UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


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





For
      the quarterly period ended September 30,
2008





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





For the
transition period from ____________ to ______________





Commission
file number: 333-118902





SIBERIAN ENERGY GROUP
INC.


(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices)





(212)
828-3011


(Registrant's
telephone number)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     Yes  x    No  [ 
]





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





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





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
number of shares outstanding of each of the issuer’s classes of equity as of
November 13, 2008, was 18,478,065 shares of common stock, par value $0.001, and
no shares of preferred stock, par value $0.001.










PART
I. FINANCIAL INFORMATION





ITEM 1. FINANCIAL
STATEMENTS





REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
  FIRM




The Board
of Directors and Stockholders


Siberian
Energy Group Inc.




We have
reviewed the accompanying condensed consolidated balance sheet of Siberian
Energy Group Inc. (a development stage company) as of September  30,
2008, and the related condensed consolidated statements of operations for the
three and nine months ended September 30, 2008 and 2007, and the cumulative
period of development stage activity (January 1, 2003 through September 30,
2008), and the condensed consolidated statements of stockholders’ equity and
cash flows for the nine months ended September 30, 2008 and 2007, and the
cumulative period  of development stage activity (January 1, 2003
through September 30, 2008).   These financial statements are the
responsibility of the Company’s management.





We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States).  A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters.  It is substantially less in scope than an audit
conducted in accordance with the auditing standards of the Public Company
Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a
whole.  Accordingly, we do not express such an opinion.





Based on
our review, we are not aware of any material modifications that should be made
to the accompanying interim financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.





We have
previously audited, in accordance with auditing standards of the Public Company
Accounting Oversight Board, the consolidated balance sheet as of December 31,
2007, and the related consolidated statements of operations, stockholders’
equity and cash flows for the year then ended (not presented herein); and in our
report dated April 14, 2008, we included an explanatory paragraph describing
conditions that raised substantial doubt about the Company’s ability to continue
as a going concern.  In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2007 is
fairly stated, in all material respects, in relation to the balance sheet from
which it has been derived.








Lumsden
& McCormick, LLP


Buffalo,
New York


November
14, 2008




F-1


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Condensed
      Consolidated Balance Sheets(Unaudited)September
      30,
              
              
              December
      31,2008
              
              
              2007AssetsCurrent
      assets:Cash
              
              $
              689
              
              
              $
              1,248Prepaid
      expenses and other
              
              
              572
              
              
              
              4,2851,261
              
              
              
              5,533Investment
      in joint venture, at equity
              
              
              -
              
              
              
              -Investment
      in affiliate, at equity
              
              
              -
              
              
              
              -Oil
      and gas properties, unproved
              
              
              -
              
              
              
              5,248,000Loan
      receivable - affiliate
              
              
              29,500
              
              
              
              -Property
      and equipment, net
              
              
              3,119
              
              
              
              3,943$
              33,880
              
              
              $
              5,257,476Liabilities
      and Stockholders' EquityCurrent
      liabilities:Demand
      loan from stockholder, interest at 9%
              
              $
              10,000
              
              
              $
              10,000Accounts
      payable:Related
      party - stockholders
              
              
              445,023
              
              
              
              370,500Related
      party - Baltic Petroleum, interest at 14%
              
              
              61,255
              
              
              
              56,693Others
              
              
              357,741
              
              
              
              213,854Accrued
      payroll
              
              
              762,541
              
              
              
              541,3681,636,560
              
              
              
              1,192,415Stockholders'
      equity:Common
      stock - authorized 100,000,000 shares, $.001 par value,18,478,030
      and 18,383,030 issued and outstanding
              
              
              18,478
              
              
              
              18,383Additional
      paid-in capital
              
              
              13,091,547
              
              
              
              13,053,756Accumulated
      deficitPre-development
      stage
              
              
              (449,785
              )
              
              
              (449,785
              )Development
      stage
              
              
              (14,256,858
              )
              
              
              (8,543,044
              )Accumulated
      other comprehensive income (loss)
              
              
              (6,062
              )
              
              
              (14,249
              )(1,602,680
              )
              
              
              4,065,061$
              33,880
              
              
              $
              5,257,476See
      accompanying notes.
  F-2
  SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theCondensed
      Consolidated Statements of Operations
                
                
                
                
                
                
                
                
                
                
                
                cumulativeperiod
      ofDevelopmentStage
      Activity-For
      the three
                
                
                For
      the nine
                
                
                January
      1, 2003months
      ended
                
                
                months
      ended
                
                
                throughSeptember
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008Revenues
      and other income:Management
      fees from joint venture
                
                $
                -
                
                
                $
                255,000
                
                
                $
                -
                
                
                $
                615,000
                
                
                $
                1,135,000Gain
      from entrance into joint venture
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                364,479Other
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,382Total
      revenues and other income
                
                
                -
                
                
                
                255,000
                
                
                
                -
                
                
                
                615,000
                
                
                
                1,505,861Expenses:Salaries
                
                
                
                88,567
                
                
                
                111,487
                
                
                
                265,243
                
                
                
                579,556
                
                
                
                3,356,138Professional
      and consulting fees
                
                
                
                117,048
                
                
                
                125,233
                
                
                
                257,906
                
                
                
                789,487
                
                
                
                4,804,732Rent
      and occupancy
                
                
                
                3,636
                
                
                
                11,893
                
                
                
                14,101
                
                
                
                34,462
                
                
                
                237,226Depreciation
      and amortization
                
                
                
                224
                
                
                
                142
                
                
                
                685
                
                
                
                357
                
                
                
                104,037Finance
      charges and interest
                
                
                
                1,110
                
                
                
                1,499
                
                
                
                6,482
                
                
                
                4,513
                
                
                
                110,406Marketing
      and other
                
                
                
                9,449
                
                
                
                182,410
                
                
                
                45,880
                
                
                
                521,420
                
                
                
                2,026,663Total
      expenses
                
                
                
                220,034
                
                
                
                432,664
                
                
                
                590,297
                
                
                
                1,929,795
                
                
                
                10,639,202Loss
      from sale of investment
                
                
                
                669,570
                
                
                
                -
                
                
                
                669,570
                
                
                
                -
                
                
                
                669,570Loss
      on deemed disposition of oil andgas
      properties, unproved
                
                
                
                3,928,000
                
                
                
                -
                
                
                
                3,928,000
                
                
                
                -
                
                
                
                3,928,000Impairment
      charge on investment
                
                
                
                525,947
                
                
                
                -
                
                
                
                525,947
                
                
                
                -
                
                
                
                525,947Loss
      before income taxes
                
                
                5,343,551
                
                
                
                177,664
                
                
                
                5,713,814
                
                
                
                1,314,795
                
                
                
                14,256,858Provision
      for income taxes (benefit)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss (development stage)
                
                $
                5,343,551
                
                
                $
                177,664
                
                
                $
                5,713,814
                
                
                $
                1,314,795
                
                
                $
                14,256,858Basic
      and diluted loss per common share
                
                $
                (0.29
                )
                
                $
                (0.01
                )
                
                $
                (0.31
                )
                
                $
                (0.09
                )
                
                $
                (1.27
                )Weighted
      average number of basic anddiluted
      common shares outstanding
                
                
                18,478,030
                
                
                
                16,130,204
                
                
                
                18,423,431
                
                
                
                15,318,012
                
                
                
                11,214,398See
      accompanying notes.
  F-3
 SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Condensed
      Consolidated Statements of Stockholders' EquityFor
      the cumulative period of Development Stage Activity - January 1, 2003
      through September 30, 2008AccumulatedCommon
      Stock
                
                
                Additional
                
                
                
                
                
                OtherNumber
      of
                
                
                Paid-In
                
                
                Accumulated
                
                
                Comprehensive
                
                
                
                
                
                ComprehensiveShares
                
                
                Par
      Value
                
                
                Capital
                
                
                Deficit
                
                
                Income
      (Loss)
                
                
                Total
                
                
                LossBalance,
      January 1, 2003 (pre-development stage)
                
                
                4,902,886
                
                
                $
                4,903
                
                
                $
                430,195
                
                
                $
                (449,785
                )
                
                $
                -
                
                
                $
                (14,687
                )Loss
      for the year - 2003
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (422,516
                )
                
                
                -
                
                
                
                (422,516
                )
                
                $
                (422,516
                )Shares
      issued in acquisition (ZNG)
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                (1,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -Balance,
      December 31, 2003
                
                
                5,902,886
                
                
                $
                5,903
                
                
                $
                429,195
                
                
                $
                (872,301
                )
                
                $
                -
                
                
                $
                (437,203
                )Loss
      for the year - 2004
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (833,567
                )
                
                
                -
                
                
                
                (833,567
                )Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (53,120
                )
                
                
                (53,120
                )
                
                $
                (886,687
                )Shares
      issued in acquisition (ZNG)
                
                
                3,450,000
                
                
                
                3,450
                
                
                
                746,550
                
                
                
                -
                
                
                
                -
                
                
                
                750,000Shares
      issued for professional services
                
                
                50,000
                
                
                
                50
                
                
                
                9,950
                
                
                
                -
                
                
                
                -
                
                
                
                10,000Other
                
                
                -
                
                
                
                -
                
                
                
                34,426
                
                
                
                -
                
                
                
                -
                
                
                
                34,426Balance,
      December 31, 2004
                
                
                9,402,886
                
                
                $
                9,403
                
                
                $
                1,220,121
                
                
                $
                (1,705,868
                )
                
                $
                (53,120
                )
                
                $
                (529,464
                )Loss
      for the year - 2005
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,153,686
                )
                
                
                -
                
                
                
                (1,153,686
                )Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                50,614
                
                
                
                50,614
                
                
                $
                (1,103,072
                )Shares
      issued for professional services
                
                
                385,000
                
                
                
                385
                
                
                
                197,829
                
                
                
                -
                
                
                
                -
                
                
                
                198,214Shares
      issued for accrued salaries
                
                
                1,700,000
                
                
                
                1,700
                
                
                
                301,871
                
                
                
                -
                
                
                
                -
                
                
                
                303,571Warrants
      granted for professional services
                
                
                -
                
                
                
                -
                
                
                
                310,000
                
                
                
                -
                
                
                
                -
                
                
                
                310,000Balance,
      December 31, 2005
                
                
                11,487,886
                
                
                $
                11,488
                
                
                $
                2,029,821
                
                
                $
                (2,859,554
                )
                
                $
                (2,506
                )
                
                $
                (820,751
                )Loss
      for the year - 2006
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4,072,788
                )
                
                
                -
                
                
                
                (4,072,788
                )Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,939
                )
                
                
                (1,939
                )
                
                $
                (4,074,727
                )Shares
      issued for employee stock option plan and warrants
                
                
                195,000
                
                
                
                195
                
                
                
                45,305
                
                
                
                -
                
                
                
                -
                
                
                
                45,500Shares
      issued for geological data
                
                
                1,900,000
                
                
                
                1,900
                
                
                
                3,323,100
                
                
                
                -
                
                
                
                -
                
                
                
                3,325,000Shares
      issued for professional services
                
                
                1,139,499
                
                
                
                1,140
                
                
                
                2,120,320
                
                
                
                -
                
                
                
                -
                
                
                
                2,121,460Warrants
      granted for professional services
                
                
                -
                
                
                
                -
                
                
                
                1,201,960
                
                
                
                -
                
                
                
                -
                
                
                
                1,201,960Shares
      cancelled
                
                
                (609,424
                )
                
                
                (610
                )
                
                
                610
                
                
                
                -
                
                
                
                -
                
                
                
                -Balance,
      December 31, 2006
                
                
                14,112,961
                
                
                $
                14,113
                
                
                $
                8,721,116
                
                
                $
                (6,932,342
                )
                
                $
                (4,445
                )
                
                $
                1,798,442Loss
      for the year - 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,060,487
                )
                
                
                -
                
                
                
                (2,060,487
                )Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,804
                )
                
                
                (9,804
                )
                
                $
                (2,070,291
                )Shares
      issued for employee stock option plan and warrants
                
                
                566,935
                
                
                
                567
                
                
                
                (567
                )
                
                
                -
                
                
                
                -
                
                
                
                -Shares
      issued for geological data
                
                
                200,000
                
                
                
                200
                
                
                
                349,800
                
                
                
                -
                
                
                
                -
                
                
                
                350,000Shares
      issued for accrued salaries
                
                
                788,000
                
                
                
                788
                
                
                
                1,444,618
                
                
                
                -
                
                
                
                -
                
                
                
                1,445,406Shares
      issued for licenses
                
                
                2,000,000
                
                
                
                2,000
                
                
                
                1,318,000
                
                
                
                -
                
                
                
                -
                
                
                
                1,320,000Shares
      issued for professional services
                
                
                715,134
                
                
                
                715
                
                
                
                1,070,395
                
                
                
                -
                
                
                
                -
                
                
                
                1,071,110Warrants
      granted for professional services
                
                
                -
                
                
                
                -
                
                
                
                150,394
                
                
                
                -
                
                
                
                -
                
                
                
                150,394Balance,
      December 31, 2007
                
                
                18,383,030
                
                
                $
                18,383
                
                
                $
                13,053,756
                
                
                $
                (8,992,829
                )
                
                $
                (14,249
                )
                
                $
                4,065,061Loss
      nine months - 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (5,713,814
                )
                
                
                -
                
                
                
                (5,713,814
                )Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8,187
                
                
                
                8,187
                
                
                $
                (5,705,627
                )Shares
      issued for professional services and accrued salaries
                
                
                95,000
                
                
                
                95
                
                
                
                32,055
                
                
                
                -
                
                
                
                -
                
                
                
                32,150Warrants
      granted for professional services
                
                
                -
                
                
                
                -
                
                
                
                5,736
                
                
                
                -
                
                
                
                -
                
                
                
                5,736Balance,
      September 30, 2008
                
                
                18,478,030
                
                
                $
                18,478
                
                
                $
                13,091,547
                
                
                $
                (14,706,643
                )
                
                $
                (6,062
                )
                
                $
                (1,602,680
                )See
      accompanying notes.
 F-4
  SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theCondensed
      Consolidated Statements of Cash Flows
                
                
                
                
                
                
                cumulativeperiod
      ofDevelopmentStage
      Activity-January
      1, 2003throughSeptember
      30,For
      the nine months ended September 30,
                
                
                2008
                
                2007
                
                2008Cash
      flows from operating activities:Net
      loss (development stage)
                
                $
                (5,713,814)
                $
                (1,314,795)
                $
                (14,256,858)Depreciation
      and amortization
                
                
                685
                
                357
                
                104,037Common
      stock and warrants issuedfor
      professional services and salaries
                
                
                37,886
                
                2,121,565
                
                7,172,314Gain
      from entrance into joint venture
                
                
                -
                
                -
                
                (364,479)Loss
      on sale of investment, including deconsolidation of
    subsidiary
                794,192
                
                -
                
                794,192Loss
      on deemed disposition of oil and gas properties, unproved
                3,928,000
                
                -
                
                3,928,000Impairment
      charge on investment
                
                
                525,947
                
                -
                
                525,947Changes
      in other current assets andcurrent
      liabilities:Management fee
      receivable
                
                
                -
                
                -
                
                110,000Prepaid
      expenses and other assets
                
                
                3,713
                
                57,951
                
                (263,964)Accounts
      payable and accrued expenses
                
                
                444,145
                
                (773,430)
                
                3,265,585Net
      cash flows from operating activities
                
                
                20,754
                
                91,648
                
                1,014,774Cash
      flows from investing activities:Expenditures
      for licenses and related
                
                
                -
                
                -
                
                (528,961)Expenditures
      for oil and gas properties
                
                
                -
                
                -
                
                (770,750)Expenditures
      for property and equipment
                
                
                -
                
                (1,620)
                
                (6,244)Loan
      to affiliate
                
                
                (29,500)
                
                -
                
                (29,500)Cash
      received in acquisition
                
                
                -
                
                -
                
                6Cash
      received from entrance into joint venture
                
                
                -
                
                -
                
                175,000Net
      cash flows for investing activities
                
                
                (29,500)
                
                (1,620)
                
                (1,160,449)Cash
      flows from financing activities:Net
      proceeds from demand loans
                
                
                -
                
                -
                
                72,500Common
      stock issued for employee stock option plan
                
                
                -
                
                -
                
                45,500Additional
      paid-in capital
                
                
                -
                
                -
                
                34,426Net
      cash flows from financing activities
                
                
                -
                
                -
                
                152,426Effect
      of exchange rates on cash
                
                
                8,187
                
                (5,702)
                
                (6,062)Net
      increase (decrease) in cash
                
                
                (559)
                
                84,326
                
                689Cash
      - beginning
                
                
                1,248
                
                1,435
                
                -Cash
      - ending
                
                $
                689
                $
                85,761
                $
                689See
      accompanying notes.
  F-5


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)
 
 Notes
      to  Condensed Consolidated Financial
      Statements
  1.  Basis
of Presentation:
 
 The
accompanying unaudited consolidated financial statements of Siberian Energy
Group Inc. (the Company) include the accounts of the Company and its 100% owned
subsidiaries.  These financial statements have been prepared pursuant
to the rules of the Securities and Exchange Commission (SEC) interim reporting,
and do not include all of the information and note disclosures required by
generally accepted accounting principles.  These consolidated
financial statements and notes herein are unaudited, but in the opinion of
management, include all the adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the Company’s financial
positions, results of operations, and cash flows for the periods
presented.  Accounting policies used in fiscal 2008 are consistent
with those used in the cumulative period of Development Stage Activity – January
1, 2003 through December 31, 2007.  These financial statements should
be read in conjunction with the Company’s audited consolidated financial
statements and notes thereto.  Interim operating results are not
necessarily indicative of operating results for any future interim period or the
full year.
  2.  The
Company and Description of Business:
 
 The
Company, through its subsidiary Kondaneftegaz, LLC (KNG), has been engaged in
the business of exploiting and developing certain oil and gas and other
petroleum products licenses issued by Russia’s subsurface management authorities
in October 2007 for a period of five years. The two licensed areas lie in the
Karabashsky zone in the Khanty-Mansi Autonomous area of the Russian
Federation.  KNG has its principal place of business in the city of
Khanty-Mansiysk, Russia.  KNG has prepared and coordinated with
Russian authorities the Program of exploration works on the Karabashski 61 and
Karabashski 67 license areas and is planning to start seismic works in December
2008.
 
 KNG was
acquired together with the vast collection of geological information data (oil
and gas properties, unproved) on the Karabashski zone of Khanty-Mansiysk
Autonomous district of the Tuymen region of the Russian Federation through the
issuance of shares and warrants as follows:
  Restricted
      common shares issued to Seller foroil
      and gas properties, unproved in 2006
                
                
                1,900,000Restricted
      common shares issued to Seller inconnection
      with license acquisition by KNG in 2007
                
                
                2,000,000Restricted
      common shares issued to an adviser in 2006
                
                
                200,000Total
      restricted common shares issued
                
                
                4,100,000Stock
      warrants issued to Seller in 2006for
      purchase option
                
                
                250,000
  As a
result of the purchase, a calculated acquisition value of $3,928,000 was
assigned to the oil and gas properties, unproved that considered the approximate
market value of the stock issued ($1.75) on the transaction date including
$3,675,000 assigned to 2,100,000 shares issued in 2006 and $253,000 assigned to
250,000 stock warrants issued.  A value of $1,320,000 was assigned to
the acquisition of licenses by KNG based on the market value of the 2,000,000
shares on the date of issue.
 
 On
September 30, 2008 the Company sold a 51% interest in KNG to a Russian oil and
gas company, and a 5% interest to two Russian individuals for $223. This Russian
company has committed to lead the exploration works on the licensed areas by
accepting the operator’s role and agreeing to provide funding for KNG’s
activities. Simultaneously with the sale of 56% of KNG, the Company made
available all geological data to the operator to be used in the program of
geological studies in the region. Since no consideration was received and the
Company has no intent to further utilize this geological data, a loss on the
deemed disposition of these unproven oil and gas properties of $3,928,000 has
been recorded.  Operations of KNG prior to September 30, 2008 are
included in the consolidated accounts of the Company in the accompanying
financial statements.  Effective September 30, 2008, the Company's 44%
investment in KNG is recorded on the equity method of accounting.  At
September 30, 2008, KNG’s assets were $13,572 and liabilities were
$135,740.  Since 56% of the Company was sold for a nominal amount, a
non-cash impairment charge of $525,947 has been recorded to reduce the carrying
value of the 44% investment in KNG to zero.
  F-6
  Zauralneftegaz
Limited is the Company’s 50% owned joint venture with Baltic Petroleum Limited,
UK created in 2005, which operates through its Russian subsidiary Zaural
Neftegaz (ZNG).  ZNG has been involved in oil and gas research
activities in the Kurgan region of the Russian Federation. During 2003 through
2008 it has completed seismic studies and drilling program in the Kurgan region.
The Company believes ZL has created value through the geological results of the
two exploratory wells and other data gathered in the area and ZL is considering
its options with regard to realizing this value by either a farm out or a direct
sale of geophysical and seismic data to a third party operating in the
area.
 
 Activities
of ZNG for the period March 2003 through October 2005 are included in the
consolidated accounts of the Company in the accompanying financial
statements.  Effective October 14, 2005, the Company’s investment in
Joint Venture has been recorded on the equity method of
accounting.  Since the cumulative losses of the Joint Venture exceed
the Company’s investment, the investment asset is carried at zero value as of
and through September 30, 2008.
 
 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.
  3.  Income
Taxes:
 
 At
September 30, 2008, the Company effectively has U.S. tax net operating loss
carryforwards totaling approximately $12,975,000.  These carryforwards
may be used to offset future taxable income, and expire in varying amounts
through 2028.  No tax benefit has been reported in the financial
statements, however, because the Company believes there is at least a 50% chance
that the carryforwards will expire unused.  Accordingly, the
$2,595,000 estimated cumulative tax benefit of the loss carryforwards have been
offset by a valuation allowance of the same amount.
 
 4.  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 September 30,
2008.
  5.  Going
Concern:
 
 These
financial statements have been prepared assuming the Company will continue as a
going concern, however, since inception of its current endeavor in 2003, it has
not earned substantial revenues and is considered to be in the development
stage, which raises substantial doubt about its ability to continue as a going
concern.
 
 Management
is of the opinion that its current and proposed oil and gas ventures will
successfully generate allocable profits to the Company in the near
term.
 
 For the
cumulative period ended September 30, 2008, 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-7
  ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS
 
 CERTAIN
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q"), 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. ("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-Q, UNLESS
ANOTHER DATE IS STATED, ARE TO SEPTEMBER 30, 2008.
 
 BUSINESS
DEVELOPMENT:
 
 Siberian
Energy Group Inc. was formed as a Nevada corporation on August 13, 1997, as
Advanced Rehab Technology Corporation. Subsequently, on March 9, 2001, the
Company changed its name to Talking Cards, Inc.; on February 12, 2002, the
Company changed its name to Oysterking Incorporated; on December 3, 2002, the
Company changed its name to 17388 Corporation Inc., at which point the
controlling interest of the Company was sold and a new board of directors was
appointed; on May 5, 2003, the Company changed its name to Trans Energy Group
Inc.; and on December 3, 2003, the Company changed its name to Siberian Energy
Group Inc.
 
 On
September 17, 1999, the Company affected a 1-for-30 reverse stock split. A
subsequent 3-for-1 forward split was consummated on October 2, 2000 and a
further 1:2 reverse stock split was affected on May 2, 2005 (collectively
the “Stock Splits”). All share amounts subsequently listed are retroactively
adjusted to reflect these stock splits unless otherwise provided.
 
 In the
spring of 2003, a majority of the Company's shares were purchased by new
shareholders who stepped into the management of the Company and defined its new
business direction as an oil and gas exploration company.
 
 On May 9,
2003, the Company entered into an Acquisition Agreement (the "Acquisition
Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation
("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant
to the Acquisition Agreement, the Company acquired a 51% interest in ZNG by
issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004, the
Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares of
the Company's common stock, making ZNG a wholly owned subsidiary of the Company.
The Company had no affiliation with ZNG prior to the acquisition in May
2003.
 
 Currently,
the operating activities of ZNG are carried out through the Joint Venture
Shareholders' Agreement ("Joint Venture") entered into on October 14, 2005 with
Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and Zauralneftegaz
Limited, the joint venture company ("ZNG, Ltd."), as contemplated by the Option
Agreement, as amended (the "Option"). The Company closed the Joint Venture and
transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in connection with
the terms and conditions of the Joint Venture. As a result of such transfer, the
Company holds 50% of the outstanding stock of ZNG, Ltd., which holds 100% of the
outstanding stock of the Company's former wholly owned subsidiary,
ZNG.  ZNG, Ltd., operates through ZNG and is engaged in the
exploration and development of, production and sale of, oil and gas assets in
the Western Siberian region of the Russian Federation and the former Soviet
Union.
 
 On
December 13, 2006, we entered into an Interest Purchase Agreement (the "Purchase
Agreement") with Key Brokerage LLC ("Key Brokerage"), pursuant to which we
purchased 100% of the stock of Kondaneftegaz LLC ("KNG"),
a Russian limited liability company, which was created in 2004 for the purpose
of oil and gas exploration in the Khanty-Mansiysk district of Western Siberia,
Russia. In addition to acquiring 100% of the stock of KNG, we received the
geological information package on the Karabashski zone of Khanty-Mansiysk
Autonomous district (Tuymen region of Russian Federation) ("Geological
Data").
 
 -2-
  On or
about September 30, 2008, we entered into an Agreement of Purchase and Sale with
Limited Liability Company Neftebitum, a Russian limited liability company, and
two Russian individuals, pursuant to which we sold fifty-six percent (56%) of
the ownership interest of KNG, as described in greater detail
below.
 
 All
dollar amounts used throughout this Report are in United States dollars, unless
otherwise stated. All amounts in Canadian dollars used throughout this Report
are preceded by CDN, for example CDN $500, is referring to $500 Canadian
dollars.


BUSINESS
OPERATIONS:





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





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





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





Description of
KNG





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





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





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




o
            to
      begin 2D seismic works during the 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), which KNG is currently making preparations to begin;
      ando
            No
      later than 2011, to start drilling an exploratory well and to complete not
      less than 2 exploratory wells by  April 1,
  2012.





-3-




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





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





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





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





·
            Begin
      2D seismic works on the Blocks during the 2008-2010 fieldwork season and
      perform not less than 176.26 linear kilometers of seismic profiles on the
      Karabashky-61 Block and not less than 158 linear kilometers of seismic
      works on the Karabashky-67 Block;





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





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





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





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




-4-




As of
September 30, 2008, the Company owns a 44% interest in KNG. While operating
results of KNG are included in the consolidated financial statements contained
herein for the nine months ended September 30, 2008, beginning in periods ending
after September 30, 2008, the Company’s investment in KNG will be recorded on
the equity method of accounting. After careful consideration of the current
financial position of KNG, the Company applied an impairment charge to the value
of investment in KNG which resulted in carrying it at zero value.





Description of
ZNG





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





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





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 September 30, 2008.




Joint
Venture





The
operations of the Joint Venture are funded via loans provided to ZNG, Ltd. and
ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly owned by
Baltic.  Loans are guaranteed by ZNG, Ltd.’s holdings in
ZNG.  As of September 30, 2008, the total funding provided to ZNG,
Ltd. and ZNG by Baltic was equal to approximately $23.5 million plus accrued
interest of approximately $5 million. The loans
are not dilutive to the Company's ownership in ZNG.





Agreement With Alternative
Energy Finance, Ltd.





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





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





-5-




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





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





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








PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS





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





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




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





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




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




-6-




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





In the
past, we have obtained cash financing from organizing stockholders in the form
of loans and advances, as a result, amounts totaling $445,023 and $370,500 were
payable to the stockholders as of September 30, 2008 and December 31, 2007,
respectively. However, there can be no certainty as to the availability of
continued financing in the future. Failure to obtain sufficient financing may
require us to reduce our operating activities. A failure to continue as a going
concern would then require stated amounts of assets and liabilities to be
reflected on a liquidation basis which could differ from the going concern
basis.





COMPARISON
OF OPERATING RESULTS




RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008, COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2007





We had no
revenues and other income for the three months ended September 30, 2008,
compared with $255,000 of revenue and other income for the three months ended
September 30, 2007, due solely to $255,000 of management fees
received.  During the three months ended September 30, 2007, the
Company received monthly management fees of $85,000 pursuant to terms of the
Joint Venture.  However, the Company did not receive any management
fees for the three months ended September 30, 2008, as a result of restructuring
of the Company’s Kurgan operations and the negotiating of potential farm outs
and further research works on ZNG’s licensed areas.




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





We had
total expenses of $220,034 for the three months ended September 30, 2008,
compared to total expenses for the three months ended September 30, 2007, of
$432,664, which represented a decrease in total expenses from the prior period
of $212,630 or 49.1%.





The main
reasons for the decrease in total expenses for the three months ended September
30, 2008, compared to the three months ended September 30, 2007, was a $172,961
or 94.8% decrease in marketing and other expenses, to $9,449 for the three
months ended September 30, 2008, compared to $182,410 for the three months ended
September 30, 2007, mainly attributable to the discontinuance of certain
marketing contracts and less travel performed by management for marketing
purposes for the three months ended  September 30, 2008, compared to
the three months ended September 30, 2007; a $22,920 or 20.6% decrease in
salaries to $88,567 for the three months ended September 30, 2008, compared to
$111,487 for the three months ended September 30, 2007, which decrease is
largely attributable to the fact that no salaries were accrued in KNG during
the three months ended September 30, 2008, and was also due to the lower
valuation of shares issued to the Company’s management for services rendered,
resulting from decreases in the trading prices of the Company’s common stock
during the three months ended September 30, 2008, compared to
the three months ended September 30, 2007; $8,185 or 6.5% decrease in
professional and consulting fees, to $117,048 for the three months ended
September 30, 2008, compared to $125,233 for the three months ended September
30, 2007, which decrease is largely attributable to the fact that the Company
used less third party consultants and advisors during the three months ended
September 30, 2008, compared to the same period of 2007; and an $8,257 or
69.4% decrease in rent and occupancy to $3,636 for the three months ended
September 30, 2008, compared to $11,893 for the three months ended September 30,
2007.





We had a
loss from sale of investment for the three months ended September 30, 2008 of
$669,570, compared to no loss from sale of investment for the three months ended
September 30, 2007.  The $669,570 of loss from sale of investment for
the three months ended September 30, 2008 can be attributed to our sale of a
controlling interest in KNG as described in greater detail above.




-7-




We had a
loss on the deemed disposition of oil and gas properties, unproved, for the
three months ended September 30, 2008 of $3,928,000, compared to no loss on
disposition of oil and gas properties, unproved, for the three months ended
September 30, 2007.  The $3,928,000 loss on deemed disposition of oil
and gas properties, unproved, for the three months ended September 30, 2008 can
be attributed to the fact that the Company no longer has any plans to utilize
the geological data valued at $3,928,000, other than through KNG’s activities
and no consideration was received for the use of such geological data in
connection with the sale of the controlling interest in KNG, although the
Company has committed to providing such information to Neftebitum.





We had an
impairment charge on investment for the three months ended September 30, 2008 of
$525,947, compared to no impairment charge on investment for the three months
ended September 30, 2007.  Since 56% of KNG was sold for a nominal
amount, a non-cash impairment charge of $525,947 has been recorded to reduce the
carrying value of the 44% investment in KNG to zero.





We had a
net loss of $5,343,551 for the three months ended September 30, 2008, compared
to a net loss of $177,664 for the three months ended September 30, 2007, an
increase in net loss of $5,165,887 from the prior period. The increase in net
loss was mainly attributable to the $3,928,000 increase in loss on deemed
disposition of oil and gas properties, unproved, the $669,570 increase in loss
from sale of investment, and the $525,947 increase in impairment charge on
investment, which was further affected by the $255,000 decrease in management
fees received, offset by the $212,630 or 49.1% decrease in total expenses for
the three months ended September 30, 2008, compared to the three months ended
September 30, 2007.





RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008, COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 2007





We had no
revenues and other income for the nine months ended September 30, 2008, compared
with $615,000 of revenue and other income for the nine months ended September
30, 2007, due solely to $615,000 of management fees received.  During
the nine months ended September 30, 2007, the Company received monthly
management fees of $55,000 during the three months ended March 31, 2007, $65,000
during the three months ended June 30, 2007, and $85,000 during the three months
ended September 30, 2007, pursuant to our Joint Venture.  However, the
Company did not receive any management fees for the nine months ended September
30, 2008, as a result of the restructuring of the Company’s Kurgan
operations.





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





We had
total expenses of $590,297 for the nine months ended September 30, 2008,
compared to total expenses for the nine months ended September 30, 2007, of
$1,929,795, which represented a decrease in total expenses from the prior period
of $1,339,498 or 69.4%.





The main
reasons for the decrease in total expenses for the nine months ended September
30, 2008, compared to the nine months ended September 30, 2007, was a $531,581
or 67.3% decrease in professional and consulting fees, to $257,906 for the nine
months ended September 30, 2008, compared to $789,487 for the nine months ended
September 30, 2007, which decrease is largely attributable to the fact that the
Company used less third party consultants and advisors during the nine months
ended September 30, 2008, compared to the same period of 2007; a $314,313 or
54.2% decrease in salaries to $265,243 for the nine months ended September 30,
2008, compared to $579,556 for the nine months ended September 30, 2007, which
decrease is largely attributable to the fact that the Company issued a
significant amount of shares to its officers and Directors during the nine
months ended September 30, 2007, which issuances were not represented in such
significant amounts, and which shares had a lower fair market value due to
decreases in the trading prices of the Company’s common stock, for the nine
months ended September 30, 2008, compared to the nine months ended September 30,
2008; and a $475,540 or 91.2% decrease in marketing and other expenses, to
$45,880 for the nine months ended September 30, 2008, compared to $521,420 for
the nine months ended September 30, 2007, mainly attributable to the
discontinuance of certain marketing contracts and less travel performed by
management for marketing purposes for the nine months ended September 30, 2008,
compared to the nine months ended September 30, 2007.




-8-




We had
loss from sale of investment for the nine months ended September 30, 2008 of
$669,570, compared to no loss from sale of investment for the nine months ended
September 30, 2007.  The $669,570 of loss from sale of investment for
the nine months ended September 30, 2008 can be attributed to our sale of a
controlling interest in KNG, as described above.





We
had loss on deemed disposition of oil and gas properties, unproved, for the nine
months ended September 30, 2008 of $3,928,000, compared to no loss on
disposition of oil and gas properties, unproved, for the nine months ended
September 30, 2007.  The $3,928,000 loss on deemed disposition of oil
and gas properties, unproved, for the nine months ended September 30, 2008 can
be attributed to the fact that the Company no longer has any plans to utilize
the geological data, valued at $3,928,000, other than through KNG’s activities,
and no consideration was received for the use of such geological data in
connection with the sale of the controlling interest in KNG, although the
Company has committed to providing such information to Neftebitum.





We had
an impairment charge on investment for the nine months ended September 30,
2008 of $525,947, compared to no impairment charge on investment for the nine
months ended September 30, 2007.   Since 56% of KNG was sold for
a nominal amount, a non-cash impairment charge of $525,947 has been recorded to
reduce the carrying value of the 44% investment in KNG to zero.





We had a
net loss of $5,713,814 for the nine months ended September 30, 2008, compared to
a net loss of $1,314,795 for the nine months ended September 30, 2007, an
increase in net loss of $4,399,019 from the prior period. The increase in net
loss was mainly attributable to the $3,928,000 increase in loss on deemed
disposition of oil and gas properties, unproved, the $669,570 increase in loss
from sale of investment, the $525,947 increase in impairment charge on
investment and the $615,000 decrease in management fees received, offset by the
$1,339,498 or 69.4% decrease in total expenses for the nine months ended
September 30, 2008, compared to the nine months ended September 30,
2007.





LIQUIDITY
AND CAPITAL RESOURCES





We had
current assets of $1,261 as of September 30, 2008, which included cash of $689;
and prepaid expenses and other current assets of $572.





We had
total assets of $33,880 as of September 30, 2008, which included current assets
of $1,261 and non-current assets of $32,619. Non-current assets included
a $29,500 loan receivable from affiliate in connection with amounts
previously loaned to KNG, which, because of the sale of majority control of KNG,
it is no longer eliminated in consolidation and has been presented
separately  in our financial statements, and $3,119 of property and
equipment, net.  Total assets of $33,880 as of September 30, 2008,
were $5,223,596 or 99.4% less than total assets of $5,257,476 as of December 31,
2007.  Total assets decreased mainly due to a $5,248,000 decrease in
oil and gas properties, unproved, due to our sale of 56% of KNG as described
above.




We had
total liabilities of $1,636,560 as of September 30, 2008, which were solely
current liabilities and which included $445,023 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 September 30, 2008; $61,255
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; $357,741 of
accounts payable to others for advisory and professional services rendered; and
$762,541 of accrued payroll, which included $427,500 payable to our Chief
Executive Officer, David Zaikin, of which $270,000 was accrued in 2007 and 2008,
and $112,500 which was owed to Mr. Zaikin for services rendered prior to
September 2005, at which time he agreed to stop accruing salary until January
2007, when he provided us notice of his intent to once again begin accruing
salary until such time as we have sufficient funds to pay such accrued salary,
$146,276 payable to our Chief Financial Officer, Elena Pochapski, and
$69,242 of accrued salary payable to our former Chief Executive Officer, Shakeel
Adam.  Total liabilities increased $444,145 or 37.2% to $1,636,560 as
of September 30, 2008, from $1,192,415 as of December 31, 2007, which increase
was mainly due to increased accounts payable and additional accrued payroll from
the period from December 31, 2007 to September 30, 2008.





We had
negative working capital of $1,635,299 and a total pre-development and
development stage accumulated deficit of $14,706,643 as of September 30,
2008.





-9-




Because
our cumulative losses associated with the operations of ZNG exceeded our
investment as of the date of the Joint Venture, ZNG, Ltd. is carried on our
balance sheet at $-0- as of September 30, 2008. Our investment in ZNG,
Ltd. will exceed $-0- at such time as ZNG, Ltd. has cumulative
earnings sufficient to repay all loans to Baltic as provided in the Joint
Venture, if ever.





As of
September 30, 2008, the Company owns a 44% interest in KNG. The Company’s
investment in KNG  is recorded on the  equity method of
accounting effective September 30, 2008. After careful consideration of the
current financial position of KNG, the Company applied an impairment charge to
the value of the investment in KNG which resulted in carrying it at zero
value.




We had
$20,754 of net cash flows for operating activities for the nine months ended
September 30, 2008, which is attributable to adjustments to reconcile $3,928,000
of loss on deemed disposition of oil and gas properties, unproved, $794,192 of
loss on sale of investment, $525,947 impairment charge on investment, $444,145
of increase in accounts payable and accrued expenses, $37,886 of common stock
and warrants granted for professional services and in connection with the
issuance of shares and options to employees for salaries, $3,713 of prepaid
expenses and other assets and $685 of depreciation and amortization, offset by
$5,713,814 of net loss.





For the
nine months ended September 30, 2008, we had net cash flows for investing
activities of $29,500, due solely to loan to affiliate in connection with
amounts previously loaned to KNG, which, because of the sale of majority control
of KNG, is required to be unconsolidated in our financial
statements.





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





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





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




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





Critical
Accounting Policies





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, including those related to
uncollectible receivables, investment values, income taxes, the recapitalization
and contingencies. We base our estimates on various assumptions that we believe
to be reasonable under the circumstances, the results of which form the
basis for making judgments about carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.




-10-




Recently issued accounting
pronouncements. The Company does not expect the adoption of any recently
issued accounting pronouncements to have a significant impact on the Company’s
results of operations, financial position or cash flows.





ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Pursuant
to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to
provide the information required by this Item as it is a “smaller reporting
company,” as defined by Rule 229.10(f)(1).





ITEM 4. 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 September 30,
2008.  This evaluation was carried out under the supervision and with
participation of our Chief Executive Officer and Chief Financial Officer. Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of September 30, 2008, our disclosure controls and procedures
are not effective as a result of the material weakness in internal control over
financial reporting discussed below.





Notwithstanding
the assessment that our internal control over financial reporting was not
effective and that there were material weaknesses as identified in this report,
we believe that our unaudited consolidated financial statements contained in
this Report fairly present our financial position, results of operations and
cash flows for the periods covered herein in all material respects.





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 our Annual Report on Form 10-KSB, 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.




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.





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.




-11-




PART II - OTHER
INFORMATION





ITEM 1. 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 1A. RISK
FACTORS





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





RISK OF CONTINUING OUR BUSINESS PLAN
WITHOUT ADDITIONAL FINANCING.





We depend
to a great degree on the ability to attract external financing in order to
conduct future exploratory and development activities. The Company believes it
can satisfy its cash requirements during the next twelve months, estimated at
approximately $300,000, through funding provided by existing stockholders and
its current cash on hand.  As of September 30, 2008, the total funding
provided to ZNG, Ltd. and ZNG by Baltic was equal to $23.5 million plus accrued
interest of approximately $5 million, which has been spent on various purposes,
including seismic and gas seismotomography surveys, drilling of two exploratory
wells, and paying consultants for services performed in connection with surveys
performed on the licensed area. The Joint Venture is responsible for the funding
of the operations of ZNG. However, if the Joint Venture is unable to raise
the additional funds required for the planned activities of ZNG or attract
interest from external parties and we are unable to raise financing for
additional activities, separate from the Joint Venture, our Company may be
forced to abandon its current business plan. If you invest in our Company and we
are unable to raise the required funds, your investment could become
worthless.





RISK
OF FUNDING PARTNER NOT MOVING FORWARD WITH JOINT VENTURE





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




-12-




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





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





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





The
Company anticipates the need for approximately $15,000,000 prior to KNG's
expected generation of any revenues. In connection with the Agreement of
Purchase and Sale, as described in more detail above, the Company sold a 51%
interest in KNG to Neftebitum in September 2008.  Pursuant to this
agreement and the related Operating Agreement, Neftebitum is responsible for
providing financing for the operations of KNG. Currently, the Company is not
aware of Neftebitum raising any of this financing and the Company can make no
assurances that this financing will ever be raised. The Company also does not
expect to generate any revenues through the operations of KNG, until such
financing can be raised, of which there can be no assurance. Therefore,
investors should keep in mind that even if Neftebitum is able to raise the
substantial amounts of additional financing that KNG requires for its
operations, it could still be years before KNG generates any revenue, if ever.
If Neftebitum does not raise the $15,000,000 which the Company anticipates KNG
needs to generate revenues, which, even if generated, will likely not be great
enough to sustain KNG if no revenues are generated and hydrocarbon reserves are
not discovered, KNG may be forced to abandon its business plan, and the Company
could be forced to abandon or curtail its business plan as well, which could
cause the value of the Company's common stock to substantially decline or become
worthless.




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





Our
Company is in its early development stage, as planned principal activities have
not begun. We have generated only minimal revenues since inception and have
incurred substantial losses including a net loss of $5,343,551 for the three
months ended September 30, 2008, a net loss of $5,713,814 for the nine months
ended September 30, 2008, and had a total accumulated deficit of $14,706,643 as
of September 30, 2008. These factors among others indicate that the Company may
be unable to continue as a going concern, particularly in the event that it
cannot generate sufficient cash flow to conduct its operations and/or obtain
additional sources of capital and financing.





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





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





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





As a
development stage company, we have had limited revenues and no profits to date
and our net cumulative deficit attributable to our development stage as of
September 30, 2008, was $14,256,858, and our total cumulative deficit was
$14,706,643 which included $449,785 of pre-development stage deficit. We had
$762,541 in accrued and unpaid salaries and a working capital deficit of
$1,635,299 as of September 30, 2008. The Company is currently being funded by
existing shareholders, but there can be no assurance this amount will be
sufficient to continue our planned operations or that we will have enough money
to repay our outstanding debts.
There is a risk that ZNG will never begin production and our Company will never
generate any revenues through our ownership of 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.





-13-




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




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




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





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





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





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





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





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





-14-




OUR
GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.





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





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





We rely
on the Company's Chief Executive Officer and Chief Financial Officer, David
Zaikin and Elena Pochapski, for the success of our Company, both of whom are
employed under contracts. Their experience and input create the foundation for
our business and they are responsible for the directorship and control over the
Company's development activities. The Company does not hold "key man" insurance
on either member of management. Moving forward, should they be lost for any
reason, the Company will incur costs associated with recruiting replacement
personnel and any potential delays in operations. If we are unable to replace
Mr. Zaikin and/or Ms. Pochapski, 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 our
44% ownership of 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 HOLDINGS ARE CONDUCTED IN RUSSIA, AND THE LICENSES OWNED THROUGH OUR
HOLDINGS ARE IN RUSSIA.





Zauralneftegaz,
Ltd. which we own 50% of through our Joint Venture and KNG, which we own 44% of,
hold 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.





-15-




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





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




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





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 fiscal year 2009, Section 404 will require us to obtain a report
from our independent registered public accounting firm attesting to the
assessment made by management.  Our testing, or the subsequent testing
by our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we 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;





-16-




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





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




INVESTORS
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.




ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS





In June
2007, we issued 70,000 shares of restricted common stock to our President, Helen
Teplitskaia, of which 50,000 shares were a sign-on bonus in connection with her
agreeing to be an officer of the Company in May 2007, and
20,000 shares were part of her compensation package with the Company, whereby
she is to be paid 10,000 shares per month for her service to the Company, which
shares were issued for services rendered in May and June 2007. During the period
from July to December 2007, 50,000 shares were issued for services rendered in
July through November 2007.  In June 2008, we issued an aggregate of
70,000 restricted shares of common stock to Ms. Teplitskaia in consideration for
services rendered during the months of December 2007, and January through June
2008.  Ms. Teplitskaia has not been issued the shares she is due for
the months ended July 2008 through November 2008, and although the Company plans
to issue such shares shortly after the filing of this report, the 60,000 shares
that Ms. Teplitskaia is due have not been included in the number of issued and
outstanding shares disclosed throughout this report.   The
Company claims an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (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.





-17-




In June
2008, the Company issued 25,000 restricted shares of common stock to Global
Consulting Group pursuant to the First Amendment to the Settlement
Agreement.  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
November 2008, the Company agreed to issue 107,520 shares of restricted common
stock to a related party of Amir Rosenfeld, an individual, which shares were
agreed to be issued to Mr. Rosenfeld in lieu of repayment of a $10,750.05 debt
owed by the Company to Mr. Rosenfeld.  The debt was in connection with
a $10,000 loan Mr. Rosenfeld provided to the Company in November 2007, which
loan had accrued $752.05 of interest as of September 30, 2008.  While
the Company has agreed to issue the shares, the Company has not issued the
shares to date, and as such, they have not been included in the number of issued
and outstanding shares disclosed throughout this report. The Company claims an
exemption from registration afforded by Section 4(2) of the Act since the
foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and the Company took appropriate measures
to restrict transfer. No underwriters or agents were involved in the foregoing
issuance and no underwriting discounts or commissions were paid by the
Company.




ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.





None.





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





None.





ITEM 5. OTHER
INFORMATION





None.





ITEM 6.
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, 2005


10.5(1)
            Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28,
2005




-18-




10.6(2)
            Option
      Agreement with Baltic Petroleum Limited dated April 28,
    200510.7(2)
            License
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.8(2)
            Loan
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.9(2)
            Guarantee
      by Siberian Energy Group, Inc. dated April 28, 200510.10(2)
            Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28, 200510.11(3)
            Clarification
      to the Contract of Purchase and Sale of the Share in Charter Capital of
      LLC "Zauralneftegaz" dated 15 May 200410.12(3)
            Agreement
      with Business - Standard (translated from Russian version)10.13(3)
            Supplementary
      Agreement to Business - Standard Agreement (translated from Russian
      version)10.14(3)
            Supplementary
      Agreement No. 2 to Business - Standard Agreement (translated from Russian
      version)10.15(3)
            Deed
      of Amendment between ZNG and BP10.16(3)
            Deed
      of Amendment between the Company and BP10.17(4)
            Joint
      Venture Shareholders' Agreement with Baltic Petroleum (E&P) Limited
      and Zauralneftegaz Limited dated October 14, 200510.18(5)
            Amendment
      to the Employment Agreement Dated August 1, 2003, with Elena
      Pochapski10.19(5)
            Form
      of Waiver 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




10.28(8)
            Option
      Agreement with Key Brokerage10.29(8)
            Warrant
      Agreement with Key Brokerage


10.30(9)
            July
      26, 2006 Deed of Agreement10.31(10)
            Consulting
      Agreement with Business Standard




-19-




10.32(11)
            Addition
      to the Loan Agreement of November 9, 200510.33(11)
            Gross
      Overriding Royalty Agreement10.34(12)
            Amendment
      No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
      Pochapski10.35(13)
            Deed
      of Variation to the Loan Agreement Dated 9th
      of November 2005, Entered into in June 200710.36(15)
            Agreement
      of Purchase and Sale with Limited Liability Company Neftebitum, Sergey V.
      Prokopiev, and Oleg G. Shelepov10.37(15)
            Operating
      Agreement with Limited Liability Company Neftebitum21.1(14)
            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.





(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.





-20-




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





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





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





(14)
Filed as an Exhibit to our Report on Form 10-KSB filed with the Commission on
April 15, 2008, and incorporated herein by reference.





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







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:
      November 19, 2008
            By: /s/ David
    ZaikinDavid
      ZaikinChief
      Executive Officer(Principal
      Executive Officer)DATED:
      November 19, 2008
            By: /s/ Elena
      PochapskiElena
      PochapskiChief
      Financial Officer(Principal
      Accounting Officer)




-21-