300,000 shares of common stock with an
exercise price of $0.055 per share, the market price of the Company’s common
stock on the grant date, May 4, 2009. One-fourth of the stock options vest on
the grant date, and one-fourth of the stock options vest at the end of each of
the Company’s next three fiscal quarters.  The stock options expire
three years from the grant date and include a cashless exercise
provision.





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 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.
Also includes Stock Options to purchase 300,000 shares of common stock with an
exercise price of $0.055 per share, the market price of the Company’s common
stock on the grant date, May 4, 2009. One-fourth of the stock options vest on
the grant date, and one-fourth of the stock options vest at the end of each of
the Company’s next three fiscal quarters.  The stock options expire
three years from the grant date and include a cashless exercise
provision.





7)
Includes 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. All options are valid until 5 P.M.
December 31, on the fourth anniversary of each year that the options vest. Also
includes Stock Options to purchase 170,000 shares of common stock with an
exercise price of $0.055 per share, the market price of the Company’s common
stock on the grant date, May 4, 2009. One-fourth of the stock options vest on
the grant date, and one-fourth of the stock options vest at the end of each of
the Company’s next three fiscal quarters.  The stock options expire
three years from the grant date and include a cashless exercise
provision.





8)
Includes certain options issuable to AEF in connection with amounts loaned to
ZNG (as described in greater detail herein), including 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. The amount listed above also includes 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. All Director options are valid until 5 P.M. December 31, on the
fourth anniversary of each year that the options vest. Also includes Stock
Options to purchase 200,000 shares of common stock with an exercise price of
$0.055 per share, the market price of the Company’s common stock on the grant
date, May 4, 2009. One-fourth of the stock options vest on the grant date, and
one-fourth of the stock options vest at the end of each of the Company’s next
three fiscal quarters.  The stock options expire three years from the
grant date and include a cashless exercise provision.


-37-


9)
Includes 90,000 shares, 10,000 each for the months ended July 2009 through March
2010, 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, except in connection with Ms. Teplitskaia’s ownership
and all of the Directors’ and officers’ ownership as disclosed
above.





10)
Includes Stock Options to purchase 200,000 shares of common stock with an
exercise price of $0.055 per share, the market price of the Company’s common
stock on the grant date, May 4, 2009. One-fourth of the stock options vest on
the grant date, and one-fourth of the stock options vest at the end of each of
the Company’s next three fiscal quarters.  The stock options expire
three years from the grant date and include a cashless exercise
provision.





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.





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 have expired as
unexercised to date.





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, which have since expired as
unexercised; 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.


-38-


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 then
      Director;o
            10,000
      shares of our restricted common stock to Vladimir Eret, our then 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.





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.


-39-


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.





The
Company has previously agreed to pay its President, Helen Teplitskaia, 10,000
shares of common stock per month for her service to the Company.  As
such, in June 2009, the Company issued Ms. Teplitskaia an aggregate of 60,000
shares, 10,000 shares per month from January 2009 to June 2009.  The
Company also owes Ms. Teplitskaia an additional 90,000 shares for services
rendered during the months of July, August, September, October, November and
December 2009 and the months of January, February and March 2010, 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.





On or
around April 30, 2009, the Company entered into a “One Year Term Extension To
The Employment Agreement of August 1, 2004” with David Zaikin, the Company’s
Chief Executive Officer and Elena Pochapski, the Company’s Chief Financial
Officer (the “Executives” and the “Employment Extension
Agreements”).  The Employment Extension Agreements extended the term
of the Executives previous employment agreements entered into on August 1, 2004
and September 1, 2003, respectively, for an additional year, such that the
employment agreements now expire on December 31, 2009.  The
Executives’ salaries for the year ending December 31, 2009 will be $180,000 and
$75,000 for Mr. Zaikin and Ms. Pochapski, respectively.  Additionally,
both of the Executives were granted additional stock options in the Company as
described below.





On May 4,
2009, the Company’s Board of Directors approved new Stock Option Agreements and
a grant of stock options to purchase an aggregate of 1,340,000 shares of the
Company’s common stock to the officers and various Directors of the Company in
consideration for their services to the Company for the year ending December 31,
2009.  David Zaikin, the Company’s Chief Executive Officer and
Director was granted stock options to purchase 300,000 shares, Elena Pochapski,
the Company’s Chief Financial Officer and Director was granted stock options to
purchase 300,000 shares, Helen Teplitskaia, the Company’s President and Director
was granted  options to purchase 200,000 shares, Timothy Peara, the
Company’s Director was granted options to purchase 200,000 shares, Oleg
Zhuravlev, the Company’s former Director was granted options to purchase 170,000
shares, and Sergey Potapov, the Company’s Director was granted options to
purchase 170,000 shares.  All of the stock options have an exercise
price of $0.055 per share, the market price of the Company’s common stock on the
grant date. Additionally, all of the stock options have the same vesting terms,
including the vesting of 1/4th of
the stock options on the grant date, and 1/4th of
the stock options vesting at the end of each of the Company’s next three fiscal
quarters.  All of the stock options expire three years from the grant
date and include a cashless exercise provision.





Vladimir
Eret resigned as a Director of the Company effective November 23,
2009.





Oleg
Zhuravlev resigned as a Director of the Company effective January 11,
2010.





The
Company has historically been funded by certain related party shareholders of
the Company, and as of December 31, 2009 and 2008, $523,906 and $447,663 was
payable to such related party shareholders, respectively.


-40-


ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES





Audit
Fees





The
aggregate fees billed for each of the fiscal years ended December 31, 2009 and
2008 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 $22,500 and $36,000,
respectively.





Audit
Related Fees





None.





Tax
Fees





The
aggregate fees billed for each of the fiscal years ended December 31, 2009 and
2008 for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning was $1,750 and $1,750,
respectively.





All
Other Fees





The total
amount of other fees billed in 2009 and 2008 was $0 and $8,000,
respectively.











-41-


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,
2005





10.6(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 Agreement  -42-
 10.20(6)
            Loan
      Agreement between OOO Zauralneftegaz and Caspian Finance
      Limited10.21(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 Standard





10.32(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(15)
            Agreement
      of Purchase and Sale with Limited Liability Company Neftebitum, Sergey V.
      Prokopiev, and Oleg G. Shelepov10.37(15)
            Operating
      Agreement with Limited Liability Company Neftebitum10.38(16)
            One
      Year Extension to the Employment Agreement of August 1, 2004 with David
      Zaikin10.39(16)
            One
      Year Extension to the Employment Agreement of August 1, 2004 with Elena
      Pochapski10.40(16)
            Stock
      Option Agreement for David Zaikin10.41(16)
            Stock
      Option Agreement for Elena Pochapski21.1*
            Subsidiaries31.1*
            Certificate
      of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
      Act of 2002  -43-
 31.2*
            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





* 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 10-K filed with the Commission on
April 14, 2009, and incorporated herein by reference.





(15)
Filed as an Exhibit to our Report on Form 8-K filed with the Commission on
November 14, 2008, and incorporated herein by reference.





(16)
Filed as an Exhibit to our Report on Form 10-Q filed with the Commission on May
19, 2009, and incorporated herein by reference.





-44-


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 15, 2010
            By:
      /s/ David
      ZaikinDavid
      ZaikinChief
      Executive Officer(Principal
      Executive Officer)DATED:
      April 15, 2010
            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
      15, 2010David
      Zaikin
            and
      Chairman of the Board of Directors(Principal
      Executive Officer)/s/ Elena Pochapski
            Chief
      Financial Officer (Principal Accounting Officer)
            April
      15, 2010Elena
      Pochapski
              (Principal
      Financial Officer)
            and
      Director/s/ Helen Teplitskaia
            President
      and Director
            April
      15, 2010Helen
      Teplitskaia/s/ Sergey Potapov
            Director
            April
      15, 2010Sergey
      Potapov





-45-