**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





(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, 2006





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





For
      the
      transition period from __________ to __________





Commission
      file number: 333-118902





**SIBERIAN
      ENERGY GROUP INC.**


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





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





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


(Address
      of principal executive offices)





**(212)
      828-3011**


(Registrant's
      telephone number)





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





NONE





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





COMMON
      STOCK, $.001 PAR VALUE PER SHARE





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












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





Indicate
      by check mark whether the registrant is a 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, 2006 were
      $360,000.





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 March 22, 2007 was approximately $18,991,994.





As
      of
      March 22, 2007, the issuer had 15,034,961 shares of common stock, $.001 par
      value per share outstanding.





Documents
      Incorporated by Reference: NONE





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




















SIBERIAN
      ENERGY GROUP INC.


FORM
      10-KSB


YEAR ENDED
      DECEMBER 31, 2006


INDEX





**Part
      I**





Item
                1. Description of Business
            4Item
                2. Description of Property
            21Item
                3. Legal Proceedings
            22Item
                4. Submission of Matters to a Vote of Security Holders
            22





**Part
      II**





Item
                5. Market for Common Equity and Related Stockholder Matters
            23Item
                6. Management's Discussion and Analysis or Plan of Operation
            26Item
                7. Financial Statements F-1
            38Item
                8. Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            39Item
                8A. Controls and Procedures
            39Item
                8B. Other Information
            39





**Part
      III**





Item
                9. Directors, Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of the Exchange Act
            40Item
                10. Executive Compensation
            48Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            55Item
                12. Certain Relationships and Related Transactions
            58Item
                13. Exhibits and Reports on Form 8-K 48 (a) Exhibits (b) Reports
                on Form
                8-K
            61Item
                14. Principal Accountant Fees and Services
            67















**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS





CERTAIN
      STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB (THIS "FORM 10-KSB"), INCLUDING
      STATEMENTS UNDER "ITEM 1. DESCRIPTION OF BUSINESS," AND "ITEM 6. 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 WHOLLY 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-KSB, UNLESS ANOTHER
      DATE
      IS STATED, ARE TO DECEMBER 31, 2006.





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.




-4-





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. All share
      amounts subsequently listed are retroactively adjusted to reflect these stock
      splits unless otherwise provided. All activities related to the Company's
      business were discontinued prior to January 1, 2000 and the Company began
      looking for opportunities to acquire an operating business.





In
      the
      spring of 2003, the balance of the Company's shares was 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. In contemplation
      of
      the Company's acquisition of a Russian oil and gas exploration company, the
      Company changed its name to Trans Energy Group, Inc.





On
      May 9,
      2003, the Company entered into an Acquisition Agreement (the "Acquisition
      Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation
      ("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant
      to the Acquisition Agreement, the Company acquired a 51% interest in ZNG by
      issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004,
      the
      Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares
      of
      the Company's common stock, making ZNG a wholly owned subsidiary of the Company.
      ZNG holds seven (7) oil and gas licenses (see "Patents, Trademarks and Licenses"
      below) for the rights to prospect, explore, drill and remove oil and gas (the
      "Exploration Rights") in the eastern parts of Kurgan Province in Russia. The
      Company had no affiliation with ZNG prior to the acquisition in May
      2003.





On
      May 2,
      2005, the Company affected a 1:2 reverse stock split and all share amounts
      listed throughout this report on Form 10-KSB reflect such split unless otherwise
      stated.





In
      April
      2005, the Company’s Board of Directors adopted Amended Bylaws of the Company,
      which Amended Bylaws are attached hereto as Exhibit 3.9.





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 proceeded by CDN, for example CDN $500, is referring to $500 Canadian
      dollars.





On
      December 13, 2006, we entered into an Interest Purchase Agreement with Key
      Brokerage LLC (“Key Brokerage”), pursuant to which we purchased 100% of the
      issued and outstanding common stock of Kondaneftegaz LLC, a Russian limited
      liability company (“KNG”), which Interest Purchase Agreement is described in
      greater detail below under “Description of KNG.”





**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 are currently evaluating investment and joint venture
      opportunities throughout Russia.




-5-





Until
      October 14, 2005, the Company's operations were conducted solely through its
      then wholly owned subsidiary, Zaural Neftegaz ("ZNG") a development stage oil
      and gas exploration company located in the Western Siberian Region of Russia.
      However, on October 14, 2005, the Company entered into a Joint Venture
      agreement, whereby the Company transferred 100% of the ownership of ZNG to
      a
      newly formed Joint Venture company, Zauralneftegaz Limited ("ZNG, Ltd."), of
      which the Company owns 50% pursuant to the Joint Venture agreement entered
      into
      on October 14, 2005 (as described in greater detail below under Joint Venture
      Agreement). From October 14, 2005 to December 13, 2006, the Company had no
      oil
      and gas operations except through its ownership of 50% of ZNG, Ltd. On December
      13, 2006, the Company entered into an Interest Purchase Agreement with Key
      Brokerage, whereby the Company purchased 100% of the issued and outstanding
      common 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. KNG has previously applied
      for 10 exploration and production licenses for parcels located within the
      existing oil deposits of the Khanty-Mansiysk district, in Russia, four of which
      are expected to be auctioned off during the second or third quarter of 2007.





Moving
      forward the Company plans to focus on the exploration and potential development
      of any licenses acquired by KNG through government auctions in fiscal 2007
      and
      working with its partner in the Joint Venture, Baltic Petroleum (E&P)
      Limited ("BP" or "Baltic"), to continue the oil and gas exploration activities
      through their co-ownership of the Joint Venture and ZNG.





**DESCRIPTION
      OF KNG**





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 are receiving the geological
      information package on the Karabashski zone of Khanty-Mansiysk Autonomous
      district (Tuymen region of Russian Federation) ("Geological Data"). The
      Geological Data is included in the total purchase price discussed
      below.





From
      2005
      through 2007 KNG applied for a total of 15 exploration and production licenses
      in the Khanty-Mansiysk district of Russia. We believe that through auctions
      and/or tenders, KNG may obtain licenses to four of the licensed areas during
      the
      second quarter of 2007. We also believe four other license areas will be
      auctioned off during the third or fourth quarter of 2007; however, the remaining
      other auction/tender dates are currently undetermined.




-6-





The
      Purchase Agreement consummated the transactions contemplated by the Option
      Agreement (the "Key Brokerage Option"), which we entered into with Key Brokerage
      in September 2006. In consideration for agreeing to the Key Brokerage Option,
      we
      granted Key Brokerage 250,000 warrants to purchase shares of our common stock
      at
      an exercise price of $2.20 per share, exercisable for up to two (2) years from
      the date of the Key Brokerage Option (the "Key Brokerage Warrants") in September
      2006.





In
      connection with the purchase of KNG, we received certain geological information,
      including well logs, surveys and structural maps regarding the Karabashsky
      zone
      of the Khanty-Mansiysk district, which an independent appraisal valued at
      approximately $3,000,000.





In
      consideration for the transfer of 100% of the stock of KNG, we issued Key
      Brokerage an aggregate of 1,900,000 restricted shares of our common stock valued
      at approximately $2,700,000, which value approximated the value of geological
      information relevant to the license blocks applied for by KNG.





**DESCRIPTION
      OF ZNG**





ZNG
      was
      created to explore and develop new hydrocarbon fields and oil and gas properties
      in the Kurgan region of Southwest Siberia, Russia. ZNG has compiled data in
      the
      Eastern part of the Kurgan region by analyzing prior geological, geophysical
      and
      lithographic exploration works in the region, data, maps, and reports from
      12
      test wells drilled between 1979-1986, profile sections, correlation schemes,
      and
      geographic maps of the region. ZNG has also obtained core samples from
      parametric wells drilled in prior years on the licensed areas and adjacent
      territories in the Eastern part of Kurgan region during the initial search
      for
      oil and gas in the region, and performed analysis of the data provided by the
      samples.





In
      March
      2003, ZNG acquired four 5-year exploration licenses through a government tender,
      which licenses expire in March 2008, and which licenses are for concessions
      covering a total territory of 643,000 acres. Upon expiration of the licenses,
      ZNG will have, subject to the signing of the Subsoil Legislation, preferential
      right to apply for the full production license for the term of 25
      years.





The
      Mokrousovsky license is the largest of the four licenses, encompassing a total
      of 240,000 acres, followed by the West Suersky, which covers 230,000 acres,
      the
      Privolny, which covers 123,000 acres, and the Orlovo-Pashkovsky license, which
      covers 50,000 acres.





In
      June
      2006, through participation in governmental auctions, ZNG successfully obtained
      three more oil and gas licenses in the Kurgan region of Siberia, Russia: the
      Yuzhno-Voskresensky, Petuhovsky and Lebyazhevsky parcels. The new licenses
      are
      for the period of 25 years and allow both exploration and production on the
      licensed areas. The total cost paid at the auctions for the three new licenses
      by ZNG was approximately $425,000.




-7-







Brief
      characteristics of the three new blocks are given below:





**Yuzhno-Voskresensky
      Block**


Total
      area approximately 130,000 acres (520 square kilometers)





The
      Yuzhno- **Voskresensky** block
      is
      located in the Kurgan region of Russia, 10-40 kilometers (“km”) to the west of
      the center of the administrative region Chastoozerye.





The
      territory of the block has significant prior exploration data. The area is
      covered by a geological survey (1:200,000 scale), a gravimetric survey
      (1:100,000 scale), and an aeromagnetic survey (1:50,000 scale). From 1979 to
      1980, seismic surveys were carried out on the block implementing refraction
      sounding and deep seismic sounding methods, which partially covered the block
      area. Regional seismic profiling and 2D seismic surveys and seismic reflection
      method were also performed here. Additionally, three parametric wells along
      the
      Kurgan regional geological and geophysical profile have been drilled during
      the
      prior initial exploration works. ZNG has obtained the source geological data
      from these wells.





Through
      these studies, two structures were identified and the placement of wildcat
      wells
      with the purpose of uncovering and testing of oil-source rocks was
      determined.





**Petukhovsky
      Block**


Total
      area approximately 208,000 acres (840 square kilometers)





The
      Petukhovsky block is located between the towns of Makushino and Petukhovo,
      Russia, further to the south of the Kurgan Region boundary.





Prior
      exploration works on the block are represented by a general geological survey
      (1:200,000 scale). From 1979 to 1980, seismic surveys were carried out by
      refraction sounding and deep seismic sounding methods, which partially covered
      the block area. The Kurgan regional seismic profile crosses the block and to
      the
      Southwest of the block is Sukhmensky regional seismic profile acquired by
      seismic reflection and correlation refraction methods.





Four
      deep
      cored wells drilled both in the territory of the block and in the adjacent
      areas
      provide an idea of the geological structure of the block.





**Lebyazhevsky
      Block**


Total
      area 42,000 acres (170 square kilometers)




The
      Lebyazhevsky block, with a total area of 170
      square kilometers (approximately 43,990 acres), is located in the Kurgan Region,
      of Siberia, Russia, 13-22 km to the South-East of the center of administrative
      region of Lebyazhye.




-8-







The
      block
      is covered by a general geological survey (1:200,000 scale), gravimetric survey
      (1:100,000 scale), aeromagnetic survey (1:50,000 scale) and partially by seismic
      surveys by common-midpoint (CMP) and seismic reflection method.





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





The
      acquisition of the three new licenses increased the total area covered by the
      licenses held by ZNG from 643,000 acres to over 1 million acres. All seven
      licensed areas are located in the Eastern part of Kurgan region, have
      well-developed infrastructure, including close proximity to the major oil
      pipeline, and have available existing prior geological data.





ZNG
      also
      has outstanding applications for two more parcels in the same area -
      Zapadno-Petukhovsky and Orlovo-Pashkovsky-2. Auctions for these licenses are
      expected to take place in the second quarter of 2007; however,  there can
      be no assurance that ZNG will be awarded the licenses to the parcels at
      auction.





Following
      detailed data collection, survey and seismic testing, ZNG will proceed with
      development of the most promising licenses first. As of March 2007, ZNG has
      performed the following research and exploration works on its licensed
      areas:


-
        Obtained core samples from parametric wells drilled in prior years on the
        licensed areas and adjacent territories in the Eastern part of Kurgan region
        during the initial search for oil and gas in the region, and performed analysis
        of the data provided by the samples.
  -
        Completed a 2D seismic survey on the West-Suersky block (approximately 320
        linear kilometers), the Privolny block (approximately 140 linear kilometers),
        and the Mokrousovky block (approximately 340 linear kilometers) using
        Bazneftgeophisica.
  -
        Performed gravimetric surveys on the West-Suersky block.
  -Completed
        approximately 2,106 linear kilometers of gas seismotomographic and geochemical
        surveys performed by Exotrad on the Privolny, Mokrousovsky, West-Suersky,
        Orlovo-Pashkovky, South-Voskresensky, Petukhovsky and Lebyazhevsky blocks,
        which
        surveys are currently continuing on the other 5 blocks. Gas seismotomography
        is
        an advanced technique of combining active gas geochemistry, passive seismic
        and
        electromagnetic methods. The surveys were performed
        by Exotrad, a world leader in this field. Exotrad has used this technology
        in
        more than 260 projects as well as “Caspian Pipeline Consortium”; “Sakhalin-2”;
        and “Blue Stream” in diverse locations across Asia, Eastern Europe and the
        Americas.
   -9-
   -Scientific
        and technical analysis was performed by the team of geologists, which included
        experts from Exploration Consultants Limited ("ECL"), a leading international
        oil and gas consulting firm (part of RPS Group).
  -Based
        on
        the results of the gas seismotomographic surveys and high definition 2D seismic
        survey shot over the geochemical anomalies found in the Privolny and
        Mokrousovsky blocks, two robust drilling prospects have been identified in
        the
        northern part of the Privolny block.
  -Drilling
        of the first prospect on the Privolny block has commenced as of the date
        of this
        filing. The “Privolny-1” well is intended to provide physical data to enable the
        seismic survey to be correlated to the geology and to better determine the
        subsurface structures in the licensed block. We believe that this will give
        ZNG
        the ability to further analyze the block and eventually drill at least two
        more
        exploration wells. We expect to see a geological update in approximately
        45 to
        60 days, which period of time is needed to drill and process data of the
        approximately 2,000 meter deep well.







**JOINT
      VENTURE**





On
      October 14, 2005, the Company entered into a Joint Venture Shareholders'
      Agreement ("Joint Venture") 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., will, operate through ZNG and be 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 and as a result of such transfer, the Company no longer has any separate
      oil and gas exploration activities in Kurgan, Russia, other than through its
      ownership of ZNG, Ltd.





On
      November 9, 2005, ZNG entered into a New Loan with Caspian (the "New Loan").
      Under the loan agreement, Caspian Finance Limited ("Caspian") agreed to provide
      a loan of up to $6,874,325 representing the assumed commitment under a prior
      loan equal to $1,739,658, of which ZNG had received $1,110,624 as of November
      9,
      2005, and a new commitment of up to $5,134,667, 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 entered into an
“Addition to the Loan Agreement of November 9, 2005,” with Caspian,
      whereby ZNG agreed to increase the amount of the New Loan from $6,874,325
      to $8,874,325 under the same terms and conditions as the New Loan. The New
      Loan
      had a total outstanding balance, including principal and accrued interest of
      $8,178,303 as of March 20, 2007.




-10-





Interest
      on any amounts loaned under the New Loan bears interest at the following rates,
      calculated and accrued 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. 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.





Pursuant
      to the New Loan, ZNG is responsible for satisfying all requirements of Russian
      Federation law and regulations in connection with each advance made under the
      New Loan, and ZNG shall indemnify Caspian for any loss or damage it may suffer
      as a result of the New Loan.





The
      New
      Loan provided for the payment of certain debts of ZNG, which were incurred
      before the Joint Venture. Payments under the New Loan will include:





1)  $352,665
      which was paid upon the Company signing the loan agreement, which was used
      for:





o
            payment
                of salaries of ZNG for August and September ($32,000);o
            payment
                of 50% of the amount of directors’ and shareholders’ loans
                ($170,000);o
            50%
                of outstanding rent payments ($44,000);o
            mineral
                tax for the second quarter of 2005 ($3,865); ando
            $102,800
                for gathering and coordination of data in respect to the new licenses
                ZNG
                has recently applied for.





2)  $882,699
      which was paid upon the Company receiving licenses to the two additional license
      blocks which were received during the year ended December 31, 2006, which was
      spent as follows:





o
            further
                payment for gathering and coordination of data in connection with
                the new
                licenses (up to $340,000);o
            final
                payments for seismic and gravimetric works performed on the West-Suerski
                field (up to $324,834);o
            to
                repay the remaining amounts owed by ZNG to directors and shareholders
                ($170,000);o
            to
                pay the remaining amount of outstanding rent payments ($44,000);
                ando
            to
                pay mineral tax for the third quarter of 2005
                ($3,865).







-11-






In
      addition to the amounts agreed to be loaned pursuant to the New Loan, ZNG Ltd.
      agreed to lend $78,000 to the Company to pay for legal and consulting services
      in connection with establishing of the Joint Venture. The Company received
      $29,000 of this amount in November 2005; and the additional $49,000 will be
      paid
      after ZNG submits a letter from the relevant license authority of the Ministry
      of Natural resources of the Russian Federation confirming that five new licenses
      were awarded to ZNG, of which three have been awarded to date. There is no
      assurance the additional two licenses will be awarded to ZNG.





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.




-12-







**AGREEMENT
      WITH ALTERNATIVE ENERGY FINANCE, LTD.**





We
      previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which
      Tim
      Peara is the Managing Director as well as a Director of the Company, certain
      warrants in connection with Mr. Peara introducing the parties who formed the
      joint venture. Pursuant to an agreement between AEF and the Company, AEF will
      receive compensation based on the total investment made by Baltic Petroleum
      Ltd.
      in the Joint Venture. This compensation included a commission of approximately
      $18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture),
      which
      amount has not been paid as of the date of this filing, and 50,068 options
      to
      purchase shares of our common stock at $0.63 per share which were granted to
      Mr.
      Peara on March 6, 2006 and a commission of $6,673 (1% of Baltic's $667,313
      investment in the Joint Venture in the first quarter of 2006), which amount
      has
      not been paid to AEF to date and 17,561 options to purchase shares of our common
      stock at $0.67 per share for the first quarter of 2006, which were granted
      to
      Mr. Peara on March 31, 2006, which options contain a cashless exercise
      provision.





On
      June
      30, 2006, in connection with our agreement with AEF, we agreed to grant AEF
      a
      warrant to purchase 20,412 shares of our common stock at an exercise price
      of
      $2.02, which warrants contained a cashless exercise feature. The warrants expire
      three years from the grant date. We were also obligated to pay AEF $23,562
      during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
      investment in the Joint Venture in the second quarter 2006), which amount has
      not been paid to AEF to date.





On
      September 30, 2006, in connection with our agreement with AEF, we agreed to
      grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
      price of $1.53 per share, which warrants contained a cashless exercise feature.
      The warrants expire three years from the grant date. We were also obligated
      to
      pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
      Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
      2006), which amount has not been paid to AEF to date.





On
      December 31, 2006, in connection with our agreement with AEF, we agreed to
      grant
      AEF a warrant to purchase 38,648 shares of our common stock at an exercise
      price
      of $1.44 per share, which warrants contained a cashless feature. The warrants
      expire three years from the grant date. We were also obliged to pay AEF $31,794
      during the three months ended December 31, 2006 (equal to 1% of Baltic’s
      approximately $3,197,400 investment in the Joint Venture in the fourth quarter
      of 2006); which amount has not been paid to date.





As
      of
      December 31, 2006, we owed approximately $98,066 to AEF in connection with
      AEF's
      introduction of the parties of the Joint Venture, as described above, $60,209
      to
      Mr. Peara in accrued Directors fees and approximately $4,703 to Mr. Peara in
      various travel related expenses.




-13-







**RECENT
      EVENTS**





**SEISMIC
      INTERPRETATION ON MOKROUSOVSKY BLOCK**





ZNG
      has
      completed an interim Seismic Interpretation and received a Mapping Report
      created by RPS Energy (“RPS”), relating to the 2D seismic studies conducted on
      the Mokrousovsky block to date. The Mokrousovsky block is the second licensed
      area surveyed using conventional 2D seismic surveys, over which 339 kilometers
      (“km”) of seismic surveys have been shot. The following results have been
      obtained through those surveys:





·
            One
                structural prospect has been identified in the south west of the
                Mokrousovsky license area. The structure has a maximum area of
                approximately 72 square km, of which approximately 52 square km lie
                within
                the licensed area. The surface geochemical anomaly discovered in
                the area
                lies over the north eastern flank of the structure within the license
                area.·
            A
                drilling location has been recommended by RPS for the prospect,
                basedon
                the strong structure and geochemical coincidence, which drilling
                has not
                begun to date.





**DRILLING
      ON THE PRIVOLNY** **BLOCK**





Drilling
      of the first prospect located in the Privolny block has commenced as of the
      filing of this report. The “Privolny-1” well is intended to provide physical
      data to enable the seismic survey to be correlated to the geology of the block
      and to better determine the subsurface structures which are present in the
      block. ZNG believes that this will provide an improved analysis to create a
      work
      program including the drilling of at least two more exploration wells. ZNG
      expects to provide a geological update in 45 to 60 days, which period of time
      is
      needed to drill and process data from the 2,000 meter deep well.





ZNG's
      Board of Directors decided to drill up to four exploration wells in connection
      with the recent Seismotomographic surveys and high definition 2D seismic shot
      over geochemical anomalies in Privolny and Mokrousovsky blocks. At least two
      of
      these wells are proposed to be drilled in northern locations in the Privolny
      block and the other two wells are proposed to be drilled on the Mokrousovsky
      block.





In
      the
      event that the wells prove successful in establishing the presence of
      hydrocarbons, of which there can be no assurance, the Board of Directors of
      ZNG
      intends that production testing will be supervised by a leading firm of
      reservoir evaluation consultants and the Board will then determine the most
      appropriate means of commercializing the license blocks.




-14-







The
      total
      budget for the exploration program and further seismic studies, which the Board
      has proposed to shoot on ZNG's Lebyazhevsky licensed block, totals approximately
      8 million British pounds or $15 million US dollars. The funds were raised by
      BP's parent via a placement of shares. ZNG is currently entering into new loan
      agreements covering such funds. The loans will not be dilutive to the Company's
      ownership in ZNG. In connection with the funding provided by Baltic, ZNG entered
      into a gross override royalty agreement with Baltic, as described below under
      "Deed of Agreement," and “Gross Override Royalty Agreement.”





**DEED
      OF AGREEMENT**





On
      July
      26, 2006, we entered into a Deed of Agreement with Baltic Petroleum (E&P)
      Limited ("BP" or "Baltic") and ZNG. Pursuant to the Deed of Agreement, BP agreed
      to allow the drawdown by ZNG, within 10 days of the date of the Deed of
      Agreement, of certain funds from Caspian under the New Loan,
      including:





o
            $185,000
                to be paid to Business Standard, which was owed to Business Standard
                from
                ZNG in consideration for Business Standard assisting ZNG with the
                process
                of the granting of the three oil and gas licenses awarded to ZNG
                in June
                2006;o
            $170,000
                to be paid to Mr. Victor Repin (a significant shareholder of the
                Company)
                and Sergey Potapov (a Director of the Company) in final settlement
                of
                amounts due to them by ZNG; ando
            $44,000
                to ZNG's landlord in full settlement of all sums due in connection
                with
                the rent on ZNG's offices in Kurgan,
                Russia.





The
      Deed
      of Agreement also contemplated ZNG's entry into a further loan agreement with
      Caspian (assuming Caspian is able to raise such financing on terms acceptable
      to
      BP), substantially with the same terms as the New Loan (other than due dates
      and
      interest amounts), whereby Caspian would provide ZNG funds for seismic drilling
      and work programs of approximately $12,000,000 (the "Additional
      Loan").





The
      Deed
      of Agreement also provided that upon the entry into the Additional Loan, we,
      BP
      and ZNG will enter into a gross override royalty agreement, whereby ZNG will
      grant a gross override royalty ("GOR") to BP equal to 3% of the gross turnover
      on all production of oil and gas at the wellhead in Kurgan by ZNG until BP
      has
      received in aggregate $20,000,000 from such GOR (the "GOR Sum"). In December
      2006, ZNG entered into a Gross Overriding Royalty Agreement with Baltic, which
      is described in greater detail below.





On
      January 16, 2007, ZNG entered into an “Addition to the Loan Agreement of
      November 9, 2005,” with Caspian, whereby Caspian agreed to increase the amount
      of the New Loan from $6,874,325 to $8,874,325 under the same terms and
      conditions as the New Loan. The increase in the new loan was intended to allow
      continuous cash flow to ZNG for its operating needs during the first two
      quarters of 2007 until the companies enter into the anticipated loan agreements
      to finance the current program of seismic studies and drilling of the first
      four
      (4) planned wells in ZNG's license blocks, two of which are planned for
      2007.







-15-







Baltic
      agreed to pay additional fees of $300,000 in connection with consulting services
      rendered in connection with the acquisition of the licenses by ZNG during the
      year ended December 31, 2006. The $300,000 expense was added to the total
      amounts loaned by Baltic to the Joint Venture.





CONSULTING
      AGREEMENT WITH BUSINESS STANDARD





On
      January 25, 2007, our Board of Directors took action to ratify the Company’s
      entry into a Consulting Agreement with Business Standard, a Russian company
      (the
“Consulting Agreement”), which Consulting Agreement provides for Business
      Standard to provide us certain consulting services in connection with
      investigating financing opportunities, assisting in the Company's day to day
      business management, assisting in negotiations with potential investment
      partners, as well as assisting in the application for oil and gas exploration
      and production licenses by our wholly owned subsidiary KNG or current and
      potential investee companies in the Western Siberia region of Russia. We
      agreed to pay Business Standard $15,000 per month pursuant to the Consulting
      Agreement and also agreed to issue Business Standard 200,000 shares of our
      restricted common stock as a signing bonus in connection with its entry into
      the
      Consulting Agreement and 200,000 restricted shares of common stock in connection
      with the acquisition of KNG. The Consulting Agreement ends on December 31,
      2007,
      but is automatically extended for additional one (1) year terms unless either
      party communicates its desire to terminate the agreement to the other party
      fifteen (15) days prior to the end of the then current term.





Also
      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) 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.





GROSS
      OVERRIDING ROYALTY AGREEMENT





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




-16-







**Estimate
      of Amount of Time Spent On Research and Development**





An
      initial business plan was developed over the course of three months in 2003.
      During that time period, market research was conducted. Research and development
      activities on the licensed blocks in the Kurgan Region were directly borne
      by
      the Company up to the time the Joint Venture was closed in October 2005. As
      a
      result of the closing of the Joint Venture, these research and development
      costs
      are now paid by both by ZNG, Ltd. (as described above) and ZNG. Research
      activities include gravimetric, seismic works and seismotomography studies
      on
      the licensed areas. Costs incurred by ZNG and ZNG Ltd. in connection with these
      studies as of December 31, 2006 totaled approximately $4,145,000. Furthermore,
      moving forward we expect additional research and development costs will be
      paid
      by us in connection with our exploration of any of the blocks that KNG may
      obtain at auction in the future, of which there can be no
      assurance.





**Employees**





Siberian
      Energy Group Inc. currently employs two (2) employees in management. Zaural
      Neftegaz ("ZNG"), which is 50% owned by the Company through its joint venture
      ZNG, Ltd., employs nineteen (19) full-time employees and one (1) part-time
      employee. KNG, which we purchased in December 2006 has two (2) part-time
      employees.





**Critical
      Accounting Policies and Estimates**





Our
      discussion and analysis of our financial condition and results of operations
      is
      based upon our unaudited financial statements, which have been prepared 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.




-17-





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. For the cumulative period ended
      December 31, 2006, the Company has obtained cash financing from organizing
      stockholders and employees in the form of loans, advances and deferred salaries,
      as well as through debt financing. 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**





Given
      the
      recent boom in the Russian oil industry, there has been an increase in interest
      and activity in the Western Siberian basin. In September 2003, a competitive
      bid
      process for eleven newly-opened exploration blocks was held in the Tyumen
      region, immediately north of Kurgan. Ten of the blocks were awarded to seven
      companies. The total value of the purchases was over $2,400,000. The closest
      of
      these blocks lies within 60 miles of the licensed areas covered by ZNG’s blocks,
      with the majority of the blocks lying within 120 miles of these areas. While
      additional blocks have recently sold in areas surrounding ZNG's blocks, this
      does not imply that ZNG or KNG (assuming it is awarded the licenses for which
      it
      has applied) are anymore likely to find hydrocarbon reserves and it has no
      bearing on the future success of the Company's development or exploration
      efforts in Western Siberia.





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 that demand
      for
      oil continues to exceed supply both domestically and
      internationally.




-18-







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, if it
      is
      granted exploration licenses at auction, of which there can be no assurance)
      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, 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.





-19-







**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**





ZNG
      holds
      seven licenses to explore seven individual properties in the Kurgan province
      of
      Russia. These licenses require ZNG to conduct seismic surveys on the properties
      and to report any discoveries to the regional government. The licenses are
      currently classified as 5-year exploration licenses and are convertible to
      25-year production licenses upon discovery of hydrocarbon reserves. ZNG also
      has
      pending applications for two additional licenses, which we believe will be
      auctioned off in 2007.





KNG
      has
      applied for 15 licenses in Western Siberia, Russia, four of which we
      believe will be auctioned off during the second quarter of 2007, 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.







-20-






**Costs and Effects of Compliance with
      Environmental****Laws**


According
      to the laws and regulations of the Russian Federation, organizations are
      permitted to carry out seismic and other development activities on licensed
      fields, provided the companies conform to ecological standards. Accordingly,
      ZNG
      and KNG have encountered two costs associated with environmental law compliance:
      costs associated with obtaining licenses and costs associated with obtaining
      permission from the Russian Ministry of Natural Resources (the "Ministry").
      These costs have totaled approximately $183,000, which includes $2,000 relating
      to the ecological review by the Ministry and $181,000 in legal costs and fees
      to
      obtain the Company's licenses. ZNG has successfully passed a review by the
      Ministry.





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
      2. DESCRIPTION OF PROPERTY**





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
      year to year basis and is renewable on March 30, 2007, which lease we currently
      plan to renew. 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 rents office space in Toronto, Ontario, Canada. The term of the lease
      on
      the Canadian office space was from January 1, 2005 until December 31, 2005,
      and
      the Company had an option to renew the lease for an additional five (5) years
      on
      a year to year basis. The Company renewed the office space for the period from
      January 1, 2007 until December 31, 2007. The monthly rental fee under the
      Canadian office space lease is currently $1,240. The rental amounts under years
      four through five of the lease are approximately $1,423.10 per month for year
      four, and $1,476.60 per month for year five. The office space encompasses
      approximately 370 square feet of office space.





KNG
      currently rents office space in Khanty-Mansiysk City, Russia, under a one year
      lease expiring in December 2007, at a monthly rental cost of approximately
      $80
      per month.








-21-







**ITEM
      3. LEGAL PROCEEDINGS**





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





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





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





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





The
      Company had no matters submitted to a vote of security holders during the fiscal
      quarter ended December 31, 2006.





-22-







**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





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 1,526,500 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, 2006. We have no outstanding shares of preferred
      stock. As of March 22, 2007 there were 15,034,996 shares of common stock
      outstanding, held by approximately 125 shareholders of record.





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





**Bid
                Prices*****Quarter
                Ended(1)******
            **High******
            **Low**December
                31, 2006
            $2.40
            $1.15September
                30, 2006
            $3.65
            $1.80June
                30, 2006
            $9.00
            $1.00March
                31, 2006
            $1.30
            $0.65December
                31, 2005
            $2.70
            $0.80September
                30, 2005
            $2.10
            $0.30June
                30, 2005(2)
            $5.00
            $0.10





(1)
      The
      earliest available bid and ask prices for the Company's common stock on the
      Over-The-Counter Bulletin Board as of the filing of this annual report on Form
      10-KSB was for the period ending June 30, 2005.





(2)
      The
      Company affected a 1 for 2 reverse stock split effective May 2, 2005, which
      reverse split is retroactively affected for the bid and ask prices for the
      quarter ended June 30, 2005.





**RECENT
      SALES OF UNREGISTERED SECURITIES**





On
      September 30, 2006, in connection with our agreement with AEF, we agreed to
      grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
      price of $1.53 per share, which warrants contained a cashless exercise feature.
      The warrants expire three years from the grant date. We were also obligated
      to
      pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
      Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
      2006), which amount has not been paid to AEF to date. We claim an exemption
      from
      registration afforded by Section 4(2) of the Securities Act of 1933 since the
      foregoing issuance of warrants did not involve a public offering, the recipient
      took the warrants for investment and we took steps to restrict the transfer
      of
      the warrants. No underwriters or agents were involved in the foregoing grant
      and
      no underwriting discounts or commissions were paid by us.




-23-







On
      November 17, 2006, we issued 35,000 shares of our restricted common stock to
      Investor Relations Group Inc., in consideration for investor relations services
      rendered. We claim an exemption from registration afforded by Section 4(2)
      of
      the Securities Act of 1933 since the foregoing issuance of shares did not
      involve a public offering, the recipient took the shares for investment and
      we
      took steps to restrict the transfer of the shares. No underwriters or agents
      were involved in the foregoing issuance and no underwriting discounts or
      commissions were paid by us.





On
      December 26, 2006, we issued 1,900,000 restricted shares of common stock to
      Key
      Brokerage in consideration for the purchase of KNG (as described above). We
      claim an exemption from registration afforded by Section 4(2) of the Securities
      Act of 1933 since the foregoing issuance of shares did not involve a public
      offering, the recipient took the shares for investment and we took steps to
      restrict the transfer of the shares. No underwriters or agents were involved
      in
      the foregoing issuance and no underwriting discounts or commissions were paid
      by
      us.





On
      December 29, 2006, we issued 52,500 shares of common stock to our Chief
      Executive Officer, David Zaikin, in consideration for and in connection with
      Mr.
      Zaikin’s exercise of 52,500 of his 2006 stock options to purchase shares of our
      common stock at an exercise price of $0.60 per share .
      We
      claim an exemption from registration afforded by Section 4(2) of the Securities
      Act of 1933 since the foregoing issuance of shares did not involve a public
      offering, the recipient took the shares for investment and we took steps to
      restrict the transfer of the shares. No underwriters or agents were involved
      in
      the foregoing issuance and no underwriting discounts or commissions were paid
      by
      us.





On
      December 31, 2006, in connection with our agreement with AEF, we agreed to
      grant
      AEF a warrant to purchase 38,648 shares of our common stock at an exercise
      price
      of $1.44 per share, which warrants contained a cashless feature. The warrants
      expire three years from the grant date. We were also obliged to pay AEF $31,794
      during the three months ended December 31, 2006 (equal to 1% of Baltic’s
      approximately $3,197,400 investment in the Joint Venture in the fourth quarter
      of 2006); which amount has not been paid to date. We claim an exemption from
      registration afforded by Section 4(2) of the Securities Act of 1933 since the
      foregoing issuance of warrants did not involve a public offering, the recipient
      took the warrants for investment and we took steps to restrict the transfer
      of
      the warrants. No underwriters or agents were involved in the foregoing grant
      and
      no underwriting discounts or commissions were paid by us.





-24-







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





o
            350,000
                shares of our restricted common stock to David Zaikin, our Chief
                Executive
                Officer and Director 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;o
            50,000
                shares of our restricted common stock to Elena Pochapski, our Chief
                Financial Officer and Director as a bonus for her services rendered
                during
                the year ended December 31, 2006;o
            20,000
                shares of our restricted common stock to Timothy Peara, our Director,
                as a
                bonus for his services rendered during the year ended December 31,
                2006;o
            25,000
                shares of our restricted common stock to Oleg Zhuravlev, our Director,
                as
                a bonus for his services rendered during the year ended December
                31,
                2006;o
            10,000
                shares of our restricted common stock to Vladimir Eret, our Director,
                as a
                bonus for his services rendered during the year ended December 31,
                2006;
                ando
            10,000
                shares of our restricted common stock to Sergei Potapov, our Director,
                as
                a bonus for his services rendered during the year ended December
                31,
                2006.





We
      claim
      an exemption from registration afforded by Section 4(2) of the Securities Act
      of
      1933 since the foregoing issuances of shares did not involve a public offering,
      the recipients took the shares for investment and we took steps to restrict
      the
      transfer of the shares. No underwriters or agents were involved in the foregoing
      issuances and no underwriting discounts or commissions were paid by
      us.





On
      January 25, 2007, in connection with our ratification of the Business Standard
      Consulting Agreement, we approved the issuance of an aggregate of 400,000 shares
      of our restricted common stock to Business Standard in consideration for
      Business Standard’s entry into the Consulting Agreement and in consideration for
      Business Standard’s services rendered to us in connection with our acquisition
      of Kondaneftegaz. We claim an exemption from registration afforded by Section
      4(2) of the Securities Act of 1933 since the foregoing issuance of shares did
      not involve a public offering, the recipient took the shares for investment
      and
      we took steps to restrict the transfer of the shares. No underwriters or agents
      were involved in the foregoing issuance and no underwriting discounts or
      commissions were paid by us.





Also
      on
      January 25, 2007, we approved the issuance of 20,000 shares of our restricted
      common stock to Lyudmila Shirko, in consideration for services rendered to
      us in
      connection with our operations during the year ended December 31, 2006. We
      claim
      an exemption from registration afforded by Section 4(2) of the Securities Act
      of
      1933 since the foregoing issuance of shares did not involve a public offering,
      the recipient took the shares for investment and we took steps to restrict
      the
      transfer of the shares. No underwriters or agents were involved in the foregoing
      issuance and no underwriting discounts or commissions were paid by
      us.




-25-







On
      January 31, 2007, we issued 20,000 share of our restricted common stock to
      Investor Relations Group Inc., in consideration for investor relations services
      rendered.   We claim an exemption from registration afforded by Section
      4(2) of the Securities Act of 1933 since the foregoing issuance of shares did
      not involve a public offering, the recipient took the shares for investment
      and
      we took steps to restrict the transfer of the shares. No underwriters or agents
      were involved in the foregoing issuance and no underwriting discounts or
      commissions were paid by us.





On
      February 15, 2007, the Board of Directors agreed to issue 4,000 restricted
      shares of the Company's common stock to Ann L. Stephenson Group, in
      consideration of investor relations services rendered to the Company in January
      2007, and 3,000 restricted shares of common stock to Friedland Capital, in
      connection with the Company's participation at Friedland's New York investment
      conference in 2007.   We claim an exemption from registration afforded by
      Section 4(2) of the Securities Act of 1933 since the foregoing issuances of
      shares did not involve a public offering, the recipients took the shares for
      investment and we took steps to restrict the transfer of the shares. No
      underwriters or agents were involved in the foregoing issuances and no
      underwriting discounts or commissions were paid by us.








**ITEM
      6. 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**





As
      a
      result of the Joint Venture, the Company will work with its partner in the
      Joint
      Venture, Baltic Petroleum (E&P) Limited ("BP" or "Baltic") to continue the
      oil and gas exploration activities through their co-ownership of the Joint
      Venture, ZNG, Ltd., which in turn owns ZNG. The Company believes that ZNG has
      adopted an aggressive but sensible work program. In connection with the Joint
      Venture, BP will supply ZNG with both the technical and financial support that
      is required to fulfill the work program. If circumstances permit and ZNG is
      awarded additional blocks in the Kurgan Region, we believe that BP will be
      able
      to ensure that adequate funding is available to support the Work Programs on
      these blocks.




-26-







The
      Company also plans to put a large part of its resources into KNG, and the
      licenses which KNG has applied for. If KNG is granted any or all of the 10
      licenses it applied for in November 2005 and May 2006, or the 5 additional
      licenses which it submitted applications for during the first quarter of 2007,
      the Company anticipates conducting oil and gas exploration surveys and studies
      on those licenses.





Moving
      forward, we anticipate targeting other potential long term investments in
      Russia, separate from our involvement in the Joint Venture and KNG. Currently
      we
      are evaluating different business opportunities in the oil and gas industry,
      including both development stage and revenue-producing enterprises. As of the
      filing of this report on Form 10-KSB, the Company is researching certain other
      projects which involve the potential purchase of oil and gas interests in
      Western Siberia, Russia; however no formal agreements or understandings have
      been entered into as of the filing date of this report, other than the purchase
      of KNG as described above.





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 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 (described under "Joint Venture Agreement,"
      above), the Company received $25,000 per month in management fees in connection
      with the Joint Venture from the date the Joint Venture was entered into until
      November 2006, at which time the management fees were increased to $55,000
      per
      month. The Company, however, can make no assurance that $55,000 per month will
      be adequate to pay its upcoming expenses and liabilities, in which case the
      Company plans that its organizing stockholders will continue to provide
      financing for the Company, of which there can be no assurance.





In
      the
      past, we have obtained cash financing from organizing stockholders in the form
      of loans and advances, as a result, amounts totaling $362,166 and $328,376
      were
      payable to the stockholders as of December 31, 2006 and December 31, 2005,
      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.







-27-







**COMPARISON
      OF OPERATING RESULTS**





**RESULTS
      OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006, COMPARED TO THE YEAR ENDED
      DECEMBER 31, 2005**





We
      had
      revenues and other income of $360,000 for the year ended December 31, 2006,
      which was solely due to $25,000 of monthly management fees received from ZNG,
      Ltd. from January 2006 to November 2006, at which time the management fees
      increased to $55,000 per month. We had $445,861 of revenue and other income
      for
      the year ended December 31, 2005, due to $75,000 of management fees, $364,479
      in
      gain from entry into the Joint Venture with ZNG, Ltd. which Joint Venture
      adjusted our negative investment in ZNG to zero as of the effective date of
      the
      Joint Venture, and $6,382 of other revenues. Revenues decreased $85,861 or
      19.3%
      for the year ended December 31, 2006, compared to the year ended December 31,
      2005, which decrease was mainly due to the $364,479 gain on our entry into
      the
      Joint Venture with ZNG, Ltd. during the year ended December 31, 2005, which
      revenues were not present during the year ended December 31, 2006.





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





We
      had
      total expenses of $3,440,336 for the year ended December 31, 2006, compared
      to
      total expenses for the year ended December 31, 2005, of $1,328,012, which
      represented an increase in total expenses from the prior period of $2,112,324
      or
      159.1%.





Total
      expenses for the year ended December 31, 2006, included $803,520 of salaries;
      $1,944,718 of professional and consulting fees, including amounts paid to our
      legal counsel and accountant in connection with the preparation and filing
      of
      our annual report on Form 10-KSB and 10-QSB, and certain warrants and shares
      granted for professional services during the year ended December 31, 2006;
      $39,698 in rent and occupancy; $337 of depreciation and amortization; $10,769
      of
      finance charges and interest, attributable to interest paid on the advances
      we
      received from BP and other loans; and $641,294 of other expenses, including
      marketing and advertising in connection with road shows, various general and
      administration expenses relating to the day to day operations of the Company,
      travel and hotel expenses in connection with the research on potential business
      acquisitions, and the value of shares of common stock issued for investor
      relations services rendered.





The
      $803,520 of salaries for the year ended December 31, 2006, included
      approximately $146,920 which was attributable to the our Chief Financial
      Officer, Elena Pochapski, which included 50,000 restricted shares of common
      stock valued at $72,000 which were issued to her in February 2007, as a bonus
      for services rendered to us during fiscal 2006; $504,000 attributable to funds
      paid to our Chief Executive Officer, David Zaikin in the form of 350,000 shares
      of common stock, which were issued to Mr. Zaikin in February 2007, in
      consideration for his services to us in fiscal 2006; and certain other amounts
      which were paid to various other officers, Directors, employees and
      consultants.




-28-


The
      main
      items leading to the increase in total expenses for the year ended December
      31,
      2006, compared to the year ended December 31, 2005, were an increase of
      $1,458,498 or 300% in professional and consulting fees to $1,944,718, and an
      increase in salaries of $497,141 or 162.3% to $803,520 for the year ended
      December 31, 2006, compared to $306,379 for the year ended December 31, 2005.
      The increase in other expenses is attributable to increased marketing and
      advisory services in connection with our operations. The professional and
      consulting fees for the year ended December 31, 2006 included the following
      expenses: $59,375 monthly consulting fees payable to Business Standard, as
      well
      as 600,000 restricted shares of common stock issued to Business Standard valued
      at $1,113,000 for services rendered in connection with the acquisition of
      various oil and gas exploration licenses by ZNG; approximately $89,552 of legal
      and accounting fees in connection with the drafting and review our public
      filings and periodic reports and the financial statements contained therein,
      and
      various other fees paid to consultants in connection with the acquisition by
      us
      of KNG, and the licenses which are held by ZNG during the fiscal year ended
      December 31, 2006.





Salaries
      increased for the year ended December 31, 2006, compared to the year ended
      December 31, 2005, due to salaries and bonus granted to our officers and
      Directors in February 2007, for the 2006 fiscal year which totaled approximately
      465,000 shares of restricted common, which had a value in salaries of
      approximately $669,600, which issuances are described in greater detail herein
      under “Certain Relationships and Related Transactions.”





Certain
      other expenses were less during the year ended December 31, 2006, compared
      to
      the year ended December 31, 2005, including depreciation and amortization,
      which
      declined by $27,997 or 98.8% from the prior period, finance charges and
      interest, which decreased $36,838 or 77.4% from the prior period, and rent
      and
      occupancy, which declined by $40,833 or 50.7% from the prior period, which
      decreases were due to the fact that the expenses of ZNG, our former wholly
      owned
      subsidiary, which is currently solely owned by ZNG, Ltd., which we own 50%
      of,
      are no longer included in our consolidated statement of operations due to the
      fact that ZNG is no longer our wholly owned subsidiary, but which expenses
      were
      included in our consolidated statement of operations during the year ended
      December 31, 2005.





We
      had a
      net loss of $3,080,336 for the year ended December 31, 2006, compared to a
      net
      loss of $882,151 for the year ended December 31, 2005, an increase in net loss
      of $2,198,185 or 249.1% from the prior period. The increase in net loss was
      mainly attributable to increases in total expenses, namely the increases in
      professional and consulting fees and salaries, described above, as well as
      the
      decrease in gain from entrance into joint venture which was $364,479 for the
      year ended December 31, 2005 compared to $0 for the year ended December 31,
      2006, which were not sufficiently offset by the $285,000 increase in management
      fees for the year ended December 31, 2006.





-29-







**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      had
      current assets of $116,707 as of December 31, 2006, which included cash of
      $1,435; management fee receivable of $110,000, which represented amounts owed
      to
      us by ZNG, Ltd. in management fees, which amount has been paid to date; and
      prepaid expenses and other of $5,272. This represented an increase in current
      assets of $54,886 or 88.8%, from $61,821 of current assets as of December 31,
      2005, which increase was mainly due to an increase in management fees receivable
      of $60,000 and an increase of $5,002 in prepaid expenses and other.





We
      had
      total assets of $2,819,272 as of December 31, 2006, which included current
      assets of $116,707 and non-current assets of $2,702,565. Non-current assets
      included $2,700,000 of oil and gas properties, unproved, representing geological
      studies and data, which we received in connection with the purchase of KNG
      and
      $2,565 of property and equipment, net. This represented an increase of
      $2,755,912 in total assets from $63,360 of total assets as of December 31,
      2005,
      versus total assets of $2,819,272 as of December 31, 2006, which increase was
      mainly attributable to the above mentioned purchase of KNG and related
      geological data.





We
      had
      total liabilities of $1,884,130 as of December 31, 2006, which were solely
      current liabilities and which included $362,166 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, 2006; $50,615
      of accounts payable to Baltic in connection with the $29,000 loan advanced
      to
      the Company from Baltic, as described above under "Description of Business"
      and
      certain other expenses owed to Baltic; $459,561 of accounts payable to others
      for advisory and professional services rendered; and $1,011,788 of accrued
      payroll, which included $112,500 payable to our Chief Executive Officer, David
      Zaikin which amount was owed to Mr. Zaikin 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, $91,177 payable to our Chief
      Financial Officer, Elena Pochapski of which $6,470, which was due for services
      rendered from November to December 2006, has been paid to date, and $69,241.97
      of accrued salary payable to our former Chief Executive Officer, Shakeel Adam.
      Current liabilities of $1,884,130 as of December 31, 2006, represented an
      increase in current liabilities of $1,028,019 or 120% from total current
      liabilities of $856,111 as of December 31, 2005. The main reasons for this
      increase were an increase of $342,331 in accounts payable to others and a
      $707,447 increase in accrued payroll for the year ended December 31, 2006,
      compared to the prior year.





We
      had
      negative working capital of $1,767,423 and a total pre development and
      development stage accumulated deficit of $5,668,355 as of December 31,
      2006.





Because
      our cumulative losses associated with the operations of ZNG exceeded our
      investment as of the date of the Joint Venture, ZNG is carried on our balance
      sheet at $-0- as of December 31, 2006. Our investment in ZNG will exceed $-0-
      at
      such time as ZNG has cumulative earnings sufficient to repay all loans to Baltic
      as provided in the Joint Venture, if ever.




-30-







We
      had
      $52,314 of net cash flows for operating activities for the year ended December
      31, 2006, which included $2,288,168 of common stock and warrants issued for
      professional services and salaries, $804,519 of accounts payable and accrued
      expenses, $337 of depreciation and amortization, which was offset by $3,080,336
      of net loss and $65,002 of prepaid expenses and other assets.





We
      had
      $1,363 of net cash flows for investing activities for the year ended December
      31, 2006, due solely to expenditures for property and equipment.





We
      had
      $45,500 of net cash flows from financing activities for the year ended December
      31, 2006, which was solely due to $45,500 of net proceeds from common stock
      issued to employees, which was in connection with the exercise of all 100,000
      of
      our Chief Financial Officer Elena Pochapski's 2003 stock options at an exercise
      price of $0.14 per share in February 2006 and the exercise of 52,500 stock
      options granted to David Zaikin, our Chief Executive Officer pursuant to his
      2006 stock option plan, for aggregate consideration of $31,500, which amount
      he
      agreed to forgive of debt previously owed to him.





As
      of
      December 31, 2006, ZNG had received $6,148,142 pursuant to the New Loan, which
      amount includes $1,110,624 assumed by ZNG in connection with a previous loan
      made to ZNG. Total interest accrued as of December 31, 2006 was $540,153,
      including accrued interest on the previous loan.





Additionally,
      in July 2006, we entered into a Deed of Agreement, whereby Baltic agreed
      (funding permitting) to loan ZNG approximately $12,000,000 to be used on seismic
      studies, drilling and a work program, which funds have not been loaned to
      date.





Under
      the
      Joint Venture, we will receive $55,000 per month as a management fee from ZNG,
      Ltd. In addition to the monthly management fee, ZNG Ltd. agreed to lend $78,000
      to us to pay for legal and consulting services in connection with establishing
      the Joint Venture. We received $29,000 of this amount in November 2005; and
      will
      receive the additional $49,000 if all five of the new licenses are awarded
      to
      ZNG, of which three have been awarded to date, and ZNG submits a letter from
      the
      relevant license authority of the Ministry of Natural Resources of the Russian
      Federation confirming such awards, of which there can be no
      assurance.





Since
      our
      transfer of ZNG to the Joint Venture, we have no oil and gas operations separate
      from the Joint Venture, which has not started production and is not currently
      generating any cash from production, which makes it difficult for us to pay
      our
      maturing obligations. However, during the three months ended December 31, 2006,
      we did purchase KNG, and hope to be awarded oil and gas exploration licenses
      in
      connection with KNG during 2007. Moving forward, we believe that in the long
      run
      a number of trends will favorably affect our liquidity. These trends include
      the
      steady trend of economic growth in Russia in the recent years which is improving
      the liquidity of our potential customers, and may favorably impact our debt
      management and the increasing overall credit rating in Russia, which we hope
      will lead to increased foreign investment in Russian companies and which will
      benefit us as well.




-31-







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





**RISK
      FACTORS**





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





**RISK
      OF CONTINUING OUR BUSINESS PLAN WITHOUT ADDITIONAL**  **FINANCING.**





We
      depend
      to a great degree on the ability to attract external financing in order to
      conduct future exploratory and development activities. The Company believes
      it
      can satisfy its cash requirements during the next twelve months through funding
      provided by existing stockholders and with amounts received from the Joint
      Venture (described above), including $55,000 a month which the Company is to
      receive from ZNG, Ltd., pursuant to the Joint Venture. Additionally, ZNG has
      received approximately $1,110,624 from BP pursuant to a prior loan and another
      $7,067,679 pursuant to the New Loan, which had a total outstanding balance,
      including the assumed balance of the prior loan and accrued and unpaid interest
      on the prior loan and the New Loan as of March 20, 2007, of $8,178,303, which
      has been spent on various purposes, including paying consultants for services
      performed in connection with surveys previously performed on the licensed area.
      As the Joint Venture is now responsible for the funding of the operations of
      ZNG, we believe our expenditures in connection with ZNG will decrease in the
      upcoming periods. If we are unable to raise the additional funds required for
      the planned activities of the Joint Venture and for additional activities,
      separate from the Joint Venture, our Company may be forced to abandon its
      current business plan. If you invest in our Company and we are unable to raise
      the required funds, your investment could become worthless.





-32-







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





The
      Company does not expect to generate any revenues through the operations of
      ZNG,
      other than the $55,000 a month that it will receive from ZNG, Ltd., of which
      there can be no assurance. Therefore, investors should keep in mind that even
      if
      ZNG is able to raise the substantial amounts of additional financing it requires
      for its operations, it could still be years before ZNG generates any revenue,
      if
      ever. Even if generated such revenues will likely not be great enough to sustain
      ZNG. If no revenues are generated and hydrocarbon reserves are not located,
      we
      may be forced to abandon or curtail our current business plan. If ZNG, which
      is
      100% owned by the Company 50/50 joint venture ownership of ZNG, Ltd., were
      forced to abandon its business plan, the Company could be forced to abandon
      or
      curtail its business plan as well, which could cause the value of the Company's
      common stock to become worthless.





**WE
      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. Currently the Company has not raised any
      of
      this financing and the Company can make no assurances that this financing will
      ever be raised. The Company also does not expect to generate any revenues
      through the operations of KNG, until such financing can be raised, of which
      there can be no assurance. Therefore, investors should keep in mind that even
      if
      KNG is able to raise the substantial amounts of additional financing it requires
      for its operations, it could still be years before KNG generates any revenue,
      if
      ever. If KNG does not raise the $15,000,000 which it anticipates needing 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 become worthless.








**WE
      WILL NEED SUBSTANTIAL FINANCING PRIOR TO ENTERING INTO ANY**  **ADDITIONAL
      JOINT VENTURES OR ACQUISITIONS.**





The
      Company anticipates the need for approximately $10,000,000 to $25,000,000 to
      enter into additional joint ventures and/or acquisitions in the future.
      Currently the Company has not raised any of this financing and the Company
      can
      make no assurances that this financing will ever be raised. Even if the Company
      does raise this money and enter into other joint ventures or acquisitions in
      the
      future, it could still be years before the Company generates any revenue, if
      ever. If the Company does not raise the $10,000,000 to $25,000,000 which it
      anticipates needing to enter into additional joint ventures or acquisitions,
      the
      Company may be forced to abandon or curtail its current business plan.
      Additionally, the raising of this money may include issuing securities with
      greater rights than our common stock shareholders and/or may result in
      substantial dilution to our existing shareholders.




-33-







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





Our
      Company is in its early development stage, as planned principal activities
      have
      not begun. We have generated only minimal revenues since inception and have
      incurred substantial losses including a net loss of $3,080,336 for the year
      ended December 31, 2006 and a total accumulated deficit of $5,668,355 as of
      December 31, 2006. These factors among others indicate that the Company may
      be
      unable to continue as a going concern, particularly in the event that it cannot
      generate sufficient cash flow to conduct its operations and/or obtain additional
      sources of capital and financing.





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





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





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





As
      a
      development stage company, we have no revenues or profits to date and our net
      cumulative deficit attributable to our development stage as of December 31,
      2006, was $5,218,570, and our total cumulative deficit was $5,668,355 which
      included $449,785 of pre-development stage deficit. We had $1,011,788 in accrued
      and unpaid salaries and a working capital deficit of $1,767,423 as of December
      31, 2006. The Company is currently being funded by existing shareholders and
      the
      $55,000 monthly payments, which the Company receives from the Joint Venture
      in
      connection with management fees, but there can be no assurance this amount
      will
      be sufficient to continue our planned operations or that we will have enough
      money to repay our outstanding debts. There is a risk that ZNG will never begin
      production and our Company will never generate any revenues through our
      ownership of ZNG, Ltd. There is also a risk that KNG will not be awarded the
      licenses for which it has applied. If throughout ZNG's oil exploration (and
      KNG’s assuming it is awarded the licenses for which it has applied, of which
      there can be no assurance), no viable wells are found, and consequently, we
      generate only minimal revenues through ZNG, Ltd. (and/or through KNG), we will
      likely be forced to curtail or abandon our business plan. If this happens,
      you
      could lose your investment in our Company. If we are unable to generate profits,
      we will be forced to rely on external financing, of which there is no guarantee,
      to continue with our business plan.




-34-







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





Our
      Company currently has a poor financial position. We have generated only minimal
      revenues to date, nor have we discovered any hydrocarbon reserves or begun
      production on any wells. There is a risk that we will not find enough, or even
      any, viable wells which we require to generate enough profits for your
      investment in our Company to appreciate. If we never generate any revenues,
      our
      Company may be forced to curtail or abandon its business plan and your shares
      may become worthless.





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





There
      is
      a risk that ZNG and KNG, assuming it is awarded the licenses for which it has
      applied, of which there can be no assurance, will not find any hydrocarbon
      reserves and the cost of exploration will become too high for ZNG, Ltd. to
      continue ZNG's business plan and/or us to continue KNG’s business plan. As our
      only current operations are through our 50% ownership of ZNG, Ltd. which in
      turn
      owns 100% of ZNG, and through KNG, if ZNG, ZNG, Ltd. or KNG were to cease
      operations, your investment in our Company could become devalued or could become
      worthless.





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





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





**OUR
      GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.**





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




-35-







**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, both of whom are
      employed under contracts. 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, 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.**





Risks
      from these factors are intertwined with the risky nature inherent in the oil
      and
      gas industry. Projections on future revenues as well as costs and required
      capital expenditures are based on estimates. Business statistical analysis
      is
      used in projection of drilling success ratios, average production costs, world
      oil price fluctuations and their correspondence to Russian domestic market.
      If
      ZNG’s or KNG’s projections or estimates are wrong or our statistical analysis
      faulty, ZNG's or KNG’s revenues may be adversely affected which could prevent
      ZNG and/or KNG from executing their business strategy. As an investor, if this
      happens your securities in our Company could be adversely affected and you
      could
      lose your investment in our Company due to the fact that our only current oil
      and gas operations are through our 50% ownership of ZNG, Ltd., which in turn
      owns 100% of ZNG and through KNG, which has applied for, but not been awarded
      any licenses to date.





**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
      new
      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-QSB's or 10-KSB'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.




-36-







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





**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 $4.00 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 $4.00 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.




-37-







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.





**CRITICAL
      ACCOUNTING POLICIES**





Our
      discussion and analysis of our financial condition and results of operations
      is
      based upon our audited financial statements, which have been prepared 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, including those related to
      uncollectible receivables, investment values, income taxes, recapitalization
      and
      contingencies. 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.





**ITEM
      7. FINANCIAL STATEMENTS**












-38-





**SIBERIAN
        ENERGY GROUP INC.**
 **(A
        Development Stage Company)**
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **December
        31, 2006**
 
  
           
 
 
 
 
 
 
 
 
 **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, 2006 and 2005 and the
        related 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, 2006. 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, 2006 and 2005 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, 2006, in conformity with
        accounting principles generally accepted in the United States of
        America.
 
 The
        accompanying financial statements have been prepared assuming that Siberian
        Energy Group Inc. will continue as a going concern. As discussed in Note
        11 to
        the financial statements, Siberian Energy Group Inc. has not earned significant
        revenue since inception of its current endeavor, and is considered to be
        in the
        development stage which raises substantial doubt about its ability to continue
        as a going concern. Management’s plans relative to these matters are also
        described in Note 11 and throughout the financial statements. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
 
 
 
 Lumsden
        & McCormick, LLP
 Buffalo,
        New York
 March
        28,
        2007
   F-1
 
  
 SIBERIAN
                  ENERGY GROUP INC. (A Development Stage Company)**Consolidated
                  Balance Sheets**December
                  31,
              
              **2006**
              
              2005**Assets****Current
                  assets:**Cash
              
              **$**
              **1,435**
              
              $
              11,551Management
                  fee receivable
              
              
              **110,000**
              
              
              50,000Prepaid
                  expenses and other
              
              
              **5,272**
              
              
              270**116,707**
              
              
              61,821Investment
                  in joint venture
              
              
              **-**
              
              
              -Oil
                  and gas properties, unproved
              
              
              **2,700,000**
              
              
              -Property
                  and equipment, net
              
              
              **2,565**
              
              
              1,539**$**
              **2,819,272**
              
              $
              63,360**Liabilities
                  and Stockholders' Equity****Current
                  liabilities:**Demand
                  loan from individual, interest at 6.5%
              
              **$**
              **-**
              
              $
              62,500Accounts
                  payable:Related
                  party - stockholders
              
              
              **362,166**
              
              
              328,376Related
                  party - Baltic Petroleum, interest at 14%
              
              
              **50,615**
              
              
              43,664Others
              
              
              **459,561**
              
              
              117,230Accrued
                  payroll
              
              
              **1,011,788**
              
              
              304,341**1,884,130**
              
              
              856,111**Stockholders'
                  equity:**Common
                  stock - authorized 100,000,000 shares, $.001 par value,14,112,961
                  and 11,487,886 issued and outstanding
              
              
              **14,113**
              
              
              11,488Additional
                  paid-in capital
              
              
              **6,593,829**
              
              
              1,786,286Accumulated
                  deficitPre-development
                  stage
              
              
              **(449,785**
              **)**
              
              (449,785
              )Development
                  stage
              
              
              **(5,218,570**
              **)**
              
              (2,138,234
              )Accumulated
                  other comprehensive income (loss)
              
              
              **(4,445**
              **)**
              
              (2,506
              )**935,142**
              
              
              (792,751
              )**$**
              **2,819,272**
              
              $
              63,360*See
                  accompanying notes.*
   F-2
    
 SIBERIAN
                  ENERGY GROUP INC. (A Development Stage Company)For
                  the**Consolidated
                  Statements of Operations**
              
              
              
              
              
              cumulativeperiod
                  ofDevelopmentStage
                  Activity-January
                  1, 2003throughDecember
                  31,For
                  the years ended December 31,
              
              **2006**
              
              2005
              
              2006Revenues
                  and other income:Management
                  fees
              
              **$**
              **360,000**
              
              $
              75,000
              
              $
              435,000Gain
                  from entrance into joint venture
              
              
              **-**
              
              
              364,479
              
              
              364,479Other
              
              
              **-**
              
              
              6,382
              
              
              6,382**360,000**
              
              
              445,861
              
              
              805,861Expenses:Salaries
              
              
              **803,520**
              
              
              306,379
              
              
              1,878,067Professional
                  and consulting fees
              
              
              **1,944,718**
              
              
              486,220
              
              
              2,649,646Rent
                  and occupancy
              
              
              **39,698**
              
              
              80,531
              
              
              176,243Depreciation
                  and amortization
              
              
              **337**
              
              
              28,334
              
              
              102,717Finance
                  charges and interest
              
              
              **10,769**
              
              
              47,607
              
              
              58,376Other
              
              
              **641,294**
              
              
              378,941
              
              
              1,159,382Total
                  expenses
              
              
              **3,440,336**
              
              
              1,328,012
              
              
              6,024,431Loss
                  before income taxes
              
              
              **3,080,336**
              
              
              882,151
              
              
              5,218,570Provision
                  for income taxes (benefit)
              
              
              **-**
              
              
              -
              
              
              -Net
                  loss (development stage)
              
              **$**
              **3,080,336**
              
              $
              882,151
              
              $
              5,218,570Basic
                  and diluted loss per common share
              
              **$**
              **(0.26**
              **)**
              $
              (0.09
              )
              $
              (0.60
              )Weighted
                  average number of basic and dilutedcommon
                  shares outstanding
              
              
              **11,749,699**
              
              
              9,935,900
              
              
              8,723,439*See
                  accompanying notes.*
     F-3
 
 SIBERIAN
                    ENERGY GROUP INC. (A Development Stage Company)**Consolidated
                    Statements of Stockholders' Equity**For
                    the cumulative period of Development Stage Activity - January
                    1, 2003
                    through December 31, 2006Common
                    Stock
                
                
                
                
                
                AccumulatedAdditional
                
                
                
                OtherNumber
                    of
                
                
                
                Paid-In
                
                Accumulated
                
                Comprehensive
                
                
                
                ComprehensiveShares
                
                Par
                    Value
                
                Capital
                
                Deficit
                
                Income
                    (Loss)
                
                Total
                
                LossBalance,
                    January 1, 2003 (pre-development stage)
                
                
                4,902,886
                
                $
                4,903
                
                $
                430,195
                
                
                ($449,785
                )
                $
                -
                
                
                ($14,687
                )Loss
                    for the year - 2003
                
                
                -
                
                
                -
                
                
                -
                
                
                (422,516
                )
                
                -
                
                
                (422,516
                )
                
                ($422,516
                )Shares
                    issued in acquisition (ZNG)
                
                
                1,000,000
                
                
                1,000
                
                
                -1,000
                
                
                -
                
                
                -
                
                
                -Balance,
                    December 31, 2003
                
                
                5,902,886
                
                
                5,903
                
                
                429,195
                
                
                (872,301
                )
                
                -
                
                
                (437,203
                )Loss
                    for the year - 2004
                
                
                -
                
                
                -
                
                
                -
                
                
                (833,567
                )
                
                -
                
                
                (833,567
                )Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (53,120
                )
                
                (53,120
                )
                
                ($886,687
                )Shares
                    issued in acquisition (ZNG)
                
                
                3,450,000
                
                
                3,450
                
                
                746,550
                
                
                -
                
                
                -
                
                
                750,000Shares
                    issued for professional services
                
                
                50,000
                
                
                50
                
                
                9,950
                
                
                -
                
                
                -
                
                
                10,000Other
                
                
                -
                
                
                -
                
                
                34,426
                
                
                -
                
                
                -
                
                
                34,426Balance,
                    December 31, 2004
                
                
                9,402,886
                
                
                9,403
                
                
                1,220,121
                
                
                (1,705,868
                )
                
                -53,120
                
                
                -529,464Loss
                    for the year - 2005
                
                
                -
                
                
                -
                
                
                -
                
                
                (882,151
                )
                
                
                
                
                (882,151
                )Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                50,614
                
                
                50,614
                
                
                ($831,537
                )Shares
                    issued for professional services
                
                
                385,000
                
                
                385
                
                
                138,365
                
                
                -
                
                
                -
                
                
                138,750Shares
                    issued for accrued salaries
                
                
                1,700,000
                
                
                1,700
                
                
                210,800
                
                
                -
                
                
                -
                
                
                212,500Warrants
                    granted for professional services
                
                
                -
                
                
                -
                
                
                217,000
                
                
                -
                
                
                -
                
                
                217,000Balance,
                    December 31, 2005
                
                
                11,487,886
                
                $
                11,488
                
                $
                1,786,286
                
                
                ($2,588,019
                )
                
                ($2,506
                )
                
                ($792,751
                )Loss
                    for the year - 2006
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,080,336
                )
                
                -
                
                
                (3,080,336
                )Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,939
                )
                
                (1,939
                )
                
                ($3,082,275
                )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
                
                
                2,235,100
                
                
                -
                
                
                -
                
                
                2,237,000Shares
                    issued for professional services
                
                
                1,139,499
                
                
                1,140
                
                
                1,685,351
                
                
                -
                
                
                -
                
                
                1,686,491Warrants
                    granted for professional services
                
                
                -
                
                
                -
                
                
                841,177
                
                
                -
                
                
                -
                
                
                841,177Shares
                    cancelled
                
                
                (609,424
                )
                
                (610
                )
                
                610
                
                
                -
                
                
                -
                
                
                -Balance,
                    December 31, 2006
                
                
                14,112,961
                
                $
                14,113
                
                $
                6,593,829
                
                
                ($5,668,355
                )
                
                ($4,445
                )
                $
                935,142*See
                    accompanying notes.*
     F-4
   
 SIBERIAN
                  ENERGY GROUP INC. (A Development Stage Company)For
                  the**Consolidated
                  Statements of Cash Flows**
              
              
              
              
              
              cumulativeperiod
                  ofDevelopmentStage
                  Activity-January
                  1, 2003throughDecember
                  31,For
                  the years ended December 31,
              
              **2006**
              
              2005
              
              2006**Cash
                  flows from operating activities:**Net
                  loss (development stage)
              
              
              **(3,080,336**
              **)**
              $
              (882,151
              )
              $
              (5,218,570
              )Depreciation
                  and amortization
              
              
              **337**
              
              
              28,334
              
              
              102,717Common
                  stock and warrants issuedfor
                  professional services and salaries
              
              
              **2,288,168**
              
              
              568,250
              
              
              2,866,418Gain
                  from entrance into joint venture
              
              
              **-**
              
              
              (364,479
              )
              
              (364,479
              )Changes
                  in other current assets andcurrent
                  liabilities:Prepaid
                  expenses and other assets
              
              
              **(65,002**
              **)**
              
              (73,914
              )
              
              (268,664
              )Accounts
                  payable and accrued expenses
              
              
              **804,519**
              
              
              833,776
              
              
              3,874,968**Net
                  cash flows from (for) operating activities**
              
              
              **(52,314**
              **)**
              
              109,816
              
              
              992,390**Cash
                  flows from investing activities:**Expenditures
                  for licenses and related
              
              
              **-**
              
              
              (348,137
              )
              
              (528,961
              )Expenditures
                  for oil and gas properties
              
              
              **-**
              
              
              (36,532
              )
              
              (770,750
              )Expenditures
                  for property and equipment
              
              
              **(1,363**
              **)**
              
              (1,710
              )
              
              (4,231
              )Cash
                  received in acquisition
              
              
              **-**
              
              
              -
              
              
              6Cash
                  received from entrance into joint venture
              
              
              **-**
              
              
              175,000
              
              
              175,000**Net
                  cash flows for investing activities**
              
              
              **(1,363**
              **)**
              
              (211,379
              )
              
              (1,128,936
              )**Cash
                  flows from financing activities:**Net
                  proceeds from demand loan
              
              
              **-**
              
              
              62,500
              
              
              62,500Common
                  stock issued for employee stock option plan
              
              
              **45,500**
              
              
              -
              
              
              45,500Additional
                  paid-in capital
              
              
              **-**
              
              
              -
              
              
              34,426**Net
                  cash flows from financing activities**
              
              
              **45,500**
              
              
              62,500
              
              
              142,426Effect
                  of exchange rates on cash
              
              
              **(1,939**
              **)**
              
              50,614
              
              
              (4,445
              )Net
                  increase (decrease) in cash
              
              
              **(10,116**
              **)**
              
              11,551
              
              
              1,435Cash
                  - beginning
              
              
              **11,551**
              
              
              -
              
              
              -Cash
                  - ending
              
              **$**
              **1,435**
              
              $
              11,551
              
              $
              1,435*See
                  accompanying notes.*
   F-5
  
 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:**
 
 Through
          October 14, 2005, Siberian Energy Group Inc. (the Company) operated through
          its
          wholly owned Russian subsidiary, Zaural Neftegaz (ZNG). ZNG is engaged
          in the
          business of exploiting and developing certain oil and gas and other petroleum
          products licenses issued by the Russia’s Kurgan Provincial Government for the
          Eastern part of Kurgan Province. ZNG has its principal place of business
          in
          Kurgan City, Kurgan Province, Russia, and is the sole and exclusive owner
          of the
          exploration licenses.
 
 On
          October 14, 2005, the Company entered into a joint venture agreement with
          a
          third party, Baltic Petroleum Limited (Baltic). The Company transferred
          100% of
          its ownership interest in ZNG to the Joint Venture and transferred 50%
          of the
          Joint Venture interest to Baltic for $175,000 and the agreement by Baltic
          to
          provide future funding to the Joint Venture as detailed in a Joint Venture
          Shareholder’s Agreement. Joint Venture will be engaged in the exploration for,
          development, production and sale of oil and gas assets in the Western Siberian
          region of the Russian Federation and the former Soviet Union.
 
 Upon
          signing of the Joint Venture agreement, Baltic, ZNG and a financing company
          wholly owned by Baltic, entered into a deed of novation regarding a previous
          loan made to ZNG by Baltic and immediately thereafter the financing company
          entered into a loan agreement with ZNG for the purpose of funding of research
          activities in the Kurgan region. Baltic released the Company from its
          obligations under a guarantee and security interest given by the Company
          to
          Baltic regarding an initial loan to ZNG.
 
 As
          of
          December 31, 2006 the total amount of funds committed by Baltic to be provided
          through loan agreements in 2007 was $14,659,880. Funds will be used for
          the
          current program of seismic studies and drilling of the first four (4) wells
          in
          ZNG’s license blocks, two of which are planned for 2007. The loans will not
          be
          dilutive to the Company’s ownership in ZNG. In connection with the funding
          provided by Baltic, ZNG entered into a gross override royalty agreement
          with
          Baltic.
    F-6
  
 Additional
          details surrounding the Company’s involvement in the Joint Venture
          follow:
 
 ·
                During
                    the arrangement, the Company receives a monthly management fee
                    of $25,000
                    from ZNG ($55,000 effective November
                    2006);
 ·
                Profits
                    from the Joint Venture are allocated 50% to the Company only
                    after all
                    financing of ZNG are settled with Baltic and Baltic’s financing
                    subsidiaries;
 ·
                Although
                    the Company and Baltic each own 50% of the Joint Venture’s shares and each
                    appoint 50% of the Directors to the Joint Venture, Baltic always
                    has an
                    additional casting vote on Board of Director related
                    issues;
 ·
                The
                    Company has essentially no liability to guarantee the debts of
                    the Joint
                    Venture;
 ·
                The
                    Company recognized a settlement gain of $364,479 as a result
                    of the
                    initial joint venture transaction. This resulted primarily to
                    adjust the
                    Company’s negative investment to zero as of the agreement date. All
                    activity of ZNG before the agreement date is otherwise included
                    in these
                    financial statements.
 
 Effective
          October 14, 2005, the Company’s investment in 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, 2006. Loan financing balances outstanding of Joint
          Venture
          to Baltic and Baltic’s financing subsidiaries at December 31, 2006 totals
          approximately $11,975,000. Activities of ZNG prior to October 14, 2005
          are
          otherwise included in the consolidated accounts of the Company in the
          accompanying financial statements.
 
 In
          June
          2006, ZNG won auctions and was awarded three new oil and gas exploration
          and
          production licenses, bringing the total number of licenses to seven and
          the
          total area covered by the licenses to 1 million acres. In connection with
          the
          license acquisitions, the Company issued 600,000 shares to a consulting
          company
          in consideration for its assistance in the application process as well
          as
          obtaining existing geological information (seismic, gravimetric) relevant
          to
          potential licensed areas. The value of these shares totaled $1,113,000
          and are
          included in professional and consulting fees in the accompanying consolidated
          statements of operations.
    F-7
   As
          part
          of a planned separate oil and gas venture, on December 31, 2006, the Company
          acquired oil and gas related geological information on the Karabashki zone
          of
          Khanty-Mansiysk Autonomous district (Tuymen region of the Russian Federation)
          from Key Brokerage, LLC, a Delaware limited liability company, for 1,900,000
          shares of restricted common stock. In conjunction with this asset purchase,
          the
          Company was also assigned ownership of Kondaneftegaz, LLC (Konda), a Russian
          limited liability company wholly-owned by Key Brokerage, LLC.
 
 As
          a
          result of the purchase, the Company assigned an acquisition value of $2,700,000
          to the geological data assets based on both the approximate share value
          of the
          Company’s stock issued at the purchase date and the assets’ estimated value as
          determined by an independent appraisal prior to the acquisition. Since
          Konda has
          essentially no assets or liabilities at the purchase date, had no previous
          operating history, and was transferred only to facilitate the Company’s
          potential future operations in Russia, no value was otherwise assigned
          to it at
          acquisition.
 
 In
          2007,
          the Company plans to participate in two or three auctions for development
          and
          production licenses for the parcels belonging to the existing oil deposits
          of
          Khanty-Mansiysk district.
 
 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., 17388 Corporation Inc.,
          Talking
          Cards Inc., Oyster 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 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.
   F-8
   **Principles
          of Consolidation** :
 
 The
          accompanying consolidated financial statements include the accounts of
          the
          Company and its wholly-owned subsidiaries, ZNG (through October 14, 2005),
          Siberian Energy Group (Canada) and Konda (effective December 31, 2006).
          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 (see “the Company and Description of Business” above). Accordingly,
          the assets, liabilities and equity are no longer presented on the Company’s
          balance sheet.
 
 **Foreign
          Currency Translation:**
 
 The
          Company translates the assets and liabilities of ZNG, Siberian Energy Group
          (Canada) and Konda 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, is
          capitalized. As a result of the Joint Venture arrangement described earlier,
          essentially all oil and gas properties associated with ZNG are the
          responsibility of the Joint Venture effective October 14, 2005.
 
 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 will not be amortized until proved reserves
          associated with the projects can be determined or until impairment occurs.
          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.
  
 F-9
    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 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 will be 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 will be 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
          license assets became the responsibility of the Joint Venture effective
          October
          14, 2005.
 
 **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.
   F-10
   **2.
          Investment in Joint Venture:**
 
 Following
          is a summary of the Joint Venture’s unaudited financial position at December 31,
          2006 and 2005 and results of development stage activity during the period
          October 14, 2005 (date of Joint Venture inception) through December 31,
          2005 and
          for the year ended December 31, 2006 ($000’s omitted):
 **2006**
                  
                  2005Current
                      assts
                  
                  **$**
                  **113**
                  
                  $
                  508Intangibles
                      andother
                      noncurrent assets
                  
                  
                  **5,421**
                  
                  
                  2,901**$**
                  **5,534**
                  
                  $
                  3,409Current
                      liabilities
                  
                  **$**
                  **729**
                  
                  $
                  1,203Long-term
                      debt and othernoncurrent
                      liabilities
                  
                  
                  **12,468**
                  
                  
                  2,448**$**
                  **13,197**
                  
                  
                  3,651Stockholders'
                      equity (deficit)
                  
                  
                  **(7,663**
                  **)**
                  
                  (242
                  )**$**
                  **5,534**
                  
                  $
                  3,409Revenues
                  
                  **$**
                  **-**
                  
                  $
                  -Net
                      loss (development stage)
                  
                  **$**
                  **(7,421**
                  **)**
                  $
                  (1,065
                  )
  The
          Company’s investment asset will begin to exceed zero once the Joint Venture has
          cumulative earnings sufficient to repay all loans to Baltic and Baltic’s
          financing subsidiaries, as agreed.
 
 There
          is
          no market for the common stock of the Joint Venture and accordingly, no
          quoted
          market price is available.
 
 
 **3.
          Income Taxes:**
 
 At
          December 31, 2006, the Company effectively has U.S. tax net operating loss
          carryforwards totaling approximately $3,937,000. These carryforwards may
          be used
          to offset future taxable income, and expire in varying amounts through
          2026. 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 $866,000 estimated cumulative tax benefit
          of the
          loss carryforwards have been offset by a valuation allowance of the same
          amount.
 
 
 **4.
          Leases:**
 
 Office
          rent expense for the years ended December 31, 2006 and 2005 was $39,698
          and
          $80,531. There currently are no long-term lease arrangements that the Company
          is
          committed to, however, it may negotiate with selected landlord prospects
          for
          space commitments.
  
 F-11
   **5.
          Related Party Transactions:**
 
 During
          the development stage period from January 1, 2003 through December 31,
          2006, a
          variety of expenses were paid for by organizing stockholders. As a result,
          amounts totaling $362,166 and $328,376 are payable to stockholders from
          the
          Company as of December 31, 2006 and 2005.
 
 
 **6.
          Employment Contracts:**
 
 The
          Company has entered into employment contracts with certain senior management
          employees through 2008 that provide for minimum annual salary, adjusted
          for
          capital levels raised by the Company. If terminated without cause, an employee
          is paid, as severance, the greater of twelve months salary or one-half
          the
          remaining amount owed under the contract. At December 31, 2006, the minimum
          total future additional commitment due is approximately $255,000.
 
 At
          December 31, 2006, accrued and unpaid salaries for all employees totaled
          $1,011,788, of which $669,600 was paid after December 31, 2006 to employees
          and
          directors through issue of the Company’s restricted common stock. The remaining
          $342,188 is expected to be paid when sufficient cash flows are generated
          by the
          Company or by issue of restricted stock of the Company.
 
 
 **7.
          Stock Option Plan:**
 
 In
          2003,
          the Company adopted a stock option plan for the benefit of employees and
          directors of the Company. All issued stock options are for acquisition
          of
          restricted shares, which means there are substantial restrictions on the
          transferability and sale of such shares. Pursuant to plan terms and related
          employment agreements, shares of common stock granted vest as
          follows:
  Shares
                      ReservedVest
                  
                  December
                      31,
                  
                  December
                      31,
                  
                  ExerciseYear
                  
                  2006
                  
                  2005
                  
                  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 average closing
                    stock
                      price for the three months prior to grant
                      date.
   The
          options generally expire four years from the date of vesting.
    F-12
   The
          following summarizes stock option activity:
 
 Number
                  
                  Exerciseof
                      Shares
                  
                  PriceOutstanding
                      and exercisable atJanuary
                      1, 2003
                  
                  
                  -
                  
                  $
                  -Vested
                      - 2003
                  
                  
                  300,000
                  
                  
                  0.14Outstanding
                      and exercisable atDecember
                      31, 2003
                  
                  
                  300,000Vested
                      - 2004
                  
                  
                  518,000
                  
                  
                  0.20Vested
                      - 2004
                  
                  
                  75,000
                  
                  
                  0.32Expired
                      - 2004
                  
                  
                  (100,000
                  )
                  
                  0.14Expired
                      - 2004
                  
                  
                  (50,000
                  )
                  
                  0.20Outstanding
                      and exercisable atDecember
                      31, 2004
                  
                  
                  743,000Vested
                      - 2005
                  
                  
                  468,000
                  
                  
                  0.60Outstanding
                      and exercisable atDecember
                      31, 2005
                  
                  
                  1,211,000Vested
                      - 2006
                  
                  
                  468,000
                  
                  
                  0.60Exercised
                      - 2006
                  
                  
                  (152,500
                  )Outstanding
                      and exercisable
 
 The
          following table summarizes information about stock options outstanding
          and
          exercisable:
 
 **December
                      31, 2006**Weighted
                      AverageExercise
                  
                  Number
                      of
                  
                  Remaining
                      Years ofPrice
                  
                  Options
                  
                  Contractual
                      Life**$
                      0.14**
                  
                  
                  **100,000**
                  
                  
                  **1****0.20**
                  
                  
                  **468,000**
                  
                  
                  **2****0.32**
                  
                  
                  **75,000**
                  
                  
                  **2****0.60**
                  
                  
                  **415,500**
                  
                  
                  **3****0.60**
                  
                  
                  **468,000**
                  
                  
                  **4****1,526,500**December
                      31, 2005Weighted
                      AverageExercise
                  
                  
                  Number
                      of
                  
                  
                  Remaining
                      Years ofPrice
                  
                  
                  Options
                  
                  
                  Contractual
                      Life$
                      0.14
                  
                  
                  200,000
                  
                  
                  20.20
                  
                  
                  468,000
                  
                  
                  30.32
                  
                  
                  75,000
                  
                  
                  30.60
                  
                  
                  468,000
                  
                  
                  41,211,000
 The
          Company recognizes compensation based on the fair value method prescribed
          by
          Financial Accounting Standards Board Statement No. 123R, “Accounting for Stock
          Based Compensation.” No compensation expense has been recognized through
          December 31, 2006 because management had determined the initial fair value
          of
          its stock options granted were minimal in light of the startup nature of
          the
          organization.
  
 F-13
   **8.
          Stock Warrants:**
 
 In
          2005
          and 2006, the Company granted warrants to purchase restricted common shares
          to
          certain consultants and non-employees for services rendered to the Company
          as
          follows:
  **2006**OriginalGrant
                  Number
                      of
                  Exercise
                  ExerciseDate
                  Shares
                  Price
                  TermMarch
                      31, 2006
                  
                  800,000
                  $
                  1.05
                  
                  4
                      yearsApril
                      1, 2006
                  
                  400,000
                  
                  1.05
                  
                  4
                      yearsMarch
                      31, 2006
                  
                  17,561
                  
                  0.67
                  
                  3
                      yearsJune
                      30, 2006
                  
                  20,412
                  
                  2.02
                  
                  3
                      yearsSeptember
                      14, 2006
                  
                  250,000
                  
                  2.20
                  
                  4
                      yearsSeptember
                      30, 2006
                  
                  20,952
                  
                  1.53
                  
                  3
                      yearsDecember
                      31, 2006
                  
                  38,648
                  
                  1.44
                  
                  3
                      yearsDecember
                      31, 2006
                  
                  100,000
                  
                  0.60
                  
                  4
                      years1,647,5732005OriginalGrant
                  
                  Number
                      of
                  
                  Exercise
                  
                  ExerciseDate
                  
                  Shares
                  
                  Price
                  
                  TermApril
                      1, 2005
                  
                  *
                      100,000
                  $
                  0.30
                  
                  2
                      yearsSeptember
                      13, 2005
                  
                  15,000
                  
                  0.30
                  
                  3
                      yearsDecember
                      22, 2005
                  
                  100,000
                  
                  1.00
                  
                  3
                      yearsDecember
                      22, 2005
                  
                  300,000
                  
                  1.00
                  
                  3
                      yearsDecember
                      22, 2005
                  
                  150,000
                  
                  2.00
                  
                  3
                      yearsDecember
                      22, 2005
                  
                  150,000
                  
                  2.50
                  
                  3
                      yearsDecember
                      31, 2005
                  
                  50,068
                  
                  0.63
                  
                  3
                      yearsDecember
                      31, 2005
                  
                  100,000
                  
                  0.60
                  
                  4
                      years965,068
  50,000
          of
          these warrants were exercised May 2006.
 
 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:
 
 **2006**
                  
                  2005Dividend
                      yield
                  
                  
                  **0**%****
                  
                  
                  0%Risk
                      free interest rate
                  
                  
                  **2.88%
                      - 4.90 **%****
                  
                  
                  3.17%
                      - 4.38 %Expected
                      volatility
                  
                  
                  **97%
                      - 131**%****
                  
                  
                  48.13%
                      - 70.12%
 
 Amounts
          charged to expense in 2006 and 2005 totaled $841,177 and $217,000.
    F-14
 
 **9.
          Fair Value of Financial Instruments:**
 
 The
          carrying values of cash, accounts payable, accrued expenses and demand
          loan
          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,
          2006.
 
 
 **11.
          Going Concern:**
 
 These
          financial statements have been prepared assuming the Company will continue
          as a
          gong 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, 2006, the Company has 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 from
          the
          going concern basis.
 
 
 **12.
          Cash Flows Information:**
 
 Net
          cash
          flows from operating activities includes cash payments for interest and
          income
          taxes as follows:
 
 2006
                    2005$                                                                                                 -
                    $                                                                                                  -**$                                                                                                 -**
                    $                                                                                                  -
 
 F-15
   
 Noncash
          investing and financing activities excluded from the 2006 statement of
          cash
          flows includes:
 
 **2006**Demand
                    loan payable settled through theissuance
                    of common stock and warrants
                
                **$**
                **62,500**Geological
                    data acquired through theissuance
                    of common stock and warrants
                
                **$**
                **2,700,000**


F-16







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





None.





**ITEM
      8A. CONTROLS AND PROCEDURES**





(a)
      Evaluation of disclosure controls and procedures. Our Chief Executive Officer
      and Principal Financial Officer, after evaluating the effectiveness of our
      "disclosure controls and procedures" (as defined in the Securities Exchange
      Act
      of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
      by
      this Annual Report on Form 10-KSB (the "Evaluation Date"), have concluded that
      as of the Evaluation Date, our disclosure controls and procedures are effective
      to provide reasonable assurance that information we are required to disclose
      in
      reports that we file or submit under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission rules and forms, and that such information is accumulated
      and communicated to our management, including our Chief Executive Officer and
      Chief Financial Officer, as appropriate, to allow timely decisions regarding
      required disclosure.





(b)
      Changes in internal control over financial reporting. There were no changes
      in
      the Company's internal control over financial reporting during the fourth fiscal
      quarter that materially affected, or are reasonably likely to materially affect,
      the Company's internal control over financial reporting.





**ITEM
      8B. OTHER INFORMATION**





None.





-39-







**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE
      WITH
      SECTION 16(A) OF THE EXCHANGE ACT**





**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**
            **Position**David
                Zaikin
            40
            Chairman
                of the Board ofDirectors
                and Chief ExecutiveOfficerElena
                Pochapski
            41
            Chief
                Financial Officer andDirectorOleg
                V. Zhuravlev
            46
            DirectorSergey
                Potapov
            43
            DirectorVladimir
                V. Eret
            62
            DirectorTimothy
                Peara
            46
            Director





**TERM
      OF OFFICE**





**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 as served as Chief Executive
      Officer and Director of ECM Asset Management, Inc. 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.




-40-







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





**Elena
      Pochapski**


*Chief
      Financial Officer and Director*





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





**Sergey
      Potapov**


*Director*





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





**Oleg
      V. Zhuravlev**


*Director*





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




-41-







**Vladimir
      V. Eret**


*Director*





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





**Timothy
      Peara**


*Director*





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





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


-42-





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.





**EMPLOYMENT
      AND OPTION AGREEMENTS**





**David
      Zaikin, Chief Executive Officer and Director**





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





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





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




-43-







**Elena
      Pochapski, Chief Financial Officer And Director**





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





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





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


-44-




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





**Oleg
      V. Zhuravlev, Director**





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




-45-







**Vladimir
      V. Eret, Director**





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





**Sergey
      Potapov, Director**





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





-46-







**Tim
      Peara, Director**





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





Additionally,
      Mr. Peara was granted 100,000 options to purchase shares of the Company's common
      stock at $0.30 per share in consideration for consulting services provided
      to
      the Company prior to his election as a Director of the Company (the "Consulting
      Options"). One half or 50,000 shares of the Consulting Options were to expire
      at
      5:00 p.m. (Eastern Standard Time) on May 1, 2006, however those options were
      exercised by Mr. Peara prior to expiring, and one half or 50,000 of the
      Consulting Options expire at 5:00 p.m. (Eastern Standard Time) on May 1, 2007,
      if not exercised prior to those dates.





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























[Remainder
      of page left intentionally blank.]





-47-


**ITEM
      10. EXECUTIVE COMPENSATION**





Compensation
      paid 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**
            
            
            
            
            
            
            
            **Other
                  Annual**
            
            **Restricted**
            
            
            
            **Total****Principal**
            
            **Fiscal**
            
            
            
            
            
            **Compen-**
            
            **Stock**
            
            **Options/**
            
            **Compen-****Position
                (1)**
            
            ****Year****
            
            **Salary**
            
            **Bonus ($)**
            
            **sation**
            
            ****Awards****
            
            **Sars**
            
            ****sation******David
                Zaikin**
            
            2006
            
            $
            0(2
            )
            
            --
            
            
            --
            
            $
            504,000(3
            )
            
            (4)
            
            $
            504,000CEO
                and
            
            2005
            
            $
            50,000(2
            )
            
            --
            
            
            --
            
            
            (2
            )
            
            (4)
            
            $
            50,000Chairman
            
            2004
            
            $
            75,000
            
            
            
            
            
            
            
            
            
            
            
            (4)
            
            $
            75,000**Shakeel
                Adam**
            
            2004(5)
            
            $
            37,500
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            $
            37,500CEO(Sept.
                1, 2003-July
                31, 2004)**Elena
                Pochapski**
            
            2006
            
            $
            74,920
            
            
            (6)
            
            
            --
            
            $
            72,000(6
            )
            
            (7)
            
            $
            146,920CFO
                and
            
            2005
            
            $
            71,083(8
            )
            
            --
            
            
            --
            
            
            (8
            )
            
            (7)
            
            $
            71,083Director
            
            2004
            
            $
            75,000
            
            
            --
            
            
            --
            
            
            
            
            
            (7)
            
            $
            75,000**Oleg
                V.**
            
            2006
            
            $
            0
            
            
            (9)
            
            
            --
            
            $
            36,000(9
            )
            
            (10)
            
            $
            36,000**Zhuravlev**
            
            2005(11)
            
            $
            30,587
            
            
            
            
            
            
            
            
            
            
            
            (10)
            
            $
            30,587Director
            
            2004(11)
            
            $
            285
            
            
            
            
            
            
            
            
            
            
            
            (10)
            
            $
            285**Vladimir**
            
            2006
            
            $
            0
            
            
            (12)
            
            
            --
            
            $
            14,400(12
            )
            
            (13)
            
            $
            14,400**Eret**Director**Sergei**
            
            2006
            
            $
            0
            
            
            (14)
            
            
            --
            
            $
            14,400(14
            )
            
            (15)
            
            $
            14,400**Potapov**Director**Timothy**
            
            2006
            
            $
            35,000(16
            )
            
            (17)
            
            
            --
            
            $
            28,800(17
            )
            $
            4,454
            
            $
            68,254**Peara**
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (18)(16)Director








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





(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 (3) fiscal years. No executive employee
      listed above received any LTIP payouts over the past three (3)
      years.





(2)
      On
      August 16, 2005, David Zaikin, the Company's Chief Executive Officer agreed
      to
      forgive $62,500, which represented a part of his accrued salary to date, in
      return for the issuance of 500,000 restricted shares of the Company's common
      stock, which shares are not included in the table above, because they were
      issued in consideration for previous debts owed to Mr. Zaikin. Mr. Zaikin also
      agreed to stop accruing salary until such time as the Company has sufficient
      monies to pay such salary, beginning in September 2005. Mr. Zaikin accrued
      $50,000 of salary for the year ended December 31, 2005 and $0 of salary for
      the
      year ended December 31, 2006. In January 2007, Mr. Zaikin informed us of his
      request to withdraw his previous request to not accrue salary and to once again
      accrue salary moving forward until such time as we have sufficient funds to
      repay such accrued salary. 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) for our Chief Executive Officer
      and Director, David Zaikin for the 2007 fiscal year.




-48-







(3)
      Represents 350,000 restricted shares of common stock issued to Mr. Zaikin in
      February 2007, in consideration for services rendered to the Company during
      the
      2006 fiscal year, which shares were valued at $504,000.





(4)
      Mr.
      Zaikin was granted 100,000 options to purchase shares of our common during
      each
      of the fiscal years ended 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. All unexercised options expire on December
      31 st 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.
      In December 2006, Mr. Zaikin exercised 52,500 options of his 2006 options to
      purchase shares of our common stock for aggregate consideration of $31,500,
      which amount was previously owed to Mr. Zaikin in accrued salary and which
      amount was forgiven by Mr. Zaikin in consideration for the exercise of the
      options.





(5)
      Shakeel Adam was no longer employed by the Company as of July 31, 2004. Mr.
      Adam's salary accrued for 2004 is listed as the total for the period January
      1,
      2004 to July 31, 2004. All of Mr. Adam's options terminated on October 31,
      2004.





(6)
      Represents the value of 50,000 restricted shares of common stock issued to
      Ms.
      Pochapski in February 2007, as a bonus for services rendered to the Company
      during the 2006 fiscal year, which shares were valued at $72,000.





(7)
      Ms.
      Pochapski was granted 100,000 options to purchase shares of our common during
      each of the fiscal years ended 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. All unexercised options expire on December
      31 st 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. In February 2006, Ms. Pochapski exercised 100,000 options to purchase
      shares of our common stock for aggregate consideration of $14,000.




-49-







(8)
      On
      September 1, 2005, the Company entered into an "Amendment to the Employment
      Agreement Dated August 1, 2003" ("Amended Employment Agreement") with its
      Director and Chief Financial Officer, 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. The value of the 400,000 shares issued to Ms. Pochapski is not
      included in the table above, because those shares were issued in consideration
      for debts previously owed to Ms. Pochapski. Additionally, Ms. Pochapski agreed
      to postpone the payment of the remaining $84,707 which she is owed in connection
      with her employment agreement from the period from August 1, 2003 to August
      30,
      2005, until such time as the Company has sufficient profits to pay the amount
      in
      cash either partially or in full. The Amended Employment Agreement also set
      Ms.
      Pochapski's annual salary for the period from September 1, 2005 until August
      30,
      2006 at CDN $75,000, after which time her salary will return to the amounts
      listed in her August 1, 2003 employment agreement, depending on the financial
      condition of the Company as of December 31, 2005, for the years ended December
      31, 2005, 2004 and 2003.





(9)
      Represents the value of 25,000 restricted shares of common stock issued to
      Mr.
      Zhuravlev in February 2007, as a bonus for services rendered to the Company
      during the 2006 fiscal year, which shares were valued at $36,000.





(10)
      Mr.
      Zhuravlev was granted 100,000 options to purchase shares of our common during
      each of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
      Agreement he entered into with us in 2004. The exercise price of those options
      for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
      $0.14 per share, respectively. All unexercised options expire on December
      31 st of the
      fourth year after they were granted. We previously determined the initial fair
      value of our stock options was minimal at the time of our entry into the Stock
      Option Agreement with Mr. Zhuravlev, as we were only a start-up company, which
      did not publicly trade its stock, and as such, the options granted to Mr.
      Zhuravlev during the periods disclosed above did not represent any expense
      on
      the Company’s financial statements and therefore have no value in the table
      above.





(11)
      All
      salary listed for Mr. Zhuravlev for the years ended December 31, 2005, 2004
      and
      2003 were paid in full. Mr. Zhuravlev forgave any unpaid amounts of his salary
      for the years ended December 31, 2005, 2004 and 2003 in connection with the
      Company's entry into the Joint Venture.







-50-







(12)
      Represents the value of 10,000 restricted shares of common stock issued to
      Mr.
      Eret in February 2007, as a bonus for services rendered to the Company during
      the 2006 fiscal year, which shares were valued at $14,400.





(13)
      Mr.
      Eret was granted 84,000 options to purchase shares of our common stock during
      each of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
      Agreement he entered into with us in 2004. The exercise price of those options
      for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
      $0.14 per share, respectively. All unexercised options expire on December
      31 st of the
      fourth year after they were granted. We previously determined the initial fair
      value of our stock options was minimal at the time of our entry into the Stock
      Option Agreement with Mr. Eret, as we were only a start-up company, which did
      not publicly trade its stock, and as such, the options granted to Mr. Eret
      during the periods disclosed above did not represent any expense on the
      Company’s financial statements and therefore have no value in the table
      above.





(14)
      Represents the value of 10,000 restricted shares of common stock issued to
      Mr.
      Potapov in February 2007, as a bonus for services rendered to the Company during
      the 2006 fiscal year, which shares were valued at $14,400.





(15)
      Mr.
      Potapov was granted 84,000 options to purchase shares of our common stock during
      each of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
      Agreement he entered into with us in 2004. The exercise price of those options
      for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
      $0.14 per share, respectively. All unexercised options expire on December
      31 st of the
      fourth year after they were granted. We previously determined the initial fair
      value of our stock options was minimal at the time of our entry into the Stock
      Option Agreement with Mr. Potapov, as we were only a start-up company, which
      did
      not publicly trade its stock, and as such, the options granted to Mr. Potapov
      during the periods disclosed above did not represent any expense on the
      Company’s financial statements and therefore have no value in the table
      above.





(16)
      Mr.
      Peara’s salary and option awards in the table above, do not include amounts paid
      by us to Alternative Energy Finance Ltd., which Mr. Peara is the Managing
      Director of, which amounts are described in greater detail herein, as those
      fees
      and options were not paid to Mr. Peara in consideration for his services to
      the
      Company as a Director.





(17)
      Represents the value of 20,000 restricted shares of common stock issued to
      Mr.
      Peara in February 2007, as a bonus for services rendered to the Company during
      the 2006 fiscal year, which shares were valued at $28,000.





(18)
      Mr.
      Peara was granted 100,000 options to purchase shares of our common stock during
      each of the fiscal years ended 2006 and 2005, pursuant to a Stock Option
      Agreement he entered into with us in 2004. The exercise price of those options
      for the years ended December 31, 2006 and 2005, were $0.60 and $0.20 per share,
      respectively.




-51-







The
      value
      of the options granted during 2006 was approximately $4,454. All unexercised
      options expire on December 31 st of the
      fourth year after they were granted.








**COMPENSATION
      DISCUSSION AND ANALYSIS**





**Director
      Compensation**





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





**Executive
      Compensation Philosophy**





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





**Base
      Salary**




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





**Incentive
      Bonus**





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




-52-





**Long-term,
      Stock Based Compensation**





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





**Criteria
      for Compensation Levels**





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





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





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





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





**Compensation
      Philosophy and Strategy**





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




-53-







**Compensation
      Philosophy**





The
      Company’s compensation philosophy is as follows:





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





**Compensation
      Strategy for Key Management Personnel**





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





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





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











[Remainder
      of page left intentionally
      blank.]





-54-







**ITEM
      11. 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
      15,034,996 shares of common stock outstanding as of March 22, 2007 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
            
            1,400,000
            
            1,000,000
            
            2,400,000
                (5)
            
            15.0%
                (A)**David
                Zaikin**
              **CEO
                and Chairman of the Board of Directors**
              275
                Madison Ave., 6th Floor, New York, New York 10016 (3)
            
            1,010,000
            
            395,000
            
            1,405,000
                (6)
            
            9.1%
                (B)**Elena
                Pochapski**
              **CFO
                and Director**
              275
                Madison Ave., 6th Floor, New York, New York 10016
            
            455,000
                (7)
            
            347,500
            
            802,500
                (8)
            
            5.2%
                (C)**Sergey
                Potapov**
              **Director**
              Kurgan
                City Lenina St. 27/X Russia 640000
            
            10,000
            
            294,000
            
            304,000
                (9)
            
            2.0%
                (D)**Oleg
                V. Zhuravlev**
              **Director**
              Kurgan
                City Lenina St. 27/X Russia 640000 (4)
            
            25,000
            
            347,500
            
            372,500
                (10)
            
            2.4%
                (E)**Vladimir
                Eret**
              **Director**
              Kurgan
                City Lenina St. 27/X Russia 640000
            
            10,000
            
            294,000
            
            304,000
                (11)
            
            2.0%
                (F)**Tim
                Peara**
              **Director**
              275
                Madison Ave., 6th Floor, New York, New York 10016
            
            117,500
            
            445,141
            
            562,641
                (12)
            
            3.6%
                (G)**All
                the Officers and Directors as a group**
              **(6
                persons)**
            
            **1,625,500**
            
            **2,123,141**
            
            **3,750,641**
              **(4),(6),(7),(8,**
              **(9),(10****)****)**
            
            **21.9%(H****)**







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.





3)
      David
      Zaikin holds 400,000 of his shares in the name of WCM, Ltd, which is 100% owned
      by Mr. Zaikin and 810,000 shares in his own name.





4)
      Includes both the number of shares of common stock beneficially owned as of
      March 22, 2007, but also any vested options which are exercisable within the
      next sixty days.





5)
      Includes warrants to purchase 300,000 shares of our common stock at $1.00 per
      share, 150,000 shares of our common stock at $2.00 per share and 150,000 shares
      of our common stock at $2.50 per share. The warrants expire if unexercised
      on
      December 22, 2008.





6)
      Includes 100,000 options to purchase shares of our common stock at $0.14 per
      share, which vested throughout the fiscal year ended 2003, 100,000 options
      to
      purchase shares of our common stock at $0.20 per share, which vested throughout
      the fiscal year ended 2004, 100,000 options to purchase shares of our common
      stock at $0.60 per share, which vested throughout the fiscal year ended 2005,
      47,500 options to purchase shares of our common stock at $0.60 per share, which
      vested throughout the fiscal year ended 2006 (Mr. Zaikin exercised 52,500
      options in December 2006), and 47,500 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, of which a portion had vested as of
      March
      22, 2007, and a portion will vest over the subsequent sixty (60) day period.
      All
      options are valid until 5 P.M. December 31, on the fourth anniversary of each
      year that the options vest. The options are described in greater detail under
      "Employment and Option Agreements" above.




-55-





7)
      Includes 30,000 shares held in Mrs. Pochapski’s daughter’s name, which Mrs.
      Pochapski is deemed to beneficially own.





8)
      Includes 100,000 options to purchase shares of our common stock at $0.20 per
      share, which vested throughout the fiscal year ended 2004, 100,000 options
      to
      purchase shares of our common stock at $0.60 per share, which vested throughout
      the fiscal year ended 2005, 100,000 options to purchase shares of our common
      stock at $0.60 per share, which vested throughout the fiscal year ended 2006,
      and 47,500 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, of which a portion had vested as of March 22, 2007, and a portion
      will vest over the subsequent sixty (60) day period. All options are valid
      until
      5 P.M. December 31, on the fourth anniversary of each year that the options
      vest. The options are described in greater detail under "Employment and Option
      Agreements" above.





9)
      Includes 84,000 options to purchase shares of our common stock at $0.20 per
      share, which vested throughout the fiscal year ended 2004, 84,000 options to
      purchase shares of our common stock at $0.60 per share, which vested throughout
      the fiscal year ended 2005, 84,000 options to purchase shares of our common
      stock at $0.60 per share, which vested throughout the fiscal year ended 2006,
      and 42,000 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, of which a portion had vested as of March 22, 2007, and a portion
      will vest over the subsequent sixty (60) day period. All options are valid
      until
      5 P.M. December 31, on the fourth anniversary of each year that the options
      vest. The options are described in greater detail under "Employment and Option
      Agreements" above.





10)
      Includes 100,000 options to purchase shares of our common stock at $0.20 per
      share, which vested throughout the fiscal year ended 2004, 100,000 options
      to
      purchase shares of our common stock at $0.60 per share, which vested throughout
      the fiscal year ended 2005, 100,000 options to purchase shares of our common
      stock at $0.60 per share, which vested throughout the fiscal year ended 2006
      and
      47,500 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, of which a portion had vested as of March 22, 2007, and a portion will
      vest over the subsequent sixty (60) day period. All options are valid until
      5
      P.M. December 31, on the fourth anniversary of each year that the options vest.
      The options are described in greater detail under "Employment and Option
      Agreements" above.





11)
      Includes 84,000 options to purchase shares of our common stock at $0.20 per
      share, which vested throughout the fiscal year ended 2004, 84,000 options to
      purchase shares of our common stock at $0.60 per share, which vested throughout
      the fiscal year ended 2005, and 84,000 options to purchase shares of our common
      stock at $0.60 per share, which vested throughout the fiscal year ended 2006,
      and 42,000 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, which had vested as of March 22, 2007, and will vest over the
      subsequent sixty (60) day period. All options are valid until 5 P.M. December
      31, on the fourth anniversary of each year that the options vest. The options
      are described in greater detail under "Employment and Option Agreements"
      above.




-56-







12)
      Includes options to purchase 50,000 shares of our common stock at an exercise
      price of $0.30 per share, which options expire if unexercised on May 1, 2007.
      Also includes certain options issuable to AEF in connection with amounts loaned
      to ZNG (as described in greater detail herein), including 50,068 options to
      purchase shares of our common stock at an exercise price of $0.63 per share,
      which vested on March 1, 2006 and represented options earned throughout the
      year
      ended 2005; 17,561 options to purchase shares of our common stock at an exercise
      price of $0.67 per share, which vested on March 31, 2006; 20,412 options to
      purchase shares of our common stock at an exercise price of $2.02 per share,
      which vested on June 30, 2006; 20,952 options to purchase shares of our common
      stock at an exercise price of $1.53 per share, which vested on September 30,
      2006; and 38,648 options to purchase shares of our common stock at an exercise
      price of $1.44 per share, which vested on December 31, 2006, which options
      expire if unexercised on the third anniversary of the date they were granted.
      Finally, the amount listed above includes 100,000 options to purchase shares
      of
      our common stock at $0.60 per share, which vested throughout the fiscal year
      ended 2005, 100,000 options to purchase shares of our common stock at $0.60
      per
      share, which vested throughout the fiscal year ended 2006 and 47,500 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 of which
      a
      portion had vested as of March 22, 2007, and a portion will vest over the
      subsequent sixty (60) day period, which options were granted pursuant to his
      Directors stock option plan. All Director options are valid until 5 P.M.
      December 31, on the fourth anniversary of each year that the options vest.
      The
      options are described in greater detail under "Employment and Option Agreements"
      above.








A)
      Using
      16,034,996 shares outstanding, assuming the exercise of all 1,000,000 options
      held by Mr. Repin.





B)
      Using
      15,429,996 shares outstanding, assuming the exercise of all 395,000 options
      held
      by Mr. Zaikin.





C)
      Using
      15,382,496 shares outstanding, assuming the exercise of all 347,500 options
      held
      by Ms. Pochapski.





E)
      Using
      15,328,996 shares outstanding, assuming the exercise of all 294,000 options
      held
      by Mr. Potapov.




-57-







E)
      Using
      15,382,496 shares outstanding, assuming the exercise of all 347,500 options
      held
      by Mr. Zhuravlev.





F)
      Using
      15,328,996 shares outstanding, assuming the exercise of all 294,000 options
      held
      by Mr. Eret.





G)
      Using
      15,480,137 shares outstanding, assuming the exercise of all 445,141 options
      held
      by Mr. Peara.





H)
      Using
      17,158,137 shares outstanding, assuming the exercise of all 2,123,141 options
      held collectively by our officers and Directors.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





In
      April
      2005, the Company’s Board of Directors adopted Amended Bylaws of the Company,
      which Amended Bylaws are attached hereto as Exhibit 3.9.





On
      August
      16, 2005, David Zaikin, the Company's Chief Executive Officer, President and
      a
      Director of the Company agreed to forgive $62,500, which represented a part
      of
      his salary, which he had accrued in return for the issuance of 500,000
      restricted shares of the Company's common stock.





On
      September 1, 2005, the Company entered into an "Amendment to the Employment
      Agreement Dated August 1, 2003" ("Amended Employment Agreement") with its
      Director and Chief Financial Officer, 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 is 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 April 2006 at CDN $75,000,
      after which time her salary will return to the amounts listed in her August
      1,
      2003 employment agreement, depending on the financial condition of the Company.
      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.





On
      December 12, 2005, the Company's Chief Executive Officer, President and
      Director, David Zaikin agreed to transfer 250,000 shares of the Company's
      restricted common stock which he held to the Jewish Russian Community Center
      of
      Toronto, Ontario, Canada (the "JRCC"). The shares were transferred to the JRCC
      as a charitable donation from Mr. Zaikin personally. The actual transfer of
      shares was affected February 16, 2006.







-58-







On
      December 12, 2005, the Company's Chief Financial Officer and Director, Elena
      Pochapski, agreed to transfer 75,000 shares of the Company's restricted common
      stock which she held to the Jewish Russian Community Center of Toronto, Ontario,
      Canada (the "JRCC"). The shares were transferred to the JRCC as a charitable
      donation from Ms. Pochapski personally. The actual transfer of shares was
      affected February 16, 2006.





Effective
      December 22, 2005, the Company entered into a Warrant Agreement with Victor
      Repin, a greater than 5% shareholder of the Company, in consideration for his
      help and assistance in successfully closing the Company's Joint Venture with
      Baltic Petroleum (E&P) Limited in November 2005. Pursuant to Mr. Repin's
      Warrant Agreement, he has the right to purchase 300,000 shares of the Company's
      common stock at $1.00 per share, 150,000 shares of the Company's common stock
      at
      $2.00 per share and 150,000 shares of the Company's common stock at $2.50 per
      share.





On
      February 13, 2006, Elena Pochapski, the Company's Chief Financial Officer and
      a
      Director of the Company exercised all 100,000 of her 2003 stock options, and
      purchased 100,000 restricted shares of the Company's common stock at an exercise
      price of $0.14 per share, for aggregate consideration of $14,000, which was
      received by the Company on February 13, 2006.





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. This compensation included a commission of approximately
      $18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture),
      which
      amount has not been paid as of the date of this filing, and 50,068 options
      to
      purchase shares of our common stock at $0.63 per share which were granted to
      Mr.
      Peara on March 6, 2006 and a commission of $6,673 (1% of Baltic's $667,313
      investment in the Joint Venture in the first quarter of 2006), which amount
      has
      not been paid to AEF to date and 17,561 options to purchase shares of our common
      stock at $0.67 per share for the first quarter of 2006, which were granted
      to
      Mr. Peara on March 31, 2006, which options contain a cashless exercise
      provision.





On
      June
      30, 2006, in connection with our agreement with AEF, we agreed to grant AEF
      a
      warrant to purchase 20,412 shares of our common stock at an exercise price
      of
      $2.02, which warrants contained a cashless exercise feature. The warrants expire
      three years from the grant date. We were also obligated to pay AEF $23,562
      during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
      investment in the Joint Venture in the second quarter of 2006), which amount
      has
      not been paid to AEF to date.




-59-







On
      September 30, 2006, in connection with our agreement with AEF, we agreed to
      grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
      price of $1.53 per share, which warrants contained a cashless exercise feature.
      The warrants expire three years from the grant date. We were also obligated
      to
      pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
      Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
      2006), which amount has not been paid to AEF to date.





On
      December 29, 2006, we issued 52,500 shares of common stock to our Chief
      Executive Officer, David Zaikin, in consideration for and in connection with
      Mr.
      Zaikin’s exercise of 52,500 of his 2006 stock options to purchase shares of our
      common stock at an exercise price of $0.60 per share





On
      December 22, 2006, 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 Jewish Russian Community Center of Toronto,
      Ontario, Canada (the "JRCC"). The shares were transferred to the JRCC as a
      charitable donation from Mr. Zaikin personally.





On
      December 22, 2006, the Company's Chief Financial Officer and Director, Elena
      Pochapski, transferred 20,000 shares of the Company's restricted common stock
      which she held to the JRCC. The shares were transferred to the JRCC as a
      charitable donation from Ms. Pochapski personally.





On
      December 31, 2006, in connection with our agreement with AEF, we agreed to
      grant
      AEF a warrant to purchase 38,648 shares of our common stock at an exercise
      price
      of $1.44 per share, which warrants contained a cashless feature. The warrants
      expire three years from the grant date. We were also obliged to pay AEF $31,794
      during the three months ended December 31, 2006 (equal to 1% of Baltic’s
      approximately $3,197,400 investment in the Joint Venture in the fourth quarter
      of 2006); which amount has not been paid to date.





As
      of
      December 31, 2006, we owed approximately $98,066 to AEF in connection with
      AEF's
      introduction of the parties of the Joint Venture, as described above, $60,209
      to
      Mr. Peara in accrued Directors fees and approximately $4,703 to Mr. Peara in
      various travel related expenses.







-60-







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





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





On
      January 25, 2007, we approved an annual salary of $180,000 (plus a performance
      based bonus to be determined by the Board of Directors at the end of the 2007
      fiscal year) 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 (September 2005), 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.





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.








**ITEM
      13. EXHIBITS**





(a)
      EXHIBITS





Exhibit
                No.
            Description
                of Exhibit3.1
                (1)
            Original
                Articles of Incorporation of the Company then called "Advanced Rehab
                Technology Corporation."3.2
                (2)
            Certificate
                of Amendment to the Company's Articles of Incorporation filed March
                9,
                2001, changing the Company's name to "Talking Cards,
                Inc."3.3
                (2)
            Certificate
                of Amendment to the Company's Articles of Incorporation filed February
                12,
                2002, changing the Company's name to "Osterking
                Incorporated."3.4
                (2)
            Certificate
                of Amendment to the Company's Articles of Incorporation filed December
                3,
                2002, changing the Company's name to "17388 Corporation
                Inc."3.5
                (2)
            Certificate
                of Amendment to the Company's Articles of Incorporation filed May
                5, 2003,
                changing the Company's name to "Trans Energy Group
                Inc."3.6
                (2)
            Certificate
                of Amendment to the Company's Articles of Incorporation filed December
                3,
                2003, changing the Company's name to "Siberian Energy Group
                Inc."3.7
                (2)
            Certificate
                of Amendment to the Company's Articles of Incorporation filed April
                25,
                2005, affecting a 1:2 reverse stock split, re-authorizing 100,000,000
                shares of common stock, par value $0.001 per share, and authorizing
                10,000,000 shares of preferred stock, par value $0.001 par value
                per
                share3.8
                (1)
            Bylaws3.9*
            Amended
                and Restated Bylaws






-61-





10.1(3)
            David
                Zaikin Employment Agreement10.2(3)
            Elena
                Pochapski Employment Agreement10.3(3)
            Oleg
                V. Zhuravlev Employment Agreement10.4(3)
            Sergey
                Potapov Employment Agreement10.5(3)
            Vladimir
                Eret Employment Agreement10.6(3)
            David
                Zaikin Stock Option Agreement10.7(3)
            Oleg
                V. Zhuravlev Stock Option Agreement10.8(3)
            Oleg
                V. Zhuravlev Employment Agreement ZNG10.9(3)
            Elena
                Pochapski Stock Option Agreement10.10(3)
            Sergey
                Potapov Stock Option Agreement10.11(3)
            Sergey
                Potapov Employment Agreement ZNG







-62-





10.12(3)
            Vladimir
                Eret Stock Option Agreement10.13(3)
            Vladimir
                Eret Employment Agreement ZNG10.14(3)
            Contract
                to purchase 51% of ZNG10.15(3)
            Contract
                to purchase 49% of ZNG10.16(3)
            Amendment
                to contract to purchase 49% of ZNG10.17(3)
            Amendment
                to David Zaikin Employment Agreement10.18(4)
            Exploratory
                Contract with Bashneftegeofizika10.19(4)
            Exploratory
                Contract with Bazhenov Geophysical Expedition10.20(4)
            Consulting
                Contract with GeoData Consulting10.21(4)
            Exploration
                License for West-Suersky Block10.22(4)
            Exploration
                License for Mokrousovsky Block10.23(4)
            Exploration
                License for Privolny Block10.24(4)
            Exploration
                License for Orlovo-Pashkovsky Block10.25(5)
            Option
                Agreement with Baltic Petroleum Limited dated April 28,
                200510.26(5)
            License
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 200510.27(5)
            Loan
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 200510.28(5)
            Guarantee
                by Siberian Energy Group, Inc. dated April 28, 200510.29(5)
            Pledge
                and Security Agreement between Siberian Energy Group, Inc. and Baltic
                Petroleum Limited dated April 28, 200510.30(6)
            Option
                Agreement with Baltic Petroleum Limited dated April 28,
                200510.31(6)
            License
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 2005







-63-





10.32(6)
            Loan
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 200510.33
                (6)
            Guarantee
                by Siberian Energy Group, Inc. dated April 28, 200510.34
                (6)
            Pledge
                and Security Agreement between Siberian Energy Group, Inc. and Baltic
                Petroleum Limited dated April 28, 200510.35
                (7)
            Clarification
                to the Contract of Purchase and Sale of the Share in Charter Capital
                of
                LLC "Zauralneftegaz" dated 15 May 200410.36
                (7)
            Agreement
                with Business - Standard (translated from Russian
                version)10.37
                (7)
            Supplementary
                Agreement to Business - Standard Agreement (translated from Russian
                version)10.38
                (7)
            Supplementary
                Agreement No. 2 to Business - Standard Agreement (translated from
                Russian
                version)10.39
                (7)
            Deed
                of Amendment between ZNG and BP10.40
                (7)
            Deed
                of Amendment between the Company and BP10.41
                (8)
            Joint
                Venture Shareholders' Agreement with Baltic Petroleum (E&P)Limited and
                Zauralneftegaz Limited dated October 14, 200510.42
                (9)
            Amendment
                to the Employment Agreement Dated August 1, 2003, with Elena
                Pochapski10.43
                (9)
            Form
                of Waiver Agreement10.44(10)
            Loan
                Agreement between OOO Zauralneftegaz and Caspian Finance
                Limited10.45(10)
            Deed
                of Novation between Baltic Petroleum Limited, Caspian Finance Limited
                and
                OOO Zauralneftegaz10.46(10)
            Deed
                of Release10.47(10)
            Release
                of Pledge10.48(10)
            Guarantee10.49(10)
            Debenture10.50(10)
            Agreement
                for the Pledge of the Participatory Interest in OOO Zauralneftegaz
                (Russian translation removed)






-64-







10.51(10)
            Sale
                and Purchase Agreement10.52(12)
            Option
                Agreement with Key Brokerage10.53(12)
            Warrant
                Agreement with Key Brokerage10.54(13)
            July
                26, 2006 Deed of Agreement10.55(14)
            Consulting
                Agreement with Business Standard10.56*
            Addition
                to the Loan Agreement of November 9, 200510.57*
            Gross
                Overriding Royalty Agreement21.1*
            Subsidiaries
                of the Company31.1*
            Certificate
                of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
                Act of 200231.2*
            Certificate
                of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
                Act of 200232.1*
            Certificate
                of the Chief Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.2*
            Certificate
                of the Chief Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200299.1(11)
            Glossary





*
      Filed
      herein.





(1)
      Filed
      as Exhibits to our Form SB-2 Registration Statement filed with the Commission
      on
      September 10, 2004, and incorporated herein by reference.





(2)
      Filed
      as Exhibits 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, respectively, to the Company's Form
      8-K filed with the Commission on May 2, 2005, and incorporated herein by
      reference.





(3)
      Filed
      as an exhibit to our Form SB-2 Registration Statement filed on September 10,
      2004.





(4)
      Filed
      as an exhibit to amendment number one to our Form SB-2/A Registration Statement
      filed on November 23, 2004.


-65-





(5)
      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.





(6)
      Filed
      as Exhibits to the Company's Form 8-K filed with the Commission on May 20,
      2005,
      and incorporated herein by reference.





(7)
      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.





(8)
      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.





(9)
      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.





(10)
      Filed as Exhibits to our Report on Form 8-K, filed with the Commission on
      December 2, 2005, and incorporated herein by reference.





(11)
      Filed as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December
      31, 2005, and incorporated herein by reference.





(12)
      Filed as Exhibits to our Report on Form 8-K, filed with the Commission on
      September 19, 2006, and incorporated herein by reference.





(13)
      Filed as an Exhibit to our Report on Form 10-QSB, filed with the Commission
      on
      November 14, 2006, and incorporated herein by reference.





(14)
      Filed as an Exhibit to our Form 8-K filed with the Commission on February 20,
      2007, and incorporated herein by reference.





**(b)
      REPORTS ON FORM 8-K**





We
      filed
      the following reports on Form 8-K during the period covered by this
      report:





o
            October
                23, 2006 - To report that ZNG had received results of the 2D Seismic
                analysis conducted on its licensed blocks.o
            October
                25, 2006 - To further report the results of ZNG's 2D Seismic analysis
                conducted on its licensed blocks.o
            November
                6, 2006 - To report ZNG's plans for drilling in its licensed
                blocks.o
            December
                21, 2006 - To report our entry into an Interest Purchase Agreement
                with
                Key Brokerage, LLC, whereby we purchased 100% of the outstanding
                stock of
                Kondaneftegaz LLC.






-66-




We
      filed
      the following reports on Form 8-K subsequent to the period covered by this
      report:





o
            February
                20, 2007 - To report that the Company’s Board of Directors agreed to seek
                a listing on the Frankfurt Exchange.o
            February
                20, 2007 - To report the Company’s entry into a Consulting Agreement with
                Business Standard, and the issuance of various shares of restricted
                common
                stock to officers, directors and consultants of the
                Company.








**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





**Audit
      Fees**





The
      aggregate fees billed for each of the fiscal years ended December 31, 2006
      and
      2005 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 $22,800 and $21,200,
      respectively.





**Audit
      Related Fees**





None.





**Tax
      Fees**





The
      aggregate fees billed for each of the fiscal years ended December 31, 2006
      and
      2005 for professional services rendered by the principal accountant for tax
      compliance, tax advice, and tax planning was $2,100 and $7,000,
      respectively.





**All
      Other Fees**





Additionally,
      our principal accountant billed us $1,150 during the year ended December 31,
      2005, for the review of our Form SB-2 Registration Statement. There were no
      other fees billed by our principal accountant other than those disclosed above
      for the year ended December 31, 2006.














[Remainder
      of page left intentionally blank.]




-67-







**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 2,
      2007 By:
      /s/ David Zaikin


David
      Zaikin


Chief
      Executive Officer





DATED:
      April 2,
      2007 By:
      /s/ Elena Pochapski


Elena
      Pochapski


Chief
      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
      2 ,
      2007


David
      Zaikin and
      Chairman of the Board of Directors


(Principal
      Executive Officer)








/s/
      Elena
      Pochapski Chief
      Financial
      Officer                                                 
  April 2 ,
      2007


Elena
      Pochapski and
      Director


(Principal
      Financial Officer)








/s/
      Oleg V. Zhuravlev  Director                                                              
        April 2 ,
      2007


Oleg
      V.
      Zhuravlev








/s/
      Sergey Potapov  Director                                                                 April
      2 ,
      2007


Sergey
      Potapov








/s/
      Vladimir V. Eret  Director                                                                 
      April 2 ,
      2007


Vladimir
      V. Eret







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