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, 2007





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





For the
transition period from __________ to __________





Commission
file number: 333-118902





SIBERIAN ENERGY GROUP
INC.


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





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





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


(Address
of principal executive offices)





(212)
828-3011


(Registrant's
telephone number)





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





NONE





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





NONE





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, 2007 were
$700,000.





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 April 10, 2008 was approximately $3,000,500.





As of
April 9, 2008, the issuer had 18,383,065 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, 2007


INDEX





Part
I





Item
      1. Description of Business
            3Item
      2. Description of Property
            13Item
      3. Legal Proceedings
            13Item
      4. Submission of Matters to a Vote of Security Holders
            14





Part
II





Item
      5. Market for Common Equity and Related Stockholder
Matters
            15Item
      6. Management's Discussion and Analysis or Plan of
    Operation
            16Item
      7. Financial Statements
            F-1Item
      8. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            25Item
      8A. Controls and Procedures
            25Item
      8B. Other Information
            26





Part
III





Item
      9. Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of the Exchange Act
            27Item
      10. Executive Compensation
            33Item
      11. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
            45Item
      12. Certain Relationships and Related Transactions
            49Item
      13. Exhibits and Reports on Form 8-K 48 (a) Exhibits (b) Reports on Form
      8-K
            52Item
      14. Principal Accountant Fees and Services
            55












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, 2007.





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





BUSINESS
DEVELOPMENT:





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





On
September 17, 1999, the Company affected a 1-for-30 reverse stock split. A
subsequent 3-for-1 forward split was consummated on October 2, 2000
(collectively the “Stock Splits”). 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.





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




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 retroactively reflect such split
and the Stock Splits described above.




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





-3-


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.




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, a company organized
under the laws of the United Kingdom ("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”). 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. On October 22, 2007, KNG was awarded two oil and gas exploration
licenses for the Karabashsky-61 and Karabashsky-67 blocks located in the
Khanty-Mansiysk Autonomous Region.  KNG also has eight more
outstanding applications for exploration licenses filed with the Russian
authorities, which auctions have not occurred to date.





Moving
forward the Company plans to focus on the exploration and potential development
of licenses acquired by KNG and to continue the oil and gas exploration
activities in Kurgan and to work towards generating production activities from
ZNG’s licenses either with its partner in the Joint Venture, Baltic Petroleum
(E&P) Limited (“BP” or “Baltic”) or by attracting a third party interest.
Additionally, the Company is currently contemplating entering into additional
partnership agreements in connection with advanced stage exploration or
production projects in Western Siberia, of which there can be no
assurance.





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 received 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.





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 warrants to purchase 250,000 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.





The total
consideration paid in connection with the acquisition of KNG consisted of
restricted shares of common stock and stock warrants and can be summarized as
follows:





Restricted
      shares of common stock issued to Key Brokerage
            
            
            1,900,000Restricted
      shares of common stock issued to an adviser in connection with the
      purchase of KNG
            
            
            200,000Total
      restricted common shares issued
            
            
            2,100,000Stock
      warrants issued to KNG on September 14, 2006in
      connection with the option to purchase KNG
            
            
            250,000








-4-





As a
result of the purchase, a calculated acquisition value of $3,928,000 was
assigned to the geological data assets based on the approximate market value of
the stock issued ($1.75) on the transaction date.  The total value of
purchased assets consisted of $3,675,000 assigned to the shares issued and
$253,000 assigned to stock warrants issued.





In
October 2007, KNG was awarded two oil & gas exploration licenses in
Khanty-Mansiysk region in West Siberia, Russia for the Karabashsky-61 and
Karabashsky-67 blocks located in the Khanty-Mansiysk Autonomous Region, Russian
Federation. On
November 7, 2007, the Board of Directors of the Company approved the issuance of
2,000,000 shares of common stock to Key Brokerage, in connection with the
successful acquisition of two new oil and gas exploration licenses by
Kondaneftegaz LLC, the value of which was determined as $1,320,000 based on the
current market prices of the shares at the date of issuance.





The
license areas together cover 166,000 acres and are situated in the territory of
the Urals oil and gas bearing area.





License
agreements for the Karabashsky-61 and Karabashshky-67 blocks specify the
conditions of subsurface use:





The right
to use the subsurface resources of the Karabashsky-61 and Karabashky-67 Fields
is granted for the term of validity of the license (five (5) years), from the
date of its state registration (October 22, 2007).





The term
of use of the subsurface resources can be extended to finish exploration and
estimation of deposit or for liquidation work, if the terms of usage of the
subsurface resources are not breached.





The right
to use the subsurface resources can be cancelled by the Subsurface Resources
Administrator based on the Russian Federation Law “On Subsurface Resources” in
the event the owner of the license:


1)
            fails
      to pay the payments and duties;2)
            does
      not start the seismic work 2D in 2008; or3)
            does
      not start exploration drilling in
2011.





Owner of
the license is obliged to perform the following geological work on subsurface of
the lease:





·
            to
      prepare and coordinate, and get approval in the prescribed manner of the
      “Program of exploration works on the Karabashsky-61 license area” within
      12 months from the date of the state registration of the license (October
      22, 2007).·
            to
      begin 2D seismic works during the 2008-2010 fieldwork season and to
      perform not less than 176.26 linear kilometers of seismic profiles on
      Karabashky-61 and 158 linear km on Karabashky-67 (minimal density of the
      profile not less than 1 linear kilometer per 1 square kilometer of license
      area).·
            No
      later than 2011, to start drilling an exploratory well and to complete not
      less than 2 exploratory wells by  April 1,
  2012;





Regular
payments are due for the total area of the licenses according to the following
rates (starting with the date of state registration of the
license):


-
            120
      rubles (approximately $5.25)  for each 1 square kilometer –
      during the first three calendar years after the license is
      granted;-
            240
      rubles (approximately $10.50) for each 1 square kilometer – during the
      fourth calendar year after the license is granted; and-
            360
      rubles (approximately $15.75) for each 1 square kilometer – during the
      fifth calendar year after the license is
  granted.





The rates currently yield total annual
payments for the two blocks of approximately $3,300 in the first three years,
$6,600 in the fourth year and $10,000 in the fifth year. Currently the Company
is negotiating a joint venture with a local partner to perform prescribed
geological research works on the two blocks, of which there can be no
assurance.




-5-


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.
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, Petukhovsky 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.  All of the 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.





As of
April 2008, ZNG had 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 over 1,000 linear kilometers on the first license
      areas obtained in 2003, through an agreement with a Russian company,
      Bashneftegeofizika;




·
            Completed
      approximately 2,106 linear kilometers of gas seismotomographic and
      geochemical surveys performed by Exotrad. 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;




·
            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);





·
            Following
      interpretation of seismic, geochemical and geophysical data the first well
      location was chosen in the northern part of the Privolny license, which
      well was spudded in the Spring of 2007. Having drilled to 2,400 metres,
      the well was suspended, pending analysis and interpretation of the data,
      with a possible view to re-entry at a future date, of which there can be
      no assurance. Results of the seismic interpretation also showed that two
      of  the licenses – West-Suersky and Orlovo-Pashkovsky did not
      have high potential and ZNG has voluntarily surrendered these licenses to
      the relevant authorities;·
            The
      Privolny-1 well provided crucial data to the determination of a second
      well location in the southern section of the Mokrousovsky block, a short
      distance to the north. The Mokrousovsky-1 well was spudded in September
      2007 and also drilled to 2,400 metres. A modern, light-weight rig was
      contracted to drill this well, which proved to be extremely challenging
      from an engineering prospective.  The drilling timeframe was
      extended, and hydrocarbons were identified with some of being tested using
      Schlumberger’s MDTTM tool. RPS Energy has evaluated all of this data and,
      as of the date of this report, ZNG awaits their report and is considering
      options for further potential exploitation. Upon expiration of the license
      terms on the Mokrousovsky and Privolny parcels in March 2008 ZNG has the
      preferential right to re-apply for the licenses to continue exploration
      works. Should the results of RPS report be affirmative and the Company and
      its current or prospective partners decide to commit to the advanced
      exploration, ZNG will re-apply for the licenses.Additionally,
      the Company plans to focus on investigating the potential of its current
      25-year licenses on the: Yuzhno-Voskresensky, Petukhovsky and Lebyazhevsky
      licenses.







-6-


Joint
Venture





Currently,
the operating activities of ZNG described above are carried out through the
Joint Venture Shareholders' Agreement ("Joint Venture") entered into on October
14, 2005 with Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and
Zauralneftegaz Limited, the joint venture company ("ZNG, Ltd."), as contemplated
by the Option Agreement, as amended (the "Option"). The Company closed the Joint
Venture and transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in
connection with the terms and conditions of the Joint Venture. As a result of
such transfer, the Company holds 50% of the outstanding stock of ZNG, Ltd.,
which holds 100% of the outstanding stock of the Company's former wholly owned
subsidiary, ZNG.  ZNG, Ltd., 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.





The
operations of the Joint Venture are funded via loans provided to ZNG, Ltd. and
ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly owned by
Baltic.  Loans are guaranteed by ZNG, Ltd.’s holdings in
ZNG.  As of December 31, 2007 the total funding provided to ZNG, Ltd.
and ZNG by Baltic was equal to approximately $23.5 million plus accrued interest
of approximately $3 million.





To date,
Caspian has provided ZNG various loans from 2005 through 2007, as described
below:





·
            On
      November 9, 2005, ZNG entered into a New Loan with Caspian (the "New
      Loan"). Under the loan agreement, Caspian agreed to provide a loan of up
      to $6,874,325 representing the assumed commitment under a prior loan 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 and Caspian entered into a Deed of Variation of the
      Loan Agreement, whereby, inter alia, the Lender agreed to make available
      to ZNG an additional loan facility of
  US$2,000,000;





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




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





The total
outstanding balance of the New Loan provided up to December 31, 2007, was
$14,763,000, including $12,790,000 of principal and $1,973,000 of interest
accrued as of December 31, 2007.





Funding
to ZNG, Ltd. is provided by Caspian on the same terms as to ZNG, through the
mechanism of intercompany billing within Baltic and certain companies affiliated
with Baltic. As of December 31, 2007, the total loan to ZNG, Ltd. from Caspian
totaled $10,235,000, including $9,380,000 of principal and accrued interest of
$855,000. In addition, ZNG, Ltd. owes $1,482,000 directly to Baltic for unpaid
management fees and accrued interest through December 31, 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, as described below under "Deed of Agreement," and “Gross Override
Royalty Agreement.”





Terms of loans to ZNG, Ltd.
and ZNG:





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





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




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




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






-7-


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.





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





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




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





Gross Overriding Royalty
Agreement





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





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) 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),
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.




-8-


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).





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).





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 obligated 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).





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





On March
31, 2007, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 48,925 shares of our common stock at an exercise price of
$1.10 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
approximately $30,695 during the three months ended March 31, 2007 (equal to 1%
of Baltic’s approximately $3,069,482 investment in the Joint Venture in the
first quarter of 2007); which amount has not been paid to date.





On June
30, 2007, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 55,233 shares of our common stock at an exercise price of
$1.14 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obliged to pay AEF
approximately $35,938.00 during the three months ended June 30, 2007 (equal to
1% of Baltic’s approximately $3,593,848 investment in the Joint Venture in the
second quarter of 2007); which amount has not been paid to date.





On
September 30, 2007, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 51,352 shares of our common stock at an exercise
price of $0.74 per share, which warrants contained a cashless feature. The
warrants expire three years from the grant date. We were also obligated to pay
AEF approximately $21,568 during the three months ended September 30, 2007
(equal to 1% of Baltic’s approximately $2,156,790 investment in the Joint
Venture in the third quarter of 2007); which amount has not been paid to
date.





On
December 31, 2007, in connection with our agreement with AEF, we agreed to grant
AEF a warrant to purchase 78,130 shares of our common stock at an exercise price
of $0.46 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
approximately $20,626 during the three months ended December 31, 2007 (equal to
1% of Baltic’s approximately $2,062,635 investment in the Joint Venture in the
fourth quarter of 2007); which amount has not been paid to date.








Officer and Director
Transactions:





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.  In July 2007, we issued an aggregate of 190,000 restricted
shares of common stock to Mr. Zaikin, and certain of his assigns, in
consideration for services rendered during the first two quarters of
2007.





-9-


In June
2007, we issued 70,000 shares of restricted common stock to our President, Helen
Teplitskaia, of which 50,000 shares was a sign-on bonus in connection with her
agreeing to be an officer of the Company in May 2007, and 20,000 shares were
part of her compensation package with the Company, whereby she is to be paid
10,000 shares per month for her service to the Company, which shares were issued
for services rendered in May and June 2007. During the period from July to
December 2007, 50,000 shares were issued for services rendered in July through
November 2007, 10,000 shares for the month of December have not been issued as
of the date of this report, and have not been included in the number of issued
and outstanding shares disclosed herein.





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





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





Global Consulting Group
Agreement





With an
effective date of April 10, 2007, we entered into an agreement with The Global
Consulting Group (“Global”), whereby Global agreed to perform investor relations
and medial communications services for us for the period of one (1) year, which
agreement is automatically renewable for additional one (1) year periods if not
terminated prior as described below. Pursuant to the Global agreement, we agreed
to pay Global $12,000 per month during the term of the agreement (subject to 3%
yearly increases, if such agreement is not terminated prior to the one (1) year
anniversary of the agreement), and pay Global one time bonuses of $5,000 upon
the achievement of any of the following goals: our common stock being listed on
the AMEX; a valuation of our common stock of at least $40 million for more than
30 days; and/or any feature story in a top tier media outlet (The Wall Street
Journal, The New York Times or similar publication). We also agreed to pay
Global’s reasonable out of pocket expenses, subject to prior approval for any
expense over $300 and to indemnify Global against any losses they may incur as a
result of the Global agreement up to a maximum of $10,000.  In
November 2007, we terminated the Global agreement and entered into a Settlement
Agreement (the “Global Settlement”) with Global, pursuant to which we agreed to
pay Global $20,000 (payable in four installments of $5,000, due December 5,
2007, January 5, 2008, February 5, 2008 and March 5, 2008) and 20,000 restricted
shares in settlement of the termination of the Global agreement.  As
of the date of this report a total of $5,000 has been paid to Global and a total
of 20,000 shares have been issued to Global in connection with the Global
Settlement.





-10-


RECENT
EVENTS





In
October 2007, the Company entered into a Settlement Agreement and Mutual Release
with its former consultant, Aspen Management Inc. and its principals
(“Aspen”).  Pursuant to the agreement, we and Aspen agreed to release
any claims or causes of action, whatsoever, that we have against each other, and
we agreed to pay Aspen a total of $12,500, and Aspen agreed to return any and
all Company documents and materials which it has in its possession.














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, 2007 totaled approximately $18 million. 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.




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





Going
Concern





The
Company's financial statements have been prepared assuming that the Company will
continue as a going concern; however, since inception of its current endeavors
in 2003, the Company has not earned any revenues from production of hydrocarbons
and is considered to be in the development stage, which raises substantial doubt
about its ability to continue as a going concern. The Company is of the opinion
that sufficient financing will be obtained from external sources to provide the
Company with the ability to continue the process of development to achieve
commercial production and sales of products. Since inception, the Company has
obtained cash financing from organizing stockholders and employees in the form
of loans, advances and deferred salaries, as well as through debt financing and
more recently has received $55,000 to $85,000 per month in management fees from
its Joint Venture. 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.





-11-


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





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.





-12-


Dependence
on One or A Few Major Customers





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





Patents,
Trademarks and Licenses





ZNG
currently holds three oil and gas exploration and production licenses that it
obtained in June 2006, which have a 25 year term.  KNG currently holds
two five-year oil and gas exploration licenses, awarded in October 2007. KNG has
also applied for 8 other licenses in Western Siberia, Russia, with no
date currently planned for the remaining auctions as of the date of this
filing.





Need
For Government Approval





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





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




Costs and Effects of Compliance with
Environmental Laws





According
to the laws and regulations of the Russian Federation, organizations are
permitted to carry out seismic and other development activities on licensed
fields, provided the companies conform to ecological standards. Accordingly, ZNG
and KNG have encountered two costs associated with environmental law compliance:
costs associated with obtaining licenses and costs associated with obtaining
permission from the Russian Ministry of Natural Resources (the "Ministry").
These costs have totaled approximately $186,900, which includes $2,000 relating
to the ecological review by the Ministry and $184,900 in legal costs and fees to
obtain the Company's licenses. ZNG has 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
month to month basis. This space is leased from Office Escape, an operator of
business centers in New York and other United States cities. The Company is not
the sole occupant of the space and consequently the cost of the rental is shared
with other occupants. The Company does not use the office for any purposes
falling outside of its business needs.





The
Company 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, and since December 31, 2007, the
Company has been leasing the office space on a month-to-month basis. The monthly
rental fee under the Canadian office space lease is currently approximately
$1,450. 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.




-13-


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, 2007.







-14-


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, 2007. We have no outstanding shares of preferred
stock. As of April 9, 2008 there were 18,383,065 shares of common stock
outstanding, held by approximately 125 shareholders of record.





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





Closing
      PricesQuarter
      Ended
            
            High
            
            LowDecember
      31, 2007
            
            $0.84
            
            $0.36September
      30, 2007
            
            $1.65
            
            $0.65June
      30, 2007
            
            $2.00
            
            $1.26March
      31, 2007
            
            $1.90
            
            $1.25December
      31, 2006
            
            $2.40
            
            $1.75September
      30, 2006
            
            $3.55
            
            $1.82June
      30, 2006
            
            $4.33
            
            $1.00March
      31, 2006
            
            $1.20
            
            $0.65








RECENT
SALES OF UNREGISTERED SECURITIES





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





On
September 30, 2007, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 51,352 shares of our common stock at an exercise
price of $0.74 per share, which warrants contained a cashless feature. The
warrants expire three years from the grant 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.




On
November 7, 2007, the Board of Directors of the Company approved the issuance of
2,000,000 shares of common stock to Key Brokerage, in connection with the
successful acquisition of two new oil and gas exploration licenses by
Kondaneftegaz LLC.    The Company claims an exemption from
registration afforded by Section 4(2) of the Act since the foregoing issuance
did not involve a public offering, the recipient took the shares for investment
and not resale and the Company took appropriate measures to restrict transfer.
No underwriters or agents were involved in the foregoing issuance and no
underwriting discounts or commissions were paid by the Company.




In
December 2007, we issued 25,000 and 20,000 restricted shares, respectively, to
two separate investor relation firms in consideration for investor relations
services rendered to the Company.  The Company claims an exemption
from registration afforded by Section 4(2) of the Act since the foregoing
issuance did not involve a public offering, the recipient took the shares for
investment and not resale and the Company took appropriate measures to restrict
transfer. No underwriters or agents were involved in the foregoing issuance and
no underwriting discounts or commissions were paid by the Company.





-15-


On
December 31, 2007, in connection with our agreement with AEF, we agreed to grant
AEF a warrant to purchase 78,130 shares of our common stock at an exercise price
of $0.46 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant 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.





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





The
Company plans to focus on the exploration and potential development of licenses
acquired by KNG in the Khanty-Mansiysk region and to continue oil and gas
exploration activities in the Kurgan region to take ZNG’s licenses into
production either with  its partner in the Joint Venture, Baltic
Petroleum, or by attracting a third party interest, of which there can be no
assurance. The Joint Venture is currently carrying on negotiations with
potential farm-in partners regarding funding and further development of ZNG’s
licenses.





The
Company also plans to put a large part of its resources into KNG, and the
licenses which KNG has applied for. On October 22, 2007, KNG received 2 licenses
of ten for which it had applied for between 2005 and 2006.  If KNG is
granted any or all of the 8 additional licenses it applied for in November 2005
and May 2006, the Company anticipates conducting oil and gas exploration surveys
and studies on those licenses, as well as the two licenses granted in October
2007, funding permitting, of which there can be no assurance.





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 advanced 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.




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 generally received management fees in connection with the
Joint Venture, which varied from $25,000 to $85,000 per month. The Company,
however, can make no assurance that the Joint Venture will continue payment of
management fees or that fees received will be adequate to pay its upcoming
expenses and liabilities, and/or that such funds will be received timely, if at
all (as the Company has recently experienced delays in obtaining such funds) 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 $370,500 and $362,166 were
payable to the stockholders as of December 31, 2007 and December 31, 2006,
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.





-16-


COMPARISON
OF OPERATING RESULTS




RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007, COMPARED TO THE YEAR ENDED
DECEMBER 31, 2006





We had
revenues and other income of $700,000 for the year ended December 31, 2007,
which was due solely to $55,000 of monthly management fees received from
ZNG, Ltd for the months of January through May 2007, and monthly management fees
of $85,000 received for the months of June through October 2007. We had $360,000
of revenue and other income for the year ended December 31, 2006, due solely to
$360,000 of management fees received. In November 2006, the management fees we
received pursuant to our Joint Venture increased from $25,000 per month to
$55,000 per month and in June 2007, additional amounts of $30,000 per month were
paid for July through October 2007.  Revenues increased $340,000 or
94% for the year ended December 31, 2007, compared to the year ended December
31, 2006, which increase was due solely to the increases in monthly management
fees we receive in connection with the Joint Venture.




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





We had
total expenses of $2,760,487 for the year ended December 31, 2007, compared to
total expenses for the year ended December 31, 2006, of $4,432,788, which
represented a decrease in total expenses from the prior period of $1,672,301 or
37.7%.





The main
reason for the decrease in total expenses for the year ended December 31, 2007,
compared to the year ended December 31, 2006, was a $1,202,248 or 49.4% decrease
in professional and consulting fees, to $1,229,593 for the year ended December
31, 2007, compared to $2,431,841 for the year ended December 31, 2006, which
decrease is largely attributable to 600,000 shares of common
stock  issued to a consulting firm Business Standard, which had a
value of $1,113,000 in connection with the acquisition of three additional
licenses by ZNG in June 2006 and to a $276,000 value of stock options granted to
certain of our consultants during the year ended December 31, 2006, compared to
$45,118 during the year ended December 31, 2007, coupled with the fact that the
options granted in fiscal 2007 had a lower value due to the lower trading price
of the Company’s common stock, partially offset by increased fees of Business
Standard accrued on a monthly basis starting in January 2007. Total expenses
also decreased because of a $258,363 or 23.7% decrease in salaries to $833,457
for the year ended December 31, 2007, compared to $1,091,820 for the year ended
December 31, 2006, mainly attributable to lower stock bonuses in 2007 ($478,480
in 2007 versus $957,900 in 2006) partially offset  by an increase in
David Zaikin’s, our Chief Executive Officer, salary, which Mr. Zaikin agreed to
waive in 2006 but accrued in the amount of $180,000 in 2007, and because of a
$176,751 or 21.6% decrease in other expenses, mainly attributable
to  a lower number and lower value of shares issued for advertising
and marketing services for the year ended December 31, 2007, compared to the
year ended December 31, 2006, partially offset by an increase of overseas travel
expenses over the same period.




The
$833,457 of salaries for the year ended December 31, 2007, included $86,844 of
salaries and applicable taxes which were attributable to our Chief Financial
Officer, Elena Pochapski, of which $14,806 was accrued; $180,000 attributable to
the salary of our Chief Executive Officer, David Zaikin, of which all $180,000
was accrued; $110,900 attributable to the salary of our President Helen
Teplitskaia, payable through the issuance of shares of common stock (described
above under “Recent Sales of Unregistered Securities”), and $6,600 of accrued
salary; and certain other amounts were paid to various other officers,
Directors, employees and consultants.  As of December 31,
2007,  Ms. Teplitskaia had earned 130,000 shares of common stock
(50,000 as a bonus and 10,000 per month) in consideration for her services to
the Company as President, of which 10,000 shares remain unissued as of the date
of this filing (and are therefore not included in the number of issued and
outstanding shares disclosed throughout this report).




We had a
net loss of $2,060,487 for the year ended December 31, 2007, compared to a net
loss of $4,072,788 for the year ended December 31, 2006, a decrease in net loss
of $2,012,301 or 49.4% from the prior year. The decrease in net loss was mainly
attributable to the $340,000 or 94% increase in management fees and by the
$1,672,301 or 37.7% decrease in total expenses, namely the decrease in
professional and consulting fees and decrease in salaries, described above, for
the year ended December 31, 2007, compared to the year ended December 31,
2006.




LIQUIDITY
AND CAPITAL RESOURCES





We had
current assets of $5,533 as of December 31, 2007, which included cash of $1,248;
and prepaid expenses and other of $4,285.





We had
total assets of $5,257,476 as of December 31, 2007, which included current
assets of $5,533 and non-current assets of $5,251,943. Non-current assets
included $5,248,000 of oil and gas properties, unproved, representing two
exploration licenses of KNG and also geological studies and data, which we
received in connection with the purchase of KNG and $3,943 of property and
equipment, net.




-17-


We had
total liabilities of $1,192,415 as of December 31, 2007, which were solely
current liabilities and which included $370,500 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, 2007; $56,693
of accounts payable to Baltic in connection with a $29,000 loan advanced to the
Company from Baltic and certain other expenses owed to Baltic; $213,854 of
accounts payable to others for advisory and professional services rendered; and
$541,368 of accrued payroll, which included $292,500 payable to our Chief
Executive Officer, David Zaikin, of which $180,000 was accrued in 2007, and
$112,500 was owed to Mr. Zaikin for services rendered prior to September 2005,
at which time he agreed to stop accruing salary until January 2007, when he
provided us notice of his intent to once again begin accruing salary until such
time as we have sufficient funds to pay such accrued salary,
$99,513 payable to our Chief Financial Officer, Elena Pochapski, and
$69,242 of accrued salary payable to our former Chief Executive Officer, Shakeel
Adam.





We had
negative working capital of $1,186,882 and a total pre-development and
development stage accumulated deficit of $8,992,829 as of December 31,
2007.





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, 2007. 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.




We had
$1,630 of net cash flows from operating activities for the year ended December
31, 2007, which resulted from payment of current liabilities through the
issuance of common stock, particularly common stock and warrants worth
$3,016,910 were issued for professional services and salaries offset by a
$1,066,415 decrease in accounts payable and accrued expenses, and $2,060,487 of
net loss.





We had
$2,013 of net cash flows for investing activities for the year ended December
31, 2007, which was for expenditures for property and
equipment.





We had
$10,000 of net cash flows from financing activities for the year ended December
31, 2007, which was due solely to net proceeds from demand loan.





Pursuant
to the Deed of Agreement, whereby Baltic agreed to loan ZNG approximately
$12,000,000 to be used on seismic studies, the budget for the current program of
seismic studies and drilling of the first four wells on ZNG’s licenses in 2007
was adopted by ZNG, Ltd.’s Board. This budget amounted to US $14,998,000, or
approximately $8 million British pounds. These funds were raised by Baltic’s
parent company through a placement of shares. Of the total budgeted amount of
$14,998,000, the sum of $9,659,000 is being provided through the ZNG loans
described earlier and the sum of $5,339,000 is committed to be provided to ZNG,
Ltd. The loans will not be dilutive to the Company's ownership in
ZNG.  ZNG currently has approximately $3,000,000 remaining from its
2007 budget and has not set, nor raised, any funds in connection with its 2008
budget as of the date of this report.





As of
December 31, 2007, ZNG had received $12,790,000 pursuant to the New Loan, which
amount includes $6,874,325 assumed by ZNG in connection with a previous loan
made to ZNG. Total interest accrued as of December 31, 2007 was $1,973,000,
including accrued interest on the previous loan. The total funding provided to
ZNG, Ltd. and ZNG by Baltic as of December 31, 2007 was equal to $22,170,000
plus accrued interest of approximately $2,828,000.





Under the
Joint Venture, we will be receiving $25,000 per month as a management fee
from ZNG, Ltd. This amount was subsequently increased to $55,000 as per the 2007
operating budget and further increased to $85,000 for the months of June through
October 2007.  However, we are currently in discussions with Baltic
regarding the amount of the management fees for fiscal 2008. Should Baltic
decide not to pursue financing for the Kurgan project, the management fees will
be discontinued and we will have to raise additional funding to support our
operations, which may be on unfavorable terms, if at all.




Since our
transfer of ZNG to the Joint Venture, our only oil and gas operations separate
from our ownership of 50% of ZNG, Ltd. has been through KNG which was awarded
two oil and gas exploration licenses in October 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.




-18-


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.





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





-19-


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.  As of December
31, 2007, the total funding provided to ZNG, Ltd. and ZNG by Baltic was equal to
$23.5 million plus accrued interest of approximately $3 million, which has been
spent on various purposes, including paying consultants for services performed
in connection with surveys 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, or if the management fees were to cease, 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.





RISK
OF FUNDING PARTNER NOT MOVING FORWARD WITH JOINT VENTURE





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





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





The
Company does not expect to generate any revenues through the operations of
ZNG.   Therefore, investors should keep in mind that even if ZNG
is able to raise the substantial amounts of additional financing it requires for
its operations, it could still be years before ZNG generates any revenue, if
ever. Even if generated, such revenues will likely not be great enough to
sustain ZNG. If no revenues are generated and hydrocarbon reserves are not
located, we may be forced to abandon or curtail our current business plan. If
ZNG, which is 100% owned by the Company 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.




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 $2,060,487 for the year
ended December 31, 2007 and had a total accumulated deficit of $8,992,829 as of
December 31, 2007. 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.





-20-


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,
2007, was $8,543,044, and our total cumulative deficit was $8,992,829 which
included $449,785 of pre-development stage deficit. We had $541,368 in accrued
and unpaid salaries and a working capital deficit of $1,186,882 as of December
31, 2007. The Company is currently being funded by existing shareholders, but
there can be no assurance this amount will be sufficient to continue our planned
operations or that we will have enough money to repay our outstanding debts.
There is a risk that ZNG will never begin production and our Company will never
generate any revenues through our ownership of ZNG, Ltd. If throughout ZNG's and
KNG’s oil exploration no viable wells are found, and consequently, we generate
only minimal revenues through ZNG, Ltd. (and/or through KNG), we will likely be
forced to curtail or abandon our business plan. If this happens, you could lose
your investment in our Company. If we are unable to generate profits, we will be
forced to rely on external financing, of which there is no guarantee, to
continue with our business plan.





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





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





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





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




-21-


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. Both Mr. Zaikin and Ms. Pochapski serve as
Directors for RAM Resources, Ltd., and as such, the amount of time they are able
to spend on Company matters may be limited.  Moving forward, should
they be lost for any reason, the Company will incur costs associated with
recruiting replacement personnel and any potential delays in operations. If we
are unable to replace Mr. Zaikin and/or Ms. Pochapski, or if Mr. Zaikin or Ms.
Pochapski are unable to spend a sufficient amount of time on Company matters,
the Company may be forced to scale back or curtail its business plan. As a
result of this, any securities you hold in our Company could become
devalued.





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





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





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





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





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





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





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





Under
Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of
periodic reports with the SEC, any OTCBB issuer who fails to file a periodic
report (Form 10-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.





-22-


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





Moving
forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, for this Annual Report on Form 10-KSB, we were required to perform
system and process evaluation and testing of our internal controls over
financial reporting to allow management to report on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act.  For fiscal year 2008, Section 404 will require us
to obtain a report from our independent registered public accounting firm
attesting to the assessment made by management.  Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.




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





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





(1)
            actual
      or anticipated variations in our results of operations;(2)
            our
      ability or inability to generate new revenues;(3)
            the
      number of shares in our public float;(4)
            increased
      competition;(5)
            the
      political atmosphere in Russia; and(6)
            conditions
      and trends in the oil, gas, and energy industries in
    general.





Furthermore,
because our common stock is traded on the 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.





-23-


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





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





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





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





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





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





-24-





ITEM 7. FINANCIAL
STATEMENTS





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, 2007 and 2006 and the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years then ended, and the cumulative period of Development Stage
Activity – January 1, 2003 through December 31, 2007.  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, 2007 and 2006 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, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
 
 As
described in Note 13 to the financial statements, the 2006 financial statements
have been restated to remove the effect of discounting the value of issued
restricted common stock.
 
 The
accompanying financial statements have been prepared assuming that Siberian
Energy Group Inc. will continue as a going concern.  As discussed in
Note 11 to the financial statements, Siberian Energy Group Inc. has not
earned  significant revenue since inception of its current endeavor,
and is considered to be in the development stage which raises substantial doubt
about its ability to continue as a going concern.  Management’s plans
relative to these matters are also described in Note 11 and throughout the
financial statements.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 
 
 Lumsden
& McCormick, LLP
 Buffalo,
New York
 April 14,
2008






F-1





SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Consolidated
      Balance SheetsRestatedDecember
      31,
            
            2007
            
            
            2006AssetsCurrent
      assets:Cash
            
            $
            1,248
            
            
            $
            1,435Management
      fee receivable
            
            
            -
            
            
            
            110,000Prepaid
      expenses and other
            
            
            4,285
            
            
            
            5,2725,533
            
            
            
            116,707Investment
      in joint venture
            
            
            -
            
            
            
            -Oil
      and gas properties, unproved
            
            
            5,248,000
            
            
            
            3,928,000Property
      and equipment, net
            
            
            3,943
            
            
            
            2,565$
            5,257,476
            
            
            $
            4,047,272Liabilities
      and Stockholders' EquityCurrent
      liabilities:Demand
      loan from stockholder, interest at 9%
            
            $
            10,000
            
            
            $
            -Accounts
      payable:Related
      party - stockholders
            
            
            370,500
            
            
            
            362,166Related
      party - Baltic Petroleum, interest at 14%
            
            
            56,693
            
            
            
            50,615Others
            
            
            213,854
            
            
            
            535,961Accrued
      payroll
            
            
            541,368
            
            
            
            1,300,0881,192,415
            
            
            
            2,248,830Stockholders'
      equity:Common
      stock - authorized 100,000,000 shares, $.001 par value,18,383,030
      and 14,112,961 issued and outstanding
            
            
            18,383
            
            
            
            14,113Additional
      paid-in capital
            
            
            13,053,756
            
            
            
            8,721,116Accumulated
      deficitPre-development
      stage
            
            
            (449,785
            )
            
            
            (449,785
            )Development
      stage
            
            
            (8,543,044
            )
            
            
            (6,482,557
            )Accumulated
      other comprehensive income (loss)
            
            
            (14,249
            )
            
            
            (4,445
            )4,065,061
            
            
            
            1,798,442$
            5,257,476
            
            
            $
            4,047,272See
      accompanying notes.







F-2






SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theConsolidated
      Statements of Operations
            
            
            
            
            
            
            
            cumulativeperiod
      ofDevelopmentStage
      Activity-January
      1, 2003throughRestated
            
            
            December
      31,For
      the years ended December 31,
            
            2007
            
            
            2006
            
            
            2007Revenues
      and other income:Management
      fees
            
            $
            700,000
            
            
            $
            360,000
            
            
            $
            1,135,000Gain
      from entrance into joint venture
            
            
            -
            
            
            
            -
            
            
            
            364,479Other
            
            
            -
            
            
            
            -
            
            
            
            6,382700,000
            
            
            
            360,000
            
            
            
            1,505,861Expenses:Salaries
            
            
            833,457
            
            
            
            1,091,820
            
            
            
            3,090,895Professional
      and consulting fees
            
            
            1,229,593
            
            
            
            2,431,841
            
            
            
            4,546,826Rent
      and occupancy
            
            
            46,882
            
            
            
            39,698
            
            
            
            223,125Depreciation and amortization
            
            
            635
            
            
            
            337
            
            
            
            103,352Finance
      charges and interest
            
            
            6,948
            
            
            
            49,369
            
            
            
            103,924Other
            
            
            642,972
            
            
            
            819,723
            
            
            
            1,980,783Total expenses
            
            
            2,760,487
            
            
            
            4,432,788
            
            
            
            10,048,905Loss
      before income taxes
            
            
            2,060,487
            
            
            
            4,072,788
            
            
            
            8,543,044Provision
      for income taxes (benefit)
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss (development stage)
            
            $
            2,060,487
            
            
            $
            4,072,788
            
            
            
            8,543,044Basic
      and diluted loss per common share
            
            $
            (0.13
            )
            
            $
            (0.35
            )
            
            $
            (0.84
            )Weighted
      average number of basic and dilutedcommon
      shares outstanding
            
            
            15,766,523
            
            
            
            11,749,699
            
            
            
            10,132,056See
      accompanying notes.







F-3


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Consolidated
      Statements of Stockholders' EquityFor
      the cumulative period of Development Stage Activity - January 1, 2003
      through December 31, 2007


Common
      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
            )
            $
            (529,464
            )Loss
      for the year - 2005
            
            -
            
            
            -
            
            
            -
            
            
            (1,153,686
            )
            
            -
            
            
            (1,153,686
            )Foreign
      currency translation adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            50,614
            
            
            50,614
            
            $
            (1,103,072
            )Shares
      issued for professional services
            
            385,000
            
            
            385
            
            
            197,829
            
            
            -
            
            
            -
            
            
            198,214Shares
      issued for accrued salaries
            
            1,700,000
            
            
            1,700
            
            
            301,871
            
            
            -
            
            
            -
            
            
            303,571Warrants
      granted for professional services
            
            -
            
            
            -
            
            
            310,000
            
            
            -
            
            
            -
            
            
            310,000Balance,
      December 31, 2005 (Restated)
            
            11,487,886
            
            $
            11,488
            
            $
            2,029,821
            
            $
            (2,859,554
            )
            $
            (2,506
            )
            $
            (820,751
            )Loss
      for the year - 2006
            
            -
            
            
            -
            
            
            -
            
            
            (4,072,788
            )
            
            -
            
            
            (4,072,788
            )Foreign
      currency translation adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,939
            )
            
            (1,939
            )
            $
            (4,074,727
            )Shares
      issued for employee stock option plan and warrants
            
            195,000
            
            
            195
            
            
            45,305
            
            
            -
            
            
            -
            
            
            45,500Shares
      issued for geological data
            
            1,900,000
            
            
            1,900
            
            
            3,323,100
            
            
            -
            
            
            -
            
            
            3,325,000Shares
      issued for professional services
            
            1,139,499
            
            
            1,140
            
            
            2,120,320
            
            
            -
            
            
            -
            
            
            2,121,460Warrants
      granted for professional services and geological data
            
            -
            
            
            -
            
            
            1,201,960
            
            
            -
            
            
            -
            
            
            1,201,960Shares
      cancelled
            
            (609,424
            )
            
            (610
            )
            
            610
            
            
            -
            
            
            -
            
            
            -Balance,
      December 31, 2006 (Restated)
            
            14,112,961
            
            $
            14,113
            
            $
            8,721,116
            
            $
            (6,932,342
            )
            $
            (4,445
            )
            $
            1,798,442Loss
      for the year - 2007
            
            -
            
            
            -
            
            
            -
            
            
            (2,060,487
            )
            
            -
            
            
            (2,060,487
            )Foreign
      currency translation adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,804
            )
            
            (9,804
            )
            $
            (2,070,291
            )Shares
      issued for employee stock option plan and warrants
            
            566,935
            
            
            567
            
            
            (567
            )
            
            -
            
            
            -
            
            
            -Shares
      issued for geological data
            
            200,000
            
            
            200
            
            
            349,800
            
            
            -
            
            
            -
            
            
            350,000Shares
      issued for accrued salaries
            
            788,000
            
            
            788
            
            
            1,444,618
            
            
            -
            
            
            -
            
            
            1,445,406Shares
      issued for licenses
            
            2,000,000
            
            
            2,000
            
            
            1,318,000
            
            
            -
            
            
            -
            
            
            1,320,000Shares
      issued for professional services
            
            715,134
            
            
            715
            
            
            1,070,395
            
            
            -
            
            
            -
            
            
            1,071,110Warrants
      granted for professional services
            
            -
            
            
            -
            
            
            150,394
            
            
            -
            
            
            -
            
            
            150,394Balance,
      December 31, 2007
            
            18,383,030
            
            $
            18,383
            
            $
            13,053,756
            
            $
            (8,992,829
            )
            $
            (14,249
            )
            $
            4,065,061See
      accompanying notes.


F-4





SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theConsolidated
      Statements of Cash Flows
            
            
            
            
            
            
            
            cumulativeperiod
      ofDevelopmentStage
      Activity-January
      1, 2003throughRestated
            
            
            December
      31,For
      the years ended December 31,
            
            2007
            
            
            2006
            
            
            2007Cash
      flows from operating activities:Net
      loss (development stage)
            
            $
            (2,060,487
            )
            
            $
            (4,072,788
            )
            
            $
            (8,543,044
            )Depreciation
      and amortization
            
            
            635
            
            
            
            337
            
            
            
            103,352Common
      stock and warrants issuedfor
      professional services and salaries
            
            
            3,016,910
            
            
            
            3,295,733
            
            
            
            7,134,428Gain
      from entrance into joint venture
            
            
            -
            
            
            
            -
            
            
            
            (364,479
            )Changes
      in other current assets andcurrent
      liabilities:Management fee receivable
            
            
            110,000
            
            
            
            -
            
            
            
            110,000Prepaid
      expenses and other assets
            
            
            987
            
            
            
            (65,002
            )
            
            
            (267,677
            )Accounts
      payable and accrued expenses
            
            
            (1,066,415
            )
            
            
            789,406
            
            
            
            2,821,440Net
      cash flows from (for) operating activities
            
            
            1,630
            
            
            
            (52,314
            )
            
            
            994,020Cash
      flows from investing activities:Expenditures
      for licenses and related
            
            
            -
            
            
            
            -
            
            
            
            (528,961
            )Expenditures
      for oil and gas properties
            
            
            -
            
            
            
            -
            
            
            
            (770,750
            )Expenditures
      for property and equipment
            
            
            (2,013
            )
            
            
            (1,363
            )
            
            
            (6,244
            )Cash
      received in acquisition
            
            
            -
            
            
            
            -
            
            
            
            6Cash
      received from entrance into joint venture
            
            
            -
            
            
            
            -
            
            
            
            175,000Net
      cash flows for investing activities
            
            
            (2,013
            )
            
            
            (1,363
            )
            
            
            (1,130,949
            )Cash
      flows from financing activities:Net
      proceeds from demand loan
            
            
            10,000
            
            
            
            -
            
            
            
            72,500Common
      stock issued for employee stock option plan
            
            
            -
            
            
            
            45,500
            
            
            
            45,500Additional
      paid-in capital
            
            
            -
            
            
            
            -
            
            
            
            34,426Net
      cash flows from financing activities
            
            
            10,000
            
            
            
            45,500
            
            
            
            152,426Effect
      of exchange rates on cash
            
            
            (9,804
            )
            
            
            (1,939
            )
            
            
            (14,249
            )Net
      increase (decrease) in cash
            
            
            (187
            )
            
            
            (10,116
            )
            
            
            1,248Cash
      - beginning
            
            
            1,435
            
            
            
            11,551
            
            
            
            -Cash
      - ending
            
            $
            1,248
            
            
            $
            1,435
            
            
            $
            1,248See
      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
Zauralneftegaz Limited, UK (ZL) 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.  The 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.
 
 Joint
Venture operations are funded through loans to ZL and ZNG by a financing company
wholly owned by Baltic.  To support the current drilling program in
ZNG’s license blocks, funds are raised by Baltic’s parent through the placement
of shares.  Loans are not dilutive to the Company’s ownership in ZNG,
but they are guaranteed by ZL’s holdings in ZNG.  In connection with
funding provided by Baltic, ZNG entered into a gross override royalty agreement
with Baltic.
 
 As of
December 31, 2007, the total amount of funds provided through such loans to ZL
and ZNG were equal to $23.5 million plus accrued interest of approximately $3
million.  The funds were used to perform extensive seismic and gas
seismotomographic works on ZNG’s licensed areas, drill 2 exploratory wells and
prepare complete analysis of geological resources in the Kurgan region, using
reputable UK and Russian geological expert firms.
 
 Additional
details surrounding the Company’s involvement in the Joint Venture
follow:
 
 ·
              During
      the arrangement, the Company generally receives a monthly management fee
      of $25,000 from ZNG ($55,000 effective November
      2006).  Management fees for the period June 2007 through October
      2007 were $85,000 per month;·
              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.
 
 Activities
of ZNG prior to October 14, 2005 are included in the consolidated accounts of
the Company in the accompanying financial statements.  Effective
October 14, 2005, the Company’s investment in Joint Venture 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, 2007.
 
 F-6
 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 Karabashski zone of
Khanty-Mansiysk Autonomous district (Tuymen region of the Russian Federation)
from Key Brokerage, LLC (“Seller”), a Delaware limited liability company, for
the following negotiated consideration consisting of restricted common shares
and stock warrants:




Restricted
      common shares issued to Seller
              1,900,000Restricted
      common shares issued to an adviser (valueincluded
      in accounts payable at December 31, 2006;shares
      issued in early 2007)
              200,000Total
      restricted common shares issued
              2,100,000Stock
      warrants issued to Seller September 14, 2006for
      purchase option (see Note 8)
              250,000




As a
result of the purchase, a calculated acquisition value of $3,928,000 was
assigned to the geological data assets that considered the approximate market
value of the stock issued ($1.75) on the transaction date.  The total
value of purchased assets consisted of $3,675,000 assigned to the shares issued
and $253,000 assigned to stock warrants issued.  The valuation method
of the stock warrants is described in Note 8 herein.  Additionally, to
facilitate the transaction, management and the Seller considered the results of
a good faith valuation of assets prepared by a Russian consultant, who attempted
to determine an “arms length fair value” price of such
assets.  However, management did not rely on this valuation, and
assumes full responsibility for the value assigned in the
acquisition.
 
 In
conjunction with the asset purchase, the Company was also assigned ownership of
Kondaneftegaz, LLC (“Konda”), a Russian limited liability company wholly-owned
by Seller.  Since Konda had 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 in connection with the acquisition.
 
 In
October 2007, Konda obtained two 5 year oil and gas exploration licenses in the
Khanty-Mansiysk region.  In connection with the acquisition of the
licenses the Company issued to Key Brokerage, LLC 2,000,000 of its restricted
common shares with a total value of $1,320,000 based on the current market
prices of the shares at the date of issue.  The Company actively seeks
partners for the geological research and development of its new
parcels.
 
 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.
 
 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
Russian subsidiaries ZNG and Konda use the Ruble as their functional currency;
Siberian Energy Group (Canada) uses the Canadian dollar as its functional
currency.  The books and records of ZNG, Konda and Siberian Energy
Group (Canada) are kept in their functional currencies.  The Company
translates to U.S. dollars the assets and liabilities of ZNG, Konda, and
Siberian Energy Group (Canada) at the year-end exchange rates; income statement
amounts are converted at the average rates of exchange for the
year.  Translation gains and losses are included within other
comprehensive income (loss).
 
 Cash:
 
 Cash in
financial institutions may exceed insured limits at various times throughout the
year, and subject the Company to concentrations of credit risk.
  F-7
 Oil
and Gas Properties:
 
 The
Company follows the full cost method of accounting for oil and gas
properties.  Accordingly, all costs associated with acquisition,
exploration, and development of oil and gas reserves, including directly related
overhead costs, are capitalized.
 
 All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, will be amortized on the unit-of production
method using estimates of proved reserves.  Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs.  When applicable, if the results of an assessment indicate
that the properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
 
 In
addition, the capitalized costs are subject to a “ceiling test,” which basically
limits such costs to the aggregate of the “estimated present value,” discounted
at a 10-percent interest rate of future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.
 
 Sales of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.  Abandonments of properties are accounted for as adjustments
of capitalized costs with no loss recognized.
 
 At
December 31, 2007, the only oil and gas properties the Company has are the
capitalized geological data assets acquired on December 31, 2006, totaling
$3,928,000, and the newly acquired exploration licenses of Konda, valued at
$1,320,000, which assets are more fully described herein under the caption “The
Company and Description of Business.”  Because proved reserves
associated with these assets have not yet been determined, they are considered
unproved properties not yet subject to amortization.  As a result of
the Join Venture, also described earlier, all oil and gas properties associated
with ZNG are otherwise the responsibility of the Joint Venture effective October
14. 2005.
 
 Management
has evaluated the geological data assets, and based on ongoing operations,
issuance of additional licenses and movements ahead, management has determined
that no impairment is deemed necessary as of December 31, 2007.
 
 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-8
 2.  Investment
in Joint Venture:
 
 Following
is a summary of the Joint Venture’s unaudited financial position at December 31,
2007 and 2006 and results of development stage activity for the years ended
December 31, 2007 and 2006 ($000’s omitted):





2007
            
            
            2006Current
      assts
            
            $
            57
            
            
            $
            113Intangibles
      andother
      noncurrent assets
            
            
            4,986
            
            
            
            5,421$
            5,043
            
            
            $
            5,534Current
      liabilities
            
            $
            950
            
            
            $
            729Long-term
      debt and othernoncurrent
      liabilities
            
            
            26,480
            
            
            
            12,468$
            27,430
            
            
            $
            13,197Stockholders'
      equity (deficit)
            
            
            (22,387
            )
            
            
            (7,663
            )$
            5,043
            
            
            $
            5,534Revenues
            
            $
            -
            
            
            $
            -Net
      loss (development stage)
            
            $
            (12,919
            )
            
            $
            (7,241
            )Cumulative
      net loss since October 14, 2005 (date of Joint   Venture
      inception)
            
            $
            (21,405
            )




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, 2007, the Company effectively has U.S. tax net operating loss
carryforwards totaling approximately $7,261,000.  These carryforwards
may be used to offset future taxable income, and expire in varying amounts
through 2027.  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
$1,452,000 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, 2007 and 2006 was $46,882 and
$39,698.  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.
 
 5.  Related
Party Transactions:
 
 During
the development stage period from January 1, 2003 through December 31, 2007, a
variety of expenses were paid for by organizing stockholders.  As a
result, amounts totaling $370,500 and $362,166 are payable to stockholders from
the Company as of December 31, 2007 and 2006.
 
 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, 2007,
the minimum total future additional commitment due is approximately
$255,000.
 
 At
December 31, 2007, accrued and unpaid salaries for all employees totaled
$541,368.  These amounts are expected to be paid when sufficient cash
flows are generated by the Company or by the issuance of restricted stock of the
Company.
 
 7.  Stock
Option Plan:
 
 In 2003,
the Company granted stock options under a plan for the benefit of employees and
directors of the Company.  All granted stock options are for
acquisition of restricted shares, meaning that there are substantial
restrictions on the transferability and sale of such shares.  Pursuant
to plan terms and related employment agreements, shares of common stock granted
vest as follows:
 
 F-9


Shares ReservedVest
              December
      31,
              December
      31,
              ExerciseYear
              2007
              2006
              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 averageclosing
      stock pricefor
      the three monthsprior
      to grant date




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




F-10


The
following summarizes stock option activity:






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




The
following table summarizes information about stock options outstanding and
exercisable:




December 31, 2007Weighted
      AverageExercise
              Number
      of
              Remaining
      Years ofPrice
              Options
              Contractual
      Life$
              0.14
              
              100,000
              
              00.20
              
              468,000
              
              10.60
              
              415,500
              
              20.60
              
              468,000
              
              32.26
              
              66,500
              
              42.14
              
              36,500
              
              41.94
              
              36,500
              
              41.62
              
              36,500
              
              41.69
              
              36,500
              
              41.82
              
              36,500
              
              41.79
              
              36,500
              
              41.77
              
              36,500
              
              41.46
              
              36,500
              
              41.16
              
              36,500
              
              40.86
              
              36,500
              
              40.76
              
              36,500
              
              41,919,500




December 31, 2006Weighted
      AverageExercise
              
              Number
      of
              
              Remaining
      Years ofPrice
              
              Options
              
              Contractual
      Life$                            0.14
              
              100,000
              
              10.20
              
              468,000
              
              20.32
              
              75,000
              
              20.60
              
              415,500
              
              30.60
              
              468,000
              
              41,526,500


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, 2007 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-11
 8.  Stock
Warrants:
 
 In 2005,
2006 and 2007, the Company granted warrants to purchase restricted common shares
to certain consultants and non-employees for services rendered to the Company as
follows:
  2007Grant
                    
                    Number
      of
                    
                    
                    Exercise
                    
                    OriginalExerciseDate
                    
                    Shares
                    
                    
                    Price
                    
                    TermJanuary
      1, 2007
                    
                    
                    17,500
                    
                    
                    $
                    2.26
                    
                    4
      yearsFebruary
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    2.14
                    
                    4
      yearsMarch
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    1.94
                    
                    4
      yearsMarch
      31, 2007
                    
                    
                    48,925
                    
                    
                    
                    1.10
                    
                    3
      yearsApril
      1, 2007
                    
                    
                    17,500
                    
                    
                    
                    1.72
                    
                    4
      yearsMay
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    1.69
                    
                    4
      yearsJune
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    1.82
                    
                    4
      yearsJune
      30, 2007
                    
                    
                    55,233
                    
                    
                    
                    1.14
                    
                    3
      yearsJuly
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    1.79
                    
                    4
      yearsAugust
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    1.77
                    
                    4
      yearsSeptember
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    1.46
                    
                    4
      yearsSeptember
      30, 2007
                    
                    
                    51,352
                    
                    
                    
                    0.74
                    
                    3
      yearsOctober
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    1.16
                    
                    4
      yearsNovember
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    0.87
                    
                    4
      yearsDecember
      1, 2007
                    
                    
                    7,500
                    
                    
                    
                    0.76
                    
                    4
      yearsDecember
      31, 2007
                    
                    
                    78,130
                    
                    
                    
                    0.46
                    
                    3
      years343,6402006Grant
                    
                    Number
      of
                    
                    
                    Exercise
                    
                    OriginalExerciseDate
                    
                    Shares
                    
                    
                    Price
                    
                    TermMarch
      31,
      2006
                    (3)
                    
                    800,000
                    
                    
                    $
                    1.05
                    
                    4
      yearsApril
      1,
      2006
                    (3)
                    
                    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
      years1,647,5732005Grant
                    
                    Number
      of
                    
                    
                    Exercise
                    
                    OriginalExerciseDate
                    
                    Shares
                    
                    
                    Price
                    
                    TermApril
      1, 2005
                    (1)
      (2)
                    
                    100,000
                    
                    
                    $
                    0.30
                    
                    2
      yearsSeptember
      13, 2005
                    
                    
                    15,000
                    
                    
                    
                    0.30
                    
                    3
      yearsDecember
      22, 2005
                    
                    
                    100,000
                    
                    
                    
                    1.00
                    
                    3
      yearsDecember 22, 2005
                    (3)
                    
                    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


(1)50,000
of these warrants were exercised May 2006.
 (2)50,000 of these
warrants were exercised June 2007.
 (3)1,500,000 warrants
exercised June 2007.


F-12


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:




2007
              2006
              2005Dividend
      yield
              0%
              0%
              0%Risk
      free interest rate
              2.50%
      - 4.75%
              2.88%
      - 4.90%
              3.17%
      - 4.38%Expected
      volatility
              100%
              97%
      - 131%
              48.13%
      - 70.12%
  Amounts
charged to expense in 2007, 2006, and 2005 totaled $150,394, $1,201,960, and
$310,000.
 
 
 9.  Fair
Value of Financial Instruments:
 
 The
carrying values of cash, management fee receivable, accounts payable, accrued
expenses and demand loans approximates fair value due to their short-term
maturity.
 
 
 10.  Loss
Per Common Share:
 
 Basic and
diluted loss per common share is computed using the weighted average number of
common shares outstanding during the period.  Shares issuable for
common stock options and warrants may have had a dilutive effect on earnings per
share had the Company generated income during the periods through December 31,
2007.
 
 
 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, 2007, 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 to be reflected on a
liquidation basis which could differ form the going concern basis.
 
 F-13
  12.  Cash
Flows Information:
 
 Net cash
flows from operating activities includes cash payments for interest and income
taxes as follows:
  2007
                
                
                2006Interest
      paid
                
                $
                -
                
                
                $
                -Income
      taxes paid
                
                $
                -
                
                
                $
                -
  Noncash
investing and financing activities excluded from the statements of cash flows
includes:
  2007
                
                
                2006Demand
      loan payable settledthrough
      the issuance of commonstock
      and warrants
                
                $
                -
                
                
                $
                62,500Geological
      data acquired throughthe
      issuance of commonstock
      and warrants
                
                $
                -
                
                
                $
                3,928,000Licenses
      aquired through theissuance
      of common stock
                
                $
                1,320,000
                
                
                $
                -
  13.  Restatement
of Financial Statements:
 
 Subsequent
to the issuance of the Company’s 2006 consolidated financial statements, it was
determined that the Company improperly discounted by 30% the value of restricted
common stock and common stock warrants issued for professional services and the
acquisition of geological data.  The discount factor has been removed,
and the accompanying financial statements have been restated based on 100% of
market prices as follows:
  As
                  previously
                
                
                
                
                
                Impact
      of2006
                
                reported
                
                
                Restated
                
                
                RestatementShares
      issued for geological data (asset)
                
                $
                2,237,000
                
                
                $
                3,325,000
                
                
                $
                1,088,000Shares
      issued for professional services (expense)
                
                
                1,686,491
                
                
                
                2,121,460
                
                
                
                708,269Warrants
      granted for professional services (expense)
                
                
                841,177
                
                
                
                1,201,960
                
                
                
                284,183
  The
following table sets forth the effects of the Restatement on the Consolidated
Statements of Operations for the year ended December 31,
2006.
  As
      previously
                
                
                
                
                
                Impact
      of2006
                
                reported
                
                
                Restated
                
                
                RestatementNet
      loss
                
                $
                3,080,336
                
                
                $
                4,072,788
                
                
                $
                992,452Basic
      and diluted earnings per share
                
                
                (.26
                )
                
                
                (.35
                )
                
                
                (.09
                )
  The
following sets forth the effects of the Restatement on the Consolidated Balance
Sheet for December 31, 2006:
  As
      previously2006
                  
                  reported
                  
                  
                  Adjustment
                  
                  
                  RestatedTotal
      liabilities
                  
                  $
                  1,884,130
                  
                  
                  $
                  364,700
                  
                  
                  $
                  2,248,830Additional
      paid in capital
                  
                  
                  6,593,829
                  
                  
                  
                  2,127,287
                  
                  
                  
                  8,721,116Accumulated
      deficit - development stage
                  
                  
                  (5,218,570
                  )
                  
                  
                  (1,263,987
                  )
                  
                  
                  (6,482,557
                  )Net
      stockholders' equity
                  
                  
                  935,142
                  
                  
                  
                  863,300
                  
                  
                  
                  1,798,442
    F-14


ITEM 8. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM 8A. CONTROLS AND
PROCEDURES
 
 Evaluation
of Disclosure Control and Procedures
 
 We
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as such term is defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) as of December 31,
2007.  This evaluation was carried out under the supervision and with
participation of our Chief Executive Officer and Chief Financial Officer. Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2007, our disclosure controls and procedures
are not effective as a result of the material weakness in internal control over
financial reporting discussed below.
 
 Notwithstanding
the assessment that our internal control over financial reporting was not
effective and that there were material weaknesses as identified in this report,
we believe that our consolidated financial statements contained in our Annual
Report on form 10-KSB for the fiscal year ended December 31, 2007 fairly present
our financial position, results of operations and cash flows for the years
covered thereby in all material respects. To address the material weaknesses in
our internal control over financial reporting described below, we
performed  additional analysis and other post-closing procedures in
order to prepare  the consolidated financial statements included in
this Annual Report on form 10-KSB.
 
 Management’s
Annual Report on Internal Control over Financial Reporting
 
 The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act. The Company's internal control over
financial reporting is a process designed under the supervision of the Company's
Chief Executive Officer and Chief Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company's financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and includes those policies and procedures that:
 -
              pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions  of our
      assets;-
              provide
      reasonable assurance that the transactions are recorded  as
      necessary to permit the preparation of financial statements in accordance
      with generally accepted accounting principles, and that our receipts and
      expenditures are being made only in accordance with authorizations of our
      management and directors; and-
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of our assets that could
      have a material effect on the financial
  statements.
 
 Management
recognizes that there are inherent limitations in the effectiveness of any
system of internal control, and accordingly, even effective internal control can
provide only reasonable assurance with respect of financial statement
preparation and may not prevent or detect misstatements. In addition, effective
internal control at a point in time may become ineffective in future periods
because of changes in conditions or due to deterioration in the degree of
compliance with our established policies and procedures.
 
 As of
December 31, 2007, management assessed the effectiveness of the Company's
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting
such assessments.
 
 Based on
that evaluation, management concluded that, during the period covered by this
report, such internal controls and procedures were not effective to detect the
inappropriate application of US GAAP rules as more fully described below. This
was due to deficiencies that existed in the design or operation of our internal
control over financial reporting that adversely affected our internal controls
and that taken together may be considered to be a material
weakness.
 
 -25-
 A
material weakness is a deficiency, or combination of deficiencies, that results
more than a remote likelihood that a material misstatement of annual or interim
financial statements will not be prevented or detected. In connection with the
assessment described above, management identified the following
control
 deficiencies
that represent material weaknesses at December 31, 2007:
 
 (1)
              lack
      of a functioning audit committee and lack of a majority of outside
      directors on the Company's board of directors capable to perform audit
      function;(2)
              inadequate
      segregation of duties due to limited number of personnel, which makes the
      reporting process susceptible to management override;
  and(3)
              insufficient
      use of the third party specialists and independent valuators in the areas
      which involve a significant level of judgment and in complicated areas of
      accounting.
 
 Management
believes that the material weaknesses set forth in items (1) and (2) above did
not have an affect on the Company's financial reporting in 2007. However,
management believes that the lack of a functioning audit committee and lack of a
majority of outside directors on the Company's board of directors can adversely
affect reporting in the future years, when our operations become more complex
and less transparent and require higher level of financial expertise from the
overseeing body of the Company.
 
 We are
committed to improving our financial organization. As part of this commitment,
we will, as soon as funds are available to the Company (1) appoint one or more
outside directors to our board of directors who shall be appointed to the audit
committee of the Company resulting in a fully functioning audit committee who
will undertake the oversight in the establishment and monitoring of required
internal controls and procedures; (2) create a position to segregate duties
consistent with control objectives and will increase our personnel resources;
and (3) hire independent third parties to perform expert advice.
 
 We will
continue to monitor and evaluate the effectiveness of our internal controls and
procedures and our internal controls over financial reporting on an ongoing
basis and are committed to taking further action and implementing additional
enhancements or improvements, as necessary and as funds allow. This annual
report does not include an attestation report of the Company's independent
registered public accounting firm regarding internal control over financial
reporting. Management's report is not subject to attestation by the Company's
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this annual report.
 
 
 Changes
in internal control over financial reporting.
 
 There
were no changes in our internal control over financial reporting during our most
recent fiscal quarter that materially affected, or were reasonably likely to
materially affect, our internal control over financial reporting.
 
 
 ITEM 8B. OTHER
INFORMATION
 
 None.
  -26-
 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
              PositionDavid
      Zaikin
              41
              Chairman
      of the Board of Directors and Chief Executive
      OfficerHelen
      Teplitskaia
              53
              President
      and DirectorElena
      Pochapski
              42
              Chief
      Financial Officer and DirectorOleg
      V. Zhuravlev
              47
              DirectorSergey
      Potapov
              44
              DirectorVladimir
      V. Eret
              63
              DirectorTimothy
      Peara
              47
              Director
 
 David
Zaikin
 Chairman
of the Board of Directors and Chief Executive Officer
 
 David
Zaikin has served as Chairman of the Board of Directors since December 2002 and
as Chief Executive Officer of the Company since August 2004. Since September
1998, Mr. Zaikin has worked as Vice President of Harvey Kalles R.E. LTD, a Real
Estate Company. Since August 2006, Mr. Zaikin has served as Chief Executive
Officer and Director of ECM Asset Management, Inc. and since January 2008 as
Executive Chairman of its parent company, RAM Resources Ltd. In 2003, Mr. Zaikin
was recognized by "Who's Who" as one of the three Canadian businessmen for his
extraordinary achievements. Mr. Zaikin also has a diverse background that
includes experience in sales, marketing, channels, finance and operation. Mr.
Zaikin is currently a member of TREB (the Toronto Real Estate Board) and OREA
(the Ontario Real Estate Association). He specializes in both Financial Analysis
and Market Analysis for Commercial Real Estate.
  Mr.
Zaikin also has a Bachelors Degree from Kharkov Government Pharmaceutical
Institute.
 
 Helen
Teplitskaia
 President
and Director
 
 Helen
Teplitskaia has served as the Company’s President and Director since May
2007.  Since January 2008 Mrs. Teplitskaya serves as President and a
member of the board of directors of RAM Resources Ltd. Ms. Teplitskaia also
currently is an Adjunct Associate Professor of International Business and
Markets - Global Initiatives in Management at Northwestern University, where she
has taught since January 1998, and she has served as Executive Vice President
and Head of Eurasia Practice at Imnex International, Inc. since April
1991.  Mr. Teplitskaia serves as President of the American-Russian
Chamber of Commerce & Industry, President of the American-Eurasian Chamber
of Commerce and Director of the International Energy Advisory
Council.  Throughout her career, Ms. Teplitskaia has successfully
assisted a variety of government agencies and private sector companies,
including the United States Agency for International Development, US State
Department, Ministry of Foreign Affairs of the Republic of Uzbekistan, AT&T,
Baker & McKenzie, Case New Holland, Gazprom, Gillette, HeidelbergCement,
Ingersoll-Rand, Maytag, Motorola, Pepsi-Cola and Morgan Stanley with start-up
operations in markets, direct investment, mergers and acquisitions, joint
ventures and licensing, marketing research, political interfacing and media
relations.
 
 -27-
  Ms.
Teplitskaia received her BA/MIS from the St. Petersburg University of Culture
and MBA degree from Northwestern University Kellogg School of
Management.
 
 Elena
Pochapski
 Chief
Financial Officer and Director
 
 Elena
Pochapski has served as Chief Financial Officer and Director of the Company
since August 1, 2003. Since August 2006, Mrs. Pochapski has served as Chief
Financial Officer and Director of ECM Asset Management, Inc. and since January
2008 as member of the board of directors of its parent company RAM Resources
Ltd. 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.
 
 -28-
 Vladimir V.
Eret
 Director
 
 Vladimir
V. Eret has served as Technical Director and Chief Geologist of ZNG since
January 1, 2003 and as Director of the Company since July 5, 2004. Before that
time Mr. Eret was the Director General of Bentonite Inc. in Kurgan City, Russia,
from February 1, 1996 to January 31, 2002. Prior to his employment at Bentonite
Inc., Mr. Eret worked as the expert of geology at Regional Investment
Corporation, in Kurgan City, Russia, from December 1, 1994 to January 31, 1996.
From March 1985 to February 1993, Mr. Eret worked as a director of
Souzgiprovodxoz, in connection with their geological expedition of Kurgan. Prior
to that time Mr. Eret worked at various jobs as a geologist and from April 1976
to July 1978, as the chief geologist of the People's Democratic Republic of
Algeria. Mr. Eret obtained his Bachelors degree from Tomsk Government University
in Geology and Engineering in 1968. He obtained a Doctorate degree from Kurgan
University in 1990 in Economics.
 
 Timothy
Peara
 Director
 
 Timothy
Peara has served as a Director of the Company since April 12, 2005. Since
October 2002, he has served as a Director of Emerging Markets Finance
International in London, England. From December 2001 to April 2003, he served as
Finance Director of TNG Energy AG, in Frankfurt, Germany. From August 2000 to
October 2001, he served as Vice President of UT Energy Holdings, in London,
England and Hartford, Connecticut. From December 1998 to June 2000, he served as
Vice President of PSG International, in London, England. From August 1997 to
June 1998 he served as a Senior Trader with Koch Supply & Trading, in
London, England. From June 1991 to July 1997, he served as a Director with
Lehman Brother, in London, England. From January 1989 to May 1991, he served as
Vice President of Prudential Securities, Inc. in London, England. Mr. Peara
obtained a Bachelors degree from Wesleyan University in Latin American Studies
in 1983 and a Masters degree in Business Administration from the University of
Chicago in 1988. Mr. Peara holds a Series 3 and Series 7 brokers license. Mr.
Peara is also a member of the Association of International Petroleum
Negotiators, and a member of the Oil Club in London, England.
 
 
 Directors
of the Company are elected annually and hold office until the annual meeting of
the shareholders of the Company and until their successors are elected and
qualified. Officers will hold their positions at the pleasure of the Board of
Directors, absent any employment agreement. There are no family relationships
among the Company's officers and directors. Officers and directors of the
Company may receive compensation as determined by the Company from time to time
by vote of the Board of Directors. Vacancies in the Board are filled by majority
vote of the remaining directors. Such compensation might be in the form of stock
options. Directors may be reimbursed by the Company for expenses incurred in
attending meetings of the Board of Directors.
 
 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.
 
 -29-
 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.
 
 Helen Teplitskaia, President
and Director
 
 Helen
Teplitskaia is the Company’s President and Director.  She has not
signed a formal employment agreement with the Company.  However,
through a letter agreement, the Company has agreed to provide her compensation
by issuing her 10,000 shares of restricted common stock per month, beginning May
2007 and for each month thereafter for the year ended December 31,
2007.  The Company also issued her 50,000 shares of restricted common
stock as a signing bonus.
 
 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.
 
 -30-
 Under Ms.
Pochapski's employment agreement, if she is terminated without cause by the
Company or if Ms. Pochapski herself terminates her employment for a reasonable
basis, defined as: (A) a material breach of the agreement by the Company,
provided that she gives written notice of such default to the Company and if
within thirty days after receipt of such notice, the Company has not cured such
default; or (B) termination of her employment by the Company without cause
during the term of the agreement; or (C) a reduction in her salary, except to
the extent that a majority of the other executive officers of the Company
incur reductions of salary that average no less than the percentage reduction
incurred by her; or (E) her termination of the her employment within 12 months
after a "Change in Control," of the Company, as defined in the employment
agreement; the Company shall, in exchange for an execution and general release
and waiver of claims against the Company by Ms. Pochapski, continue to pay as
severance Ms. Pochapski's salary for twelve (12) months or one half (1/2) of the
remaining term of the agreement whichever is greater.
 
 On
September 1, 2005, the Company entered into an "Amendment to the Employment
Agreement Dated August 1, 2003" ("Amended Employment Agreement") with Elena
Pochapski. Pursuant to the terms of the Amended Employment Agreement, Ms.
Pochapski agreed to forgive $50,000 of salary which she was owed for services
rendered under her employment agreement, in return for the Company issuing her
400,000 shares of the Company's restricted common stock. Additionally, Ms.
Pochapski agreed to postpone the payment of the remaining $84,707 which she was
owed in connection with her employment agreement from the period from August 1,
2003 to August 30, 2005, until such time as the Company has sufficient profits
to pay the amount in cash either partially or in full. The Amended Employment
Agreement also set Ms. Pochapski's annual salary for the period from September
1, 2005 until August 30, 2006 at CDN $75,000, after which time her salary 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.
 
 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.
 
 -31-
 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.
  Tim Peara,
Director
 
 Tim
Peara, a Director of the Company has the right to purchase stock options in the
Company pursuant to a Stock Option Agreement. Under his Stock Option Agreement,
Mr. Peara has the right to purchase 100,000 shares of the Company's common stock
at an exercise price of $0.60 per share during the year ended December 31, 2005.
Mr. Peara has the right to purchase 100,000 shares of the Company's common stock
at an exercise price of $0.60 per share during the year ended December 31, 2006.
Mr. Peara's stock option plan continues until his employment is terminated or
ends, giving him the right to purchase 10,000 shares of common stock as of
January 1, of each year, and 7,500 shares on the first date of each month
thereafter, up to a maximum of 100,000 shares per year, with exercise prices as
follows: for 2007 and each subsequent year the exercise price is 110% of the
average closing prices for the three months prior to the grant date. All stock
options received by Mr. Peara according to the above will terminate at 5:00 p.m.
(Eastern Standard Time) on the fourth anniversary of December 31st of each year
in which the options were granted. All options received by Mr. Peara are
non-transferable except by will or the laws of decent and distribution and any
attempt to do so shall void the option.
 
 Additionally,
Mr. Peara was granted 100,000 options to purchase shares of the Company's common
stock at $0.30 per share in consideration for consulting services provided to
the Company prior to his election as a Director of the Company (the "Consulting
Options"). One half or 50,000 shares of the Consulting Options were to expire at
5:00 p.m. (Eastern Standard Time) on May 1, 2006, however those options were
exercised by Mr. Peara prior to expiring, and one half or 50,000 of the
Consulting Options were to expire at 5:00 p.m. (Eastern Standard Time) on May 1,
2007, but were exercised by Mr. Peara prior to their expiration
date.
 
 Additionally,
pursuant to an agreement between Alternative Energy Finance and the Company,
Timothy Peara, our Director and the managing Director of Alternative Energy
Finance, receives compensation based on the total investment made by Baltic in
the Joint Venture described in greater detail below under “Certain Relationships
and Related Transactions.”
 
 -32-
 
 ITEM 10. EXECUTIVE
COMPENSATION
 
 Compensation
paid (or payable) to Officers and Directors is set forth in the Summary
Compensation Table below. The Company may reimburse its Officers and Directors
for any and all out-of-pocket expenses incurred relating to the business of the
Company.
 
 
 Name
      And
              
              
              
              All
      Other
              
              
              TotalPrincipal
              Fiscal
              
              
              Compen-
              Stock
              Option
              Compen-Position (1)
              Year
              Salary
              Bonus ($)
              sation
              Awards
              Awards
              sationDavid
    Zaikin
              2007
              $180,000
              --
              --
              $309,700
              (4)
              $489,700CEO
      and
              2006
              $0(2)
              --
              --
              $721,000(3)
              (4)
              $721,000Chairman
              2005
              $50,000(2)
              --
              --
              (2)
              (4)
              $50,000Helen
      Teplitskaia
              2007
              --
              --
              --
              $110,900
              --
              $110,900President
      andDirectorElena
      Pochapski
              2007
              $86,625
              --
              --
              -
              (7)
              $86,625CFO  and
              2006
              $74,920
              (6)
              --
              $103,000(6)
              (7)
              $177,920Director
              2005
              $71,083(8)
              --
              --
              (8)
              (7)
              $71,083Oleg V.
              2007
              $0
              --
              --
              -
              --
              $0Zhuravlev
              2006
              $0
              (9)
              --
              $51,500(9)
              (10)
              $51,500Director
              2005(11)
              $30,587
              --
              --
              --
              (10)
              $30,587Vladimir
              2007
              $0
              --
              --
              -
              --
              $0Eret
              2006
              $0
              (12)
              --
              $20,600(12)
              (13)
              $20,600DirectorSergei
              2007
              $0
              --
              --
              --
              --
              $0Potapov
              2006
              $0
              (14)
              --
              $20,600
      (14)
              (15)
              $20,600DirectorTimothy
              2007
              $35,000
              --
              --
              -
              $867
              $35,867Peara
              2006
              $35,000(16)
              (17)
              --
              $41,200(17)
              $4,454
              $80,654Director
              
              
              
              
              
              (18)(16)
 
 
 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 Non-Equity Incentive Plan Compensation or Nonqualified
Deferred Compensation Earnings 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.
 
 -33-
 (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 $721,000.
 
 (4) Mr.
Zaikin was granted 100,000 options to purchase shares of our common during each
of the fiscal years ended 2007, 2006, 2005 and 2004, pursuant to a Stock Option
Agreement he entered into with us in 2003. The exercise price of those options
for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
$0.14 per share, respectively. For 2007 and each subsequent year the exercise
price is 110% of the average closing prices for the three months prior to the
grant date. Options were granted on the first day of the month as follows
starting with January 2007: 17,500 options at an exercise price $2.26 per share,
7,500 options at an exercise price of $2.14 per share, 7,500 options at an
exercise price of $1.94 per share, 7,500 options at an exercise price of $1.62
per share, 7,500 at an exercise price of $1.69 per share, 7,500 options at an
exercise price of $1.82 per share, 7,500 options at an exercise price of $1.79
per share, 7,500 options at an exercise price of $1.77 per share, 7,500 options
at an exercise price of $1.46 per share, 7,500 options at an exercise price of
$1.16 per share, 7,500 options at an exercise price of at $0.86 per share,
and  7,500 options at  $0.76 per share. All unexercised
options expire on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Zaikin, as we were only a start-up company, which did
not publicly trade its stock, and as such, the options granted to Mr. Zaikin
during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table above.
The value of the options were calculated pursuant to FAS 123R.  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.
 
 (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 $103,000.
 
 (7) Ms.
Pochapski was granted 100,000 options to purchase shares of our common during
each of the fiscal years ended 2007, 2006, 2005 and 2004, pursuant to a Stock
Option Agreement she entered into with us in 2003. The exercise price of those
options for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20
and $0.14 per share, respectively. For 2007 and each subsequent year the
exercise price is 110% of the average closing prices for the three months prior
to the grant date. Options were granted on the first day of the month as follows
starting with January 2007: 17,500 options at an exercise price $2.26 per share,
7,500 options at $2.14 per share, 7,500 options at $1.94 per share, 7,500
options at $1.62 per share, 7,500 options at $1.69 per share, 7,500 options at
$1.82 per share, 7,500 options at $1.79 per share, 7,500 options at $1.77 per
share, 7,500 options at $1.46 per share, 7,500 options at $1.16 per share, 7,500
options at $0.86 per share, and 7,500 options at $0.76 per share.  All
unexercised options expire on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Ms. Pochapski, as we were only a start-up company, which
did not publicly trade its stock, and as such, the options granted to Ms.
Pochapski during the periods disclosed above did not represent any expense on
the Company’s financial statements and therefore have no value in the table
above. The value of the options were calculated pursuant to FAS
123R.  In February 2006, Ms. Pochapski exercised 100,000 options to
purchase shares of our common stock for aggregate consideration of
$14,000.
 
 (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.
 
 -34-
 (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 $51,500.
 
 (10) Mr.
Zhuravlev was granted 100,000 options to purchase shares of our common during
each of the fiscal years ended 2007, 2006, 2005 and 2004, pursuant to a Stock
Option Agreement he entered into with us in 2004. The exercise price of those
options for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20
and $0.14 per share, respectively. For 2007 and each subsequent year the
exercise price is 110% of the average closing prices for the three months prior
to the grant date. Options were granted on the first day of the month as follows
starting with January 2007: 17,500 options at an exercise price $2.26 per share,
7,500 options at $2.14 per share, 7,500 options at $1.94 per share, 7,500
options at $1.62 per share, 7500 at $1.69, 7500 at $1.82, 7500 at $1.79, 7500 at
$1.77, 7500 at $1.46, 7500 at $1.16, 7500 at 0.86, and 7,500 options at $0.76
per share.  All unexercised options expire on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Zhuravlev, as we were only a start-up company, which
did not publicly trade its stock, and as such, the options granted to Mr.
Zhuravlev during the periods disclosed above did not represent any expense on
the Company’s financial statements and therefore have no value in the table
above. The value of the options were calculated pursuant to FAS
123R.
 
 (11) All
salary listed for Mr. Zhuravlev for the years ended December 31, 2007, 2006 and
2005 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.
  (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 $20,600.
 
 (13) Mr.
Eret was granted 84,000 options to purchase shares of our common stock during
each of the fiscal years ended 2007, 2006, 2005 and 2004, pursuant to a Stock
Option Agreement he entered into with us in 2004. The exercise price of those
options for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20
and $0.14 per share, respectively. For 2007 and each subsequent year the
exercise price is 110% of the average closing prices for the three months prior
to the grant date. Options were granted on the first day of the month as follows
starting with January 2007: 7,000 options at an exercise price $2.26 per share,
7,000 options at an exercise price of $2.14 per share, 7,000 options at an
exercise price of $1.94 per share, 7,000 options at an exercise price of $1.62
per share, 7,000 options at an exercise price of $1.69 per share, 7,000 options
at an exercise price of $1.82 per share, 7,000 options at an exercise price of
$1.79 per share, 7,000 options at an exercise price of $1.77 per share, 7,000
options at an exercise price of $1.46 per share, 7,000 options at $1.16 per
share, 7,000 options at $0.86 per share, and 7,000 options at $0.76 per share.
All unexercised options expire on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Eret, as we were only a start-up company, which did
not publicly trade its stock, and as such, the options granted to Mr. Eret
during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table above.
The value of the options were calculated pursuant to FAS 123R.
 
 -35-
 (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 $20,600.
 
 (15) Mr.
Potapov was granted 84,000 options to purchase shares of our common stock during
each of the fiscal years ended 2007, 2006, 2005 and 2004, pursuant to a Stock
Option Agreement he entered into with us in 2004. The exercise price of those
options for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20
and $0.14 per share, respectively. For 2007 and each subsequent year the
exercise price is 110% of the average closing prices for the three months prior
to the grant date. Options were granted on the first day of the month as follows
starting with January 2007: 7,000 options at an exercise price $2.26 per share,
7,000 options at an exercise price of $2.14 per share, 7,000 options at $1.94
per share, 7,000 options at an exercise price of $1.62 per share, 7,000 options
at an exercise price of $1.69 per share, 7,000 options at an exercise price of
$1.82 per share, 7,000 options at an exercise price of $1.79 per share, 7,000
options at an exercise price of $1.77 per share, 7,000 options at an exercise
price of $1.46 per share, 7,000 options at an exercise price of $1.16 per share,
7,000 options at $0.86 per share, and 7,000 options at an exercise price of
$0.76 per share.  All unexercised options expire on December 31st of the
fourth year after they were granted. We previously determined the initial fair
value of our stock options was minimal at the time of our entry into the Stock
Option Agreement with Mr. Potapov, as we were only a start-up company, which did
not publicly trade its stock, and as such, the options granted to Mr. Potapov
during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table above.
The value of the options were calculated pursuant to FAS 123R.
 
 (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 $41,200.
 
 (18) Mr.
Peara was granted 100,000 options to purchase shares of our common stock during
each of the fiscal years ended 2007, 2006 and 2005, pursuant to a Stock Option
Agreement he entered into with us in 2004. The exercise price of those options
for the years ended December 31, 2006 and 2005, were $0.60 and $0.20 per share,
respectively. For 2007 and each subsequent year the exercise price is 110% of
the average closing prices for the three months prior to the grant date. Options
were granted on the first day of the month as follows starting with January
2007: 7,000 options at an exercise price of $2.26 per share, 7,000 options at an
exercise price of $2.14 per share, 7,000 options at an exercise price of $1.94
per share, 7,000 options at an exercise price of $1.62 per share, 7,000 options
at an exercise price of $1.69 per share, 7,000 options at an exercise price of
$1.82 per share, 7,000 options at an exercise price of $1.79 per share, 7,000
options at an exercise price of $1.77 per share, 7,000 options at an exercise
price of $1.46 per share, 7,000 options at $1.16 per share, and 7,000 options at
an exercise price of $0.86 per share, and 7,000 options at an exercise price of
$0.76 per share.   The value of the options granted in 2005,
which vested during 2007 and 2006 was approximately $867 and $4,454. All
unexercised options expire on December 31st of the
fourth year after they were granted. The value of the options were calculated
pursuant to FAS 123R.
 
 -36-
 
  OUTSTANDING EQUITY AWARDS AT
      FISCAL YEAR-ENDOPTION
      AWARDS
              STOCK
      AWARDSName
              Number
      of Securities Underlying Unexercised Options
              Number
      of Securities Underlying Unexercised Options
              Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
              Option
      Exercise Price
              Option
      Expiration Date
              Number
      of Shares or Units of Stock That Have Not Vested
              Market
      Value of Shares or Units of Stock That Have Not Vested
              Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
              Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested(a)
              (#)
              (#)
              (#)
              ($)
              (f)
              (#)
              ($)
              (#)
              (#)Exercisable
              Unexercisable
              (d)
              (e)
              
              (g)
              (h)
              (i)
              (j)(b)
              (c)David
      Zaikin
              17,500
              -
              -
              $2.26
              December
      31, 20117,500
              -
              -
              $2.14
              December
      31, 20117,500
              -
              -
              $1.94
              December
      31, 20117,500
              -
              -
              $1.62
              December
      31, 20117,500
              -
              -
              $1.69
              December
      31, 20117,500
              -
              -
              $1.82
              December
      31, 20117,500
              -
              -
              $1.79
              December
      31, 20117,500
              -
              -
              $1.77
              December
      31, 20117,500
              -
              -
              $1.46
              December
      31, 20117,500
              -
              -
              $1.16
              December
      31, 20117,500
              -
              -
              $0.86
              December
      31, 20117,500
              -
              -
              $0.76
              December
      31, 201147,500
              -
              -
              $0.60
              December
      31, 2010100,000
              -
              -
              $0.60
              December
      31, 2009100,000
              -
              -
              $0.20
              December
      31, 2008
    -37-
  Elena
      Pochapski
              17,500
              -
              -
              $2.26
              December
      31, 20117,500
              -
              -
              $2.14
              December
      31, 20117,500
              -
              -
              $1.94
              December
      31, 20117,500
              -
              -
              $1.62
              December
      31, 20117,500
              -
              -
              $1.69
              December
      31, 20117,500
              -
              -
              $1.82
              December
      31, 20117,500
              -
              -
              $1.79
              December
      31, 20117,500
              -
              -
              $1.77
              December
      31, 20117,500
              -
              -
              $1.46
              December
      31, 20117,500
              -
              -
              $1.16
              December
      31, 20117,500
              -
              -
              $0.86
              December
      31, 20117,500
              -
              -
              $0.76
              December
      31, 2011100,000
              -
              -
              $0.60
              December
      31, 2010100,000
              -
              -
              $0.60
              December
      31, 2009100,000
              -
              -
              $0.20
              December
      31, 2008
    -38-
  Oleg
      V. Zhuravlev
              17,500
              -
              -
              $2.26
              December
      31, 20117,500
              -
              -
              $2.14
              December
      31, 20117,500
              -
              -
              $1.94
              December
      31, 20117,500
              -
              -
              $1.62
              December
      31, 20117,500
              -
              -
              $1.69
              December
      31, 20117,500
              -
              -
              $1.82
              December
      31, 20117,500
              -
              -
              $1.79
              December
      31, 20117,500
              -
              -
              $1.77
              December
      31, 20117,500
              -
              -
              $1.46
              December
      31, 20117,500
              -
              -
              $1.16
              December
      31, 20117,500
              -
              -
              $0.86
              December
      31, 20117,500
              -
              -
              $0.76
              December
      31, 2011100,000
              -
              -
              $0.60
              December
      31, 2010100,000
              -
              -
              $0.60
              December
      31, 2009100,000
              -
              -
              $0.20
              December
      31, 2008
   -39-
  Sergey
      Potopov
              7,000
              -
              -
              $2.26
              December
      31, 20117,000
              -
              -
              $2.14
              December
      31, 20117,000
              -
              -
              $1.94
              December
      31, 20117,000
              -
              -
              $1.62
              December
      31, 20117,000
              -
              -
              $1.69
              December
      31, 20117,000
              -
              -
              $1.82
              December
      31, 20117,000
              -
              -
              $1.79
              December
      31, 20117,000
              -
              -
              $1.77
              December
      31, 20117,000
              -
              -
              $1.46
              December
      31, 20117,000
              -
              -
              $1.16
              December
      31, 20117,000
              -
              -
              $0.86
              December
      31, 20117,000
              -
              -
              $0.76
              December
      31, 201184,000
              -
              -
              $0.60
              December
      31, 201084,000
              -
              -
              $0.60
              December
      31, 200984,000
              -
              -
              $0.20
              December
      31, 2008
    -40-
  Vladimir
      Eret
              7,000
              -
              -
              $2.26
              December
      31, 20117,000
              -
              -
              $2.14
              December
      31, 20117,000
              -
              -
              $1.94
              December
      31, 20117,000
              -
              -
              $1.62
              December
      31, 20117,000
              -
              -
              $1.69
              December
      31, 20117,000
              -
              -
              $1.82
              December
      31, 20117,000
              -
              -
              $1.79
              December
      31, 20117,000
              -
              -
              $1.77
              December
      31, 20117,000
              -
              -
              $1.46
              December
      31, 20117,000
              -
              -
              $1.16
              December
      31, 20117,000
              -
              -
              $0.86
              December
      31, 20117,000
              -
              -
              $0.76
              December
      31, 201184,000
              -
              -
              $0.60
              December
      31, 201084,000
              -
              -
              $0.60
              December
      31, 200984,000
              -
              -
              $0.20
              December
      31, 2008
    -41-
  Tim
      Peara (1)
              17,500
              -
              -
              $2.26
              December
      31, 20117,500
              -
              -
              $2.14
              December
      31, 20117,500
              -
              -
              $1.94
              December
      31, 20117,500
              -
              -
              $1.62
              December
      31, 20117,500
              -
              -
              $1.69
              December
      31, 20117,500
              -
              -
              $1.82
              December
      31, 20117,500
              -
              -
              $1.79
              December
      31, 20117,500
              -
              -
              $1.77
              December
      31, 20117,500
              -
              -
              $1.46
              December
      31, 20117,500
              -
              -
              $1.16
              December
      31, 20117,500
              -
              -
              $0.86
              December
      31, 20117,500
              -
              -
              $0.76
              December
      31, 2011100,000
              -
              -
              $0.60
              December
      31, 2010100,000
              -
              -
              $0.60
              December
      31, 2009
 
  -42-
 
 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.
 
 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.
 
 -43-
 The Board
of Directors (in establishing compensation levels for the Chief Executive
Officer and Chief Operating Officer, as well as other executive positions) and
the Company (in establishing compensation levels for all executives of the
Company) considers many factors, which may include, but are not limited to, the
individual’s abilities and executed performance that results in: the advancement
of corporate goals of the Company, execution of the Company’s business
strategies, contributions to positive financial results, contributions to the
Company’s overall image and reputation in the Company’s industry, and
contributions to the development of the management team and other
employees.
 
 An
officer must demonstrate his or her ability to deliver results in his or her
areas of responsibility, which can include, among other things: business
development, efficient management of operations and systems, implementation of
appropriate changes and improvements to operations and systems, personnel
management, financial management, and strategic decision making. In determining
compensation levels, the Board of Directors may also consider: competitiveness
of compensation packages relative to other comparable companies, both inside and
outside of the oil and gas exploration and development industry, and the
experience level of each particular individual.
 
 Compensation
levels for executive officers are generally reviewed upon the expiration of such
executive’s employment and/or consulting agreements (if any), or annually, but
may be reviewed more often as deemed appropriate.
 
 Compensation
Philosophy and Strategy
 
 In
addition to the “Criteria for Compensation Levels” set forth above, the Company
has a “Compensation Philosophy” for all employees of the Company (set forth
below), and a “Compensation Strategy for Key Management Personnel” (set forth
below), a substantial portion of which also applies to all employees of the
Company.
 
 Compensation
Philosophy
 
 The
Company’s compensation philosophy is as follows:
 
 ·
              The
      Company believes that compensation is an integral component of its overall
      business and human resource strategies. The Company’s compensation plans
      will strive to promote the hiring and retention of personnel necessary to
      execute the Company’s business strategies and achieve its business
      objectives.·
              The
      Company’s compensation plans will be strategy-focused, competitive, and
      recognize and reward individual and group contributions and results. The
      Company’s compensation plans will strive to promote an alignment of the
      interests of employees with the interests of the shareholders by having a
      portion of compensation based on financial results and actions that will
      generate future shareholder value.·
              In
      order to reward financial performance over time, the Company’s
      compensation programs generally will consist of: base compensation, and
      may also consist of short-term variable incentives and long-term variable
      incentives, as appropriate.·
              The
      Company’s compensation plans will be administered consistently and fairly
      to promote equal opportunities for the Company’s
  employees.
 
 Compensation Strategy for
Key Management Personnel
 
 The
Company’s compensation strategy for its key management personnel is as
follows:
 
 ·
              Total
      compensation may include base salary and short-term and long-term variable
      incentives based on annual and long term performance, and long-term
      variable incentives, in each case, where appropriate.·
              Compensation
      will be comparable to general and industry-specific compensation
      practices.
    -44-
  ·
              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 andconnections
      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.
 
  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
18,383,065 shares of common stock outstanding as of March 31, 2008 and by the
officers and directors, individually and as a group. Except as otherwise
indicated, all shares are owned directly.
 
 Name
      and Address of Beneficial Owner
              Shares
      of Common Stock Beneficially Owned (1)
              Options
      to purchase shares of Common Stock Exercisable within the next 60
      days
              Total
      Shares of Common Stock Beneficially Owned (2)
              Percent(1)Victor
      Repin Kurgan City, Klimova St. 41,  Russia
640020
              1,750,000
              300,000
              2,050,000
      (5)
              11.0%
      (A)Svetlana
      Slepchuk
                Mosfilmovskaya
      Street 17/25
                Apt.
      17
                Moscow,
      Russia 119330
              3,900,000
              -
              3,900,000
              21.2%David
      Zaikin
                CEO
      and
      Director           275
      Madison Ave., 6th Floor, New York, New York 10016 (3)
              1,160,000
              395,000
              1,555,000
      (6)
              8.3%
      (B)Helen
      Teplitskaia
                President
      and Director
                275
      Madison Ave.
                6th
      Floor
                New
      York, New York 10016
              130,000
                (13)
              -
              130,000
              0.7%
    -45-
    Elena
      Pochapski
                CFO
      and Director  275 Madison Ave., 6th Floor, New York, New York
      10016
              380,000
      (7)
              347,500
              827,500
      (8)
              4.4%
      (C)Oleg
      V. Zhuravlev
                Director
                Kurgan
      City Lenina St. 27/X Russia 640000 (4)
              25,000
              447,500
              472,500
      (10)
              2.5%
      (E)Sergey
      Potapov
                Director
                Kurgan
      City Lenina St. 27/X Russia 640000
              10,000
              378,000
              388,000
      (9)
              2.1%
      (D)Valdimir
      Eret
                Director
                Kurgan
      City Lenina St. 27/X Russia 640000
              10,000
              378,000
              388,000
      (11)
              2.1%
      (F)Tim
      Peara
                Director
                275
      Madison Ave., 6th Floor, New York, New York 10016
              117,569
              786,915
              904,484
      (12)
              4.7%
      (G)All
      the Officers and Directors as a group (7 persons)
              1,822,569
              2,832,915
              4,655,484
      (4),(6),(7),(8),(9),(10), (11), (12)
              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.
 
 4)
Includes both the number of shares of common stock beneficially owned as of
March 31, 2008, and any options which will vest and be exercisable within the
next sixty days.
 
 5)
Includes warrants to purchase 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.
 
 -46-
 6)
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, 47,500 options to purchase shares of our common
stock at $0.60 per share, which vested throughout the fiscal year ended 2006
(Mr. Zaikin exercised 52,500 options in December 2006), 100,000 options to
purchase shares of our common stock as described above, which vested throughout
the fiscal year ended 2007, and 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
31, 2008, 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.
  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,
100,000 options to purchase shares of our common stock as described above, which
vested throughout the fiscal year ended 2007 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 31, 2008, 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,
84,000 options to purchase shares of our common stock as described above, which
vested throughout the fiscal year ended 2007, 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 31, 2008, 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,
100,000 options to purchase shares of our common stock at as described above,
which vested throughout the fiscal year ended 2007 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 31, 2008, 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, 84,000 options to purchase shares of our common
stock at $0.60 per share, which vested throughout the fiscal year ended 2006,
84,000 options to purchase shares of our common stock as described above, which
vested throughout the fiscal year ended 2007, and 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 31, 2008, 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.
 
 -47-
 12)
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; 38,648 options to purchase shares of our common stock at an exercise price
of $1.44 per share, which vested on December 31, 2006, 48,925 options to
purchase shares of our common stock at an exercise price of $1.10 per share,
which warrants vested on March 31, 2007, 55,233 options to purchase shares of
our common stock at an exercise price of $1.14 per share, which vested on June
30, 2007, 51,352 options to purchase shares of our common stock at an exercise
price of $0.74 per share, which warrants vested on September 30, 2007, 78,130
options to purchase shares of our common stock at an exercise price of $0.46 per
share, which vested on December 31, 2007, which options expire if unexercised on
the third anniversary of the date they were granted. Does not include the
options issuable to AEF for the period ended March 31, 2008.  Finally,
the amount listed above includes 100,000 options to purchase shares of our
common stock at $0.60 per share, which vested throughout the fiscal year ended
2005, 100,000 options to purchase shares of our common stock at $0.60 per share,
which vested throughout the fiscal year ended 2006, 100,000 options to purchase
shares of our common stock as described above, which vested throughout the
fiscal year ended 2007 and 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 31,
2008, 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.
 
 13)
Includes 10,000 shares which the Company agreed to issue in consideration for
services rendered during December 2007, which shares have not been issued to
date, and which have therefore not been included in the number of issued and
outstanding shares disclosed throughout this report.
 
 A) Using
19,385,065 shares outstanding, assuming the exercise of all 300,000 options held
by Mr. Repin.
 
 B) Using
18,685,065 shares outstanding, assuming the exercise of all 300,000 options held
by Mr. Zaikin.
 
 C) Using
18,830,565 shares outstanding, assuming the exercise of all 447,500 options held
by Ms. Pochapski.
 
 D) Using
18,761,065 shares outstanding, assuming the exercise of all 388,000 options held
by Mr. Potapov.
  E) Using
18,830,565 shares outstanding, assuming the exercise of all 472,500 options held
by Mr. Zhuravlev.
 
 F) Using
18,761,065 shares outstanding, assuming the exercise of all 388,000 options held
by Mr. Eret.
 
 G) Using
19,169,980 shares outstanding, assuming the exercise of all 786,915 options held
by Mr. Peara.
 
 H) Using
21,215,980 shares outstanding, assuming the exercise of all 2,832,915 options
held collectively by our officers and Directors.
 
 
 -48-
 ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
 
 On May 1,
2006, our Director, Timothy Peara exercised his option to purchase 50,000 shares
of our common stock in accordance with the terms of his Option agreement entered
into in consideration for consulting services rendered in 2005. Mr. Peara
elected a cashless exercise of the options and he will therefore receive the
full number of shares exercised (50,000), less the number of shares that totaled
the aggregate exercise price of the 50,000 shares ($15,000 with each option
exercisable at $0.30 per share), based on the average market value of the common
stock on the five (5) trading days prior to Mr. Peara's exercise ($2.00), which
is equal to 7,500 shares. As a result, Mr. Peara was issued 42,500 shares in
connection with the exercise of his options.
 
 We
previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which Tim
Peara is the Managing Director as well as a Director of the Company, certain
warrants in connection with Mr. Peara introducing the parties who formed the
joint venture. Pursuant to an agreement between AEF and the Company, AEF will
receive compensation based on the total investment made by Baltic Petroleum Ltd.
in the Joint Venture. 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.
 
 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.
 
 -49-
 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.
  On
January 25, 2007, our Board of Directors approved the issuance of an aggregate
of 465,000 shares of our restricted common stock to our current officers and
Directors in consideration for services rendered to the Company during the year
ended December 31, 2006, as follows:
  o
              350,000
      shares of our restricted common stock to David Zaikin, our Chief Executive
      Officer and Director, which compensation was granted by our Board of
      Directors in its sole discretion, even though Mr. Zaikin had previously
      agreed not to be paid or accrue any salary for fiscal
  2006;o
              50,000
      shares of our restricted common stock to Elena Pochapski, our Chief
      Financial Officer and Director;o
              20,000
      shares of our restricted common stock to Timothy Peara, our
      Director;o
              25,000
      shares of our restricted common stock to Oleg Zhuravlev, our
      Director;o
              10,000
      shares of our restricted common stock to Vladimir Eret, our Director;
      ando
              10,000
      shares of our restricted common stock to Sergei Potapov, our
      Director.
 
 On
January 25, 2007, we approved an annual salary of $180,000 (plus a performance
based bonus to be determined by the Board of Directors at the end of the 2007
fiscal year, which bonus totaled 190,000 shares valued at $309,700, which shares
were issued in July 2007) for our Chief Executive Officer and Director, David
Zaikin for the 2007 fiscal year. On January 31, 2007, Mr. Zaikin notified us
that effective February 1, 2007, he was withdrawing his previous request to not
accrue any salary until we had sufficient funds to pay such salary, and instead
requested that we pay him his 2007 salary if funds were available for such
payments and/or that we accrue such salary until we have sufficient funds to
repay him any accrued amounts. In February 2007, our Board of Directors approved
the issuance of 350,000 shares of our restricted common stock to Mr. Zaikin, in
consideration for compensation for the year ended December 31, 2006, which
compensation was granted by our Board of Directors in its sole discretion, even
though Mr. Zaikin had previously agreed not to be paid or accrue any salary for
fiscal 2006.  In July 2007, we issued an aggregate of 190,000
restricted shares of common stock to Mr. Zaikin, and certain of his assigns, in
consideration for services rendered during the first two quarters of
2007.
 
 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.
 
 On March
13, 2007, Mr. Peara personally, and on behalf of AEF agreed to accept 58,134
shares of our restricted common stock in consideration for the forgiveness of
$45,626 owed personally to Mr. Peara in Directors fees and accrued expenses and
$47,969 owed to AEF in connection with our agreement with AEF, which shares have
been issued to date and which debt has been forgiven by Mr. Peara and
AEF.
 
 On March
31, 2007, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 48,925 shares of our common stock at an exercise price of
$1.10 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
approximately $30,695 during the three months ended March 31, 2007 (equal to 1%
of Baltic’s approximately $3,069,482 investment in the Joint Venture in the
first quarter of 2007); which amount has not been paid to date.
  -50-
 On June
30, 2007, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 55,233 shares of our common stock at an exercise price of
$1.14 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obliged to pay AEF
approximately $35,938 during the three months ended June 30, 2007 (equal to 1%
of Baltic’s approximately $ 3,593,848 investment in the Joint Venture in the
second quarter of 2007); which amount has not been paid to date.
 
 In June
2007, we issued 70,000 shares of restricted common stock to our President, Helen
Teplitskaia, of which 50,000 shares were a sign-on bonus in connection with her
agreeing to be an officer of the Company in May 2007, and 20,000 shares were
part of her compensation package with the Company, whereby she is to be paid
10,000 shares per month for her service to the Company, which shares were issued
for services rendered in May and June 2007.  In August 2007, Ms.
Teplitskaia was issued an additional 20,000 shares for her services to the
Company for the months of July and August 2007.   In November
2007, Ms. Teplitskaia was issued 30,000 shares in consideration for services
rendered for September through November 2007.  Ms. Teplitskaia is
still due to receive 10,000 shares in consideration for services rendered in
December 2007, which has not been issued as of the date of this report, and has
not been included in the number of issued and outstanding shares disclosed
throughout this report.
 
 In July
2007, Mr. Zaikin agreed to transfer 40,000 shares of the Company's restricted
common stock which he held to the Toronto Jewish Russian Academy Ohr Menahem
(the "TJRA”). The shares were transferred to the TJRA as a charitable donation
from Mr. Zaikin personally.
 
 In July
2007, Ms. Pochapski agreed to transfer 75,000 shares of the Company's restricted
common stock which she held to the Jewish- Russian Community Center (the
"JRCC”). The shares were transferred to the JRCC as a charitable donation from
Ms. Pochapski personally.
 
 On
September 30, 2007, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 51,352 shares of our common stock at an exercise
price of $0.74 per share, which warrants contained a cashless feature. The
warrants expire three years from the grant date. We were also obligated to pay
AEF approximately $21,568 during the three months ended September 30, 2007
(equal to 1% of Baltic’s approximately $2,156,790 investment in the Joint
Venture in the third quarter of 2007); which amount has not been paid to
date.
 
 On
December 31, 2007, in connection with our agreement with AEF, we agreed to grant
AEF a warrant to purchase 78,130 shares of our common stock at an exercise price
of $0.46 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
approximately $20,626 during the three months ended December 31, 2007 (equal to
1% of Baltic’s approximately $2,062,635 investment in the Joint Venture in the
fourth quarter of 2007); which amount has not been paid to date.
 
 
 -51-
 ITEM 13.
EXHIBITS
 
 (a)
Exhibits
 
 Exhibit No.
              Description of Exhibit10.1(1)
              Option
      Agreement with Baltic Petroleum Limited dated April 28,
    200510.2(1)
              License
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.3(1)
              Loan
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.4(1)
              Guarantee
      by Siberian Energy Group, Inc. dated April 28, 200510.5(1)
              Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28, 200510.6(2)
              Option
      Agreement with Baltic Petroleum Limited dated April 28,
    200510.7(2)
              License
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.8(2)
              Loan
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.9
      (2)
              Guarantee
      by Siberian Energy Group, Inc. dated April 28, 200510.10
      (2)
              Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28, 200510.11
      (3)
              Clarification
      to the Contract of Purchase and Sale of the Share in Charter Capital of
      LLC "Zauralneftegaz" dated 15 May 200410.12
      (3)
              Agreement
      with Business - Standard (translated from Russian version)10.13
      (3)
              Supplementary
      Agreement to Business - Standard Agreement (translated from Russian
      version)10.14
      (3)
              Supplementary
      Agreement No. 2 to Business - Standard Agreement (translated from Russian
      version)10.15
      (3)
              Deed
      of Amendment between ZNG and BP10.16
      (3)
              Deed
      of Amendment between the Company and BP10.17
      (4)
              Joint
      Venture Shareholders' Agreement with Baltic Petroleum (E&P) Limited
      and Zauralneftegaz Limited dated October 14, 200510.18
      (5)
              Amendment
      to the Employment Agreement Dated August 1, 2003, with Elena
      Pochapski10.19
      (5)
              Form
      of Waiver Agreement10.20(6)
              Loan
      Agreement between OOO Zauralneftegaz and Caspian Finance
      Limited10.21(6)
              Deed
      of Novation between Baltic Petroleum Limited, Caspian Finance Limited and
      OOO Zauralneftegaz10.22(6)
              Deed
      of Release10.23(6)
              Release
      of Pledge10.24(6)
              Guarantee10.25(6)
              Debenture10.26(6)
              Agreement
      for the Pledge of the Participatory Interest in OOO Zauralneftegaz
      (Russian translation removed)10.27(6)
              Sale
      and Purchase Agreement
   -52-
  10.28(8)
              Option
      Agreement with Key Brokerage10.29(8)
              Warrant
      Agreement with Key Brokerage10.30(9)
              July
      26, 2006 Deed of Agreement10.31(10)
              Consulting
      Agreement with Business Standard10.32(11)
              Addition
      to the Loan Agreement of November 9, 200510.33(11)
              Gross
      Overriding Royalty Agreement10.34(12)
              Amendment
      No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
      Pochapski10.35(13)
              Deed
      of Variation to the Loan Agreement Dated 9th
      of November 2005, Entered into in June 200721.1*
              Subsidiaries31.1*
              Certificate
      of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
      Act of 200231.2*
              Certificate
      of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
              Certificate
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2*
              Certificate
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200299.1(7)
              Glossary
  * Filed
herein.
 
 (1) Filed
as Exhibit 10.1, 10.2, 10.3, 10.4 and 10.5 to the Company's Form 8-K filed with
the Commission on May 20, 2005, and incorporated herein by
reference.
 
 (2) Filed
as Exhibits to the Company's Form 8-K filed with the Commission on May 20, 2005,
and incorporated herein by reference.
 
 (3) Filed
as Exhibits to the Company's Report on Form 10-QSB, filed with the Commission on
August 22, 2005, and incorporated herein by reference.
 
 (4) Filed
as Exhibits to the Company's Report on Form 8-K, filed with the Commission on
October 28, 2005, and incorporated herein by reference.
 
 (5) Filed
as Exhibits to our Report on Form 10-QSB for the period ending September 31,
2005, which was filed with the Commission on November 21, 2005, and is
incorporated herein by reference.
 
 (6) Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on December 2,
2005, and incorporated herein by reference.
  (7) Filed
as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December 31,
2005, and incorporated herein by reference.
 
 -53-
 (8) Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on September
19, 2006, and incorporated herein by reference.
 
 (9) Filed
as an Exhibit to our Report on Form 10-QSB, filed with the Commission on
November 14, 2006, and incorporated herein by reference.
 
 (10)
Filed as an Exhibit to our Form 8-K filed with the Commission on February 20,
2007, and incorporated herein by reference.
 
 (11)
Filed as Exhibits to our Report on Form 10-KSB filed with the Commission on
February 2, 2007, and incorporated herein by reference.
 
 (12)
Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission on
May 15, 2007, and incorporated herein by reference.
 
 (13)
Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission on
August 14, 2007, and incorporated herein by reference.
 
 (b)
REPORTS ON FORM 8-K
 
 We have
not filed a Form 8-K during the three months ended December 31, 2007, or
subsequent to the period covered by this report.
  -54-
 ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
 
 Audit
Fees
 
 The
aggregate fees billed for each of the fiscal years ended December 31, 2007 and
2006 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 $26,000 and $22,800,
respectively.
 
 Audit
Related Fees
 
 None.
 
 Tax
Fees
 
 The
aggregate fees billed for each of the fiscal years ended December 31, 2007 and
2006 for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning was $1,800 and $2,100,
respectively.
 
 All
Other Fees
 
 Other
fees billed by our principal accountant in 2007 included review and evaluation
of responses to SEC queries surrounding Form 10KSB for 2006. Total amount billed
in 2007 was $6,200.
  -55-
 SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
  SIBERIAN ENERGY GROUP
INC.
 
 DATED:
      April 15, 2008
              By: /s/ David ZaikinDavid
      ZaikinChief
      Executive Officer(Principal
      Executive Officer)DATED:
      April 15, 2008
              By: /s/ Elena PochapskiElena
      PochapskiChief
      Financial Officer(Principal
      Accounting Officer)
 
 In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
 
 NAME
              TITLE
              DATE/s/ David Zaikin
              Chief
      Executive Officer
              April
      15, 2008David
      Zaikin
              and
      Chairman of the Board of Directors(Principal
      Executive Officer)/s/ Elena Pochapski
              Chief
      Financial Officer
              April
      15, 2008Elena
      Pochapski
              and
      Director(Principal
      Financial Officer)/s/ Oleg V.
      Zhuravlev
              Director
              April
      15, 2008Oleg
      V. Zhuravlev/s/ Sergey
      Potapov
              Director
              April
      15, 2008Sergey
      Potapov/s/ Vladimir V.
      Eret
              Director
              April
      15, 2008Vladimir
      V. Eret/s/ Timothy
      Peara
              Director
              April
      15, 2008Timothy Peara
 
 -56-