**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**


(Mark
      One)





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





For
      the
      quarterly period ended June 30, 2007





[ 
                 ]
            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 small business issuer as specified in its charter)





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





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


(Address
      of principal executive offices)





**(212)
      828-3011**


(Registrant's
      telephone number)





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





As
      of
      August 1, 2007, 16,218,065 shares of Common Stock of the issuer were outstanding
      ("Common Stock").





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





Traditional
      Small Business Disclosure Format (Check One): Yes [   ] No
      [X].













**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**















**SIBERIAN
      ENERGY GROUP INC.**


**(A
      Development Stage Company)**





**CONDENSED
      CONSOLIDATED**


**FINANCIAL
      STATEMENTS**





**June
      30, 2007**












2








**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 June 30, 2007, and the
      related condensed consolidated statements of operations, stockholders' equity,
      and cash flows for the six months ended June 30, 2007 and 2006, and the
      cumulative period of development stage activity (January 1, 2003 through June
      30, 2007).   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,
      2006, 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 March 28, 2007, 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, 2006 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


August
      1,
      2007










3









SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)**Condensed
                Consolidated Balance Sheets****(Unaudited)****June
                30,**
            
            
            December
                31,**2007**
            
            
            2006**Assets****Current
                assets:**Cash
            
            **$**
            **2,791**
            
            
            $
            1,435Management
                fee
                receivable
            
            ****
            **85,000**
            
            
            
            110,000Prepaid
                expenses and other
            
            ****
            **112,100**
            
            
            
            5,272****
            **199,891**
            
            
            
            116,707Investment
                in joint venture
            
            ****
            **-**
            
            
            
            -Oil
                and gas properties, unproved
            
            ****
            **2,700,000**
            
            
            
            2,700,000Property
                and equipment, net
            
            ****
            **3,953**
            
            
            
            2,565**$**
            **2,903,844**
            
            
            $
            2,819,272**Liabilities
                and Stockholders' Equity****Current
                liabilities:**Accounts
                payable:Related party - stockholders
            
            **$**
            **365,814**
            
            
            $
            362,166Related party - Baltic Petroleum, interest at
                14%
            
            ****
            **53,628**
            
            
            
            50,615Others
            
            ****
            **532,348**
            
            
            
            459,561Accrued
                payroll
            
            ****
            **698,784**
            
            
            
            1,011,788****
            **1,650,574**
            
            
            
            1,884,130**Stockholders'
                equity:**Common
                stock - authorized 100,000,000 shares, $.001 par value,15,708,030 and 14,112,961 issued and outstanding
            
            ****
            **15,708**
            
            
            
            14,113Additional
                paid-in capital
            
            ****
            **8,053,318**
            
            
            
            6,593,829Accumulated
                deficitPre-development stage
            
            ****
            **(449,785**
            **)**
            
            
            (449,785
            )Development stage
            
            ****
            **(6,355,701**
            **)**
            
            
            (5,218,570
            )Accumulated
                other comprehensive income (loss)
            
            ****
            **(10,270**
            **)**
            
            
            (4,445
            )****
            **1,253,270**
            
            
            
            935,142**$**
            **2,903,844**
            
            
            $
            2,819,272*See
                accompanying notes.*









4


SIBERIAN
                  ENERGY GROUP INC. (A Development Stage Company)For
                  the**Condensed
                  Consolidated Statements of Operations**
              
              
              
              
              
              
              
              
              
              
              
              cumulativeperiod
                  ofDevelopmentStage
                  Activity-For
                  the three
              
              
              For
                  the six
              
              
              January
                  1, 2003months
                  ended
              
              
              months
                  ended
              
              
              through**June
                  30,**
              
              
              June
                  30,
              
              
              **June
                  30,**
              
              
              June
                  30,
              
              
              June
                  30,**2007**
              
              
              2006
              
              
              **2007**
              
              
              2006
              
              
              2007Revenues
                  and other income:Management fees from joint venture
              
              **$**
              **195,000**
              
              
              $
              75,000
              
              
              **$**
              **360,000**
              
              
              $
              150,000
              
              
              $
              795,000Gain from entrance into joint venture
              
              ****
              **-**
              
              
              
              -
              
              
              ****
              **-**
              
              
              
              -
              
              
              
              364,479Other
              
              ****
              **-**
              
              
              
              -
              
              
              ****
              **-**
              
              
              
              -
              
              
              
              6,382Total
                  revenues and other income
              
              ****
              **195,000**
              
              
              
              75,000
              
              
              ****
              **360,000**
              
              
              
              150,000
              
              
              
              1,165,861Expenses:Salaries
              
              ****
              **384,426**
              
              
              
              35,251
              
              
              ****
              **468,069**
              
              
              
              68,562
              
              
              
              2,346,136Professional and consulting fees
              
              ****
              **461,866**
              
              
              
              1,433,429
              
              
              ****
              **664,254**
              
              
              
              1,589,145
              
              
              
              3,313,900Rent and occupancy
              
              ****
              **10,184**
              
              
              
              10,009
              
              
              ****
              **22,569**
              
              
              
              19,746
              
              
              
              198,812Depreciation and amortization
              
              ****
              **133**
              
              
              
              81
              
              
              ****
              **215**
              
              
              
              167
              
              
              
              102,932Finance charges and interest
              
              ****
              **1,515**
              
              
              
              2,416
              
              
              ****
              **3,014**
              
              
              
              6,264
              
              
              
              61,390Marketing and other
              
              ****
              **164,914**
              
              
              
              161,727
              
              
              ****
              **339,010**
              
              
              
              353,218
              
              
              
              1,498,392Total
                  expenses
              
              ****
              **1,023,038**
              
              
              
              1,642,913
              
              
              ****
              **1,497,131**
              
              
              
              2,037,102
              
              
              
              7,521,562Loss
                  before income taxes
              
              ****
              **828,038**
              
              
              
              1,567,913
              
              
              ****
              **1,137,131**
              
              
              
              1,887,102
              
              
              
              6,355,701Provision
                  for income taxes (benefit)
              
              ****
              **-**
              
              
              
              -
              
              
              ****
              **-**
              
              
              
              -
              
              
              
              -Net loss (development stage)
              
              **$**
              **828,038**
              
              
              $
              1,567,913
              
              
              **$**
              **1,137,131**
              
              
              $
              1,887,102
              
              
              $
              6,355,701Basic
                  and diluted loss per common share
              
              **$**
              **(0.05**
              **)**
              
              $
              (0.14
              )
              
              **$**
              **(0.08**
              **)**
              
              $
              (0.16
              )
              
              $
              (0.67
              )Weighted
                  average number of basic anddiluted
                  common shares outstanding
              
              ****
              **15,173,503**
              
              
              
              11,453,792
              
              
              ****
              **14,905,185**
              
              
              
              11,487,319
              
              
              
              9,405,277*See
                  accompanying notes.*




5





SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)**Condensed
                Consolidated Statements of Stockholders' Equity**For
                the cumulative period of Development Stage Activity - January 1,
                2003
                through June 30, 2007Common
                StockAdditionalNumber
                of
            
            
            Paid-InShares
            
            
            Par
                Value
            
            
            CapitalBalance,
                January 1, 2003 (pre-development stage)
            
            
            4,902,886
            
            
            $
            4,903
            
            
            $
            430,195Loss
                for the year - 2003
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued in acquisition (ZNG)
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            (1,000
            )Balance, December 31, 2003
            
            
            5,902,886
            
            
            $
            5,903
            
            
            $
            429,195Loss
                for the year - 2004
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
                currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued in acquisition (ZNG)
            
            
            3,450,000
            
            
            
            3,450
            
            
            
            746,550Shares
                issued for professional services
            
            
            50,000
            
            
            
            50
            
            
            
            9,950Other
            
            
            -
            
            
            
            -
            
            
            
            34,426Balance,
                December 31, 2004
            
            
            9,402,886
            
            
            $
            9,403
            
            
            $
            1,220,121Loss
                for the year - 2005
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
                currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued for professional services
            
            
            385,000
            
            
            
            385
            
            
            
            138,365Shares
                issued for accrued salaries
            
            
            1,700,000
            
            
            
            1,700
            
            
            
            210,800Warrants
                granted for professional services
            
            
            -
            
            
            
            -
            
            
            
            217,000Balance, December 31, 2005
            
            
            11,487,886
            
            
            $
            11,488
            
            
            $
            1,786,286Loss
                for the year - 2006
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
                currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued for employee stock option plan and warrants
            
            
            195,000
            
            
            
            195
            
            
            
            45,305Shares
                issued for geological data
            
            
            1,900,000
            
            
            
            1,900
            
            
            
            2,235,100Shares
                issued for professional services
            
            
            1,139,499
            
            
            
            1,140
            
            
            
            1,685,351Warrants
                granted for professional services
            
            
            -
            
            
            
            -
            
            
            
            841,177Shares
                cancelled
            
            
            (609,424
            )
            
            
            (610
            )
            
            
            610Balance, December 31, 2006
            
            
            14,112,961
            
            
            $
            14,113
            
            
            $
            6,593,829Loss
                for six months - 2007Foreign
                currency translation adjustmentShares
                issued for employee stock option plan and warrants
            
            
            566,935
            
            
            
            567
            
            
            
            67,447Shares
                issued for geological data
            
            
            200,000
            
            
            
            200
            
            
            
            285,800Shares
                issued for accrued salaries
            
            
            465,000
            
            
            
            465
            
            
            
            669,135Shares
                issued for professional services
            
            
            363,134
            
            
            
            363
            
            
            
            437,107Balance, June 30, 2007
            
            
            15,708,030
            
            
            $
            15,708
            
            
            $
            8,053,318*See
                accompanying notes.*









6


AccumulatedOtherAccumulated
              
              
              Comprehensive
              
              
              ComprehensiveDeficit
              
              
              Income
                  (Loss)
              
              
              Total
              
              
              Loss$
              (449,785
              )
              
              $
              -
              
              
              $
              (14,687
              )(422,516
              )
              
              
              -
              
              
              
              (422,516
              )
              
              $
              (422,516
              )-
              
              
              
              -
              
              
              
              -$
              (872,301
              )
              
              
              -
              
              
              $
              437,203
              )(833,567
              )
              
              
              -
              
              
              
              (833,567
              )-
              
              
              
              (53,120
              )
              
              
              (53,120
              )
              
              $
              (886,687
              )-
              
              
              
              -
              
              
              
              750,000-
              
              
              
              -
              
              
              
              10,000-
              
              
              
              -
              
              
              
              34,426$
              (1,705,868
              )
              
              $
              (53,120
              )
              
              $
              529,464
              )(882,151
              )
              
              
              
              
              
              
              (882,151
              )-
              
              
              
              50,614
              
              
              
              50,614
              
              
              $
              (831,537
              )-
              
              
              
              -
              
              
              
              138,750-
              
              
              
              -
              
              
              
              212,500-
              
              
              
              -
              
              
              
              217,000$
              (2,588,019
              )
              
              $
              (2,506
              )
              
              $
              (792,751
              )(3,080,336
              )
              
              
              -
              
              
              
              (3,080,336
              )-
              
              
              
              (1,939
              )
              
              
              (1,939
              )
              
              $
              (3,082,275
              )-
              
              
              
              -
              
              
              
              45,500-
              
              
              
              -
              
              
              
              2,237,000-
              
              
              
              -
              
              
              
              1,686,491-
              
              
              
              -
              
              
              
              841,177-
              
              
              
              -
              
              
              
              -$
              (5,668,355
              )
              
              $
              (4,445
              )
              
              $
              935,142(1,137,131
              )
              
              
              
              
              
              
              (1,137,131
              )(5,825
              )
              
              
              (5,825
              )
              
              $
              (1,142,956
              )68,014286,000669,600437,470$
              (6,805,486
              )
              
              $
              (10,270
              )
              
              $
              1,253,270




7










SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)For
                the**Condensed
                Consolidated Statements of Cash Flows**
            
            
            
            
            cumulativeperiod
                ofDevelopmentStage
                Activity-January
                1, 2003throughJune
                30,For
                the six months ended June 30,
            
            
            
            
            **2007**
            2006
            2007**Cash
                flows from operating activities:**Net
                loss (development stage)
            
            
            
            $
            **(1,137,131)**
            $(1,887,102)
            $  (6,355,701)Depreciation
                and amortization
            
            
            
            
            **215**
            167
            102,932Common
                stock and warrants issued
            
            
            
            **1,461,084**
            1,039,980
            4,327,502Gain
                from entrance into joint venture
            
            
            
            **-**
            -
            (364,479)Changes
                in other current assets and current liabilities:Prepaid
                expenses and other assets
            
            
            
            **(81,828)**
            25,000
            (350,492)Accounts
                payable and accrued expenses
            
            
            **(233,556)**
            845,999
            3,641,412**Net
                cash flows from operating activities**
            
            
            **8,784**
            24,044
            1,001,174**Cash
                flows from investing activities:**Expenditures
                for licenses and related
            
            
            
            **-**
            -
            (528,961)Expenditures
                for oil and gas properties
            
            
            
            **-**
            -
            (770,750)Expenditures
                for property and equipment
            
            
            **(1,603)**
            -
            (5,834)Cash
                received in acquisition
            
            
            
            
            **-**
            -
            6Cash
                received from entrance into joint venture
            
            
            **-**
            -
            175,000**Net
                cash flows for investing activities**
            
            
            **(1,603)**
            -
            (1,130,539)**Cash
                flows from financing activities:**Net
                proceeds from demand loan
            
            
            
            
            **-**
            -
            62,500Common
                stock issued for employee stock option plan
            
            **-**
            14,000
            45,500Additional
                paid-in capital
            
            
            
            
            **-**
            -
            34,426**Net
                cash flows from financing activities**
            
            
            **-**
            14,000
            142,426Effect
                of exchange rates on cash
            
            
            
            
            **(5,825)**
            (3,314)
            (1,000)Net increase in cash
            
            
            
            
            
            **1,356**
            34,730
            2,791Cash
                - beginning
            
            
            
            
            
            **1,435**
            11,551
            -Cash
                - ending
            
            
            
            
            $
            **2,791**
            $     46,281
            $         2,791*See
                accompanying notes.*









8




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 2007 are consistent
      with those used in the cumulative period of Development Stage Activity – January
      1, 2003 through June 30, 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:**





Through
      October 14, 2005, the Company operated through its wholly owned subsidiary,
      Zaural Neftegaz (ZNG).  ZNG is engaged in the business of exploiting
      and developing certain oil and gas and other petroleum products licenses issued
      by the Russia’s Kurgan Provincial Government for the Eastern part of Kurgan
      Province.  ZNG has its principal place of business in Kurgan City,
      Kurgan Province, Russia, and is the sole and exclusive owner of the exploration
      licenses.





On
      October 14, 2005, the Company entered into a joint venture agreement with a
      third party, Baltic Petroleum Limited (Baltic).  The Company
      transferred 100% of its ownership interest in ZNG to the Joint Venture
      Zauralneftagaz Limited, UK (ZL) and transferred 50% of the Joint Venture
      interest to Baltic for $175,000 and the agreement by Baltic to provide future
      funding to the Joint Venture as detailed in a Joint Venture Shareholders’
Agreement.   ZL is currently preparing to drill its second well
      based on the recommendations from the analysis of the first Privolny-1 well
      and
      continues geological exploration works throughout the territory of its seven
      licenses covering in total 1 million acres.  These operations are
      funded via loans provided to ZL and ZNG by a financing company wholly owned
      by
      Baltic. Loans are guaranteed by ZL’s holdings in ZNG. As of June 30, 2007 the
      total amounts provided through such loans to ZL and ZNG were equal to $17.2
      million plus accrued interest of approximately $1.9 million.





In
      connection with the current program of seismic studies and drilling of the
      first
      four wells in the ZNG’s license blocks, additional funds were raised by Baltic’s
      parent through a placement of shares.  On June 18, 2007 ZNG entered
      into an new loan agreement for $7.4 million, and it is anticipated that ZL
      will
      enter into an additional loan agreement for approximately $5.3 million covering
      drilling and geological works through the end of 2007.  The loans will
      not be dilutive to the Company’s ownership in ZNG.  In connection with
      the funding provided by Baltic, ZNG entered into a gross override royalty
      agreement with Baltic.





Additional
      details surrounding the Company’s involvement in the Joint Venture
      follow:





·
            During
                the arrangement, the Company will receive a monthly management fee
                of
                $25,000 from ZNG ($55,000 effective November
                2006);


·
            Profits
                from the Joint Venture are allocated 50% to the Company only after
                all
                financing of ZNG are settled with Baltic and Baltic’s financing
                subsidiaries;


·
            Although
                the Company and Baltic each own 50% of the Joint Venture’s shares and each
                appoint 50% of the Directors to the Joint Venture, Baltic always
                has an
                additional casting vote on Board of Director related
                issues;


·
            The
                Company has essentially no liability to guarantee the debts of the
                Joint
                Venture;


·
            The
                Company recognized a settlement gain of $364,479 as a result of the
                initial joint venture transaction.  This resulted primarily to
                adjust the Company’s negative investment to zero as of the agreement
                date.  All activity of ZNG before the agreement date is
                otherwise included in these financial
                statements.





Effective
      October 14, 2005, the Company’s investment in Joint Venture is recorded on the
      equity method of accounting.  Since cumulative losses of Joint Venture
      exceed the Company’s investment, the investment asset is carried at zero value
      as of June 30, 2007 and December 31, 2006.    Activities of
      ZNG prior to October 14, 2005 are otherwise included in the consolidated
      accounts of the Company in the accompanying financial statements.





As
      part
      of a planned separate oil and gas venture, on December 31, 2006, the Company
      acquired oil and gas related geological information on the Karabashki zone
      of
      Khanty-Mansiysk Autonomous district (Tuymen region of the Russian Federation)
      from Key Brokerage, LLC, a Delaware limited liability company, for 1,900,000
      shares of restricted common stock.  In conjunction with this asset
      purchase, the Company was also assigned ownership of Kondaneftegaz, LLC (Konda),
      a Russian limited liability company wholly-owned by Key Brokerage,
      LLC.





As
      a
      result of the purchase, the Company assigned an acquisition value of $2,700,000
      to the geological data assets based on both the approximate share value of
      the
      Company’s stock issued at the purchase date and the assets’ estimated value as
      determined by an independent appraisal prior to the
      acquisition.  Since Konda had essentially no assets or liabilities at
      the purchase date, had no previous operating history, and was transferred only
      to facilitate the Company’s potential future operations in Russia, no value was
      otherwise assigned to it at acquisition.





In
      2007,
      the Company plans to participate in two or three auctions for development and
      production licenses for the parcels belonging to the existing oil deposits
      of
      Khanty-Mansiysk district.





On
      a
      moving forward basis, the Company anticipates further business
      expansion.   It is constantly evaluating new mineral resource
      assets, both explored and unexplored, as part of its growth
      strategy.





The
      Company was incorporated in the State of Nevada on August 13, 1997, and
      previously provided comprehensive outpatient rehabilitation services to patients
      suffering from work, sports and accident related injuries.  All
      activities related to the Company's previous business ventures were essentially
      discontinued prior to January 1, 2000.  Predecessor names of the
      Company since its inception include Trans Energy Group Inc., 17388 Corporation
      Inc., Talking Cards Inc., Oyster King Incorporated and Advanced Rehab Technology
      Corporation.





**3.  Income
      Taxes:**




At
      June
      30, 2007, the Company has estimated U.S. tax net operating loss carryforwards
      totaling approximately $5,075,000.  These carryforwards may be used to
      offset future taxable income, and expire in varying amounts through
      2027.  No tax benefit has been reported in the financial statements
      since the Company believes there is at least a 50% chance that the carryforwards
      will expire unused.  Accordingly, the $1,015,000 estimated cumulative
      tax benefit of the loss carryforward has 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 may have had a dilutive effect on earnings per share had
      the Company generated income during the periods through June 30,
      2007.




**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 the Joint Venture arrangement established in 2005 will
      successfully generate allocable profits to the Company in the near
      term.





For
      the
      cumulative period ended June 30, 2007, the Company has obtained cash financing
      from organizing stockholders and employees in the form of loans, advances,
      and
      deferred salaries.  However, there can be no certainty as to
      availability of continued financing in the future.  Failure to obtain
      sufficient financing may require the Company to reduce its operating
      activities.  A failure to continue as a going concern would then
      require stated amounts of assets and liabilities be reflected on a liquidation
      basis which could differ form the going concern basis.  9


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





CERTAIN
      STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB (THIS "FORM 10-QSB"),
      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. ("SIBERIAN", THE "COMPANY", "WE",
      "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE
      OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
      REFERENCES IN THIS FORM 10-QSB, UNLESS ANOTHER DATE IS STATED, ARE TO JUNE
      30,
      2007.





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





**BUSINESS
      DEVELOPMENT:**





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





On
      September 17, 1999, the Company affected a 1-for-30 reverse stock split. A
      subsequent 3-for-1 forward split was consummated on October 2, 2000. All share
      amounts subsequently listed are retroactively adjusted to reflect these stock
      splits unless otherwise provided. All activities related to the Company's
      business were discontinued prior to January 1, 2000 and the Company began
      looking for opportunities to acquire an operating business.





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





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









10









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





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 are currently evaluating investment and joint venture
      opportunities throughout Russia.




Until
      October 14, 2005, the Company's operations were conducted solely through its
      then wholly owned subsidiary, Zaural Neftegaz ("ZNG") a development stage oil
      and gas exploration company located in the Western Siberian Region of Russia.
      However, on October 14, 2005, the Company entered into a Joint Venture
      agreement, whereby the Company transferred 100% of the ownership of ZNG to
      a
      newly formed Joint Venture company, Zauralneftegaz Limited, a company organized
      under the laws of the United Kingdom ("ZNG, Ltd."), of which the Company owns
      50% pursuant to the Joint Venture agreement entered into on October 14, 2005
      (as
      described in greater detail below under “Joint Venture”). From October 14, 2005
      to December 13, 2006, the Company had no oil and gas operations except through
      its ownership of 50% of ZNG, Ltd. On December 13, 2006, the Company entered
      into
      an Interest Purchase Agreement with Key Brokerage, whereby the Company purchased
      100% of the issued and outstanding common stock of Kondaneftegaz, LLC (“KNG”), a
      Russian limited liability company, which was created in 2004 for the purpose
      of
      oil and gas exploration in the Khanty-Mansiysk district of Western Siberia,
      Russia. KNG has previously applied for 10 exploration and production licenses
      for parcels located within the existing oil deposits of the Khanty-Mansiysk
      district, in Russia, four of which are expected to be auctioned off during
      the
      third or fourth quarters of 2007.





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





**Description
      of KNG**





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





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





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









11







In
      connection with the purchase of KNG, we received certain geological information,
      including well logs, surveys and structural maps regarding the Karabashsky
      zone
      of the Khanty-Mansiysk district, which an independent appraisal valued at
      approximately $2,700,000.





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





**Description
      of ZNG**





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





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





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





In
      June
      2006, through participation in governmental auctions, ZNG successfully obtained
      three more oil and gas licenses in the Kurgan region of Siberia, Russia: the
      Yuzhno-Voskresensky, Petuhovsky and Lebyazhevsky parcels. The new licenses
      are
      for the period of 25 years and allow both exploration and production on the
      licensed areas. The total cost paid at the auctions for the three new licenses
      by ZNG was approximately $425,000. The acquisition of the three new
      licenses increased the total area covered by the licenses held by ZNG from
      643,000 acres to over 1 million acres. All seven licensed areas are located
      in
      the Eastern part of Kurgan region, have well-developed infrastructure, including
      close proximity to the major oil pipeline, and have available existing prior
      geological data.





ZNG
      also
      has outstanding applications for two more parcels in the same area -
      Zapadno-Petukhovsky and Orlovo-Pashkovsky-2. The anticipated auction dates
      for
      these licenses are currently unknown and there can be no assurance that ZNG
      will
      be awarded the licenses to the parcels at auction.





As
      of
      June 2007, ZNG had performed the following research and exploration works on
      its
      licensed areas:





·
            Obtained
                core samples from parametric wells drilled in prior years on the
                licensed
                areas and adjacent territories in the Eastern part of Kurgan region
                during
                the initial search for oil and gas in the region, and performed analysis
                of the data provided by the
                samples;





·
            Completed
                a 2D seismic survey on the West-Suersky block (approximately 320
                linear
                kilometers), the Privolny block (approximately 140 linear kilometers),
                and
                the Mokrousovsky block (approximately 340 linear kilometers) using
                Bazneftgeophisica;




·
            Performed
                gravimetric surveys on the West-Suersky
                block;










12










·
            Completed
                approximately 2,106 linear kilometers of gas seismotomographic and
                geochemical surveys performed by Exotrad on the Privolny, Mokrousovsky,
                West-Suersky, Orlovo- Pashkovsky, South-Voskresensky, Petukhovsky
                and
                Lebyazhevsky blocks. Gas seismotomography is an advanced technique
                of
                combining active gas geochemistry, passive seismic and electromagnetic
                methods. The surveys were performed by Exotrad, a world leader in
                this
                field. Exotrad has used this technology in more than 260 projects
                as well
                as “Caspian Pipeline Consortium”; “Sakhalin-2”; and “Blue Stream” in
                diverse locations across Asia, Eastern Europe and the
                Americas;




·
            Scientific
                and technical analysis was performed by the team of geologists, which
                included experts from Exploration Consultants Limited ("ECL"), a
                leading
                international oil and gas consulting firm (part of RPS
                Group);





·
            Based
                on the results of the gas seismotomographic surveys and high definition
                2D
                seismic survey shot over the geochemical anomalies found in the Privolny
                and Mokrousovsky blocks, ZNG's Board of Directors decided to drill
                up to
                four exploration wells. At least two of these wells are proposed
                to be
                drilled in northern locations in the Privolny block (one of which
                has
                previously been drilled, the Privolny-1 Well) and the other two wells
                are
                proposed to be drilled on the Mokrousovsky block; and·
            Preliminary
                Drilling Results of the first well drilled on the Privolny block,
                the
                Privolny-1 Well, have
                been****obtained****to substantiate
                the interpretation of seismic data obtained in 2006, together with
                other
                geophysical and geochemical work conducted over the last two
                years. ZNG believes that the Privolny-1 Well will help provide an
                improved analysis which will allow it to create a work program including
                the drilling of at least two more exploration
                wells.





Following
      detailed data collection, survey and seismic testing, ZNG will proceed with
      development of the most promising licenses first, which will allow it to
      concentrate its resources on the most prospective areas. Based on research
      performed to date the areas of most interest are the Privolny and Mokrousovsky
      blocks. The West Suersky and Orlovo-Pashkovsky-1 blocks currently have the
      least
      potential in the assessment of ZNG and ZNG has decided not to proceed with
      its
      commitments in respect to those licenses.  The Yuzhno-Voskresensky,
      Petuhovsky and Lebyazhevsky parcels will require further exploration before
      the
      decision on their potential can be reached.





The
      following survey and exploration activities have taken place on the first two
      blocks designated by ZNG for exploration, the Privolny and the Mokrousovsky
      blocks to date:





**Privolny
      Block**





·
              Based
                  on the results of the gas seismotomographic surveys and high definition
                  2D
                  seismic survey shot over the geochemical anomalies found in the
                  Privolny
                  and Mokrousovsky blocks, two drilling prospects were identified
                  in the
                  northern part of the Privolny block;·
              A
                  drilling of the first prospect
                  located in the Privolny block was performed. The “Privolny-1” well is
                  intended to provide physical data to enable the seismic survey
                  to be
                  correlated to the geology of the block and to better determine
                  the
                  subsurface structures which are present in the block;·
              A
                  drilling depth of 2402.5 meters has been reached to date on the
                  Privolny-1
                  well, and sufficient data has been gathered to enable a tie in
                  to the
                  adjoining Mokrousovsky license block; and


·
            The
                core samples from the Privolny-1 well were obtained in the Middle
                Carboniferous-Moscovian and Upper and Middle Devonian sections, including
                lean source rocks lying within the oil maturation window.  The
                cores and electric logs obtained from the Privolny-1 well will be
                analyzed
                and the results will determine whether the well is to be further
                deepened
                to prospective geological horizons. As such, further drilling on
                the
                Privolny-1 well has been temporarily put on hold, pending further
                analysis
                of the data.









13








**Mokrousovsky
      Block**





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





·
            One
                structural prospect was identified in the south west of the Mokrousovsky
                license area. The structure has a maximum area of approximately 72
                square
                km, of which approximately 52 square km lie within the licensed area.
                The
                surface geochemical anomaly discovered in the area lies over the
                north
                eastern flank of the structure within the license area;·
            A
                drilling location has been recommended by RPS for the prospect, based
                on
                the strong structure and geochemical coincidence, which drilling
                has not
                begun to date; and·
            ZNG
                believes that the data gathered by drilling of the Privolny-1 well
                will
                enable it to determine the location for its second well, the
                Mokrousovsky-1, with a greater degree of confidence, of which there
                can be
                no assurance. As of the date of this filing, ZNG has signed the
                contract for drilling of the Mokrousovsky-1 well. Actual
                drilling  is expected to begin in late September or early
                October 2007, of which there can be no
                assurance.





**Joint
      Venture**





Operating
      activities of ZNG described above are carried out through the Joint Venture
      Shareholders' Agreement ("Joint Venture") entered into on October 14, 2005
      with
      Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and Zauralneftegaz
      Limited, the joint venture company ("ZNG, Ltd."), as contemplated by the Option
      Agreement, as amended (the "Option"). The Company closed the Joint Venture
      and
      transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in connection
      with
      the terms and conditions of the Joint Venture. As a result of such transfer,
      the
      Company holds 50% of the outstanding stock of ZNG, Ltd., which holds 100% of
      the
      outstanding stock of the Company's former wholly owned subsidiary, ZNG. ZNG,
      Ltd., will, operate through ZNG and be engaged in the exploration and
      development of, production and sale of, oil and gas assets in the Western
      Siberian region of the Russian Federation and the former Soviet Union and as
      a
      result of such transfer, the Company no longer has any separate oil and gas
      exploration activities in Kurgan, Russia, other than through its ownership
      of
      ZNG, Ltd.





The
      operations of the Joint Venture are funded via loans provided to ZNG, Ltd.
      and
      ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly owned
      by
      Baltic.  Loans are guaranteed by ZNG, Ltd.’s holdings in
      ZNG.  As of June 30, 2007 the total funding provided to ZL and ZNG by
      Baltic was equal to $17.2 million plus accrued interest of approximately $1.9
      million.





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





·
            On
                November 9, 2005, ZNG entered into a New Loan with Caspian (the "New
                Loan"). Under the loan agreement, Caspian agreed to provide a loan
                of up
                to $6,874,325 representing the assumed
                commitment
                  under a prior loan equal to $1,739,658, of which ZNG had received
                  $1,110,624 as of November 9, 2005, and a new commitment of up to
                  $5,134,667, to be used for operations in the Kurgan region in 2005
                  and
                  through the first half of 2006. The New Loan is available to ZNG
                  until the
                  sixth anniversary of the date of the New Loan, or November 9, 2011
                  (the
                  "Term");









14











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





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








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





The
      total
      outstanding balance of the New Loan provided up to June 30, 2007, is
      $10,107,000, including $8,992,000 principal and $1,115,000 of interest accrued
      as of June 30, 2007.





Funding
      to ZNG, Ltd. is provided by Caspian on the same terms as to ZNG, through the
      mechanism of intercompany billing within Baltic and certain companies affiliated
      with Baltic. As of June 30, 2007, the total loan to ZNG, Ltd. from Caspian
      comprised $7,956,000 including $7,128,000 of principal and accrued interest
      of
      $828,000. In addition, ZNG, Ltd. owes $1,135,000 directly to Baltic for unpaid
      management fees and accrued interest through June 30, 2007.





The
      total
      budget for the current program
      of seismic
      studies and drilling of the first four wells on ZNG’s licenses which the
      Board has proposed to undertake on ZNG's licensed blocks in 2007, is
      approximately US $14,998,000, or approximately $8 million British pounds. These
      funds were raised
      by
      Baltic’s parent company through a placement of shares. Of the total
      budgeted amount of $14,998,000, the sum of $9,659,000 is being provided through
      the ZNG loans described earlier and the sum of $5,339,000 is committed to be
      provided to ZNG, Ltd. The loans will not be dilutive to the Company's ownership
      in ZNG. In connection with the funding provided by Baltic, ZNG entered into
      a
      gross override royalty agreement with Baltic, as described below under "Deed
      of
      Agreement," and “Gross Override Royalty Agreement.”




Terms
      of loans to ZL and ZNG:





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





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




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




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








15










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





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





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





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




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




**Deed
      of Agreement**





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





o
            $185,000
                to be paid to Business Standard, which was owed to Business Standard
                from
                ZNG in consideration for Business Standard assisting ZNG with the
                process
                of the granting of the three oil and gas licenses awarded to ZNG
                in June
                2006;o
            $170,000
                to be paid to Mr. Victor Repin (a significant shareholder of the
                Company)
                and Sergey Potapov (a Director of the Company) in final settlement
                of
                amounts due to them by ZNG; and


o
            $44,000
                to ZNG's landlord in full settlement of all sums due in connection
                with
                the rent on ZNG's offices in Kurgan,
                Russia.





16


**Gross
      Overriding Royalty Agreement**





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





**Agreement
      With Alternative Energy Finance, Ltd.**





We
      previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which
      Tim
      Peara is the Managing Director as well as a Director of the Company, certain
      warrants in connection with Mr. Peara introducing the parties who formed the
      joint venture. Pursuant to an agreement between AEF and the Company, AEF will
      receive compensation based on the total investment made by Baltic Petroleum
      Ltd.
      in the Joint Venture. This compensation included a commission of approximately
      $18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture) and
      50,068 options to purchase shares of our common stock at $0.63 per share which
      were granted to Mr. Peara on March 6, 2006 and a commission of $6,673 (1% of
      Baltic's $667,313 investment in the Joint Venture in the first quarter of 2006),
      and 17,561 options to purchase shares of our common stock at $0.67 per share
      for
      the first quarter of 2006, which were granted to Mr. Peara on March 31, 2006,
      which options contain a cashless exercise provision.





On
      June
      30, 2006, in connection with our agreement with AEF, we agreed to grant AEF
      a
      warrant to purchase 20,412 shares of our common stock at an exercise price
      of
      $2.02, which warrants contained a cashless exercise feature. The warrants expire
      three years from the grant date. We were also obligated to pay AEF $23,562
      during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
      investment in the Joint Venture in the second quarter 2006).





On
      September 30, 2006, in connection with our agreement with AEF, we agreed to
      grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
      price of $1.53 per share, which warrants contained a cashless exercise feature.
      The warrants expire three years from the grant date. We were also obligated
      to
      pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
      Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
      2006).





On
      December 31, 2006, in connection with our agreement with AEF, we agreed to
      grant
      AEF a warrant to purchase 38,648 shares of our common stock at an exercise
      price
      of $1.44 per share, which warrants contained a cashless feature. The warrants
      expire three years from the grant date. We were also obligated to pay AEF
      $31,794 during the three months ended December 31, 2006 (equal to 1% of Baltic’s
      approximately $3,197,400 investment in the Joint Venture in the fourth quarter
      of 2006).





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





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








17







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








**Recent
      Officer and Director Transactions:**





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





In
      June
      2007, we issued 70,000 shares of restricted common stock to our President,
      Helen
      Teplitskaia, of which 50,000 shares was a sign-on bonus in connection with
      her
      agreeing to be an officer of the Company in May 2007, and 20,000 shares were
      part of her compensation package with the Company, whereby she is to be paid
      10,000 shares per month for her service to the Company, which shares were issued
      for services rendered in May and June 2007.





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





**Uptick
      Capital Agreement**





On
      January 31, 2007, we entered into an agreement with Uptick Capital Ltd.
      (“Uptick”), whereby Uptick agreed to assist us in developing market links and
      strategic initiatives as well as financing introductions for us as requested
      from time to time. The initial agreement was for a period of three (3) months,
      but was extended for two months, and has since been terminated.  We
      agreed to issue Uptick 10,000 shares of our restricted common stock for each
      month that the agreement with Uptick is in place. We also agreed to indemnify
      Uptick for certain costs and damages in connection with its performance of
      its
      duties under the Uptick agreement, as described in greater detail in the
      agreement.





**Global
      Consulting Group Agreement**





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






18






The
      Global agreement can be terminated by either party after six (6) months upon
      thirty (30) days prior written notice, and can be terminated immediately at
      any
      time due to a material breach of the agreement by either party, which breach
      is
      not cured within 15 days of notice thereof from the non-breaching party, and/or
      if any party becomes bankrupt or ceases to carry on business.





**Exercise
      of Stock Options**





On
      May 1,
      2007 at 9:00 a.m., Tim Peara, our Director, exercised 50,000 of the options
      he
      held to purchase restricted shares of our common stock at an exercise price
      of
      $0.30 per share, which options would have expired on May 1, 2007 at 5:00 p.m.
      if
      not previously exercised by Mr. Peara. Mr. Peara used the cashless exercise
      provision of the options and received 41,935 shares of our common stock in
      connection with the exercise of the options, based on the fair market value
      of
      the common stock on the date he exercised of $1.86.





In
      June
      2007, Mr. Viktor Repin exercised 700,000 of the options he held to purchase
      112,500 shares of our restricted common stock at an exercise price of $1.00
      per
      share and 137,000 shares at an exercise price of $1.05 per share. Mr. Repin
      used
      the cashless exercise provision of the options and received 250,000 shares
      of
      our common stock in the name of his nominee in connection with the exercise
      of
      the options, based on the fair market value of the common stock on the date
      he
      exercised of $1.60.





In
      June
      2007, LLC Business Standard exercised 800,000 of the options it held to purchase
      shares of our restricted common stock at an exercise price of $1.05 per share.
      Business Standard used the cashless exercise provision of the options and
      received 275,000 shares of our common stock for it and its nominees in
      connection with the exercise of the options, based on the fair market value
      of
      the common stock on the date he exercised of $1.60.





**Amendment
      to Employment Agreement with Elena Pochapski**





On
      or
      about April 2, 2007, with an effective date of April 1, 2007, we entered into
      “Amendment 2 to the Employment Agreement Dated August 1, 2003” with Elena
      Pochapski, our Chief Financial Officer and Director, which amended the terms
      of
      the first amendment to Ms. Pochapski’s Employment Agreement, in September 2005,
      to provide that Ms. Pochapski’s annual salary shall thereafter be $75,000 per
      year.





19


**Appointment
      of New Officer and Director**





Effective
      May 1, 2007, Helen Teplitskaia was appointed as the Company’s President and as a
      Director of the Company.





Helen
      Teplitskaia is Executive Vice President and Head of Eurasia Practice at Imnex
      International, Inc. She also serves as President of the American-Russian Chamber
      of Commerce & Industry, President of the American-Eurasian Chamber of
      Commerce, Director of the International Energy Advisory Council and Adjunct
      Associate Professor of International Business and Markets - Global Initiatives
      in Management at Northwestern University Kellogg School of
      Management.




Throughout
      her career, Ms. Teplitskaia has successfully assisted a variety of government
      agencies and private sector companies, including the United States Agency for
      International Development, US State Department, Ministry of Foreign Affairs
      of
      the Republic of Uzbekistan, AT&T, Baker & McKenzie, Case New Holland,
      Gazprom, Gillette, HeidelbergCement, Ingersoll-Rand, Maytag, Motorola,
      Pepsi-Cola and Morgan Stanley with start-up operations in markets, direct
      investment, mergers and acquisitions, joint ventures and licensing, marketing
      research, political interfacing and media relations.




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





Subsequent
      to her appointment as President of the Company, we agreed to provide Ms.
      Teplitskaia a compensation package consisting of 10,000 shares per month for
      her
      service to the Company and a sign-on bonus of 50,000 shares of common
      stock.





**Critical
      Accounting Policies and Estimates**





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




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





**Going
      Concern**





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






20







**PLAN
      OF OPERATIONS FOR THE NEXT TWELVE MONTHS**





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




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





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




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





In
      connection with the Joint Venture (described under "Joint Venture Agreement,"
      above), the Company received $25,000 per month in management fees in connection
      with the Joint Venture from the date the Joint Venture was entered into until
      November 2006, at which time the management fees were increased to $55,000
      per
      month until June 2007 when they increased again to $85,000. The Company,
      however, can make no assurance that $85,000 per month will be adequate to pay
      its upcoming expenses and liabilities, in which case the Company plans that
      its
      organizing stockholders will continue to provide financing for the Company,
      of
      which there can be no assurance.





In
      the
      past, we have obtained cash financing from organizing stockholders in the form
      of loans and advances, as a result, amounts totaling $365,814 and $421,343
      were
      payable to the stockholders as of June 30, 2007 and June 30, 2006, respectively.
      However, there can be no certainty as to the availability of continued financing
      in the future. Failure to obtain sufficient financing may require us to reduce
      our operating activities. A failure to continue as a going concern would then
      require stated amounts of assets and liabilities to be reflected on a
      liquidation basis which could differ from the going concern basis.





**COMPARISON
      OF OPERATING RESULTS**





**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007, COMPARED TO THE THREE
      MONTHS ENDED JUNE 30, 2006**





We
      had
      revenues and other income of $195,000 for the three months ended June 30, 2007,
      which was primarily due to $55,000 of monthly management fees received from
      ZNG,
      Ltd for the months of April and May 2007 and monthly management fees of $85,000
      for the month of June 2007. We had $75,000 of revenue and other income for
      the three months ended June 30, 2006, due solely to $75,000 of management fees
      received. In November 2006, the management fees we received pursuant to our
      Joint Venture increased from $25,000 per month to $55,000 per month and in
      June
      2007 the monthly management fees increased again to $85,000 per month. Revenues
      increased $120,000 or 160% for the three months ended June 30, 2007, compared
      to
      the three months ended June 30, 2006, which increase was due to the increases
      in
      management fees received in connection with the Joint Venture.





21







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





We
      had
      total expenses of $1,023,038 for the three months ended June 30, 2007, compared
      to total expenses for the three months ended June 30, 2006, of $1,642,913,
      which
      represented a decrease in total expenses from the prior period of $619,875
      or
      37.7%.





The
      main
      reason for the decrease in total expenses for the three months ended June 30,
      2007, compared to the three months ended June 30, 2006, was a $971,563 decrease
      in professional and consulting fees, to $461,866 for the three months ended
      June
      30, 2007, compared to $1,433,429 for the three months ended June 30, 2006,
      which
      decrease is largely attributable to 600,000 shares of common
      stock  issued to a  consulting firm Business Standard, which
      had a value of $1,113,000 in connection with the acquisition of three additional
      licenses by ZNG in June 2006 and to $276,000 of stock options granted to certain
      of our consultants during the three months ended June 30, 2006,,which were
      not
      represented during the three months ended June 30, 2007; which was offset by
      a
      $349,175 increase in salaries to $384,426 for the three months ended June 30,
      2007, compared to $35,251 for the three months ended June 30, 2006, mainly
      attributable to the salary of David Zaikin, who previously agreed during the
      2006 fiscal year, including the three months ended June 30, 2006, to not accrue
      salary, but who since decided as of January 30, 2007, to once again accrue
      salary from the Company, the 190,000 shares of common stock issued to Mr. Zaikin
      during the three months ended June 30, 2007, in consideration for services
      rendered and to the salary of our new President Helen Teplitskaia, which was
      paid through the issuance of shares of common stock during the three months
      ended June 30, 2007, as described below, which expenses were not present during
      the three months ended June 30, 2006.







The
      $384,426 of salaries for the three months ended June 30, 2007, included $22,358
      which was attributable to the our Chief Financial Officer, Elena Pochapski,
      of
      which $6,104 was accrued; $45,000 attributable to the salary of our Chief
      Executive Officer, David Zaikin, of which such $45,000 amount was accrued and
      $216,600 value of the 190,000 shares issued to David Zaikin (as described below
      under “Unregistered Sales of Equity Securities”); $79,800 attributable to the
      salary of our President Helen Teplitskaia, which was paid through the issuance
      of 70,000 shares (described below under “Unregistered Sales of Equity
      Securities”) and certain other amounts which were paid to various other
      officers, Directors, employees and consultants.




We
      had a
      net loss of $828,038 for the three months ended June 30, 2007, compared to
      a net
      loss of $1,567,913 for the three months ended June 30, 2006, a decrease in
      net
      loss of $739,875 or 47.2% from the prior period.  The decrease in net
      loss was mainly attributable to the $120,000 or 160% increase in management
      fees
      and by the $619,875 or 39.5% decrease in total expenses, namely the increase
      in
      salaries offset by the decrease in professional and consulting fees, for the
      three months ended June 30, 2007, compared to the three months ended June 30,
      2006.




**RESULTS
      OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007, COMPARED TO THE SIX MONTHS
      ENDED JUNE 30, 2006**





We
      had
      revenues and other income of $360,000 for the six months ended June 30, 2007,
      which was primarily due to $55,000 of monthly management fees received from
      ZNG, Ltd for the months of April and May 2007 and monthly management fees of
      $85,000 for the month of June 2007. We had $150,000 of revenue and other income
      for the six months ended June 30, 2006, due solely to $150,000 of management
      fees received. In November 2006, the management fees we received pursuant to
      our
      Joint Venture increased from $25,000 per month to $55,000 per month and in
      June
      2007, the management fees increased again to $85,000 per month. Revenues
      increased $210,000 or 140% for the six months ended June 30, 2007, compared
      to
      the six months ended June 30, 2006, which increase was due solely to the
      increases in monthly management fees we receive in connection with the
      Joint Venture




22







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





We
      had
      total expenses of $1,497,131 for the six months ended June 30, 2007, compared
      to
      total expenses for the six months ended June 30, 2006, of $2,037,102, which
      represented a decrease in total expenses from the prior period of $539,971
      or
      26.5%.





The
      main
      reason for the decrease in total expenses for the six months ended June 30,
      2007, compared to the six months ended June 30, 2006, was a $924,891 decrease
      in
      professional and consulting fees, to $664,254 for the six months ended June
      30,
      2007, compared to $1,589,145 for the six months ended June 30, 2006, which
      decrease is largely attributable to 600,000 shares of common
      stock  issued to a consulting firm Business Standard, which had a
      value of $1,113,000 in connection with the acquisition of three additional
      licenses by ZNG in June 2006 and to $276,000 value of stock options granted
      to
      certain of our consultants during the six months ended June 30, 2006, which
      were
      not represented during the six months ended June 30, 2007, partially offset
      by
      increased fees of Business Standard, accrued on a monthly basis starting in
      January 2007. The decrease in professional and consulting fees was offset by
      a
      $399,507 increase in salaries to $468,069 for the six months ended June 30,
      2007, compared to $68,562 for the six months ended June 30, 2006, mainly
      attributable to the salary of David Zaikin, who previously agreed during the
      2006 fiscal year, including the six months ended June 30, 2006, to not accrue
      salary, but who since decided as of January 30, 2007, to once again accrue
      salary from the Company, and  the 190,000 shares of common stock
      issued to Mr. Zaikin during the three months ended June 30, 2007, in
      consideration for services rendered and to the salary of our new President
      Helen
      Teplitskaia, which was paid through the issuance of shares of common stock
      during the six months ended June 30, 2007, as described below, which expenses
      were not present during the six months ended June 30, 2006.




The
      $468,069 of salaries for the six months ended June 30, 2007, included $40,418
      which was attributable to the our Chief Financial Officer, Elena Pochapski,
      of
      which $6,104 was accrued; $90,000 attributable to the salary of our Chief
      Executive Officer, David Zaikin, of which such $90,000 amount was accrued and
      $216,600 value of the 190,000 shares issued to David Zaikin (as described below
      under “Unregistered Sales of Equity Securities”); $79,800 attributable to the
      salary of our President Helen Teplitskaia, which was paid through the issuance
      of 70,000 shares (described below under “Unregistered Sales of Equity
      Securities”); and certain other amounts which were paid to various other
      officers, Directors, employees and consultants.




We
      had a
      net loss of $1,137,131 for the six months ended June 30, 2007, compared to
      a net
      loss of $1,887,102 for the six months ended June 30, 2006, a decrease in net
      loss of $749,971 or 39.7% from the prior period. The decrease in net loss was
      mainly attributable to the $210,000 or 140% increase in management fees and
      by
      the $539,971 or 26.5% decrease in total expenses, namely the decrease in
      professional and consulting fees, described above, offset by the increase in
      salaries for the six months ended June 30, 2007, compared to the six months
      ended June 30, 2006.




**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      had
      current assets of $199,891 as of June 30, 2007, which included cash of $2,791;
      management fee receivable of $85,000, which represented amounts owed to us
      by
      ZNG, Ltd. in management fees, which amount has been paid to date; and prepaid
      expenses and other of $112,100.





We
      had
      total assets of $2,903,844 as of June 30, 2007, which included current assets
      of
      $199,891 and non-current assets of $2,703,953. Non-current assets included
      $2,700,000 of oil and gas properties, unproved, representing geological studies
      and data, which we received in connection with the purchase of KNG and $3,953
      of
      property and equipment, net.








23







We
      had
      total liabilities of $1,650,574 as of June 30, 2007, which were solely current
      liabilities and which included $365,814 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 June 30, 2007; $53,628
      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; $532,348 of
      accounts payable to others for advisory and professional services rendered;
      and
      $698,784 of accrued payroll, which included $419,100 payable to our Chief
      Executive Officer, David Zaikin of which $216,600 was paid to Mr. Zaikin in
      July
      2007, through the issuance of190,000 shares (described below under “Unregistered
      Sales of Equity Securities”), $90,000 relating to Mr. Zaikin’s salary for the
      six months ended June 30, 2007, which amount has been accrued, 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, $90,811 payable
      to
      our Chief Financial Officer, Elena Pochapski, and $69,242 of accrued salary
      payable to our former Chief Executive Officer, Shakeel Adam.





We
      had
      negative working capital of $1,450,683 and a total pre development and
      development stage accumulated deficit of $6,805,486 as of June 30,
      2007.





Because
      our cumulative losses associated with the operations of ZNG exceeded our
      investment as of the date of the Joint Venture, ZNG is carried on our balance
      sheet at $-0- as of June 30, 2007. Our investment in ZNG will exceed $-0- at
      such time as ZNG has cumulative earnings sufficient to repay all loans to Baltic
      as provided in the Joint Venture, if ever.




We
      had
      $8,784 of net cash flows for operating activities for the six months ended
      June
      30, 2007, which resulted from payment of current liabilities  through
      the issuance of common stock, particularly  common stock and warrants
      worth $1,461,084 were issued for professional services and salaries offset
      by a
      $233,556 increase in accounts payable and accrued expenses, and $1,137,131
      of
      net loss.





Pursuant
      to the Deed of Agreement, whereby Baltic agreed to loan ZNG approximately
      $12,000,000 to be used on seismic studies, the budget for the current program
      of seismic
      studies and drilling of the first four wells on ZNG’s licenses in 2007
      was adopted by ZL’s Board. This budget amounted to US $14,998,000, or
      approximately $8 million British pounds. These funds were raised
      by
      Baltic’s parent company through a placement of shares. Of the total
      budgeted amount of $14,998,000, the sum of $9,659,000 is being provided through
      the ZNG loans described earlier and the sum of $5,339,000 is committed to be
      provided to ZNG, Ltd. The loans will not be dilutive to the Company's ownership
      in ZNG.





As
      of
      June 30, 2007, ZNG had received $10,107,000 pursuant to the New Loan, which
      amount includes $1,110,624 assumed by ZNG in connection with a previous loan
      made to ZNG. Total interest accrued as of June 30, 2007 was $1,115,000,
      including accrued interest on the previous loan. The total funding provided
      to
      ZNG, Ltd. and ZNG by Baltic as of June 30, 2007 was equal to $17.2 million
      plus
      accrued interest of approximately $1.9 million.




Under
      the
      Joint Venture, we currently receive $85,000 per month as a management fee
      from ZNG, Ltd. In addition to the monthly management fee, ZNG Ltd. agreed to
      lend $78,000 to us to pay for legal and consulting services in connection with
      establishing the Joint Venture. We received $29,000 of this amount in November
      2005; and will receive the additional $49,000 if all five of the new licenses
      are awarded to ZNG, of which three have been awarded to date, and ZNG submits
      a
      letter from the relevant license authority of the Ministry of Natural Resources
      of the Russian Federation confirming such awards, of which there can be no
      assurance.








24







Since
      our
      transfer of ZNG to the Joint Venture, our only oil and gas operations separate
      from our ownership of 50% of ZNG, Ltd. has been through KNG, and we hope to
      be
      awarded oil and gas exploration licenses in connection with KNG during 2007.
      Moving forward, we believe that in the long run a number of trends will
      favorably affect our liquidity. These trends include the steady trend of
      economic growth in Russia in the recent years which is improving the liquidity
      of our potential customers, and may favorably impact our debt management and
      the
      increasing overall credit rating in Russia, which we hope will lead to increased
      foreign investment in Russian companies and which will benefit us as
      well.




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







25







**RISK
      FACTORS**





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





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





We
      depend
      to a great degree on the ability to attract external financing in order to
      conduct future exploratory and development activities. The Company believes
      it
      can satisfy its cash requirements during the next twelve months through funding
      provided by existing stockholders and with amounts received from the Joint
      Venture (described above), including $85,000 a month which the Company is to
      receive from ZNG, Ltd., pursuant to the Joint Venture. Additionally, ZNG has
      received approximately $1,110,624 from BP pursuant to a prior loan and another
      $8,996,376 pursuant to the New Loan, which had a total outstanding balance,
      including the assumed balance of the prior loan and accrued and unpaid interest
      on the prior loan and the New Loan as of June 30, 2007, of $10,107,000, which
      has been spent on various purposes, including paying consultants for services
      performed in connection with surveys previously performed on the licensed area.
      As the Joint Venture is now responsible for the funding of the operations of
      ZNG, we believe our expenditures in connection with ZNG will decrease in the
      upcoming periods. If we are unable to raise the additional funds required for
      the planned activities of the Joint Venture and for additional activities,
      separate from the Joint Venture, our Company may be forced to abandon its
      current business plan. If you invest in our Company and we are unable to raise
      the required funds, your investment could become worthless.





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





The
      Company does not expect to generate any revenues through the operations of
      ZNG,
      other than the $85,000 a month that it will receive from ZNG, Ltd., of which
      there can be no assurance. Therefore, investors should keep in mind that even
      if
      ZNG is able to raise the substantial amounts of additional financing it requires
      for its operations, it could still be years before ZNG generates any revenue,
      if
      ever. Even if generated such revenues will likely not be great enough to sustain
      ZNG. If no revenues are generated and hydrocarbon reserves are not located,
      we
      may be forced to abandon or curtail our current business plan. If ZNG, which
      is
      100% owned by the Company 50/50 joint venture ownership of ZNG, Ltd., were
      forced to abandon its business plan, the Company could be forced to abandon
      or
      curtail its business plan as well, which could cause the value of the Company's
      common stock to become worthless.





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





The
      Company anticipates the need for approximately $15,000,000 prior to KNG's
      expected generation of any revenues. Currently the Company has not raised any
      of
      this financing and the Company can make no assurances that this financing will
      ever be raised. The Company also does not expect to generate any revenues
      through the operations of KNG, until such financing can be raised, of which
      there can be no assurance. Therefore, investors should keep in mind that even
      if
      KNG is able to raise the substantial amounts of additional financing it requires
      for its operations, it could still be years before KNG generates any revenue,
      if
      ever. If KNG does not raise the $15,000,000 which it anticipates needing to
      generate revenues, which, even if generated, will likely not be great enough
      to
      sustain KNG if no revenues are generated and hydrocarbon reserves are not
      discovered, KNG may be forced to abandon its business plan, and the Company
      could be forced to abandon or curtail its business plan as well, which could
      cause the value of the Company's common stock to become worthless.






26







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





Our
      Company is in its early development stage, as planned principal activities
      have
      not begun. We have generated only minimal revenues since inception and have
      incurred substantial losses including a net loss of $3,080,336 for the year
      ended December 31, 2006, a net loss of $1,137,131 for the six months ended
      June
      30, 2007 and a total accumulated deficit of $6,805,486 as of June 30, 2007.
      These factors among others indicate that the Company may be unable to continue
      as a going concern, particularly in the event that it cannot generate sufficient
      cash flow to conduct its operations and/or obtain additional sources of capital
      and financing.





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





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





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





As
      a
      development stage company, we have no revenues or profits to date and our net
      cumulative deficit attributable to our development stage as of June 30, 2007,
      was $6,355,701, and our total cumulative deficit was $6,805,486 which included
      $449,785 of pre-development stage deficit. We had $698,784 in accrued and unpaid
      salaries and a working capital deficit of $1,450,683 as of June 30, 2007. The
      Company is currently being funded by existing shareholders and the $85,000
      monthly payments, which the Company receives from the Joint Venture in
      connection with management fees, but there can be no assurance this amount
      will
      be sufficient to continue our planned operations or that we will have enough
      money to repay our outstanding debts. There is a risk that ZNG will never begin
      production and our Company will never generate any revenues through our
      ownership of ZNG, Ltd. There is also a risk that KNG will not be awarded the
      licenses for which it has applied. If throughout ZNG's oil exploration (and
      KNG’s, assuming it is awarded the licenses for which it has applied, of which
      there can be no assurance), no viable wells are found, and consequently, we
      generate only minimal revenues through ZNG, Ltd. (and/or through KNG), we will
      likely be forced to curtail or abandon our business plan. If this happens,
      you
      could lose your investment in our Company. If we are unable to generate profits,
      we will be forced to rely on external financing, of which there is no guarantee,
      to continue with our business plan.





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






27







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





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





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





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




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





We
      rely
      on the Company's Chief Executive Officer and Chief Financial Officer, David
      Zaikin and Elena Pochapski, for the success of our Company, both of whom are
      employed under contracts. Their experience and input create the foundation
      for
      our business and they are responsible for the directorship and control over
      the
      Company's development activities. The Company does not hold "key man" insurance
      on either member of management. Moving forward, should they be lost for any
      reason, the Company will incur costs associated with recruiting replacement
      personnel and any potential delays in operations. If we are unable to replace
      Mr. Zaikin and/or Ms. Pochapski, the Company may be forced to scale back or
      curtail its business plan. As a result of this, any securities you hold in
      our
      Company could become devalued.





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





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


28





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





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





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





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





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





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





**IN
      THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF OPERATING
      AS A FULLY REPORTING COMPANY AND OUR MANAGEMENT WILL BE 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. For example, we expect
      these new rules and regulations to make it more difficult and more expensive
      for
      us to obtain director and officer liability insurance, and we may be required
      to
      incur substantial costs to maintain the same or similar coverage. 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, commencing in fiscal 2008, we must perform system
      and
      process evaluation and testing of our internal controls over financial reporting
      to allow management and our independent registered public accounting firm to
      report on the effectiveness of our internal controls over financial reporting,
      as required by Section 404 of the Sarbanes-Oxley Act. 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.






29







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





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





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





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





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





Our
      common stock will be subject to the requirements of Rule 15(g)9, promulgated
      under the Securities Exchange Act as long as the price of our common stock
      is
      below $4.00 per share. Under such rule, broker-dealers who recommend low-priced
      securities to persons other than established customers and accredited investors
      must satisfy special sales practice requirements, including a requirement that
      they make an individualized written suitability determination for the purchaser
      and receive the purchaser's consent prior to the transaction. The Securities
      Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
      additional disclosure in connection with any trades involving a stock defined
      as
      a penny stock. Generally, the Commission defines a penny stock as any equity
      security not traded on an exchange or quoted on NASDAQ that has a market price
      of less than $4.00 per share. The required penny stock disclosures include
      the
      delivery, prior to any transaction, of a disclosure schedule explaining the
      penny stock market and the risks associated with it. Such requirements could
      severely limit the market liquidity of the securities and the ability of
      purchasers to sell their securities in the secondary market.






30






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
      3. CONTROLS AND PROCEDURES**





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





(b)
      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.









31







**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
      2. UNREGISTERED SALES OF EQUITY SECURITIES**





In
      April
      2007, we issued 35,000 restricted shares of common stock to Uptick Capital
      in
      connection with the agreement with Uptick Capital entered into in January 2007
      (as described above) for services rendered during the months of February, March,
      April and half of May 2007. We claim an exemption from registration afforded
      by
      Section 4(2) of the Securities Act of 1933 since the foregoing issuance of
      shares did not involve a public offering, the recipient took the shares for
      investment and we took steps to restrict the transfer of the shares. No
      underwriters or agents were involved in the foregoing issuance and no
      underwriting discounts or commissions were paid by us.





In May
      2007, Tim Peara, our Director, exercised 50,000 of the options he held to
      purchase shares of our common stock at an exercise price of $0.30 per share.
       Mr. Peara used the cashless exercise provision of the options and received
      41,935 restricted shares of our common stock in connection with the
      exercise of the options, based on the fair market value of the common stock
      on
      the date he exercised of $1.86. We claim an exemption from registration afforded
      by Section 4(2) of the Securities Act of 1933 since the foregoing issuance
      of
      shares did not involve a public offering, the recipient took the
      shares for investment and we took steps to restrict the transfer of the
      shares. No underwriters or agents were involved in the foregoing issuance
      and no underwriting discounts or commissions were paid by us.





In
      May
      2007, we issued 13,000 restricted shares of common stock to an individual,
      Valdimir Orlov in partial payment of amounts owed to him in connection with
      services rendered. 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.







32







In
      June
      2007, we issued 70,000 shares of restricted common stock to our President,
      Helen
      Teplitskaia, of which 50,000 shares was a sign-on bonus in connection with
      her
      agreeing to be an officer of the Company in May 2007, and 20,000 shares were
      part of her compensation package with the Company, whereby she is to be paid
      10,000 shares per month for her service to the Company, which shares were issued
      for services rendered in May and June 2007. 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
      June
      2007, Mr. Viktor Repin exercised 300,000 of the options he held to
      purchase  shares of our restricted common stock at an exercise price
      of $1.00 per share and  400,000 of the options he held to
      purchase  shares of our restricted common stock  at an
      exercise price of $1.05 per share. Mr. Repin used the cashless exercise
      provision of the options and received a total of 250,000 shares of our common
      stock in the name of his nominee Sergei Tomnikov, in connection with the
      exercise of the options, based on the fair market value of the common stock
      on
      the date he exercised of $1.60. 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
      June
      2007, LLC Business Standard exercised 800,000 of the options it held to purchase
      shares of our restricted common stock at an exercise price of $1.05 per share.
      Business Standard used the cashless exercise provision of the options and
      received 275,000 shares of our common stock for it and its nominees in
      connection with the exercise of the options, based on the fair market value
      of
      the common stock on the date he exercised of $1.60. 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 recipients took the
      shares for investment and not resale and the Company took appropriate measures
      to restrict transfer. No underwriters or agents were involved in the foregoing
      issuance and no underwriting discounts or commissions were paid by the
      Company.








On
      June
      30, 2007, in connection with our agreement with AEF, we agreed to grant AEF
      a
      warrant to purchase 55,233 shares of our common stock at an exercise price
      of
      $1.14 per share, which warrants contained a cashless feature. The warrants
      expire three years from the grant date. We claim an exemption from registration
      afforded by Section 4(2) of the Securities Act of 1933 since the foregoing
      issuance of warrants did not involve a public offering, the recipient took
      the
      warrants for investment and we took steps to restrict the transfer of the
      warrants. No underwriters or agents were involved in the foregoing grant and
      no
      underwriting discounts or commissions were paid by us.





In
      July
      2007, we issued an aggregate of 190,000 restricted shares of common stock to
      David Zaikin, our Chief Executive Officer, and certain of his assigns, in
      consideration for services rendered during the first two quarters of 2007.
      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
      July
      2007, we issued an aggregate of 250,000 shares of restricted common stock to
      Business Standard and its nominees in consideration as a six month bonus for
      services rendered to the Company and its 50% owned Joint Venture,
      Zauralneftegaz, Ltd., during the first two quarters of 2007. 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.







33





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
      5. OTHER INFORMATION**





On
        or
        around August 9, 2007, the Company’s Chief Executive Officer, David Zaikin,
        entered into a Stock Purchase Agreement with LLC “Business Standard.” Pursuant
        to the Stock Purchase Agreement, Mr. Zaikin agreed to purchase 400,000
        restricted shares of the Company’s common stock from Business Standard, for
        aggregate consideration of $500,000 or $1.25 per share. The closing date
        of the
        Stock Purchase Agreement is scheduled to occur on August 30, 2007, or at
        such
        other time as the parties agree.
  Mr.
        Zaikin entered into the Stock Purchase Agreement because he personally believes
        that the Company’s common stock has significant value. None of the Company’s
        officers and Directors are currently selling nor do they have any immediate
        plans to sell any shares of the Company’s common stock.


**ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K**





a)
      Exhibits





**Exhibit
                No.**
            **Description
                of Exhibit**10.1(1)
            Option
                Agreement with Baltic Petroleum Limited dated April 28,
                200510.2(1)
            License
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 200510.3(1)
            Loan
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 200510.4(1)
            Guarantee
                by Siberian Energy Group, Inc. dated April 28, 200510.5(1)
            Pledge
                and Security Agreement between Siberian Energy Group, Inc. and Baltic
                Petroleum Limited dated April 28, 200510.6(2)
            Option
                Agreement with Baltic Petroleum Limited dated April 28,
                200510.7(2)
            License
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 200510.8(2)
            Loan
                Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                dated
                April 28, 200510.9
                (2)
            Guarantee
                by Siberian Energy Group, Inc. dated April 28, 200510.10
                (2)
            Pledge
                and Security Agreement between Siberian Energy Group, Inc. and Baltic
                Petroleum Limited dated April 28, 200510.11
                (3)
            Clarification
                to the Contract of Purchase and Sale of the Share in Charter Capital
                of
                LLC "Zauralneftegaz" dated 15 May 200410.12
                (3)
            Agreement
                with Business - Standard (translated from Russian
                version)







34










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 Agreement10.28(8)
            Option
                Agreement with Key Brokerage10.29(8)
            Warrant
                Agreement with Key Brokerage10.30(9)
            July
                26, 2006 Deed of Agreement10.31(10)
            Consulting
                Agreement with Business Standard10.32(11)
            Addition
                to the Loan Agreement of November 9, 200510.33(11)
            Gross
                Overriding Royalty Agreement10.34(12)
            Amendment
                No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
                Pochapski







35










10.35*
            Deed
                of Variation to the Loan Agreement Dated 9th
                of November
                2005, Entered into in June 200731.1*
            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.





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







36





(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.





**b)
      Reports on Form 8-K:**





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





o
            On
                July 31, 2007, we filed a Report on Form 8-K to report our filing
                of a
                press release regarding the status of the well drilled by ZNG on
                the
                Privolny license.











37







**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**SIBERIAN
      ENERGY GROUP INC.**





DATED:
                August 14, 2007
            By:
                */s/ David Zaikin***David
                ZaikinChief
                Executive Officer





38