UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


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





For
      the quarterly period ended September 30,
2009





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





For the
transition period from ____________ to ______________





Commission
file number: 000-53766





SIBERIAN ENERGY GROUP
INC.


(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices)





(212)
828-3011


(Registrant's
telephone number)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  [  ]
No  [  ]





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





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





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





The
number of shares outstanding of each of the issuer’s classes of equity as of
November 12, 2009, was 18,705,585 shares of common stock, par value $0.001,
and no shares of preferred stock, par value $0.001.





PART
I. FINANCIAL INFORMATION





ITEM 1. FINANCIAL
STATEMENTS






REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
  FIRM
 
 
 
 The Board
of Directors and Stockholders
 Siberian
Energy Group Inc.
 
 
 We have
reviewed the accompanying condensed consolidated balance sheet of Siberian
Energy Group Inc. (a development stage company) as of September 30, 2009, and
the related condensed consolidated statements of operations for the three and
nine months ended September 30, 2009 and 2008, and the cumulative period of
development stage activity (January 1, 2003 through September 30, 2009), and the
condensed consolidated statements of stockholders’ equity and cash flows for the
nine months ended September 30, 2009 and 2008, and the cumulative
period  of development stage activity (January 1, 2003 through
September 30, 2009).   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,
2008, 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 31, 2009, 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, 2008 is
fairly stated, in all material respects, in relation to the balance sheet from
which it has been derived.
 
 
 Lumsden
& McCormick, LLP
 Buffalo,
New York
 November
11, 2009
 
 F-1
 SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Condensed
      Consolidated Balance Sheets
                                      
                                      (Unaudited)September
      30,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008AssetsCurrent
      assets:Cash
                                      
                                      $
                                      758
                                      
                                      
                                      $
                                      739Prepaid
      expenses and other
                                      
                                      
                                      556
                                      
                                      
                                      
                                      5211,314
                                      
                                      
                                      
                                      1,260Investment
      in joint venture, at equity
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Investment
      in KNG, at equity
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Loan
      receivable - affiliate
                                      
                                      
                                      29,500
                                      
                                      
                                      
                                      29,500Property
      and equipment, net
                                      
                                      
                                      1,406
                                      
                                      
                                      
                                      1,783$
                                      32,220
                                      
                                      
                                      $
                                      32,543Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts payable:Related
      party - stockholders
                                      
                                      $
                                      505,211
                                      
                                      
                                      $
                                      447,663Related
      party - Baltic Petroleum, interest at 14%
                                      
                                      
                                      67,316
                                      
                                      
                                      
                                      62,771Others
                                      
                                      
                                      565,013
                                      
                                      
                                      
                                      410,039Accrued payroll
                                      
                                      
                                      1,069,212
                                      
                                      
                                      
                                      824,7442,206,752
                                      
                                      
                                      
                                      1,745,217Stockholders'
      equity:Common
      stock - authorized 100,000,000 shares, $.001 par value,18,705,550
      and 18,645,550 issued and outstanding
                                      
                                      
                                      18,706
                                      
                                      
                                      
                                      18,646Additional
      paid-in capital
                                      
                                      
                                      13,150,228
                                      
                                      
                                      
                                      13,112,299Accumulated
      deficitPre-development
      stage
                                      
                                      
                                      (449,785
                                      )
                                      
                                      
                                      (449,785
                                      )Development
      stage
                                      
                                      
                                      (14,891,959
                                      )
                                      
                                      
                                      (14,406,604
                                      )Accumulated
      other comprehensive income
                                      
                                      
                                      (1,722
                                      )
                                      
                                      
                                      12,770(2,174,532
                                      )
                                      
                                      
                                      (1,712,674
                                      )$
                                      32,220
                                      
                                      
                                      $
                                      32,543See
      accompanying notes.




F-2




SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theCondensed
      Consolidated Statements of Operations
                                                                                                    
                                                                                                    
                                                                                                    cumulativeperiod
      ofDevelopmentStage
      Activity-For
      the three
                                                                                                    
                                                                                                    
                                                                                                    For
      the nine
                                                                                                    
                                                                                                    
                                                                                                    January
      1, 2003months
      ended
                                                                                                    
                                                                                                    
                                                                                                    months
      ended
                                                                                                    
                                                                                                    
                                                                                                    throughSeptember
      30,
                                                                                                    
                                                                                                    
                                                                                                    September
      30,
                                                                                                    
                                                                                                    
                                                                                                    September
      30,
                                                                                                    
                                                                                                    
                                                                                                    September
      30,
                                                                                                    
                                                                                                    
                                                                                                    September
      30,2009
                                                                                                    
                                                                                                    
                                                                                                    2008
                                                                                                    
                                                                                                    
                                                                                                    2009
                                                                                                    
                                                                                                    
                                                                                                    2008
                                                                                                    
                                                                                                    
                                                                                                    2009Revenues
      and other income:Management
      fees from joint venture
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    1,135,000Gain
      from entrance into joint venture
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    364,479Other
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    6,382Total
      revenues and other income
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,505,861Expenses:Salaries
                                                                                                    
                                                                                                    
                                                                                                    92,663
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    88,567
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    276,189
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    265,243
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,713,794Professional
      and consulting fees
                                                                                                    
                                                                                                    
                                                                                                    61,814
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    117,048
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    176,174
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    257,906
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,038,983Rent
      and occupancy
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,636
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    14,101
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    237,226Depreciation
      and amortization
                                                                                                    
                                                                                                    
                                                                                                    159
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    224
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    458
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    685
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    104,695Finance
      charges and interest
                                                                                                    
                                                                                                    
                                                                                                    1,752
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,110
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,451
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    6,482
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    117,514Marketing
      and other
                                                                                                    
                                                                                                    
                                                                                                    3,090
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9,449
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    27,083
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    45,880
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,062,091Total
      expenses
                                                                                                    
                                                                                                    
                                                                                                    159,478
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    220,034
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    485,355
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    590,297
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    11,274,303Loss
      from sale of investment
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    669,570
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    669,570
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    669,570Loss
      on deemed disposition of oil andgas
      properties, unproved
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,928,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,928,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,928,000Impairment
      charge on investment
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    525,947
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    525,947
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    525,947Loss
      before income taxes
                                                                                                    
                                                                                                    
                                                                                                    159,478
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,343,551
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    485,355
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,713,814
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    14,891,959Provision
      for income taxes (benefit)
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Net
      loss (development stage)
                                                                                                    
                                                                                                    $
                                                                                                    159,478
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    5,343,551
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    485,355
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    5,713,814
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    14,891,959Basic
      and diluted loss per common share
                                                                                                    
                                                                                                    $
                                                                                                    (0.01
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.29
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.03
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.31
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (1.21
                                                                                                    )Weighted
      average number of basic anddiluted
      common shares outstanding
                                                                                                    
                                                                                                    
                                                                                                    18,705,550
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    18,478,030
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    18,668,187
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    18,423,431
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    12,315,131See
      accompanying notes.


F-3


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Condensed
      Consolidated Statements of Stockholders' EquityFor
      the cumulative period of Development Stage Activity - January 1, 2003
      through September 30, 2009AccumulatedCommon
      Stock
                                              
                                              
                                              Additional
                                              
                                              
                                              OtherNumber
      of
                                              
                                              
                                              Paid-In
                                              
                                              
                                              Accumulated
                                              
                                              
                                              Comprehensive
                                              
                                              
                                              ComprehensiveShares
                                              
                                              
                                              Par
      Value
                                              
                                              
                                              Capital
                                              
                                              
                                              Deficit
                                              
                                              
                                              Income
      (Loss)
                                              
                                              
                                              Total
                                              
                                              
                                              LossBalance,
      January 1, 2003 (pre-development stage)
                                              
                                              
                                              4,902,886
                                              
                                              
                                              $
                                              4,903
                                              
                                              
                                              $
                                              430,195
                                              
                                              
                                              $
                                              (449,785
                                              )
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (14,687
                                              )Loss
      for the year - 2003
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (422,516
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (422,516
                                              )
                                              
                                              $
                                              (422,516
                                              )Shares
      issued in acquisition (ZNG)
                                              
                                              
                                              1,000,000
                                              
                                              
                                              
                                              1,000
                                              
                                              
                                              
                                              (1,000
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Balance,
      December 31, 2003
                                              
                                              
                                              5,902,886
                                              
                                              
                                              $
                                              5,903
                                              
                                              
                                              $
                                              429,195
                                              
                                              
                                              $
                                              (872,301
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              (437,203
                                              )Loss
      for the year - 2004
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (833,567
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (833,567
                                              )Foreign
      currency translation adjustment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (53,120
                                              )
                                              
                                              
                                              (53,120
                                              )
                                              
                                              $
                                              (886,687
                                              )Shares
      issued in acquisition (ZNG)
                                              
                                              
                                              3,450,000
                                              
                                              
                                              
                                              3,450
                                              
                                              
                                              
                                              746,550
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              750,000Shares
      issued for professional services
                                              
                                              
                                              50,000
                                              
                                              
                                              
                                              50
                                              
                                              
                                              
                                              9,950
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              10,000Other
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              34,426
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              34,426Balance,
      December 31, 2004
                                              
                                              
                                              9,402,886
                                              
                                              
                                              $
                                              9,403
                                              
                                              
                                              $
                                              1,220,121
                                              
                                              
                                              $
                                              (1,705,868
                                              )
                                              
                                              $
                                              (53,120
                                              )
                                              
                                              $
                                              (529,464
                                              )Loss
      for the year - 2005
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,153,686
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,153,686
                                              )Foreign
      currency translation adjustment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              50,614
                                              
                                              
                                              
                                              50,614
                                              
                                              
                                              $
                                              (1,103,072
                                              )Shares
      issued for professional services
                                              
                                              
                                              385,000
                                              
                                              
                                              
                                              385
                                              
                                              
                                              
                                              197,829
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              198,214Shares
      issued for accrued salaries
                                              
                                              
                                              1,700,000
                                              
                                              
                                              
                                              1,700
                                              
                                              
                                              
                                              301,871
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              303,571Warrants
      granted for professional services
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              310,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              310,000Balance,
      December 31, 2005
                                              
                                              
                                              11,487,886
                                              
                                              
                                              $
                                              11,488
                                              
                                              
                                              $
                                              2,029,821
                                              
                                              
                                              $
                                              (2,859,554
                                              )
                                              
                                              $
                                              (2,506
                                              )
                                              
                                              $
                                              (820,751
                                              )Loss
      for the year - 2006
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (4,072,788
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (4,072,788
                                              )Foreign
      currency translation adjustment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,939
                                              )
                                              
                                              
                                              (1,939
                                              )
                                              
                                              $
                                              (4,074,727
                                              )Shares
      issued for employee stock option plan and warrants
                                              
                                              
                                              195,000
                                              
                                              
                                              
                                              195
                                              
                                              
                                              
                                              45,305
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              45,500Shares
      issued for geological data
                                              
                                              
                                              1,900,000
                                              
                                              
                                              
                                              1,900
                                              
                                              
                                              
                                              3,323,100
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,325,000Shares
      issued for professional services
                                              
                                              
                                              1,139,499
                                              
                                              
                                              
                                              1,140
                                              
                                              
                                              
                                              2,120,320
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,121,460Warrants
      granted for professional services
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,201,960
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,201,960Shares
      cancelled
                                              
                                              
                                              (609,424
                                              )
                                              
                                              
                                              (610
                                              )
                                              
                                              
                                              610
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Balance,
      December 31, 2006
                                              
                                              
                                              14,112,961
                                              
                                              
                                              $
                                              14,113
                                              
                                              
                                              $
                                              8,721,116
                                              
                                              
                                              $
                                              (6,932,342
                                              )
                                              
                                              $
                                              (4,445
                                              )
                                              
                                              $
                                              1,798,442See
      accompanying notes.


F-4


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)Condensed
      Consolidated Statements of Stockholders' EquityFor
      the cumulative period of Development Stage Activity - January 1, 2003
      through September 30, 2009AccumulatedCommon
      Stock
                                                        
                                                        
                                                        Additional
                                                        
                                                        
                                                        OtherNumber
      of
                                                        
                                                        
                                                        Paid-In
                                                        
                                                        
                                                        Accumulated
                                                        
                                                        
                                                        Comprehensive
                                                        
                                                        
                                                        ComprehensiveShares
                                                        
                                                        
                                                        Par
      Value
                                                        
                                                        
                                                        Capital
                                                        
                                                        
                                                        Deficit
                                                        
                                                        
                                                        Income
      (Loss)
                                                        
                                                        
                                                        Total
                                                        
                                                        
                                                        LossBalance,
      December 31, 2006
                                                        
                                                        
                                                        14,112,961
                                                        
                                                        
                                                        $
                                                        14,113
                                                        
                                                        
                                                        $
                                                        8,721,116
                                                        
                                                        
                                                        $
                                                        (6,932,342
                                                        )
                                                        
                                                        $
                                                        (4,445
                                                        )
                                                        
                                                        $
                                                        1,798,442Loss
      for the year - 2007
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,060,487
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,060,487
                                                        )Foreign
      currency translation adjustment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (9,804
                                                        )
                                                        
                                                        
                                                        (9,804
                                                        )
                                                        
                                                        $
                                                        (2,070,291
                                                        )Shares
      issued for employee stock option plan and warrants
                                                        
                                                        
                                                        566,935
                                                        
                                                        
                                                        
                                                        567
                                                        
                                                        
                                                        
                                                        (567
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Shares
      issued for geological data
                                                        
                                                        
                                                        200,000
                                                        
                                                        
                                                        
                                                        200
                                                        
                                                        
                                                        
                                                        349,800
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        350,000Shares
      issued for accrued salaries
                                                        
                                                        
                                                        788,000
                                                        
                                                        
                                                        
                                                        788
                                                        
                                                        
                                                        
                                                        1,444,618
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,445,406Shares
      issued for licenses
                                                        
                                                        
                                                        2,000,000
                                                        
                                                        
                                                        
                                                        2,000
                                                        
                                                        
                                                        
                                                        1,318,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,320,000Shares
      issued for professional services
                                                        
                                                        
                                                        715,134
                                                        
                                                        
                                                        
                                                        715
                                                        
                                                        
                                                        
                                                        1,070,395
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,071,110Warrants
      granted for professional services
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        150,394
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        150,394Balance,
      December 31, 2007
                                                        
                                                        
                                                        18,383,030
                                                        
                                                        
                                                        $
                                                        18,383
                                                        
                                                        
                                                        $
                                                        13,053,756
                                                        
                                                        
                                                        $
                                                        (8,992,829
                                                        )
                                                        
                                                        $
                                                        (14,249
                                                        )
                                                        
                                                        $
                                                        4,065,061Loss
      for the year - 2008
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (5,863,560
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (5,863,560
                                                        )Foreign
      currency translation adjustment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        27,019
                                                        
                                                        
                                                        
                                                        27,019
                                                        
                                                        
                                                        $
                                                        (5,836,541
                                                        )Shares
      issued for professional services and accrued salaries
                                                        
                                                        
                                                        155,000
                                                        
                                                        
                                                        
                                                        155
                                                        
                                                        
                                                        
                                                        41,595
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        41,750Warrants
      granted for professional services
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        6,303
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        6,303Shares
      issued for loan repayment and related interest
                                                        
                                                        
                                                        107,520
                                                        
                                                        
                                                        
                                                        108
                                                        
                                                        
                                                        
                                                        10,645
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        10,753Balance,
      December 31, 2008
                                                        
                                                        
                                                        18,645,550
                                                        
                                                        
                                                        $
                                                        18,646
                                                        
                                                        
                                                        $
                                                        13,112,299
                                                        
                                                        
                                                        $
                                                        (14,856,389
                                                        )
                                                        
                                                        $
                                                        12,770
                                                        
                                                        
                                                        $
                                                        (1,712,674
                                                        )Loss
      for nine months - 2009
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (485,355
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (485,355
                                                        )Foreign
      currency translation adjustment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (14,492
                                                        )
                                                        
                                                        
                                                        (14,492
                                                        )
                                                        
                                                        $
                                                        (499,847
                                                        )Shares
      issued for professional services and accrued salaries
                                                        
                                                        
                                                        60,000
                                                        
                                                        
                                                        
                                                        60
                                                        
                                                        
                                                        
                                                        3,540
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3,600Options
      vested to employees and directors
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        34,389
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        34,389Balance,
      September 30, 2009
                                                        
                                                        
                                                        18,705,550
                                                        
                                                        
                                                        $
                                                        18,706
                                                        
                                                        
                                                        $
                                                        13,150,228
                                                        
                                                        
                                                        $
                                                        (15,341,744
                                                        )
                                                        
                                                        $
                                                        (1,722
                                                        )
                                                        
                                                        $
                                                        (2,174,532
                                                        )See
      accompanying notes.


F-5


SIBERIAN
      ENERGY GROUP INC. (A Development Stage Company)For
      theCondensed
      Consolidated Statements of Cash Flows
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      cumulativeperiod
      ofDevelopmentStage
      Activity-January
      1, 2003throughSeptember
      30,For
      the nine months ended September 30,
                                                                                                                                                                      
                                                                                                                                                                      2009
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      2008
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      2009Cash
      flows from operating activities:Net
      loss (development stage)
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      (485,355
                                                                                                                                                                      )
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      (5,713,814
                                                                                                                                                                      )
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      (14,891,959
                                                                                                                                                                      )Depreciation
      and amortization
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      458
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      685
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      104,695Common
      stock and warrants issuedfor
      professional services, salaries, and geological data
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      37,989
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      37,886
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      7,220,470Gain
      from entrance into joint venture
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (364,479
                                                                                                                                                                      )Loss
      on disposition of office furniture
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      1,029Loss
      on sale of investment, including deconsolidation of
    subsidiary
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      794,192
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      794,192Loss
      on deemed disposition of oil and gas properties, unproved
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      3,928,000
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      3,928,000Impairment
      charge on investment
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      525,947
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      525,947Changes
      in other current assets andcurrent
      liabilities:Management
      fee receivable
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      110,000Prepaid
      expenses and other assets
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (35
                                                                                                                                                                      )
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      3,713
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (263,948
                                                                                                                                                                      )Accounts
      payable and accrued expenses
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      461,535
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      444,145
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      3,846,530Net
      cash flows from operating activities
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      14,592
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      20,754
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      1,010,477Cash
      flows from investing activities:Expenditures
      for licenses and related
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (528,961
                                                                                                                                                                      )Expenditures
      for oil and gas properties
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (770,750
                                                                                                                                                                      )Expenditures
      for property and equipment
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (6,244
                                                                                                                                                                      )Proceeds
      of disposition of office furniture
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      107Loan
      to affiliate
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (29,500
                                                                                                                                                                      )
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (29,500
                                                                                                                                                                      )Cash
      received in acquisition
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      6Cash
      received from entrance into joint venture
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      175,000Net
      cash flows for investing activities
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (29,500
                                                                                                                                                                      )
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (1,160,342
                                                                                                                                                                      )Cash
      flows from financing activities:Net
      proceeds from demand loans
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      72,500Common
      stock issued for employee stock option plan
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      45,500Additional
      paid-in capital
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      34,426Net
      cash flows from financing activities
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      152,426Effect
      of exchange rates on cash
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (14,573
                                                                                                                                                                      )
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      8,187
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (1,803
                                                                                                                                                                      )Net
      increase (decrease) in cash
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      19
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      (559
                                                                                                                                                                      )
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      758Cash
      - beginning
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      739
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      1,248
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -Cash
      - ending
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      758
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      689
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      758See
      accompanying notes.




F-6


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 2009 are consistent
with those used in the cumulative period of Development Stage Activity – January
1, 2003 through December 31, 2008.  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:
 
 Kondaneftegaz
 
 The
Company, through its subsidiary Kondaneftegaz, LLC (KNG), has been engaged in
the business of exploiting and developing certain oil and gas and other
petroleum products licenses issued for a period of five years by Russia’s
subsurface management authorities in October 2007. The two licensed areas lie in
the Karabashsky zone in the Khanty-Mansiysk Autonomous area of the Russian
Federation.  KNG has its principal place of business in the city of
Khanty-Mansiysk, Russia.  KNG has prepared and coordinated with
Russian authorities the Program of exploration works on the Karabashski 61 and
Karabashski 67 license areas.  KNG is evaluating the possibility of
using prior seismic data in the current exploration program.
 
 KNG was
acquired together with the vast collection of geological information data (oil
and gas properties, unproved) on the Karabashski zone of Khanty-Mansiysk
Autonomous district of the Tuymen region of the Russian Federation through the
issuance of shares and warrants as follows:
 
 Restricted
      common shares issued foroil
      and gas properties, unproved in 2006
                      
                      
                      1,900,000Restricted
      common shares issued inconnection
      with license acquisition by KNG in 2007
                      
                      
                      2,000,000Restricted
      common shares issued in 2006
                      
                      
                      200,000Total
      restricted common shares issued
                      
                      
                      4,100,000Stock
      warrants issued in 2006for
      purchase option
                      
                      
                      250,000
 As a
result of the purchase, a calculated acquisition value of $3,928,000 was
assigned to the oil and gas properties, unproved that considered the approximate
market value of the stock issued ($1.75) on the transaction date including
$3,675,000 assigned to 2,100,000 shares issued in 2006 and $253,000 assigned to
250,000 stock warrants issued.  A value of $1,320,000 was assigned to
the acquisition of licenses by KNG based on the market value of the 2,000,000
shares on the date of issue.
 
 On
September 30, 2008 the Company sold a 51% interest in KNG to a Russian oil and
gas company, and a 5% interest to two Russian individuals for $223. This Russian
company has committed to lead the exploration works on the licensed areas by
accepting the operator’s role and agreeing to provide funding for KNG’s
activities. Simultaneously with the sale of 56% of KNG, the Company made
available all geological data to the operator to be used in the program of
geological studies in the region. Since no consideration was received and the
Company has no intent to further utilize this geological data, a loss on the
deemed disposition of these unproven oil and gas properties of $3,928,000 has
been recorded.  Operations of KNG prior to September 30, 2008 are
included in the consolidated accounts of the Company in the accompanying
financial statements.  Effective September 30, 2008, the Company's 44%
investment in KNG is recorded on the equity method of accounting.  At
September 30, 2008, KNG’s assets were $13,572 and liabilities were
$135,740.  Since 56% of the Company was sold for a nominal amount, a
non-cash impairment charge of $525,947 has been recorded to reduce the carrying
value of the 44% investment in KNG to zero.
 F-7
 Zauralneftegaz
 
 Zauralneftegaz
Limited (ZNG, Ltd) is the Company’s 50% owned joint venture with Baltic
Petroleum Limited, UK created in 2005, which operates through its Russian
subsidiary Zaural Neftegaz (ZNG).  ZNG has been involved in oil and
gas research activities in the Kurgan region of the Russian Federation. During
2003 through September 30, 2009 it has completed seismic studies and drilling
program in the Kurgan region. The Company believes ZNG, Ltd has created value
through the geological results of the two exploratory wells and other data
gathered in the area and ZNG, Ltd is considering its options with regard to
realizing this value by either a farm out or a direct sale of geophysical and
seismic data to a third party operating in the area.
 
 Activities
of ZNG for the period March 2003 through October 2005 are included in the
consolidated accounts of the Company in the accompanying financial
statements.  Effective October 14, 2005, the Company’s investment in
Joint Venture has been recorded on the equity method of
accounting.  Since the cumulative losses of the Joint Venture exceed
the Company’s investment, the investment asset is carried at zero value as of
and through September 30, 2009.
 
 Both
equity investments are recorded at zero on the accompanying balance
sheets.  Although management is hopeful, the Company is uncertain when
and if any income will be realized from these investments.  On a
moving forward basis, the Company anticipates further business
expansion.  It is currently evaluating new mineral resource producing
assets, particularly in the in Perm and Orenburg regions of the Russian
Federation.
 
 The
Company was incorporated in the State of Nevada on August 13, 1997, and
previously provided comprehensive outpatient rehabilitation services to patients
suffering from work, sports and accident related injuries.  All
activities related to the Company’s previous business ventures were essentially
discontinued prior to January 1, 2000.  Predecessor names of the
Company since its inception include Trans Energy Group, Inc., King Incorporated
and Advanced Rehab Technology Corporation.
 
 3.  Income
Taxes:
 
 At
September 30, 2009, the Company effectively has U.S. tax net operating loss
carryforwards totaling approximately $13,610,000.  These carryforwards
may be used to offset future taxable income, and expire in varying amounts
through 2029.  No tax benefit has been reported in the financial
statements, however, because the Company believes there is at least a 50% chance
that the carryforwards will expire unused.  Accordingly, the
$2,720,000 estimated cumulative tax benefit of the loss carryforwards have been
offset by a valuation allowance of the same amount.
 
 4.  Loss
Per Common Share:
 
 Basic and
diluted loss per common share is computed using the weighted average number of
common shares outstanding during the period.  Shares issuable for
common stock options and warrants may have had a dilutive effect on earnings per
share had the Company generated income during the periods through September 30,
2009.
 
 5.  Going
Concern:
 
 These
financial statements have been prepared assuming the Company will continue as a
going concern, however, since inception of its current endeavor in 2003, it has
not earned substantial revenues and is considered to be in the development
stage, which raises substantial doubt about its ability to continue as a going
concern.
 
 Management
is of the opinion that its current and proposed oil and gas ventures will
successfully generate allocable profits to the Company in the near
term.
 
 For the
cumulative period ended September 30, 2009, the Company has obtained cash
financing from organizing stockholders and employees in the form of loans,
advances, and deferred salaries.  However, there can be no certainty
as to availability of continued financing in the future.  Failure to
obtain sufficient financing may require the Company to reduce its operating
activities.  A failure to continue as a going concern would then
require stated amounts of assets and liabilities to be reflected on a
liquidation basis which could differ form the going concern
basis.
 F-8
 ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS





CERTAIN
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q"), CONSTITUTE
"FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH
FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR
THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR
BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
SIBERIAN ENERGY GROUP INC. ("THE COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS
ANOTHER DATE IS STATED, ARE TO SEPTEMBER 30, 2009.





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





BUSINESS
DEVELOPMENT:





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





On
September 17, 1999, the Company affected a 1-for-30 reverse stock split. A
subsequent 3-for-1 forward split was consummated on October 2, 2000 and a
further 1:2 reverse stock split was affected on May 2, 2005 (collectively the
“Stock Splits”). All share amounts subsequently listed are retroactively
adjusted to reflect these stock splits unless otherwise provided.





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





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





Currently,
the operating activities of ZNG are carried out through the Joint Venture
Shareholders' Agreement ("Joint Venture") entered into on October 14, 2005 with
Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and Zauralneftegaz
Limited, the joint venture company ("ZNG, Ltd."), as contemplated by the Option
Agreement, as amended (the "Option"). The Company closed the Joint Venture and
transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in connection with
the terms and conditions of the Joint Venture. As a result of such transfer, the
Company holds 50% of the outstanding stock of ZNG, Ltd., which holds 100% of the
outstanding stock of the Company's former wholly-owned subsidiary,
ZNG.  ZNG, Ltd. operates through ZNG and is engaged in the exploration
and development of, production and sale of, oil and gas assets in the Western
Siberian region of the Russian Federation and the former Soviet
Union.


-2-


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





On or
about September 30, 2008, we entered into an Agreement of Purchase and Sale with
Limited Liability Company Neftebitum, a Russian limited liability company, and
two Russian individuals, pursuant to which we sold fifty-six percent (56%) of
the ownership interest of KNG, as described in greater detail
below.





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




BUSINESS
OPERATIONS:





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





We
currently hold investments in ZNG, Ltd. and KNG.  Both companies are
operating in the Western Siberia region of Russia and are involved in oil and
gas exploration, provided however, as described below, ZNG, Ltd. has advised us
that it will no longer undertake any further exploration activities in Western
Siberia.





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





Description of
KNG





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





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


-3-


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




o
            to
      begin 2D seismic works during the 2009-2010 fieldwork season and to
      perform not less than 176.26 linear kilometers of seismic profiles on
      Karabashky-61 and 158 linear kilometers on Karabashky-67 (minimal density
      of the profile not less than 1 linear kilometer per 1 square kilometer of
      license area), ando
            no
      later than 2011, to start drilling an exploratory well and to complete not
      less than 2 exploratory wells by April 1,
  2012.





KNG is
currently re-interpreting the existing seismic data from prior studies and is
evaluating the possibility of using this data in the current program of seismic
studies.





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





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





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





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





·
            Begin
      2D seismic works on the Blocks during the 2009-2010 fieldwork season and
      perform not less than 176.26 linear kilometers of seismic profiles on the
      Karabashky-61 Block and not less than 158 linear kilometers of seismic
      works on the Karabashky-67 Block;


-4-


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





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





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





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





As of the
date of this filing, Neftebitum has raised approximately $70,000 through the
sale of debt to pay for the first stage of the seismic project and the
government fees for the subsoil use.





As of
September 30, 2009, the Company owned a 44% interest in KNG. Operating results
of KNG were included in the consolidated financial statements contained herein
for the three and nine month periods ended September 30, 2008. After
September 30, 2008, the Company’s investment in KNG is accounted for on the
equity method of accounting. Accordingly, the assets, liabilities and equity of
KNG are no longer presented on the Company’s balance sheet.





After
careful consideration of the current financial position of KNG, the Company has
applied an impairment charge to the value of investment in KNG which resulted in
carrying it at zero value.





Description of
ZNG





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





Between
2003 and 2007, ZNG carried out extensive seismic and gas seismotomographic
studies on its 4 licensed blocks acquired in 2003 through a government tender
(which have since expired): the Privolny, Mokrousovsky, West-Suersky and
Orlovo-Pashkovsky blocks, and drilled 2 exploratory wells on the Privolny and
Mokrousovsky blocks. Based on the interpretation of seismic and
seismotomographic surveys and analysis of samples from the wells, ZNG
prepared a comprehensive analysis of geological resources of the Kurgan
region.  Both the Privolny-1 and Mokrousovsky-1 studies confirmed the
presence of hydrocarbons and contributed greatly to the understanding of
geological resources in the region. However, a substantial amount of further
exploration studies and work is required before a conclusion on the future
potential of the blocks can be drawn. Upon the expiration of the license terms
of these blocks in March 2008, ZNG kept the preferential right to re-apply for
the licenses.


-5-


The
Company’s investment in the Joint Venture is recorded on the equity method of
accounting.  Since cumulative losses of Joint Venture exceed the
Company’s investment, the investment asset is carried at zero value as of and
through December 31, 2008 and September 30, 2009.





As of the
date of this filing, Baltic has advised us that Baltic and as a result, ZNG, has
withdrawn from any further exploration activities in the Kurgan region and that
they will not expend any further resources on such activities moving
forward.  Baltic has however advised us that they believe they may be
able to sell ZNG’s previously prepared seismic and geological studies and data
in the future, assuming other exploration companies in the area desire to
purchase such information, of which there is no assurance.





Joint
Venture





The
operations of the Joint Venture are funded via loans provided to ZNG, Ltd. and
ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly-owned by
Baltic.  Loans are guaranteed by ZNG, Ltd.’s holdings in
ZNG.  As of September 30, 2009, the total funding provided to ZNG,
Ltd. and ZNG by Baltic was equal to approximately $23.5 million plus accrued
interest of approximately $5 million. The loans are not dilutive to the
Company's ownership in ZNG.





Agreement With Alternative
Energy Finance, Ltd.





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





In
connection with that agreement, the following warrants were granted to AEF:
warrants to purchase 17,561 shares of our common stock at $0.67 per share, which
were granted to Mr. Peara on March 31, 2006, and which expired unexercised on
March 31, 2009; warrants to purchase 20,412 shares of our common stock at an
exercise price of $2.02 per share, granted effective June 30, 2006, and which
expired unexercised on June 30, 2009; warrants to purchase 20,952 shares of our
common stock at an exercise price of $1.53 per share effective September 30,
2006, and which expired unexercised on September 30, 2009; and warrants to
purchase 38,648 shares of our common stock at an exercise price of $1.44 per
share effective December 31, 2006.  All of the warrants are
exercisable for three years from the date of issuance and contain a cashless
exercise provision.





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





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


-6-


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





Recent
Events:





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





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





PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS





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





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





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





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


-7-


In
connection with the Joint Venture, the Company previously received
monthly management fees, which varied from $25,000 to $85,000 per month.
Due to the “transition period” of the Joint Venture’s exploration activities and
subsequent decision of Baltic not to pursue further exploration activities
through ZNG, no management fees have been paid since October 2007, and the
Joint Venture will not pay any management fees in the future.  As the
Company will not receive any management fees moving forward, the Company
believes that its organizing stockholders will continue to provide financing for
the Company, of which there can be no assurance.





In the
past, we have obtained cash financing from organizing stockholders in the form
of loans and advances, as a result, amounts totaling $505,211 and $447,663 were
payable to the stockholders as of September 30, 2009 and December 31, 2008,
respectively. However, there can be no certainty as to the availability of
continued financing in the future. Failure to obtain sufficient financing may
require us to reduce our operating activities. A failure to continue as a going
concern would then require stated amounts of assets and liabilities to be
reflected on a liquidation basis which could differ from the going concern
basis.





COMPARISON
OF OPERATING RESULTS




RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009, COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2008





We had no
revenues and other income for the three months ended September 30, 2009 or
2008.  Until October 2007, the Company received monthly management
fees of between $25,000 and $85,000 pursuant to terms of the Joint
Venture.  However, the Company has not received any management fees
since October 2007, and does not anticipate receiving any such fees moving
forward.




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





We had
total expenses of $159,478 for the three months ended September 30, 2009,
compared to total expenses for the three months ended September 30, 2008, of
$220,034, which represented a decrease in total expenses from the prior period
of $60,556 or 27.5%.





The main
reasons for the decrease in total expenses for the three months ended September
30, 2009, compared to the three months ended September 30, 2008, were a $55,234
or 47.2% decrease in professional and consulting fees to $61,814 for the three
months ended September 30, 2009, compared to $117,048 for the three months ended
September 30, 2008, which decrease is largely attributable to the fact that the
Company used less third party consultants and advisors during the three months
ended September 30, 2009, compared to the same period of 2008; a $6,359 or 67.3%
decrease in marketing and other to $3,090 for the three months ended September
30, 2009, compared to $9,449 for the three months ended September 30, 2008; and
a $3,636 decrease in rent and occupancy, to no rent and occupancy expense for
the three months ended September 30, 2009, compared to $3,636 of rent and
occupancy for the three months ended September 30, 2008 (as described below);
partially offset by a $4,096 or 4.6% increase in salaries, to $92,663 for the
three months ended September 30, 2009, compared to $88,567 for the three months
ended September 30, 2008.  The Company is currently taking steps to
move its New York office space, and as such, the Chief Executive Officer has
been personally paying the Company’s office space rent and not billing the
Company since approximately December 31, 2008, which resulted in the Company
having no rent or occupancy expense for the three months ended September 30,
2009.


-8-


We had
certain one-time additional expenses during the three months ended September 30,
2008, which were not represented during the three months ended September 30,
2009, including $669,570 of loss from sale of investment (described
below),  $3,928,000 of loss on deemed disposition of oil and gas
properties, unproved (described below), and $525,947 of impairment charge on
investment. Since 56% of KNG was sold for a nominal amount, a non-cash
impairment charge of $525,947 was recorded to reduce the carrying value of the
44% investment in KNG to zero.  The $669,570 of loss from sale of
investment for the three months ended September 30, 2008 can be attributed to
our sale of a controlling interest in KNG as described in greater detail
above.  The $3,928,000 loss on deemed disposition of oil and gas
properties, unproved, for the three months ended September 30, 2008 can be
attributed to the fact that the Company no longer has any plans to utilize the
geological data associated with KNG, valued at $3,928,000, other than through
KNG’s activities, and no consideration was received for the use of such
geological data in connection with the sale of the controlling interest in KNG,
although the Company has committed to providing such information to
Neftebitum.





We had a
net loss of $159,478 for the three months ended September 30, 2009, which
represented a decrease in net loss of $5,184,073 or 97% from a net loss of
$5,343,551 for the three months ended September 30, 2008, which decrease in net
loss was mainly due to the certain one-time expenses associated with the
Company’s accounting for the sale of KNG during the three months ended September
30, 2008, as described above, which were not repeated during the three months
ended September 30, 2009.





RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009, COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 2008





We had no
revenues and other income for the nine months ended September 30, 2009 or
2008.  Until October 2007, the Company received monthly management
fees of between $25,000 and $85,000 pursuant to terms of the Joint
Venture.  However, the Company has not received any management fees
since October 2007, and does not anticipate receiving any such fees moving
forward.




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





We had
total expenses of $485,355 for the nine months ended September 30, 2009,
compared to total expenses for the nine months ended September 30, 2008, of
$590,297, which represented a decrease in total expenses from the prior period
of $104,942 or 17.8%.





The main
reasons for the decrease in total expenses for the nine months ended September
30, 2009, compared to the nine months ended September 30, 2008, were an $81,732
or 31.7% decrease in professional and consulting fees to $176,174 for the nine
months ended September 30, 2009, compared to $257,906 for the nine months ended
September 30, 2008, which decrease is largely attributable to the fact that the
Company used less third party consultants and advisors during the nine months
ended September 30, 2009, compared to the same period of 2008; an $18,797 or
41.0% decrease in marketing and other expenses, to $27,083 for the nine months
ended September 30, 2009, compared to $45,880 for the nine months ended
September 30, 2008; and a $14,101 decrease in rent and occupancy expenses to no
rent and occupancy expenses for the nine months ended September 30, 2009,
compared to $14,101 for the nine months ended September 30, 2008, partially
offset by a $10,946 or 4.1% increase in salaries to $276,189 for the nine months
ended September 30, 2009, compared to $265,243 for the nine months ended
September 30, 2008.  The Company is currently taking steps to move its
New York office space, and as such, the Chief Executive Officer has been
personally paying the Company’s office space rent and not billing the Company
since approximately December 31, 2008, which resulted in the Company having no
rent or occupancy expense for the nine months ended September 30,
2009.





As
described above under the comparison of operating results for the three months
ended September 30, 2009, compared to the three months ended September 30, 2008,
we had certain one-time additional expenses during the nine months ended
September 30, 2008, which were not represented during the nine months ended
September 30, 2009, including $669,570 of loss from sale of investment,
$3,928,000 of loss on deemed disposition of oil and gas properties, unproved,
and $525,947 of impairment charge on investment.


-9-


We had a
net loss of $485,355 for the nine months ended September 30, 2009, which
represented a decrease in net loss of $5,228,459 or 91.5% from net loss of
$5,713,814 for the nine months ended September 30, 2008, which decrease in net
loss was mainly due to the certain one-time expenses associated with the
Company’s accounting for the sale of KNG during the nine months ended September
30, 2008, as described above, which were not repeated during the nine months
ended September 30, 2009.





LIQUIDITY
AND CAPITAL RESOURCES





We had
current assets of $1,314 as of September 30, 2009, which included cash of $758;
and prepaid expenses and other current assets of $556.





We had
total assets of $32,220 as of September 30, 2009, which included current assets
of $1,314 and non-current assets of $30,906. Non-current assets included
a $29,500 loan receivable from affiliate in connection with amounts
previously loaned to KNG, and $1,406 of property and equipment,
net.




We had
total liabilities of $2,206,752 as of September 30, 2009, which were solely
current liabilities and which included $505,211 of accounts payable to related
party stockholders in connection with those shareholders paying certain of our
expenses from the period between January 1, 2003 to September 30, 2009; $67,316
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; $565,013 of
accounts payable to others for advisory and professional services rendered; and
$1,069,212 of accrued payroll, which included $607,500 payable to our Chief
Executive Officer, David Zaikin, of which $360,000 was accrued in 2007 and 2008,
and $112,500 which was owed to Mr. Zaikin for services rendered prior to
September 2005, at which time he agreed to stop accruing salary until January
2007, when he provided us notice of his intent to once again begin accruing
salary until such time as we have sufficient funds to pay such accrued salary,
$218,537 payable to our Chief Financial Officer, Elena Pochapski, and $69,242 of
accrued salary payable to our former Chief Executive Officer, Shakeel
Adam.





We had
negative working capital of $2,205,438 and a total pre-development and
development stage accumulated deficit of $15,341,744 as of September 30,
2009.





Because
our cumulative losses associated with the operations of ZNG exceeded our
investment as of the date of the Joint Venture, ZNG, Ltd. is carried on our
balance sheet at $-0- as of September 30, 2009. Our investment in ZNG,
Ltd. will exceed $-0- at such time as ZNG, Ltd. has cumulative
earnings sufficient to repay all loans to Baltic as provided in the Joint
Venture, if ever.





As of
September 30, 2009, the Company owns a 44% interest in KNG. The Company’s
investment in KNG is recorded on the equity method of accounting
effective October 1, 2008. After careful consideration of the current financial
position of KNG, the Company applied an impairment charge to the value of the
investment in KNG which resulted in carrying it at zero value.




We had
$14,592 of net cash flows from operating activities for the nine months ended
September 30, 2009, which was attributable to adjustments to reconcile $485,355
of net loss, offset by $461,535 of accounts payable and accrued expenses, $458
of depreciation and amortization, $37,989 of common stock and warrants issued
for services and increased by $35 of prepaid expenses and other
assets.





In
connection with the Joint Venture (described under "Joint Venture," above), the
Company historically received management fees, which varied from $25,000 to
$85,000 per month. Due to the “transition period” of the Joint Venture’s
exploration activities, no management fees were paid during the year ended
December 31, 2008 or the nine months ended September 30, 2009, and the Company
does not anticipate receiving any such fees moving forward.  If the
Company does not receive any management fees moving forward, the Company
anticipates that its stockholders and management will continue to provide
financing for the Company, of which there can be no assurance.


-10-


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





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





Critical
Accounting Policies





Use
of Estimates:





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.





Principles
of Consolidation:





The
accompanying consolidated financial statements include the accounts of the
Company and its then wholly-owned subsidiaries, ZNG (through October 14, 2005),
Siberian Energy Group (Canada) and KNG (December 31, 2006 through September 30,
2008).  All intercompany transactions and balances have been
eliminated.  After October 14, 2005, the Company’s investment in ZNG
is accounted for on the equity method of accounting.  After September
30, 2008, the Company’s investment in KNG is accounted for on the equity method
of accounting. Accordingly, the assets, liabilities and equity are no longer
presented on the Company’s balance sheet.





Foreign
Currency Translation:





The
Russian subsidiaries ZNG and KNG use the Ruble as their functional currency;
Siberian Energy Group (Canada) uses the Canadian dollar as its functional
currency.  The books and records of ZNG, KNG and Siberian Energy Group
(Canada) are kept in their functional currencies.  The Company
translates to U.S. dollars the assets and liabilities of ZNG, KNG, and Siberian
Energy Group (Canada) at the year-end exchange rates; and income statement
amounts are converted at the average rates of exchange for the
year.  Translation gains and losses are included within other
comprehensive income (loss).





Oil
and Gas Properties:





The
Company follows the full cost method of accounting for oil and gas
properties.  Accordingly, all costs associated with acquisition,
exploration, and development of oil and gas reserves, including directly related
overhead costs, are capitalized.





All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, will be amortized on the unit-of production
method using estimates of proved reserves.  Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs.  When applicable, if the results of an assessment indicate
that the properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.





In
addition, the capitalized costs are subject to a “ceiling test,” which basically
limits such costs to the aggregate of the “estimated present value,” discounted
at a 10-percent interest rate of future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.


-11-


Sales of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.  Abandonments of properties are accounted for as adjustments
of capitalized costs with no loss recognized.





Property
and Equipment:





Property
and equipment is stated at cost, net of accumulated
depreciation.  Depreciation is provided using the straight-line
method.





Long-Lived
Assets:





Long
lived assets to be held and used or disposed of other than by sale are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.  When required, impairment
losses on assets to be held and used or disposed of other than by sale are
recognized based on the fair value of the asset.  Long-lived assets to
be disposed of by sale are reported at the lower of its carrying amount or fair
value less cost to sell.





ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





ITEM 4. CONTROLS AND
PROCEDURES





Evaluation
of Disclosure Control and Procedures





We
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as such term is defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) as of September 30,
2009.  This evaluation was carried out under the supervision and with
participation of our Chief Executive Officer and Chief Financial Officer. Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of September 30, 2009, our disclosure controls and procedures
are not effective as a result of the material weakness in internal control over
financial reporting discussed below.





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





As of
December 31, 2008, management assessed the effectiveness of the Company's
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting
such assessments.  Based on that evaluation, management concluded
that, during the period covered by our Annual Report on Form 10-K, such internal
controls and procedures were not effective to detect the inappropriate
application of US GAAP rules as more fully described below. This was due to
deficiencies that existed in the design or operation of our internal control
over financial reporting that adversely affected our internal controls and that
taken together may be considered to be a material weakness.


-12-


We are
committed to improving our financial organization. As part of this commitment,
we will, as soon as funds are available to the Company (1) appoint one or more
outside directors to our board of directors who shall be appointed to the audit
committee of the Company resulting in a fully functioning audit committee who
will undertake the oversight in the establishment and monitoring of required
internal controls and procedures; (2) create a position to segregate duties
consistent with control objectives and will increase our personnel resources;
and (3) hire independent third parties to perform expert advice.





We will
continue to monitor and evaluate the effectiveness of our internal controls and
procedures and our internal controls over financial reporting on an ongoing
basis and are committed to taking further action and implementing additional
enhancements or improvements, as necessary and as funds allow.





Changes
in internal control over financial reporting





There
were no changes in our internal control over financial reporting during our most
recent fiscal quarter that materially affected, or were reasonably likely to
materially affect, our internal control over financial
reporting.






-13-





PART II - OTHER
INFORMATION





ITEM 1. LEGAL
PROCEEDINGS





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





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





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





ITEM 1A. RISK
FACTORS





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





RISK OF CONTINUING OUR BUSINESS PLAN
WITHOUT ADDITIONAL FINANCING.





We depend
to a great degree on the ability to attract external financing in order to
conduct future exploratory and development activities. The Company believes it
can satisfy its cash requirements during the next twelve months, estimated at
approximately $300,000, through funding provided by existing stockholders. As of
September 30, 2009, the total funding provided to ZNG, Ltd. and ZNG by Baltic
was equal to $23.5 million plus accrued interest of approximately $5 million,
which has been spent on various purposes, including seismic and gas
seismotomography surveys, drilling of two exploratory wells, and paying
consultants for services performed in connection with surveys performed on the
previously licensed area. Our partner in ZNG, Baltic has informed us that they
do not plan to move forward with any further exploration activities through ZNG.
The Company’s partner in KNG, Neftebitum, is responsible for financing the
research work of KNG. Neftebitum is currently attempting to raise external
funds; however, no significant amounts have been raised to date. If you invest
in our Company and we are unable to raise the required funds, your investment
could become worthless.





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





The
Company anticipates the need for approximately $15,000,000 prior to KNG's
expected generation of any revenues. In connection with the Agreement of
Purchase and Sale, as described in more detail above, the Company sold a 56%
interest in KNG to Neftebitum and various individuals in September
2008.  Pursuant to this agreement and the related Operating Agreement,
Neftebitum is responsible for providing financing for the operations of KNG.
Currently, the Company is aware of Neftebitum raising only a small part of this
financing and the Company can make no assurances that sufficient financing will
ever be raised. The Company also does not expect to generate any revenues
through the operations of KNG, until such financing can be raised, of which
there can be no assurance. Therefore, investors should keep in mind that even if
Neftebitum is able to raise the substantial amounts of additional financing that
KNG requires for its operations, it could still be years before KNG generates
any revenue, if ever. If Neftebitum does not raise the $15,000,000 which the
Company anticipates KNG needs to generate revenues, which, even if generated,
will likely not be great enough to sustain KNG if no revenues are generated and
hydrocarbon reserves are not discovered, KNG may be forced to abandon its
business plan, and the Company could be forced to abandon or curtail its
business plan as well, which could cause the value of the Company's common stock
to substantially decline or become worthless.


-14-


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 $485,355 for the nine months
ended September 30, 2009, a net loss of $5,863,560 for the year ended December
31, 2008, and had a total accumulated deficit of $15,341,744 as of September 30,
2009. These factors among others indicate that the Company may be unable to
continue as a going concern, particularly in the event that it cannot generate
sufficient cash flow to conduct its operations and/or obtain additional sources
of capital and financing.





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





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





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





As a
development stage company, we have had limited revenues and no profits to date
and our net cumulative deficit attributable to our development stage as of
September 30, 2009, was $14,891,959, and our total cumulative deficit was
$15,341,744 which included $449,785 of pre-development stage deficit. We had
$1,069,212 in accrued and unpaid salaries and a working capital deficit of
$2,205,438 as of September 30, 2009. The Company is currently being funded by
existing shareholders, but there can be no assurance this amount will be
sufficient to continue our planned operations or that we will have enough money
to repay our outstanding debts. If throughout KNG’s future oil exploration, if
any, no viable wells are found, and consequently, we generate only minimal
revenues through KNG, we will likely be forced to curtail or abandon our
business plan. If this happens, you could lose your investment in our Company.
If we are unable to generate profits, we will be forced to rely on external
financing, of which there is no guarantee, to continue with our business
plan.





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




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


-15-


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 KNG DOES NOT FIND HYDROCARBON RESERVES, WE MAY BE
FORCED TO CURTAIL OUR BUSINESS PLAN.





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





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





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





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.


-16-


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





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





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





Projections
on future revenues as well as costs and required capital expenditures are based
on estimates. Business statistical analysis is used in projection of drilling
success ratios, average production costs, world oil price fluctuations and their
correspondence to Russian domestic market. If ZNG’s or KNG’s projections or
estimates are wrong or our statistical analysis faulty, ZNG's or KNG’s revenues
may be adversely affected which could prevent ZNG and/or KNG from executing
their business strategy. As an investor, if this happens your securities in our
Company could be adversely affected and you could lose your investment in our
Company due to the fact that our only current oil and gas operations are through
our 50% ownership of ZNG, Ltd., which in turn owns 100% of ZNG and through our
44% ownership of KNG, which has been awarded two exploration oil and
gas licenses to date.





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





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





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





Zauralneftegaz,
Ltd. which we own 50% of through our Joint Venture, and KNG, which we own 44%
of, hold certain licenses and rights to reapply for licenses to certain oil and
gas properties in the Kurgan Region of Russia.  As a result, we are
subject to various risks associated with doing business in Russia relating to
Russia's economic and political environment. As is typical of an emerging
market, Russia does not possess a well-developed business, legal and regulatory
infrastructure that would generally exist in a more mature free market economy
and, in recent years, Russia has undergone substantial political, economic and
social change. Furthermore, in recent years the Russian government has
unilaterally annexed certain oil and gas properties and companies for the
government, and there can be no assurance that if commercially exploitable oil
and gas reserves are found on our properties, that such properties will not be
annexed or otherwise claimed by the Russian government.  Our failure
to manage the risks associated with doing business in Russia could have a
material adverse effect upon our results of operations.


-17-


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





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





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





We
anticipate incurring significant legal, accounting and other expenses in
connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, for fiscal year 2010, Section 404 will require us to obtain a report
from our independent registered public accounting firm attesting to the
assessment made by management.  Our testing, or the subsequent testing
by our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we may need to hire
additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.





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.


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





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





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





STATE
SECURITIES LAWS MAY LIMIT SECONDARY TRADING, WHICH MAY RESTRICT THE STATES IN
WHICH AND CONDITIONS UNDER WHICH YOU CAN SELL SHARES.





Secondary
trading in our common stock will not be possible in any state until the common
stock is qualified for sale under the applicable securities laws of the state or
there is confirmation that an exemption, such as listing in certain recognized
securities manuals, is available for secondary trading in the state. If we fail
to register or qualify, or to obtain or verify an exemption for the secondary
trading of, the common stock in any particular state, the common stock cannot be
offered or sold to, or purchased by, a resident of that state. In the event that
a we do not apply for registration in, there is not a valid exemption for,
and/or a significant number of states refuse to permit secondary trading in our
common stock, the liquidity for the common stock could be significantly
impacted.





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





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


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





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





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





The
Company has previously agreed to pay its President, Helen Teplitskaia, 10,000
shares of common stock per month for her service to the Company.  As
such, in June 2009, the Company issued Ms. Teplitskaia an aggregate of 60,000
shares, 10,000 shares per month from January 2009 to June 2009.  The
Company also owes Ms. Teplitskaia an additional 40,000 shares for services
rendered during the months of July, August, September, October 2009, which
shares have not been issued to date and have not been included in the number of
issued and outstanding shares disclosed throughout this
report.





The
Company claims an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended, since the foregoing issuance did not involve
a public offering, the recipient took the securities for investment and not
resale and the Company took appropriate measures to restrict
transfer.





ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.





None.





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





None.





ITEM 5. OTHER
INFORMATION





None.





ITEM 6.
EXHIBITS





Exhibit
      No.
            Description
      of Exhibit10.1(1)
            Option
      Agreement with Baltic Petroleum Limited dated April 28,
    200510.2(1)
            License
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.3(1)
            Loan
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.4(1)
            Guarantee
      by Siberian Energy Group, Inc. dated April 28, 200510.5(1)
            Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28,
2005


-20-


10.6(2)
            Option
      Agreement with Baltic Petroleum Limited dated April 28,
    200510.7(2)
            License
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.8(2)
            Loan
      Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
      April 28, 200510.9(2)
            Guarantee
      by Siberian Energy Group, Inc. dated April 28, 200510.10(2)
            Pledge
      and Security Agreement between Siberian Energy Group, Inc. and Baltic
      Petroleum Limited dated April 28, 200510.11(3)
            Clarification
      to the Contract of Purchase and Sale of the Share in Charter Capital of
      LLC "Zauralneftegaz" dated 15 May 200410.12(3)
            Agreement
      with Business - Standard (translated from Russian version)10.13(3)
            Supplementary
      Agreement to Business - Standard Agreement (translated from Russian
      version)10.14(3)
            Supplementary
      Agreement No. 2 to Business - Standard Agreement (translated from Russian
      version)10.15(3)
            Deed
      of Amendment between ZNG and BP10.16(3)
            Deed
      of Amendment between the Company and BP10.17(4)
            Joint
      Venture Shareholders' Agreement with Baltic Petroleum (E&P) Limited
      and Zauralneftegaz Limited dated October 14, 200510.18(5)
            Amendment
      to the Employment Agreement Dated August 1, 2003, with Elena
      Pochapski10.19(5)
            Form
      of Waiver Agreement10.20(6)
            Loan
      Agreement between OOO Zauralneftegaz and Caspian Finance
      Limited10.21(6)
            Deed
      of Novation between Baltic Petroleum Limited, Caspian Finance Limited and
      OOO Zauralneftegaz10.22(6)
            Deed
      of Release10.23(6)
            Release
      of Pledge10.24(6)
            Guarantee10.25(6)
            Debenture10.26(6)
            Agreement
      for the Pledge of the Participatory Interest in OOO Zauralneftegaz
      (Russian translation removed)10.27(6)
            Sale
      and Purchase Agreement


-21-


10.28(8)
            Option
      Agreement with Key Brokerage10.29(8)
            Warrant
      Agreement with Key Brokerage10.30(9)
            July
      26, 2006 Deed of Agreement10.31(10)
            Consulting
      Agreement with Business Standard




10.32(11)
            Addition
      to the Loan Agreement of November 9, 200510.33(11)
            Gross
      Overriding Royalty Agreement10.34(12)
            Amendment
      No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
      Pochapski10.35(13)
            Deed
      of Variation to the Loan Agreement Dated 9th
      of November 2005, Entered into in June 200710.36(15)
            Agreement
      of Purchase and Sale with Limited Liability Company Neftebitum, Sergey V.
      Prokopiev, and Oleg G. Shelepov10.37(15)
            Operating
      Agreement with Limited Liability Company Neftebitum10.38(16)
            One
      Year Extension to the Employment Agreement of August 1, 2004 with David
      Zaikin10.39(16)
            One
      Year Extension to the Employment Agreement of August 1, 2004 with Elena
      Pochapski10.40(16)
            Stock
      Option Agreement for David Zaikin10.41(16)
            Stock
      Option Agreement for Elena Pochapski21.1(14)
            Subsidiaries31.1*
            Certificate
      of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
      Act of 200231.2*
            Certificate
      of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
            Certificate
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2*
            Certificate
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200299.1(7)
            Glossary




* Filed
herein.





(1) Filed
as Exhibit 10.1, 10.2, 10.3, 10.4 and 10.5 to the Company's Form 8-K filed with
the Commission on May 20, 2005, and incorporated herein by
reference.




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




(3) Filed
as Exhibits to the Company's Report on Form 10-QSB, filed with the Commission on
August 22, 2005, and incorporated herein by reference.





(4) Filed
as Exhibits to the Company's Report on Form 8-K, filed with the Commission on
October 28, 2005, and incorporated herein by reference.


-22-


(5) Filed
as Exhibits to our Report on Form 10-QSB for the period ending September 31,
2005, which was filed with the Commission on November 21, 2005, and is
incorporated herein by reference.





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




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





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





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





(10)
Filed as an Exhibit to our Form 8-K filed with the Commission on February 20,
2007, and incorporated herein by reference.




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





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





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





(14)
Filed as an Exhibit to our Report on Form 10-K filed with the Commission on
April 14, 2009, and incorporated herein by reference.





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





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





SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




SIBERIAN ENERGY GROUP
  INC.DATED:
      November 13, 2009
                  By:
      /s/ David
      ZaikinDavid
      ZaikinChief
      Executive Officer(Principal
      Executive Officer)DATED:
      November 13, 2009
                  By:
      /s/ Elena
      PochapskiElena
      PochapskiChief
      Financial Officer(Principal
      Accounting
Officer)




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