**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-QSB**
 (Mark
        One)
 
 [X]
              QUARTERLY
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934
 
 For
        the
        quarterly period ended September 30, 2007
 
 [ 
                   ]
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT
  For
          the
          transition period from ____________ to ______________
  Commission
        file number 333-118902
 
 SIBERIAN
        ENERGY GROUP INC.
 (Exact
        name of small business issuer as specified in its charter)
 
 **NEVADA**
              **52-2207080**(State
                  or other jurisdiction of
              (IRS
                  Employer Identification No.)incorporation
                  or organization)
 
 275
        Madison Ave, 6th Floor, New York, NY 10016
 (Address
        of principal executive offices)
 
 (212)
        828-3011
 (Registrant's
        telephone number)
 
 Check
        whether the registrant (1) has filed all reports required to be filed by
        Section
        13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
        period that the registrant was required to file such reports), and (2) has
        been
        subject to such filing requirements for the past 90 days. Yes [X] No [
        ]
 
 As
        of
        November 9, 2007, 16,308,065 shares of Common Stock of the issuer were
        outstanding ("Common Stock").
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes [   ] No [X].
 
 Traditional
        Small Business Disclosure Format (Check One): Yes [   ] No
        [X].
  
 
 
 
  
 PART
        I. FINANCIAL INFORMATION
 
 ITEM
        1. FINANCIAL STATEMENTS






**SIBERIAN
      ENERGY GROUP INC.**


**(A
      Development Stage Company)**





**CONDENSED
      CONSOLIDATED**


**FINANCIAL
      STATEMENTS**





**September
      30, 2007**


































































**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, 2007, and
      the related condensed consolidated statements of operations, stockholders'
      equity, and cash flows for the nine months ended September 30, 2007 and 2006,
      and the cumulative period of development stage activity (January 1, 2003 through
      September 30, 2007).   These financial statements are the
      responsibility of the Company’s management.





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





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





We
      have
      previously audited, in accordance with auditing standards of the Public Company
      Accounting Oversight Board, the consolidated balance sheet as of December 31,
      2006, and the related consolidated statements of operations, stockholders’
equity and cash flows for the year then ended (not presented herein); and in
      our
      report dated March 28, 2007, we included an explanatory paragraph describing
      conditions that raised substantial doubt about the Company’s ability to continue
      as a going concern.  In our opinion, the information set forth in the
      accompanying condensed consolidated balance sheet as of December 31, 2006 is
      fairly stated, in all material respects, in relation to the balance sheet from
      which it has been derived.








Lumsden
      & McCormick, LLP


Buffalo,
      New York


November
      13, 2007








F-2


SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)**Condensed
                Consolidated Balance Sheets****(Unaudited)****September
                30,**
            
            
            December
                31,**2007**
            
            
            2006**Assets****Current
                assets:**Cash
            
            **$**
            **85,761**
            
            
            $
            1,435Management
                fee receivable
            
            ****
            **-**
            
            
            
            110,000Prepaid
                expenses and other
            
            ****
            **57,321**
            
            
            
            5,272****
            **143,082**
            
            
            
            116,707Investment
                in joint venture
            
            ****
            **-**
            
            
            
            -Oil
                and gas properties, unproved
            
            ****
            **2,700,000**
            
            
            
            2,700,000Property
                and equipment, net
            
            ****
            **3,828**
            
            
            
            2,565**$**
            **2,846,910**
            
            
            $
            2,819,272**Liabilities
                and Stockholders' Equity****Current
                liabilities:**Accounts
                payable:Related
                party - stockholders
            
            **$**
            **241,898**
            
            
            $
            362,166Related
                party - Baltic Petroleum, interest at 14%
            
            ****
            **55,127**
            
            
            
            50,615Others
            
            ****
            **349,692**
            
            
            
            459,561Accrued
                payroll
            
            ****
            **463,983**
            
            
            
            1,011,788****
            **1,110,700**
            
            
            
            1,884,130**Stockholders'
                equity:**Common
                stock - authorized 100,000,000 shares, $.001 par value,16,308,030
                and 14,112,961 issued and outstanding
            
            ****
            **16,308**
            
            
            
            14,113Additional
                paid-in capital
            
            ****
            **8,713,199**
            
            
            
            6,593,829Accumulated
                deficitPre-development
                stage
            
            ****
            **(449,785**
            **)**
            
            
            (449,785
            )Development
                stage
            
            ****
            **(6,533,365**
            **)**
            
            
            (5,218,570
            )Accumulated
                other comprehensive income (loss)
            
            ****
            **(10,147**
            **)**
            
            
            (4,445
            )****
            **1,736,210**
            
            
            
            935,142**$**
            **2,846,910**
            
            
            $
            2,819,272*See
                accompanying notes.*






F-3


SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)For
                the**Condensed
                Consolidated Statements of Operations**
            
            
            
            
            
            
            
            
            
            
            
            cumulativeperiod
                ofDevelopmentStage
                Activity-For
                the three
            
            
            For
                the nine
            
            
            January
                1, 2003months
                ended
            
            
            months
                ended
            
            
            through**September
                30,**
            
            
            September
                30,
            
            
            **September
                30,**
            
            
            September
                30,
            
            
            September
                30,**2007**
            
            
            2006
            
            
            **2007**
            
            
            2006
            
            
            2007Revenues
                and other income:Management
                fees from joint venture
            
            **$**
            **255,000**
            
            
            $
            75,000
            
            
            **$**
            **615,000**
            
            
            $
            225,000
            
            
            $
            1,050,000Gain
                from entrance into joint venture
            
            ****
            **-**
            
            
            
            -
            
            
            ****
            **-**
            
            
            
            -
            
            
            
            364,479Other
            
            ****
            **-**
            
            
            
            -
            
            
            ****
            **-**
            
            
            
            -
            
            
            
            6,382Total
                revenues and other income
            
            ****
            **255,000**
            
            
            
            75,000
            
            
            ****
            **615,000**
            
            
            
            225,000
            
            
            
            1,420,861Expenses:Salaries
            
            ****
            **111,487**
            
            
            
            32,994
            
            
            ****
            **579,556**
            
            
            
            101,556
            
            
            
            2,457,623Professional
                and consulting fees
            
            ****
            **125,233**
            
            
            
            166,111
            
            
            ****
            **789,487**
            
            
            
            1,755,256
            
            
            
            3,439,133Rent
                and occupancy
            
            ****
            **11,893**
            
            
            
            9,912
            
            
            ****
            **34,462**
            
            
            
            29,658
            
            
            
            210,705Depreciation
                and amortization
            
            ****
            **142**
            
            
            
            86
            
            
            ****
            **357**
            
            
            
            253
            
            
            
            103,074Finance
                charges and interest
            
            ****
            **1,499**
            
            
            
            2,626
            
            
            ****
            **4,513**
            
            
            
            8,890
            
            
            
            62,889Marketing
                and other
            
            ****
            **182,410**
            
            
            
            130,903
            
            
            ****
            **521,420**
            
            
            
            484,121
            
            
            
            1,680,802Total
                expenses
            
            ****
            **432,664**
            
            
            
            342,632
            
            
            ****
            **1,929,795**
            
            
            
            2,379,734
            
            
            
            7,954,226Loss
                before income taxes
            
            ****
            **177,664**
            
            
            
            267,632
            
            
            ****
            **1,314,795**
            
            
            
            2,154,734
            
            
            
            6,533,365Provision
                for income taxes (benefit)
            
            ****
            **-**
            
            
            
            -
            
            
            ****
            **-**
            
            
            
            -
            
            
            
            -Net
                loss (development stage)
            
            **$**
            **177,664**
            
            
            $
            267,632
            
            
            **$**
            **1,314,795**
            
            
            $
            2,154,734
            
            
            $
            6,533,365Basic
                and diluted loss per common share
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            **$**
            **(0.09**
            **)**
            
            $
            (0.19
            )
            
            $
            (0.67
            )Weighted
                average number of basic anddiluted
                common shares outstanding
            
            ****
            **16,130,204**
            
            
            
            11,671,174
            
            
            ****
            **15,318,012**
            
            
            
            11,582,245
            
            
            
            9,762,284*See
                accompanying notes.*






F-4


SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)**Condensed
                Consolidated Statements of Stockholders' Equity**For
                the cumulative period of Development Stage Activity - January 1,
                2003
                through September 30, 2007Common
                StockAdditionalNumber
                of
            
            
            
            Paid-InShares
            
            
            Par
                Value
            
            
            CapitalBalance,
                January 1, 2003 (pre-development stage)
            
            
            4,902,886
            
            
            $
            4,903
            
            
            $
            430,195Loss
                for the year - 2003
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued in acquisition (ZNG)
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            (1,000
            )Balance,
                December 31, 2003
            
            
            5,902,886
            
            
            $
            5,903
            
            
            $
            429,195Loss
                for the year - 2004
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
                currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued in acquisition (ZNG)
            
            
            3,450,000
            
            
            
            3,450
            
            
            
            746,550Shares
                issued for professional services
            
            
            50,000
            
            
            
            50
            
            
            
            9,950Other
            
            
            -
            
            
            
            -
            
            
            
            34,426Balance,
                December 31, 2004
            
            
            9,402,886
            
            
            $
            9,403
            
            
            $
            1,220,121Loss
                for the year - 2005
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
                currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued for professional services
            
            
            385,000
            
            
            
            385
            
            
            
            138,365Shares
                issued for accrued salaries
            
            
            1,700,000
            
            
            
            1,700
            
            
            
            210,800Warrants
                granted for professional services
            
            
            -
            
            
            
            -
            
            
            
            217,000Balance,
                December 31, 2005
            
            
            11,487,886
            
            
            $
            11,488
            
            
            $
            1,786,286Loss
                for the year - 2006
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
                currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -Shares
                issued for employee stock option plan and warrants
            
            
            195,000
            
            
            
            195
            
            
            
            45,305Shares
                issued for geological data
            
            
            1,900,000
            
            
            
            1,900
            
            
            
            2,235,100Shares
                issued for professional services
            
            
            1,139,499
            
            
            
            1,140
            
            
            
            1,685,351Warrants
                granted for professional services
            
            
            -
            
            
            
            -
            
            
            
            841,177Shares
                cancelled
            
            
            (609,424
            )
            
            
            (610
            )
            
            
            610Balance,
                December 31, 2006
            
            
            14,112,961
            
            
            $
            14,113
            
            
            $
            6,593,829Loss
                for nine months - 2007Foreign
                currency translation adjustmentShares
                issued for employee stock option plan and warrants
            
            
            566,935
            
            
            
            567
            
            
            
            80,828Shares
                issued for geological data
            
            
            200,000
            
            
            
            200
            
            
            
            285,800Shares
                issued for accrued salaries
            
            
            745,000
            
            
            
            745
            
            
            
            979,855Shares
                issued for professional services
            
            
            683,134
            
            
            
            683
            
            
            
            772,887Balance,
                September 30, 2007
            
            
            16,308,030
            
            
            $
            16,308
            
            
            $
            8,713,199*See
                accompanying notes.*






F-5




AccumulatedOtherAccumulated
              
              
              Comprehensive
              
              
              
              
              
              ComprehensiveDeficit
              
              
              Income
                  (Loss)
              
              
              Total
              
              
              Loss$
              (449,785
              )
              
              $
              -
              
              
              $
              (14,687
              )(422,516
              )
              
              
              -
              
              
              
              (422,516
              )
              
              $
              (422,516
              )-
              
              
              
              -
              
              
              
              -$
              (872,301
              )
              
              
              -
              
              
              $
              (437,203
              )(833,567
              )
              
              
              -
              
              
              
              (833,567
              )-
              
              
              
              (53,120
              )
              
              
              (53,120
              )
              
              $
              (886,687
              )-
              
              
              
              -
              
              
              
              750,000-
              
              
              
              -
              
              
              
              10,000-
              
              
              
              -
              
              
              
              34,426$
              (1,705,868
              )
              
              $
              (53,120
              )
              
              $
              (529,464
              )(882,151
              )
              
              
              
              
              
              
              (882,151
              )-
              
              
              
              50,614
              
              
              
              50,614
              
              
              $
              (831,537
              )-
              
              
              
              -
              
              
              
              138,750-
              
              
              
              -
              
              
              
              212,500-
              
              
              
              -
              
              
              
              217,000$
              (2,588,019
              )
              
              $
              (2,506
              )
              
              $
              (792,751
              )(3,080,336
              )
              
              
              -
              
              
              
              (3,080,336
              )-
              
              
              
              (1,939
              )
              
              
              (1,939
              )
              
              $
              (3,082,275
              )-
              
              
              
              -
              
              
              
              45,500-
              
              
              
              -
              
              
              
              2,237,000-
              
              
              
              -
              
              
              
              1,686,491-
              
              
              
              -
              
              
              
              841,177-
              
              
              
              -
              
              
              
              -$
              (5,668,355
              )
              
              $
              (4,445
              )
              
              $
              935,142(1,314,795
              )
              
              
              
              
              
              
              (1,314,795
              )(5,702
              )
              
              
              (5,702
              )
              
              $
              (1,320,497
              )-
              
              
              
              -
              
              
              
              81,395--
              
              
              
              -
              
              
              
              286,000--
              
              
              
              -
              
              
              
              980,600-
              
              
              
              -
              
              
              
              773,570$
              (6,983,150
              )
              
              $
              (10,147
              )
              
              $
              1,736,210






F-6


SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)For
                the**Condensed
                Consolidated Statements of Cash Flows**
            
            
            
            
            
            
            
            cumulativeperiod
                ofDevelopmentStage
                Activity-January
                1, 2003throughSeptember
                30,For
                the nine months ended September 30,
            
            **2007**
            
            
            2006
            
            
            2007**Cash
                flows from operating activities:**Net
                loss (development stage)
            
            **$**
            **(1,314,795**
            **)**
            
            $
            (1,887,102
            )
            
            $
            (6,533,365
            )Depreciation
                and amortization
            
            ****
            **357**
            
            
            
            167
            
            
            
            103,074Common
                stock and warrants issued
            
            ****
            **2,121,565**
            
            
            
            1,039,980
            
            
            
            4,987,983Gain
                from entrance into joint venture
            
            ****
            **-**
            
            
            
            -
            
            
            
            (364,479
            )Changes
                in other current assets and current liabilities:Prepaid
                expenses and other assets
            
            ****
            **57,951**
            
            
            
            25,000
            
            
            
            (210,713
            )Accounts
                payable and accrued expenses
            
            ****
            **(773,430**
            **)**
            
            
            845,999
            
            
            
            3,101,538**Net
                cash flows from operating activities**
            
            ****
            **91,648**
            
            
            
            24,044
            
            
            
            1,084,038**Cash
                flows from investing activities:**Expenditures
                for licenses and related
            
            ****
            **-**
            
            
            
            -
            
            
            
            (528,961
            )Expenditures
                for oil and gas properties
            
            ****
            **-**
            
            
            
            -
            
            
            
            (770,750
            )Expenditures
                for property and equipment
            
            ****
            **(1,620**
            **)**
            
            
            -
            
            
            
            (5,851
            )Cash
                received in acquisition
            
            ****
            **-**
            
            
            
            -
            
            
            
            6Cash
                received from entrance into joint venture
            
            ****
            **-**
            
            
            
            -
            
            
            
            175,000**Net
                cash flows for investing activities**
            
            ****
            **(1,620**
            **)**
            
            
            -
            
            
            
            (1,130,556
            )**Cash
                flows from financing activities:**Net
                proceeds from demand loan
            
            ****
            **-**
            
            
            
            -
            
            
            
            62,500Common
                stock issued for employee stock option plan
            
            ****
            **-**
            
            
            
            14,000
            
            
            
            45,500Additional
                paid-in capital
            
            ****
            **-**
            
            
            
            -
            
            
            
            34,426**Net
                cash flows from financing activities**
            
            ****
            **-**
            
            
            
            14,000
            
            
            
            142,426Effect
                of exchange rates on cash
            
            ****
            **(5,702**
            **)**
            
            
            (3,314
            )
            
            
            (10,147
            )Net
                increase in cash
            
            ****
            **84,326**
            
            
            
            34,730
            
            
            
            85,761Cash
                - beginning
            
            ****
            **1,435**
            
            
            
            11,551
            
            
            
            -Cash
                - ending
            
            **$**
            **85,761**
            
            
            $
            46,281
            
            
            $
            85,761*See
                accompanying notes.*






F-7


SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)





**Notes
                  to Condensed Consolidated Financial
                  Statements**


**1.  Basis
      of Presentation:**





The
      accompanying unaudited consolidated financial statements of Siberian Energy
      Group Inc. (the Company) include the accounts of the Company and its 100% owned
      subsidiaries.  These financial statements have been prepared pursuant
      to the rules of the Securities and Exchange Commission (SEC) interim reporting,
      and do not include all of the information and note disclosures required by
      generally accepted accounting principles.  These consolidated
      financial statements and notes herein are unaudited, but in the opinion of
      management, include all the adjustments (consisting of only normal recurring
      adjustments) necessary for a fair presentation of the Company’s financial
      positions, results of operations, and cash flows for the periods
      presented.  Accounting policies used in fiscal 2007 are consistent
      with those used in the cumulative period of Development Stage Activity – January
      1, 2003 through September 30, 2007.  These financial statements should
      be read in conjunction with the Company’s audited consolidated financial
      statements and notes thereto.  Interim operating results are not
      necessarily indicative of operating results for any future interim period or
      the
      full year.





**2.  The
      Company and Description of Business:**





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





On
      October 14, 2005, the Company entered into a joint venture agreement with a
      third party, Baltic Petroleum Limited (Baltic).  The Company
      transferred 100% of its ownership interest in ZNG to the Joint Venture
      Zauralneftagaz Limited, UK (ZL) and transferred 50% of the Joint Venture
      interest to Baltic for $175,000 and the agreement by Baltic to provide future
      funding to the Joint Venture as detailed in a Joint Venture Shareholders’
Agreement.   ZL is currently drilling its second well based on
      the recommendations from the analysis of the first Privolny-1 well and continues
      geological exploration works throughout the territory of its five licenses
      covering in total 740 thousand acres.  These operations are funded via
      loans provided to ZL and ZNG by a financing company wholly owned by Baltic.
      Loans are guaranteed by ZL’s holdings in ZNG. As of September 30, 2007 the total
      amounts provided through such loans to ZL and ZNG were equal to $19.9 million
      plus accrued interest of approximately $2.7 million.





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





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





·
            During
                the arrangement, the Company will receive a monthly management fee
                of
                $25,000 from ZNG ($55,000 effective November 2006).  Management
                fees for the period June through October 2007 were paid at the rate
                of
                $85,000 per month;


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


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


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


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






F-8


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





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





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





On
      October 22, 2007, Konda was awarded two 5-year oil and gas exploration licenses
      in the Khanty-Mansiysk district of Russia, covering a total of 166,000
      acres.





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





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





**3.  Income
      Taxes:**





At
      September 30, 2007, the Company has estimated U.S. tax net operating loss
      carryforwards totaling approximately $5,252,000.  These carryforwards
      may be used to offset future taxable income, and expire in varying amounts
      through 2027.  No tax benefit has been reported in the financial
      statements, since the Company believes there is at least a 50% chance that
      the
      carryforwards will expire unused.  Accordingly, the $1,015,000
      estimated cumulative tax benefit of the loss carryforward has been offset by
      a
      valuation allowance of the same amount.








**4.  Loss
      Per Common Share:**





Basic
      and
      diluted loss per common share is computed using the weighted average number
      of
      common shares outstanding during the period.  Shares issuable for
      common stock options may have had a dilutive effect on earnings per share had
      the Company generated income during the periods through September 30,
      2007.








**5.  Going
      Concern:**





These
      financial statements have been prepared assuming the Company will continue
      as a
      going concern. However, since inception of its current endeavor in 2003, it
      has
      not earned substantial revenues and is considered to be in the development
      stage, which raises substantial doubt about its ability to continue as a going
      concern.





Management
      is of the opinion that the Joint Venture arrangement established in 2005 will
      successfully generate allocable profits to the Company in the near
      term.





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


F-9




**ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
 
 CERTAIN
        STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB (THIS "FORM 10-QSB"),
        CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A
        OF THE
        SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION
        REFORM
        ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY
        ALL,
        OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
        FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD",
        OR
        "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
        TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES.
        SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
        AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
        ACHIEVEMENTS OF SIBERIAN ENERGY GROUP INC. ("SIBERIAN", THE "COMPANY", "WE",
        "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE
        OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
        REFERENCES IN THIS FORM 10-QSB, UNLESS ANOTHER DATE IS STATED, ARE TO SEPTEMBER
        30, 2007.
 
 Investors
        should also take note of the fact that some of the more technical terms relating
        to the Company's operations as described below are explained in greater detail
        under exhibit 99.1, incorporated by reference hereto.
 
 **BUSINESS
        DEVELOPMENT:**
 
 Siberian
        Energy Group Inc. was formed as a Nevada corporation on August 13, 1997,
        as
        Advanced Rehab Technology Corporation. Subsequently, on March 9, 2001, the
        Company changed its name to Talking Cards, Inc.; on February 12, 2002, the
        Company changed its name to Oysterking Incorporated; on December 3, 2002,
        the
        Company changed its name to 17388 Corporation Inc., at which point the
        controlling interest of the Company was sold and a new board of directors
        was
        appointed; on May 5, 2003, the Company changed its name to Trans Energy Group
        Inc.; and on December 3, 2003, the Company changed its name to Siberian Energy
        Group Inc.
 
 On
        September 17, 1999, the Company affected a 1-for-30 reverse stock split.
        A
        subsequent 3-for-1 forward split was consummated on October 2, 2000. All
        share
        amounts subsequently listed are retroactively adjusted to reflect these stock
        splits unless otherwise provided. All activities related to the Company's
        business were discontinued prior to January 1, 2000 and the Company began
        looking for opportunities to acquire an operating business.
 
 In
        the
        spring of 2003, the balance of the Company's shares was purchased by new
        shareholders who stepped into the management of the Company and defined its
        new
        business direction as an oil and gas exploration company.
 
 On
        May 9,
        2003, the Company entered into an Acquisition Agreement (the "Acquisition
        Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation
        ("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant
        to the Acquisition Agreement, the Company acquired a 51% interest in ZNG
        by
        issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004,
        the
        Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares
        of
        the Company's common stock, making ZNG a wholly owned subsidiary of the Company.
        The Company had no affiliation with ZNG prior to the acquisition in May
        2003.
  On
        May 2,
        2005, the Company affected a 1:2 reverse stock split and all share amounts
        listed throughout this report on Form 10-QSB reflect such split unless otherwise
        stated.
  -3-
 All
        dollar amounts used throughout this Report are in United States dollars,
        unless
        otherwise stated. All amounts in Canadian dollars used throughout this Report
        are preceded by CDN, for example CDN $500, is referring to $500 Canadian
        dollars.
 
 **BUSINESS
        OPERATIONS:**
 
 We
        are a
        development stage company, which is seeking opportunities for investment
        in
        and/or acquisition of small to medium companies in Russia, specifically in
        the
        oil and gas industry. We are currently evaluating investment and joint venture
        opportunities throughout Russia.
  Until
        October 14, 2005, the Company's operations were conducted solely through
        its
        then wholly owned subsidiary, Zaural Neftegaz ("ZNG") a development stage
        oil
        and gas exploration company located in the Western Siberian Region of Russia.
        However, on October 14, 2005, the Company entered into a Joint Venture
        agreement, whereby the Company transferred 100% of the ownership of ZNG to
        a
        newly formed Joint Venture company, Zauralneftegaz Limited, a company organized
        under the laws of the United Kingdom ("ZNG, Ltd."), of which the Company
        owns
        50% pursuant to the Joint Venture agreement entered into on October 14, 2005
        (as
        described in greater detail below under “Joint Venture”). From October 14, 2005
        to December 13, 2006, the Company had no oil and gas operations except through
        its ownership of 50% of ZNG, Ltd. On December 13, 2006, the Company entered
        into
        an Interest Purchase Agreement with Key Brokerage, whereby the Company purchased
        100% of the issued and outstanding common stock of Kondaneftegaz, LLC (“KNG”), a
        Russian limited liability company, which was created in 2004 for the purpose
        of
        oil and gas exploration in the Khanty-Mansiysk district of Western Siberia,
        Russia. On October 22, 2007, KNG was awarded two oil and gas exploration
        licenses for the Karabashsky-61 and Karabashsky-67 blocks located in the
        Khanty-Mansiysk Autonomous Region.  KNG also has eight more
        outstanding applications for exploration licenses filed with the Russian
        authorities, which auctions have not occurred to date.
 
 Moving
        forward the Company currently plans to focus on the exploration and potential
        development of any licenses acquired by KNG through government auctions in
        fiscal 2007 and working with its partner in the Joint Venture, Baltic Petroleum
        (E&P) Limited ("BP" or "Baltic"), to continue the oil and gas exploration
        activities through their co-ownership of the Joint Venture and ZNG.
 
 **Description
        of KNG**
 
 On
        December 13, 2006, we entered into an Interest Purchase Agreement (the "Purchase
        Agreement") with Key Brokerage LLC ("Key Brokerage"), pursuant to which we
        purchased 100% of the stock of Kondaneftegaz LLC ("KNG"), a Russian limited
        liability company, which was created in 2004 for the purpose of oil and gas
        exploration in the Khanty-Mansiysk district of Western Siberia, Russia. In
        addition to acquiring 100% of the stock of KNG, we received the geological
        information package on the Karabashski zone of Khanty-Mansiysk Autonomous
        district (Tuymen region of Russian Federation) ("Geological Data"). The
        Geological Data is included in the total purchase price discussed
        below.
 
 The
        Purchase Agreement consummated the transactions contemplated by the Option
        Agreement (the "Key Brokerage Option"), which we entered into with Key Brokerage
        in September 2006. In consideration for agreeing to the Key Brokerage Option,
        we
        granted Key Brokerage 250,000 warrants to purchase shares of our common stock
        at
        an exercise price of $2.20 per share, exercisable for up to two (2) years
        from
        the date of the Key Brokerage Option (the "Key Brokerage Warrants") in September
        2006.  In connection with the purchase of KNG, we received certain
        geological information, including well logs, surveys and structural maps
        regarding the Karabashsky zone of the Khanty-Mansiysk district, which an
        independent appraisal valued at approximately $2,700,000.
 
 In
        consideration for the transfer of 100% of the stock of KNG, we issued Key
        Brokerage an aggregate of 1,900,000 restricted shares of our common stock
        valued
        at approximately $2,700,000, which value approximated the value of geological
        information relevant to the license blocks applied for by KNG.
  -4-
 
 In
        October 2007, KNG was awarded two oil & gas exploration licenses in
        Khanty-Mansiysk region in West Siberia, Russia for the Karabashsky-61 and
        Karabashsky-67 blocks located in the Khanty-Mansiysk Autonomous Region, Russian
        Federation. The license areas together cover 166,000 acres and are situated
        in
        the territory of the Urals oil and gas bearing area. In accordance with the
        Sketch map of oil and gas deposits of the West-Siberian province, the license
        areas lie in the territory of the Urals oil and gas bearing area.
 
 On
        November 7, 2007, the Board of Directors of the Company approved the issuance
        of
        2,000,000 shares of common stock to Key Brokerage, in connection with the
        successful acquisition of two new oil and gas exploration licenses by
        Kondaneftegaz LLC. The shares had not been issued as of November 9, 2007,
        however, so have not been included in the number of issued and outstanding
        shares disclosed throughout this report.
 
 **Description
        of ZNG**
 
 ZNG
        was
        created to explore and develop new hydrocarbon fields and oil and gas properties
        in the Kurgan region of Southwest Siberia, Russia. ZNG has compiled data
        in the
        Eastern part of the Kurgan region by analyzing prior geological, geophysical
        and
        lithographic exploration works in the region, data, maps, and reports from
        12
        test wells drilled between 1979-1986, profile sections, correlation schemes,
        and
        geographic maps of the region. ZNG has also obtained core samples from
        parametric wells drilled in prior years on the licensed areas and adjacent
        territories in the Eastern part of Kurgan region during the initial search
        for
        oil and gas in the region, and performed analysis of the data provided by
        the
        samples.
 
 In
        March
        2003, ZNG acquired four 5-year exploration licenses covering a total of 643,000
        acres through a government tender. Upon expiration of the licenses in March
        2008, ZNG will have, subject to the signing of the Subsoil Legislation,
        preferential right to apply for the full production license for the term
        of 25
        years.
 
 In
        June
        2006, through participation in governmental auctions, ZNG successfully obtained
        three more oil and gas licenses in the Kurgan region of Siberia, Russia:
        the
        Yuzhno-Voskresensky, Petukhovsky and Lebyazhevsky parcels. The new licenses
        are
        for the period of 25 years and allow both exploration and production on the
        licensed areas. The total cost paid at the auctions for the three new licenses
        by ZNG was approximately $425,000.  All the licensed areas are located in
        the Eastern part of Kurgan region, have well-developed infrastructure, including
        close proximity to the major oil pipeline, and have available existing prior
        geological data.
 
 ZNG
        also
        has outstanding applications for two more parcels in the same area -
        Zapadno-Petukhovsky and Orlovo-Pashkovsky-2. The anticipated auction dates
        for
        these licenses are currently unknown and there can be no assurance that ZNG
        will
        be awarded the licenses to the parcels at auction.
 
 As
        of
        September 2007, ZNG had performed the following research and exploration
        works
        on its licensed areas:
 
 ·
              Obtained
                  core samples from parametric wells drilled in prior years on the
                  licensed
                  areas and adjacent territories in the Eastern part of Kurgan region
                  during
                  the initial search for oil and gas in the region, and performed
                  analysis
                  of the data provided by the
                  samples;
 
 ·
              Completed
                  a 2D seismic survey on the West-Suersky block (approximately 320
                  linear
                  kilometers), the Privolny block (approximately 140 linear kilometers),
                  and
                  the Mokrousovsky block (approximately 340 linear kilometers) using
                  Bazneftgeophisica;
  ·
              Performed
                  gravimetric surveys on the West-Suersky
                  block;
 
 
 -5-
 ·
              Completed
                  approximately 2,106 linear kilometers of gas seismotomographic
                  and
                  geochemical surveys performed by Exotrad on the Privolny, Mokrousovsky,
                  West-Suersky, Orlovo- Pashkovsky, South-Voskresensky, Petukhovsky
                  and
                  Lebyazhevsky blocks. Gas seismotomography is an advanced technique
                  of
                  combining active gas geochemistry, passive seismic and electromagnetic
                  methods. The surveys were performed by Exotrad, a world leader
                  in this
                  field. Exotrad has used this technology in more than 260 projects
                  as well
                  as “Caspian Pipeline Consortium”; “Sakhalin-2”; and “Blue Stream” in
                  diverse locations across Asia, Eastern Europe and the
                  Americas;
  ·
              Scientific
                  and technical analysis was performed by the team of geologists,
                  which
                  included experts from Exploration Consultants Limited ("ECL"),
                  a leading
                  international oil and gas consulting firm (part of RPS
                  Group);
 
 ·
              Based
                  on the results of the gas seismotomographic surveys and high definition
                  2D
                  seismic survey shot over the geochemical anomalies found in the
                  Privolny
                  and Mokrousovsky blocks, ZNG's Board of Directors decided to drill
                  up to
                  four exploration wells. At least two of these wells are proposed
                  to be
                  drilled in northern locations in the Privolny block (one of which
                  has
                  previously been drilled, the Privolny-1 Well) and the other two
                  wells are
                  proposed to be drilled on the Mokrousovsky block;·
              Performed
                  drilling of the first prospect located in the Privolny block, Privolny-1.
                  ZNG believes that the original objective of the Privolny-1 exploration
                  well, which was to substantiate the interpretation of seismic data
                  obtained in 2006, together with other geophysical and geochemical
                  work
                  conducted over the last two years ,has been achieved . ZNG believes
                  that the Privolny-1 Well will help provide an improved analysis
                  which will
                  allow it to create a work program including the drilling of at
                  least two
                  more exploration wells; andThe
                  data gathered by the drilling of the Privolny-1 well allowed ZNG
                  to
                  determine with a greater degree of confidence the exact location
                  of the
                  second exploration well, Mokrousovsky-1, which spudding (drilling)
                  started
                  on September 25, 2007. The target depth of the Mokrousovsky-1 well
                  is
                  currently expected to be 2,400 meters (approximately 7,875
                  feet).
 
 Following
        detailed data collection, survey and seismic testing, ZNG will proceed with
        development of the most promising licenses first, which will allow it to
        concentrate its resources on the most prospective areas. Based on research
        performed to date the areas of most interest are the Privolny and Mokrousovsky
        blocks. The West Suersky and Orlovo-Pashkovsky-1 blocks currently have the
        least
        potential in the assessment of ZNG and ZNG has decided not to proceed with
        its
        commitments in respect to those licenses. The Yuzhno-Voskresensky,
        Petuhovsky and Lebyazhevsky parcels will require further exploration before
        the
        decision on their potential can be reached.
 
 As
        of
        September 2007, ZNG holds five exploration licenses in the Kurgan region,
        including the Privolny block, covering 123 acres; the Mokrousovsky block,
        covering 235 acres; the Yuzhno-Voskresensky block, covering 127 acres; the
        Petuhovsky covering 206 acres; and the Lebyazhevsky block, covering 738
        acres.
 
 The
        following survey and exploration activities have taken place on the first
        two
        blocks designated by ZNG for exploration, the Privolny and the Mokrousovsky
        blocks to date:
 
 **Privolny
        Block**
 
 
 ·
              Based
                  on the results of the gas seismotomographic surveys and high definition
                  2D
                  seismic survey shot over the geochemical anomalies found in the
                  Privolny
                  and Mokrousovsky blocks, two drilling prospects were identified
                  in the
                  northern part of the Privolny block;·
              A
                  drilling of the first prospect located in the Privolny block was
                  performed. The “Privolny-1” well is intended to provide physical data to
                  enable the seismic survey to be correlated to the geology of the
                  block and
                  to better determine the subsurface structures which are present
                  in the
                  block;
  
 -6-
 ·
              The
                  core samples from the Privolny-1 well were obtained in the Middle
                  Carboniferous-Moscovian and Upper and Middle Devonian sections,
                  including
                  lean source rocks lying within the oil maturation window.  The
                  cores and electric logs obtained from the Privolny-1 well will
                  be analyzed
                  and the results will determine whether the well is to be further
                  deepened
                  to prospective geological horizons;·
              The
                  exploration well Privolny 1, was extended to 2,400 meters (7,875
                  feet)
                  from the original planned target depth of 2,000 meters (6,562 feet).
                  The
                  drilling on the Privolny-1 well was temporarily put on hold at
                  the end of
                  July 2007, pending further analysis of the data on both the Privolny-1
                  and
                  Mokrousovsky wells, and has not resumed as of the date of this
                  report;
                  and·
              The
                  Privolny-1 exploration well is awaiting final geological reports
                  regarding
                  certain hydrocarbon results in the lower sections. Although
                  non-commercial, these provide encouragement for future exploration
                  activity in the area. Additionally, sufficient data has been gathered
                  through the Privolny-1 well to enable a tie in to the adjoining
                  Mokrousovsky license block.
  **Mokrousovsky
        Block**
 
 ZNG
        has
        completed an interim Seismic Interpretation and received a Mapping Report
        created by RPS Energy (“RPS”), relating to the 2D seismic studies conducted on
        the Mokrousovsky block to date. The Mokrousovsky block is the second licensed
        area surveyed using conventional 2D seismic surveys, over which 339 kilometers
        (“km”) of seismic surveys have been shot. The following results have been
        obtained through those surveys:
 
 ·
              One
                  structural prospect was identified in the south west of the Mokrousovsky
                  license area. The structure has a maximum area of approximately
                  72 square
                  km, of which approximately 52 square km lie within the licensed
                  area. The
                  surface geochemical anomaly discovered in the area lies over the
                  north
                  eastern flank of the structure within the license area;·
              A
                  drilling location has been recommended by RPS for the prospect,
                  based on
                  the strong structure and geochemical coincidence, which drilling
                  has not
                  begun to date;·
              The
                  data gathered by the drilling of the Privolny-1 well allowed ZNG
                  to
                  determine with a greater degree of confidence the exact location
                  of the
                  drilling of its second well, the Mokrousovsky-1; and·
              ZNG
                  has signed the contract for drilling of the Mokrousovsky-1 well
                  with a
                  reputable Russian drilling Company. The Mokrousovcky-1 well was
                  spudded
                  (began drilling) on September 25, 2007; and has a target depth
                  of 2,400
                  meters (7,875 feet).
 
 **Joint
        Venture**
 
 Operating
        activities of ZNG described above are carried out through the Joint Venture
        Shareholders' Agreement ("Joint Venture") entered into on October 14, 2005
        with
        Baltic Petroleum (E&P) Limited ("BP" or
        "Baltic") and Zauralneftegaz Limited, the joint venture company ("ZNG, Ltd."),
        as contemplated by the Option Agreement, as amended (the "Option"). The Company
        closed the Joint Venture and transferred 100% of the outstanding stock of
        ZNG to
        ZNG, Ltd. in connection with the terms and conditions of the Joint Venture.
        As a
        result of such transfer, the Company holds 50% of the outstanding stock of
        ZNG,
        Ltd., which holds 100% of the outstanding stock of the Company's former wholly
        owned subsidiary, ZNG. ZNG, Ltd., will, operate through ZNG and be engaged
        in
        the exploration and development of, production and sale of, oil and gas assets
        in the Western Siberian region of the Russian Federation and the former Soviet
        Union and as a result of such transfer, the Company no longer has any separate
        oil and gas exploration activities in Kurgan, Russia, other than through
        its
        ownership of ZNG, Ltd.
  -7-
 
 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, 2007 the total funding provided to ZNG, Ltd.
        and ZNG by Baltic was equal to approximately $19.9 million plus accrued interest
        of approximately $2.7 million.
 
 To
        date,
        Caspian has provided ZNG various loans from 2005 through 2007, as described
        below:
 
 ·
              On
                  November 9, 2005, ZNG entered into a New Loan with Caspian (the
                  "New
                  Loan"). Under the loan agreement, Caspian agreed to provide a loan
                  of up
                  to $6,874,325 representing the assumedcommitment
                  under a prior loan equal to $1,739,658, of which ZNG had received
                  $1,110,624 as of November 9, 2005, and a new commitment of up to
                  $5,134,667, to be used for operations in the Kurgan region in 2005
                  and
                  through the first half of 2006. The New Loan is available to ZNG
                  until the
                  sixth anniversary of the date of the New Loan, or November 9, 2011
                  (the
                  "Term");
  ·
              On
                  January 16, 2007, ZNG and Caspian entered into a Deed of Variation
                  of the
                  Loan Agreement, whereby, inter alia, the Lender agreed to make
                  available
                  to ZNG an additional loan facility of
                  US$2,000,000;
 
 ·
              On
                  April 23, 2007, ZNG and Caspian further entered into a Deed of
                  Variation
                  of the Loan Agreement whereby, inter alia, the Lender agreed to
                  make
                  available to ZNG an additional loan facility of US$300,000;
                  and
  ·
              On
                  June 18, 2007, ZNG and Caspian entered into another Deed of Variation
                  to
                  the Loan Agreement, whereby Caspian agreed to make available to
                  ZNG an
                  additional loan facility of US$7,359,190 (the “June 2007 Deed of
                  Variation”).
 
 The
        total
        outstanding balance of the New Loan provided up to September 30, 2007, was
        $12,393,134, including $10,782,068 of principal and $1,611,066 of interest
        accrued as of September 30, 2007.
 
 Funding
        to ZNG, Ltd. is provided by Caspian on the same terms as to ZNG, through
        the
        mechanism of intercompany billing within Baltic and certain companies affiliated
        with Baltic. As of September 30, 2007, the total loan to ZNG, Ltd. from Caspian
        totaled $8,845,342, including $7,846,104 of principal and accrued interest
        of
        $999,238. In addition, ZNG, Ltd. owes $1,454,468 directly to Baltic for unpaid
        management fees and accrued interest through September 30, 2007.
 
 The
        total
        budget for the current program of seismic studies and drilling of the first
        four
        wells on ZNG’s licenses which the Board has proposed to undertake on ZNG's
        licensed blocks in 2007, is approximately US $14,998,000, or approximately
        $8
        million British pounds. These funds were raised by Baltic’s parent company
        through a placement of shares. Of the total budgeted amount of $14,998,000,
        the
        sum of $9,659,000 is being provided through the ZNG loans described earlier
        and
        the sum of $5,339,000 is committed to be provided to ZNG, Ltd. The loans
        will
        not be dilutive to the Company's ownership in ZNG.
 In
        connection with the funding provided by Baltic, ZNG entered into a gross
        override royalty agreement with Baltic, as described below under "Deed of
        Agreement," and “Gross Override Royalty Agreement.”
  -8-
  Terms
        of loans to ZNG, Ltd. and ZNG:
 
 Interest
        on any amounts loaned under the New Loan bears interest at the following
        rates,
        calculated and compounded on a daily basis, 14% per annum during the first
        two
        years of the Term, 13% per annum during the third year of the Term; and 12%
        thereafter until the end of the Term.
 
 Additionally,
        under the terms of the June 2007 Deed of Variation, interest on the loans
        made
        by Baltic to ZNG is payable on:
  a)
              the
                  earlier of (i) the date on which ZNG’s monthly turnover as shown by its
                  monthly management accounts exceeds US $200,000 and (ii) the fifth
                  anniversary of the Deed of Variation dated June 18, 2007;
                  and
  b)
              thereafter,
                  on a monthly basis on the final day of each calendar month using
                  all
                  available turnover, provided that in the event the interest due
                  thereafter
                  exceeds the monthly turnover of ZNG then all of the turnover except
                  for
                  the direct budgeted operating expenses of ZNG and management fees
                  agreed
                  to be paid to Siberian Energy Group Inc. under the Joint Venture
                  Agreement
                  will be allocated prior to the payment of such interest and any
                  interest
                  not able to be paid will accrue and be payable as soon as the level
                  of
                  turnover (less the fees payable to us) permits (collectively the
                  “Interest Payments”).
   In
        the
        event that ZNG does not make the Interest Payments when due, interest on
        the
        unpaid amounts shall be payable from the due date to the date paid at the
        rate
        of 6% per annum, calculated and accrued on a daily basis. The New Loan is
        unsecured by ZNG, but Caspian reserved the right to request security over
        all or
        some of the assets and/or undertaking of ZNG at any time prior to any drawdown
        of the New Loan, or while any money is outstanding under the New
        Loan.
 
 Pursuant
        to the New Loan, ZNG is responsible for satisfying all requirements of Russian
        Federation law and regulations in connection with each advance made under
        the
        New Loan, and ZNG shall indemnify Caspian for any loss or damage it may suffer
        as a result of the New Loan.
 
 On
        November 9, 2005, ZNG, Ltd. and Caspian entered into a Debenture, whereby
        ZNG,
        Ltd. granted Caspian a security interest in substantially all of its assets,
        including its 100% ownership of ZNG, to secure the repayment of the New Loan
        Agreement. Pursuant to the Debenture, ZNG, Ltd. granted Caspian a continuing
        security interest for the payment, performance and discharge of all of the
        liabilities owing to Caspian by ZNG, Ltd., in the following assets, both
        present
        and future, from time to time to the extent owned by ZNG, Ltd., or to the
        extent
        in which it has an interest.
 
 Additionally,
        on November 9, 2005, ZNG, Ltd. and Caspian entered into an "Agreement for
        the
        Pledge of the Participatory Interest in OOO Zauralneftegaz" (the "Pledge
        Agreement"). Pursuant to the Pledge Agreement, ZNG, Ltd., pledged its 100%
        ownership interest in ZNG to Caspian, which included any proceeds, dividends,
        distributions or income deriving from ZNG and any compensation, whether monetary
        or in-kind, deriving from ZNG, received due to the liquidation or reorganization
        of ZNG. The Pledge Agreement shall remain in effect until all amounts owed
        to
        Caspian by ZNG, Ltd. are repaid. Pursuant to the Pledge Agreement, ZNG, Ltd.,
        agreed to hold all dividends, interest and other income deriving from and
        by it
        for the account of Caspian, and agreed to pay such dividends, interest and
        other
        income to Caspian upon Caspian's request.
  If
        ZNG,
        Ltd. fails to pay the amounts owed to Caspian pursuant to the Pledge Agreement,
        Caspian can sell the 100% interest in ZNG at public auction, in one or several
        sales, with an opening bid price of seventy five
        percent (75%) of the value set forth for the value of ZNG in the Pledge
        Agreement ($7,705,079) at the first public auction and fifty percent (50%)
        of
        the value set forth in the Pledge Agreement at the second public auction.
        If the
        opening bid for ZNG is not met at either the first or second public auction,
        Caspian shall have the right to retain ZNG, with its value equal to 90% of
        the
        value set at the second auction, and set-off its claims secured by ZNG, Ltd.
        by
        such value. If ZNG is sold at public auction, any and all proceeds from such
        sale received by Caspian shall be applied towards the discharge of the amounts
        owed by ZNG, Ltd. to Caspian.
  -9-
  **Deed
        of Agreement**
 
 On
        July
        26, 2006, we entered into a Deed of Agreement with Baltic Petroleum (E&P)
        Limited ("BP" or "Baltic") and ZNG. Pursuant to the Deed of Agreement, BP
        agreed
        to allow the drawdown by ZNG, within 10 days of the date of the Deed of
        Agreement, of certain funds from Caspian under the New Loan,
        including:
 
 o
              $185,000
                  paid to Business Standard, which was owed to Business Standard
                  from ZNG in
                  consideration for Business Standard assisting ZNG with the process
                  of the
                  granting of the three oil and gas licenses awarded to ZNG in June
                  2006;o
              $170,000
                  paid to Mr. Victor Repin (a significant shareholder of the Company)
                  and
                  Sergey Potapov (a Director of the Company) in final settlement
                  of amounts
                  due to them by ZNG; ando
              $44,000
                  to ZNG's landlord in full settlement of all sums due in connection
                  with
                  the rent on ZNG's offices in Kurgan,
                  Russia.
 
 **Gross
        Overriding Royalty Agreement**
 
 In
        December 2006, ZNG entered into a Gross Overriding Royalty Agreement (the
        “Royalty Agreement”) with Baltic, which was contemplated by the Deed of
        Agreement dated July 26, 2006, described above and entered into in connection
        with the addition to the New Loan, described above. The Royalty Agreement
        provided that ZNG would grant Baltic a gross overriding royalty interest
        equal
        to 3% of ZNG’s interest in any and all of the hydrocarbons found in, produced,
        marketed and/or extracted from ZNG’s licensed blocks (the “Royalty”). Pursuant
        to the Royalty Agreement, the Royalty shall be paid free and clear of any
        expenses associated with the exploration and/or production of any hydrocarbons
        discovered on the licensed blocks. The Royalty will apply until ZNG has received
        an aggregate of $20,000,000 from the gross sales of any hydrocarbon production
        produced or occurring on any wells owned or operated by ZNG. The Royalty
        Agreement also provides that Baltic may at any time, upon not less than one
        (1)
        week prior notice, take the Royalty in oil and/or gas production, instead
        of in
        cash. ZNG also granted Baltic a security interest on any and all of its future
        hydrocarbon production to secure the payment of the Royalty.
 
 **Agreement
        With Alternative Energy Finance, Ltd.**
 
 We
        previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which
        Tim
        Peara is the Managing Director as well as a Director of the Company, certain
        warrants in connection with Mr. Peara introducing the parties who formed
        the
        joint venture. Pursuant to an agreement between AEF and the Company, AEF
        will
        receive compensation based on the total investment made by Baltic Petroleum
        Ltd.
        in the Joint Venture. This compensation included a commission of approximately
        $18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture)
        and
        50,068 options to purchase shares of our common stock at $0.63 per share
        which
        were granted to Mr. Peara on March 6, 2006 and a commission of $6,673 (1%
        of
        Baltic's $667,313 investment in the Joint Venture in the first quarter of
        2006),
        and 17,561 options to purchase shares of our common stock at $0.67 per share
        for
        the first quarter of 2006, which were granted to Mr. Peara on March 31, 2006,
        which options contain a cashless exercise provision.
  On
        June
        30, 2006, in connection with our agreement with AEF, we agreed to grant AEF
        a
        warrant to purchase 20,412 shares of our common stock at an exercise price
        of
        $2.02, which warrants contained a cashless exercise feature. The warrants
        expire
        three years from the grant date. We were also obligated to pay AEF $23,562
        during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
        investment in the Joint Venture in the second quarter 2006).
  -10-
 
 On
        September 30, 2006, in connection with our agreement with AEF, we agreed
        to
        grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
        price of $1.53 per share, which warrants contained a cashless exercise feature.
        The warrants expire three years from the grant date. We were also obligated
        to
        pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1%
        of
        Baltic's $1,830,292 investment in the Joint Venture in the third quarter
        of
        2006).
 
 On
        December 31, 2006, in connection with our agreement with AEF, we agreed to
        grant
        AEF a warrant to purchase 38,648 shares of our common stock at an exercise
        price
        of $1.44 per share, which warrants contained a cashless feature. The warrants
        expire three years from the grant date. We were also obligated to pay AEF
        $31,794 during the three months ended December 31, 2006 (equal to 1% of Baltic’s
        approximately $3,197,400 investment in the Joint Venture in the fourth quarter
        of 2006).
 
 On
        March
        13, 2007, Mr. Peara personally, and on behalf of AEF agreed to accept 58,134
        shares of our restricted common stock in consideration for the forgiveness
        of
        $45,626 owed personally to Mr. Peara in Directors fees and accrued expenses
        and
        $47,969 owed to AEF in connection with our agreement with AEF, which shares
        have
        been issued to date and which debt has been forgiven by Mr. Peara and
        AEF.
 
 On
        March
        31, 2007, in connection with our agreement with AEF, we agreed to grant AEF
        a
        warrant to purchase 48,925 shares of our common stock at an exercise price
        of
        $1.10 per share, which warrants contained a cashless feature. The warrants
        expire three years from the grant date. We were also obligated to pay AEF
        approximately $30,695 during the three months ended March 31, 2007 (equal
        to 1%
        of Baltic’s approximately $3,069,482 investment in the Joint Venture in the
        first quarter of 2007); which amount has not been paid to date.
  On
        June
        30, 2007, in connection with our agreement with AEF, we agreed to grant AEF
        a
        warrant to purchase 55,233 shares of our common stock at an exercise price
        of
        $1.14 per share, which warrants contained a cashless feature. The warrants
        expire three years from the grant date. We were also obliged to pay AEF
        approximately $35,938.00 during the three months ended June 30, 2007 (equal
        to
        1% of Baltic’s approximately $ 3,593,848 investment in the Joint Venture in the
        second quarter of 2007); which amount has not been paid to date.
 
 On
        September 30, 2007, in connection with our agreement with AEF, we agreed
        to
        grant AEF a warrant to purchase 51,352 shares of our common stock at an exercise
        price of $0.74 per share, which warrants contained a cashless feature. The
        warrants expire three years from the grant date. We were also obligated to
        pay
        AEF approximately $21,568 during the three months ended September 30, 2007
        (equal to 1% of Baltic’s approximately $2,156,790 investment in the Joint
        Venture in the third quarter of 2007); which amount has not been paid to
        date.
 
 **Recent
        Officer and Director Transactions:**
 
 On
        January 25, 2007, we approved an annual salary of $180,000 (plus a performance
        based bonus to be determined by the Board of Directors at the end of the
        2007
        fiscal year) for our Chief Executive Officer and Director, David Zaikin for
        the
        2007 fiscal year. On January 31, 2007, Mr. Zaikin notified us that effective
        February 1, 2007, he was withdrawing his previous request to not accrue any
        salary until we had sufficient funds to pay such salary, and instead requested
        that we pay him his 2007 salary if funds were available for such payments
        and/or
        that we accrue such salary until we have sufficient funds to repay him any
        accrued amounts. In February 2007, our Board of Directors approved the issuance
        of 350,000 shares of our restricted common stock to Mr. Zaikin, in consideration
        for compensation for the year ended December 31, 2006,
        which compensation was granted by our Board of Directors in its sole discretion,
        even though Mr. Zaikin had previously agreed not to be paid or accrue any
        salary
        for fiscal 2006.  In July 2007, we issued an aggregate of 190,000
        restricted shares of common stock to Mr. Zaikin, and certain of his assigns,
        in
        consideration for services rendered during the first two quarters of
        2007.
  -11-
  
 In
        June
        2007, we issued 70,000 shares of restricted common stock to our President,
        Helen
        Teplitskaia, of which 50,000 shares was a sign-on bonus in connection with
        her
        agreeing to be an officer of the Company in May 2007, and 20,000 shares were
        part of her compensation package with the Company, whereby she is to be paid
        10,000 shares per month for her service to the Company, which shares were
        issued
        for services rendered in May and June 2007.  In August 2007, Ms.
        Teplitskaia was issued an additional 20,000 shares for her services to the
        Company for the months of July and August 2007.
 
 In
        July
        2007, Mr. Zaikin agreed to transfer 40,000 shares of the Company's restricted
        common stock which he held to the Toronto Jewish Russian Academy Ohr Menahem
        (the "TJRA”). The shares were transferred to the TJRA as a charitable donation
        from Mr. Zaikin personally.
 
 In
        July
2007, Ms. Pochapski agreed to transfer 75,000 shares of the Company's restricted
        common stock which she held to the Jewish- Russian Community Center (the
        "JRCC”). The shares were transferred to the JRCC as a charitable donation from
        Ms Pochapski personally.
 
 **Global
        Consulting Group Agreement**
 
 With
        an
        effective date of April 10, 2007, we entered into an agreement with The Global
        Consulting Group (“Global”), whereby Global agreed to perform investor relations
        and medial communications services for us for the period of one (1) year,
        which
        agreement is automatically renewable for additional one (1) year periods
        if not
        terminated prior as described below. Pursuant to the Global agreement, we
        agreed
        to pay Global $12,000 per month during the term of the agreement (subject
        to 3%
        yearly increases, if such agreement is not terminated prior to the one (1)
        year
        anniversary of the agreement), and pay Global one time bonuses of $5,000
        upon
        the achievement of any of the following goals: our common stock being listed
        on
        the AMEX; a valuation of our common stock of at least $40 million for more
        than
        30 days; and/or any feature story in a top tier media outlet (The Wall Street
        Journal, The New York Times or similar publication). We also agreed to pay
        Global’s reasonable out of pocket expenses, subject to prior approval for any
        expense over $300 and to indemnify Global against any losses they may incur
        as a
        result of the Global agreement up to a maximum of $10,000.  We have
        since terminated the Global agreement and are currently in negotiations with
        Global regarding the settlement of such terminated agreement.
  **Recent
        Events**
 
 In
        October 2007, the Company entered into a Settlement Agreement and Mutual
        Release
        with its former consultant, Aspen Management Inc. and its principals
        (“Aspen”).  Pursuant to the agreement, we and Aspen agreed to release
        any claims or causes of action, whatsoever, that we have against each other,
        and
        we agreed to pay Aspen a total of $12,500, and Aspen agreed to return any
        and
        all Company documents and materials which it has in its possession.
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        discussion and analysis of our financial condition and results of operations
        is
        based upon our unaudited financial statements, which have been prepared in
        accordance with accounting principals generally accepted in the United States.
        The preparation of these financial statements requires us to make estimates
        and
        judgments that affect the reported amounts of assets, liabilities, revenues
        and
        expenses, and related disclosure of any contingent assets and liabilities.
        On an
        on-going basis, we evaluate our estimates. We base our estimates on various
        assumptions that we believe to be reasonable under the circumstances, the
        results of which form the basis for making judgments about carrying values
        of
        assets and liabilities that are not
        readily apparent from other sources. Actual results may differ from these
        estimates under different assumptions or conditions.
  We
        believe the following critical accounting policy affects our more significant
        judgments and estimates used in the preparation of our financial
        statements:
 
 -12-
 **Going
        Concern**
 
 The
        Company's financial statements have been prepared assuming that the Company
        will
        continue as a going concern; however, since inception of its current endeavors
        in 2003, the Company has not earned any revenues from production of hydrocarbons
        and is considered to be in the development stage, which raises substantial
        doubt
        about its ability to continue as a going concern. The Company is of the opinion
        that sufficient financing will be obtained from external sources to provide
        the
        Company with the ability to continue the process of development to achieve
        commercial production and sales of products. Since inception, the Company
        has
        obtained cash financing from organizing stockholders and employees in the
        form
        of loans, advances and deferred salaries, as well as through debt financing
        and
        more recently has received $85,000 per month in management fees from its
        Joint
        Venture. There can be no certainty as to availability of continued financing
        in
        the future. Failure to obtain sufficient financing may require the Company
        to
        reduce its operating activities. A failure to continue as a going concern
        would
        require stated amounts of assets and liabilities to be reflected on a
        liquidation basis which could differ from the going concern basis.
  **PLAN
        OF OPERATIONS FOR THE NEXT TWELVE MONTHS**
 
 As
        a
        result of the Joint Venture, the Company will work with its partner in the
        Joint
        Venture, Baltic Petroleum (E&P) Limited ("BP" or "Baltic") to continue the
        oil and gas exploration activities through their co-ownership of the Joint
        Venture, ZNG, Ltd., which in turn owns ZNG. The Company believes that ZNG
        has
        adopted an aggressive but sensible work program. In connection with the Joint
        Venture, BP will supply ZNG with both the technical and financial support
        that
        is required to fulfill the work program. If circumstances permit and ZNG
        is
        awarded additional blocks in the Kurgan Region, we believe that BP will be
        able
        to ensure that adequate funding is available to support the Work Programs
        on
        these blocks.
  The
        Company also plans to put a large part of its resources into KNG, and the
        licenses which KNG has applied for. On October 22, 2007, KNG received 2 licenses
        of ten for which it had applied for between 2005 and 2006.  If KNG is
        granted any or all of the 8 additional licenses it applied for in November
        2005
        and May 2006, the Company anticipates conducting oil and gas exploration
        surveys
        and studies on those licenses, as well as the two licenses granted in October
        2007, funding permitting, of which there can be no assurance.
 
 Moving
        forward, we anticipate targeting other potential long term investments in
        Russia, separate from our involvement in the Joint Venture and KNG. Currently
        we
        are evaluating different business opportunities in the oil and gas industry,
        including both development stage and revenue-producing enterprises. As of
        the
        filing of this report on Form 10-QSB, the Company is researching certain
        other
        projects which involve the potential purchase of oil and gas interests in
        Western Siberia, Russia; however no formal agreements or understandings have
        been entered into as of the filing date of this report, other than the purchase
        of KNG as described above.
  Historically,
        we have obtained cash financing from organizing stockholders in the form
        of
        loans and advances. Additionally, during the fourth quarter of 2005, we
        restructured much of our debt through the issuance of shares to our creditors
        and obtained waiver letters, postponing certain of our liabilities until
        such
        time as we have generated sufficient profits to pay such debts. These waiver
        letters related to the payment of certain trade debts as well as shareholder
        loans and accrued salaries.
 
 In
        connection with the Joint Venture (described under "Joint Venture Agreement,"
        above), the Company received $25,000 per month in management fees in connection
        with the Joint Venture from the date the Joint Venture was entered into until
        November 2006, at which time the management fees were increased to $55,000
        per
        month until June 2007 when they increased again to $85,000. The Company,
        however, can make no assurance that $85,000 per month will be adequate to
        pay
        its upcoming expenses and liabilities, in which case the Company plans that
        its
        organizing stockholders will continue to provide financing for the Company,
        of
        which there can be no assurance.
 
 In
        the
        past, we have obtained cash financing from organizing stockholders in the
        form
        of loans and advances, as a result, amounts totaling $241,898 and $362,166
        were
        payable to the stockholders as of September 30, 2007 and December 31, 2006,
        respectively. However, there can be no certainty as to the availability of
        continued financing in the future. Failure to obtain sufficient financing
        may
        require us to reduce our operating activities. A failure to continue as a
        going
        concern would then require stated amounts of assets and liabilities to be
        reflected on a liquidation basis which could differ from the going concern
        basis.
  -13-
 
 **COMPARISON
        OF OPERATING RESULTS**
 
 **RESULTS
        OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007, COMPARED TO
        THE
        THREE MONTHS ENDED SEPTEMBER 30, 2006**
 
 We
        had
        revenues and other income of $255,000 for the three months ended September
        30,
        2007, which was due solely to monthly management fees of $85,000 received
        from
        ZNG, Ltd. We had $75,000 of revenue and other income for the three months
        ended September 30, 2006, due solely to $75,000 of management fees received,
        at
        the rate of $25,000 of management fees per month. In November 2006, the
        management fees we received pursuant to our Joint Venture increased from
        $25,000
        per month to $55,000 per month and in June 2007 the monthly management fees
        increased again to $85,000 per month. Revenues increased $180,000 or 240%
        for
        the three months ended September 30, 2007, compared to the three months ended
        September 30, 2006, which increase was due to the increases in management
        fees
        received in connection with the Joint Venture.
 
 We
        have
        not generated any revenues to date through the sale of oil and/or
        gas.
 
 We
        had
        total expenses of $432,664 for the three months ended September 30, 2007,
        compared to total expenses for the three months ended September 30, 2006,
        of
        $342,632, which represented an increase in total expenses from the prior
        period
        of $90,032 or 26%.
 
 The
        main
        reason for the increase in total expenses for the three months ended September
        30, 2007, compared to the three months ended September 30, 2006, was a $78,493
        increase in salaries, to $111,487 for the three months ended September 30,
        2007,
        compared to $32,994 for the three months ended September 30, 2006, mainly
        attributable to the salary of David Zaikin, who previously agreed during
        the
        2006 fiscal year, including the three months ended September 30, 2006, to
        not
        accrue salary, but who since decided as of January 30, 2007, to once again
        accrue salary from the Company, and to the salary of our President Helen
        Teplitskaia, which was paid through the issuance of shares of common stock
        during the three months ended September 30, 2007, at the rate of 10,000 shares
        per month and a one-time signing bonus of 50,000 shares, and a $51,507 or
        39%
        increase in marketing and other expenses, to $182,410 for the three months
        ended
        September 30, 2007, compared to $130,903 for the three months ended September
        30, 2006, which was offset by a $40,878 or 24.6% decrease in professional
        and
        consulting fees, to $125,233 for the three months ended September 30, 2007,
        compared to $166,111 for the three months ended September 30, 2006, in
        connection with the fact, that management performed more marketing activities
        and conducted more business travel, while also decreasing the amount of
        outsourcing of advisory services during the three months ended September
        30,
        2007, compared to the three months ended September 30, 2006.
 
 The
        $111,487 of salaries for the three months ended September 30, 2007, included
        $23,506 which was attributable to the our Chief Financial Officer, Elena
        Pochapski, of which $6,470 was accrued; $45,000 attributable to the salary
        of
        our Chief Executive Officer, David Zaikin, of which such $45,000 amount was
        accrued and $21,900 related to the value of the 30,000 shares issued to our
        President Helen Teplitskaia (described below under “Unregistered Sales of Equity
        Securities”), relating to her services to the Board of Directors during the
        three months ended September 30, 2007 (10,000 shares per month), as well
        as
        certain other amounts which were paid to various other officers, Directors,
        employees and consultants.
  We
        had a
        net loss of $177,664 for the three months ended September 30, 2007, compared
        to
        a net loss of $267,632 for the three months ended September 30, 2006, a decrease
        in net loss of $89,968 or 33.6% from the prior period.  The decrease
        in net loss was mainly attributable to the $180,000 or 240% increase in
        management fees for the three months ended September 30, 2007, compared to
        the
        three months ended September 30, 2006.
  -14-
  **RESULTS
        OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007, COMPARED TO THE
        NINE
        MONTHS ENDED SEPTEMBER 30, 2006**
 
 We
        had
        revenues and other income of $615,000 for the nine months ended September
        30,
        2007, which was due solely to $55,000 of monthly management fees received
        from ZNG, Ltd for the months of January through May 2007 and monthly management
        fees of $85,000 for the months of June through September 2007. We had $225,000
        of revenue and other income for the nine months ended September 30, 2006,
        due
        solely to $225,000 of management fees received. In November 2006, the management
        fees we received pursuant to our Joint Venture increased from $25,000 per
        month
        to $55,000 per month and in June 2007, the management fees increased again
        to
        $85,000 per month. Revenues increased $390,000 or 173% for the nine months
        ended
        September 30, 2007, compared to the nine months ended September 30, 2006,
        which
        increase was due solely to the increases in monthly management fees
        we receive in connection with the Joint Venture.
  We
        have
        not generated any revenues to date through the sale of oil and/or
        gas.
 
 We
        had
        total expenses of $1,929,795 for the nine months ended September 30, 2007,
        compared to total expenses for the nine months ended September 30, 2006,
        of
        $2,379,734, which represented a decrease in total expenses from the prior
        period
        of $449,939 or 18.9%.
 
 The
        main
        reason for the decrease in total expenses for the nine months ended September
        30, 2007, compared to the nine months ended September 30, 2006, was a $965,769
        or 55% decrease in professional and consulting fees, to $789,487 for the
        nine
        months ended September 30, 2007, compared to $1,755,256 for the nine months
        ended September 30, 2006, which decrease is largely attributable to 600,000
        shares of common stock  issued to a consulting firm Business Standard,
        which had a value of $1,113,000 in connection with the acquisition of three
        additional licenses by ZNG in June 2006 and to $276,000 value of stock options
        granted to certain of our consultants during the nine months ended September
        30,
        2006, which were not represented in as significant amounts during the nine
        months ended September 30, 2007, partially offset by increased fees of Business
        Standard, accrued on a monthly basis starting in January 2007. The decrease
        in
        professional and consulting fees was mainly offset by a $478,000 or 479%
        increase in salaries to $579,556 for the nine months ended September 30,
        2007,
        compared to $101,556 for the nine months ended September 30, 2006, mainly
        attributable to the salary of David Zaikin, who previously agreed during
        the
        2006 fiscal year, including the nine months ended September 30, 2006, to
        not
        accrue salary, but who since decided as of January 30, 2007, to once again
        accrue salary from the Company, and  the 190,000 shares of common
        stock issued to Mr. Zaikin during the nine months ended September 30, 2007,
        in
        consideration for services rendered and to the salary of our new President
        Helen
        Teplitskaia, which was paid through the issuance of shares of common stock
        during the nine months ended September 30, 2007, as described below, which
        expenses were not present during the nine months ended September 30,
        2006.
  The
        $579,556 of salaries for the nine months ended September 30, 2007, included
        $63,924 which was attributable to our Chief Financial Officer, Elena Pochapski,
        of which $6,470 was accrued; $351,600 attributable to the salary of our Chief
        Executive Officer, David Zaikin, of which $135,000 was accrued and $216,600
        representing the value of the 190,000 shares issued to David Zaikin (as
        described below under “Unregistered Sales of Equity Securities”); $101,700
        attributable to the salary of our President Helen Teplitskaia, payable through
        the issuance of shares of common stock (described below under “Unregistered
        Sales of Equity Securities”); and certain other amounts were paid to various
        other officers, Directors, employees and consultants.  As of September
        30, 2007,  Ms. Teplitskaia had earned 100,000 shares of common stock
        (50,000 as a bonus and 10,000 per month) in consideration for her services
        to
        the Company as President, of which 10,000 shares remain unissued as of the
        date
        of this filing (and are therefore not included in the number of issued and
        outstanding shares disclosed throughout this report), representing services
        rendered during September 2007.
  We
        had a
        net loss of $1,314,795 for the nine months ended September 30, 2007, compared
        to
        a net loss of $2,154,734 for the nine months ended September 30, 2006, a
        decrease in net loss of $839,939 or 39% from the
        prior
        period. The decrease in net loss was mainly attributable to the $390,000
        or 173%
        increase in management fees and by the $449,939 or 18.9% decrease in total
        expenses, namely the decrease in professional and consulting fees, described
        above, offset by the increase in salaries for the nine months ended September
        30, 2007, compared to the nine months ended September 30, 2006.
  -15-
  **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 We
        had
        current assets of $143,082 as of September 30, 2007, which included cash
        of
        $85,761; and prepaid expenses and other of $57,321.
 
 We
        had
        total assets of $2,846,910 as of September 30, 2007, which included current
        assets of $143,082 and non-current assets of $2,703,828. Non-current assets
        included $2,700,000 of oil and gas properties, unproved, representing geological
        studies and data, which we received in connection with the purchase of KNG
        and
        $3,828 of property and equipment, net.
 
 We
        had
        total liabilities of $1,110,700 as of September 30, 2007, which were solely
        current liabilities and which included $241,898 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, 2007; $55,127
        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; $349,692 of
        accounts payable to others for advisory and professional services rendered;
        and
        $463,983 of accrued payroll, which included $135,000 payable to our Chief
        Executive Officer, David Zaikin, which amount has been accrued, and $112,500
        which was owed to Mr. Zaikin for services rendered prior to September 2005,
        at
        which time he agreed to stop accruing salary until January 2007, when he
        provided us notice of his intent to once again begin accruing salary until
        such
        time as we have sufficient funds to pay such accrued salary,
        $84,707  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 $967,618 and a total pre-development and development
        stage accumulated deficit of $6,983,150 as of September 30, 2007.
 
 Because
        our cumulative losses associated with the operations of ZNG exceeded our
        investment as of the date of the Joint Venture, ZNG is carried on our balance
        sheet at $-0- as of September 30, 2007. Our investment in ZNG will exceed
        $-0-
        at such time as ZNG has cumulative earnings sufficient to repay all loans
        to
        Baltic as provided in the Joint Venture, if ever.
  We
        had
        $91,648 of net cash flows from operating activities for the nine months ended
        September 30, 2007, which resulted from payment of current
        liabilities through the issuance of common stock, particularly common
        stock and warrants worth $2,121,565 were issued for professional services
        and
        salaries offset by a $773,430 decrease in accounts payable and accrued expenses,
        and $1,314,795 of net loss.
 
 Pursuant
        to the Deed of Agreement, whereby Baltic agreed to loan ZNG approximately
        $12,000,000 to be used on seismic studies, the budget for the current program
        of seismic
        studies and drilling of the first four wells on ZNG’s licenses in 2007
        was adopted by ZNG, Ltd.’s Board. This budget amounted to US $14,998,000, or
        approximately $8 million British pounds. These funds were raised
        by
        Baltic’s parent company through a placement of shares. Of the total
        budgeted amount of $14,998,000, the sum of $9,659,000 is being provided through
        the ZNG loans described earlier and the sum of $5,339,000 is committed to
        be
        provided to ZNG, Ltd. The loans will not be dilutive to the Company's ownership
        in ZNG.
 
 As
        of
        September 30, 2007, ZNG had received $12,393,134 pursuant to the New Loan,
        which
        amount includes $1,110,624 assumed by ZNG in connection with a previous loan
        made to ZNG. Total interest accrued as of September 30, 2007 was $1,611,066
        ,
        including accrued interest on the previous loan. The total
        funding provided to ZNG, Ltd. and ZNG by Baltic as of September 30, 2007
        was
        equal to $19.9  million plus accrued interest of approximately $2.7
        million.
  -16-
  Under
        the
        Joint Venture, we currently receive $85,000 per month as a management fee
        from ZNG, Ltd. In addition to the monthly management fee, ZNG Ltd. agreed
        to
        lend $78,000 to us to pay for legal and consulting services in connection
        with
        establishing the Joint Venture. We received $29,000 of this amount in November
        2005; and will receive the additional $49,000 if all five of the new licenses
        are awarded to ZNG, of which three have been awarded to date, and ZNG submits
        a
        letter from the relevant license authority of the Ministry of Natural Resources
        of the Russian Federation confirming such awards, of which there can be no
        assurance.
  Since
        our
        transfer of ZNG to the Joint Venture, our only oil and gas operations separate
        from our ownership of 50% of ZNG, Ltd. has been through KNG which was awarded
        two oil and gas exploration licenses in October 2007. Moving forward, we
        believe
        that in the long run a number of trends will favorably affect our liquidity.
        These trends include the steady trend of economic growth in Russia in the
        recent
        years which is improving the liquidity of our potential customers, and may
        favorably impact our debt management and the increasing overall credit rating
        in
        Russia, which we hope will lead to increased foreign investment in Russian
        companies and which will benefit us as well.
  We
        are
        taking steps in an attempt to raise equity capital and/or to borrow additional
        funds. There can be no assurance that any new capital will be available to
        us or
        that adequate funds for our operations, whether from our financial markets,
        or
        other arrangements will be available when needed or on terms satisfactory
        to us,
        if at all. We have no commitments from officers, directors or affiliates
        to
        provide funding. Our failure to obtain adequate financing may require us
        to
        delay, curtail or scale back some or all of our operations. Additionally,
        any
        additional financing may involve dilution to our then-existing
        shareholders.
 
 Additionally,
        we are currently reviewing our status as a U.S. reporting Company, and our
        management may decide it is more advantageous for us to go private, cease
        our
        public reporting in the future, and/or trade our common stock on alternative
        markets or exchanges in Europe in the future (or to dual list our stock on
        multiple exchanges), which could cause any investment in the Company to become
        illiquid or worthless if such transaction were to occur (see also “Risk Factors”
below”).
  -17-
 
 **RISK
        FACTORS**
 
 Our
        securities are highly speculative and should only be purchased by persons
        who
        can afford to lose their entire investment in our Company. If any of the
        following risks actually occur, our business and financial results could
        be
        negatively affected to a significant extent. The Company's business is subject
        to many risk factors, including the following:
 
 **RISK
        OF CONTINUING OUR BUSINESS PLAN WITHOUT
        ADDITIONAL** **FINANCING.**
 
 We
        depend
        to a great degree on the ability to attract external financing in order to
        conduct future exploratory and development activities. The Company believes
        it
        can satisfy its cash requirements during the next twelve months through funding
        provided by existing stockholders and with amounts received from the Joint
        Venture (described above), including $85,000 a month which the Company is
        to
        receive from ZNG, Ltd., pursuant to the Joint Venture.  As of
        September 30, 2007, the total funding provided to ZNG, Ltd. and ZNG by Baltic
        was equal to $19.9 million plus accrued interest of approximately $2.7 million,,
        which has been spent on various purposes, including paying consultants for
        services performed in connection with surveys previously performed on the
        licensed area. As the Joint Venture is now responsible for the funding of
        the
        operations of ZNG, we believe our expenditures in connection with ZNG will
        decrease in the upcoming periods. If we are unable to raise the additional
        funds
        required for the planned activities of the Joint Venture and for additional
        activities, separate from the Joint Venture, our Company may be forced to
        abandon its current business plan. If you invest in our Company and we are
        unable to raise the required funds, your investment could become
        worthless.
 
 **WE
        WILL NEED SUBSTANTIAL FINANCING AND SUBSTANTIAL
        TIME** **BEFORE WE ANTICIPATE GENERATING REVENUES THROUGH OUR
        OWNERSHIP OF ZNG, LTD., IF ANY.**
 
 The
        Company does not expect to generate any revenues through the operations of
        ZNG,
        other than the $85,000 a month that it will receive from ZNG, Ltd., of which
        there can be no assurance. Therefore, investors should keep in mind that
        even if
        ZNG is able to raise the substantial amounts of additional financing it requires
        for its operations, it could still be years before ZNG generates any revenue,
        if
        ever. Even if generated such revenues will likely not be great enough to
        sustain
        ZNG. If no revenues are generated and hydrocarbon reserves are not located,
        we
        may be forced to abandon or curtail our current business plan. If ZNG, which
        is
        100% owned by the Company 50/50 joint venture ownership of ZNG, Ltd., were
        forced to abandon its business plan, the Company could be forced to abandon
        or
        curtail its business plan as well, which could cause the value of the Company's
        common stock to become worthless.
 
 **WE
        WILL NEED SUBSTANTIAL FINANCING AND SUBSTANTIAL TIME BEFORE WE ANTICIPATE
        GENERATING REVENUES THROUGH KNG, IF ANY.**
 
 The
        Company anticipates the need for approximately $15,000,000 prior to KNG's
        expected generation of any revenues. Currently the Company has not raised
        any of
        this financing and the Company can make no assurances that this financing
        will
        ever be raised. The Company also does not expect to generate any revenues
        through the operations of KNG, until such financing can be raised, of which
        there can be no assurance. Therefore, investors should keep in mind that
        even if
        KNG is able to raise the substantial amounts of additional financing it requires
        for its operations, it could still be years before KNG generates any revenue,
        if
        ever. If KNG does not raise the $15,000,000 which it anticipates needing
        to
        generate revenues, which, even if generated, will likely not be great enough
        to
        sustain KNG if no revenues are generated and hydrocarbon reserves are not
        discovered, KNG may be forced to abandon its business plan, and the Company
        could be forced to abandon or curtail its business plan as well, which could
        cause the value of the Company's common stock to become worthless.
  
 
 -18-
 **OUR
        AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO
        WHETHER** **OUR COMPANY CAN CONTINUE AS A GOING
        CONCERN.**
 
 Our
        Company is in its early development stage, as planned principal activities
        have
        not begun. We have generated only minimal revenues since inception and have
        incurred substantial losses including a net loss of $3,080,336 for the year
        ended December 31, 2006, a net loss of $1,314,795 for the nine months ended
        September 30, 2007 and had a total accumulated deficit of $6,983,150 as of
        September 30, 2007. These factors among others indicate that the Company
        may be
        unable to continue as a going concern, particularly in the event that it
        cannot
        generate sufficient cash flow to conduct its operations and/or obtain additional
        sources of capital and financing.
 
 **WE
        LACK AN OPERATING HISTORY WHICH YOU CAN USE TO
        EVALUATE** **US, MAKING ANY INVESTMENT IN OUR COMPANY
        RISKY.**
 
 Our
        Company lacks a long standing operating history which investors can use to
        evaluate our Company's previous earnings. Therefore, an investment in our
        Company is risky because we have no business history and it is hard to predict
        what the outcome of our business operations will be in the future.
 
 **WE
        MAY CONTINUE TO BE UNPROFITABLE AND MAY NOT
        GENERATE** **PROFITS TO CONTINUE OUR BUSINESS
        PLAN.**
 
 As
        a
        development stage company, we have no revenues or profits to date and our
        net
        cumulative deficit attributable to our development stage as of September
        30,
        2007, was $6,533,365, and our total cumulative deficit was $6,983,150 which
        included $449,785 of pre-development stage deficit. We had $463,983 in accrued
        and unpaid salaries and a working capital deficit of $967,618 as of September
        30, 2007. The Company is currently being funded by existing shareholders
        and the
        $85,000 monthly payments, which the Company receives from the Joint Venture
        in
        connection with management fees, but there can be no assurance this amount
        will
        be sufficient to continue our planned operations or that we will have enough
        money to repay our outstanding debts. There is a risk that ZNG will never
        begin
        production and our Company will never generate any revenues through our
        ownership of ZNG, Ltd. There is also a risk that KNG will not be awarded
        the
        licenses for which it has applied. If throughout ZNG's oil exploration (and
        KNG’s, assuming it is awarded the licenses for which it has applied, of which
        there can be no assurance), no viable wells are found, and consequently,
        we
        generate only minimal revenues through ZNG, Ltd. (and/or through KNG), we
        will
        likely be forced to curtail or abandon our business plan. If this happens,
        you
        could lose your investment in our Company. If we are unable to generate profits,
        we will be forced to rely on external financing, of which there is no guarantee,
        to continue with our business plan.
 
 **WE
        HAVE A POOR FINANCIAL POSITION AND IF WE DO NOT
        GENERATE** **REVENUES, WE MAY BE FORCED TO ABANDON OUR
        BUSINESS PLAN.**
 
 Our
        Company currently has a poor financial position. We have generated only minimal
        revenues to date, and we have not discovered any hydrocarbon reserves or
        begun
        production on any wells. There is a risk that we will not find enough, or
        even
        any, viable wells which we require to generate enough profits for your
        investment in our Company to appreciate. If we never generate any revenues,
        our
        Company may be forced to curtail or abandon its business plan and your shares
        may become worthless.
 
 **OUR
        BUSINESS IS SPECULATIVE AND RISKY AND IF ZNG OR KNG DOES
        NOT** **FIND HYDROCARBON RESERVES, WE MAY BE FORCED TO CURTAIL
        OUR** **BUSINESS PLAN.**
 
 There
        is
        a risk that ZNG and KNG, assuming it is awarded the licenses for which it
        has
        applied, of which there can be no assurance, will not find any hydrocarbon
        reserves and the cost of exploration will become too high for ZNG, Ltd. to
        continue ZNG's business plan and/or us to continue KNG’s business plan. As our
        only current operations are through our 50% ownership of ZNG, Ltd. which
        in turn
        owns 100% of ZNG, and
        through KNG, if ZNG, ZNG, Ltd. or KNG were to cease operations, your investment
        in our Company could become devalued or could become worthless.
  -19-
 
 **OUR
        INDUSTRY IS COMPETITIVE AND AS SUCH, COMPETITIVE
        PRESSURES** **COULD PREVENT US FROM OBTAINING
        PROFITS.**
 
 The
        main
        factor determining success in the oil exploration and extraction industry
        is
        finding viable wells. If our Company, through ZNG, Ltd., KNG or other joint
        ventures we may enter into in the future, are unable to find producing wells
        and
        our competition is, it is likely that our Company will be driven out of
        business. Additionally, our industry is subject to significant capital
        requirements and as such, larger companies such as LUKoil, BP-TNK,
        Surgutneftegaz and Sibneft may have an advantage should they compete with
        us for
        exploration licenses, because they may have resources substantially greater
        than
        ours. Investors should take into account the above factors and understand
        that
        if we are unable to raise additional capital or generate the profits, the
        Company may be forced to liquidate its assets and an investment in our Company
        could become worthless.
 
 **OUR
        GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.**
 
 The
        Company's growth is expected to place a significant strain on the Company's
        managerial, operational and financial resources. Furthermore, as the Company
        receives contracts, the Company will be required to manage multiple
        relationships with various customers and other third parties. These requirements
        will be exacerbated in the event of further growth of the Company or in the
        number of its contracts. There can be no assurance that the Company's systems,
        procedures or controls will be adequate to support the Company's operations
        or
        that the Company will be able to achieve the rapid execution necessary to
        succeed and implement its business plan. The Company's future operating results
        will also depend on its ability to add additional personnel commensurate
        with
        the growth of its business. If the Company is unable to manage growth
        effectively, the Company's business, results of operations and financial
        condition will be adversely affected.
  **WE
        RELY ON KEY PERSONNEL AND IF THEY LEAVE OUR COMPANY OUR BUSINESS PLAN COULD
        BE
        ADVERSELY AFFECTED.**
 
 We
        rely
        on the Company's Chief Executive Officer and Chief Financial Officer, David
        Zaikin and Elena Pochapski, for the success of our Company, both of whom
        are
        employed under contracts. Their experience and input create the foundation
        for
        our business and they are responsible for the directorship and control over
        the
        Company's development activities. The Company does not hold "key man" insurance
        on either member of management. Moving forward, should they be lost for any
        reason, the Company will incur costs associated with recruiting replacement
        personnel and any potential delays in operations. If we are unable to replace
        Mr. Zaikin and/or Ms. Pochapski, the Company may be forced to scale back
        or
        curtail its business plan. As a result of this, any securities you hold in
        our
        Company could become devalued.
 
 **ZNG’S
        OR KNG’S PROJECTIONS, ESTIMATES AND STATISTICAL ANALYSIS MAY BE INACCURATE OR
        SUBSTANTIALLY WRONG, WHICH MAY PREVENT ZNG AND/OR KNG FROM EXECUTING THEIR
        BUSINESS PLANS.**
 
 Projections
        on future revenues as well as costs and required capital expenditures are
        based
        on estimates. Business statistical analysis is used in projection of drilling
        success ratios, average production costs, world oil price fluctuations and
        their
        correspondence to Russian domestic market. If ZNG’s or KNG’s projections or
        estimates are wrong or our statistical analysis faulty, ZNG's or KNG’s revenues
        may be adversely affected which could prevent ZNG and/or KNG from executing
        their business strategy. As an investor, if this happens your securities
        in our
        Company could be adversely affected and you could lose your investment in
        our
        Company due to the fact that our only current oil and gas operations are
        through
        our 50% ownership of ZNG, Ltd., which in turn owns 100% of ZNG and through
        KNG,
        which has been awarded two exploration oil & gas  licenses to
        date.
  -20-
 
 **THERE
        IS UNCERTAINTY AS TO OUR ABILITY TO ENFORCE CIVIL LIABILITIES BOTH IN AND
        OUTSIDE OF THE UNITED STATES DUE TO THE FACT THAT OUR OFFICERS, DIRECTORS
        AND
        ASSETS ARE NOT LOCATED IN THE UNITED STATES.**
 
 Our
        officers and Directors, our properties and licenses, and the majority of
        our
        assets are located in countries other than the United States, including Canada
        and Russia. As a result, it may be difficult for shareholders to effect service
        of process within the United States on our officer and Director. In addition,
        investors may have difficulty enforcing judgments based upon the civil liability
        provisions of the securities laws of the United States or any state thereof,
        both in and outside of the United States.
 
 **WE
        FACE RISKS ASSOCIATED WITH THE FACT THAT THE MAJORITY OF OUR OPERATIONS THROUGH
        OUR JOINT VENTURE ARE CONDUCTED IN RUSSIA, AND THE LICENSES OWNED THROUGH
        OUR
        JOINT VENTURE ARE IN RUSSIA.**
 
 Zauralneftegaz,
        Ltd. which we own 50% of through our Joint Venture holds licenses to certain
        oil
        and gas properties in the Kurgan Region of Russia.  As a result, we
        are subject to various risks associated with doing business in Russia relating
        to Russia's economic and political environment. As is typical of an emerging
        market, Russia does not possess a well-developed business, legal and regulatory
        infrastructure that would generally exist in a more mature free market economy
        and, in recent years, Russia has undergone substantial political, economic
        and
        social change. Furthermore, in recent years the Russian government has
        unilaterally annexed certain oil and gas properties and companies for the
        government, and there can be no assurance that if commercially exploitable
        oil
        and gas reserves are found on our properties, that such properties will not
        be
        annexed or otherwise claimed by the Russian government.  Our failure
        to manage the risks associated with doing business in Russia could have a
        material adverse effect upon our results of operations.
 
 **IF
        WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY
        BE
        DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.**
 
 Under
        Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing
        of
        periodic reports with the SEC, any OTCBB issuer who fails to file a periodic
        report (Form 10-QSB's or 10-KSB's) by the due date of such report (not
        withstanding any extension granted to the issuer by the filing of a Form
        12b-25), three (3) times during any twenty-four (24) month period are de-listed
        from the OTCBB. Such removed issuer would not be re-eligible to be listed
        on the
        OTCBB for a period of one-year, during which time any subsequent late filing
        would reset the one-year period of de-listing. Therefore, if we are late
        in
        filing a periodic report three times in any twenty-four (24) month period
        and
        are de-listed from the OTCBB, our securities may become worthless and we
        may be
        forced to curtail or abandon our business plan.
 
 **IN
        THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF OPERATING
        AS A FULLY REPORTING COMPANY AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE
        SUBSTANTIAL TIME TO NEW COMPLIANCE INITIATIVES.**
 
 Moving
        forward, we anticipate incurring significant legal, accounting and other
        expenses in connection with our status as a fully reporting public company.
        The
        Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
        implemented by the SEC have imposed various new requirements on public
        companies, including requiring changes in corporate governance practices.
        As
        such, our management and other personnel will need to devote a substantial
        amount of time to these new compliance initiatives. Moreover, these rules
        and
        regulations will increase our legal and financial compliance costs and will
        make
        some activities more time-consuming and costly. For example, we expect these
        new
        rules and regulations to make it more difficult and more expensive for us
        to
        obtain director and officer liability insurance, and we may be required to
        incur
        substantial costs to maintain the same or similar coverage. In addition,
        the
        Sarbanes-Oxley Act requires, among other things, that we maintain effective
        internal controls for
        financial reporting and disclosure of controls and procedures. In particular,
        commencing in fiscal 2008, we must perform system and process evaluation
        and
        testing of our internal controls over financial reporting to allow management
        and our independent registered public accounting firm to report on the
        effectiveness of our internal controls over financial reporting, as required
        by
        Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing
        by
        our independent registered public accounting firm, may reveal deficiencies
        in
        our internal controls over financial reporting that are deemed to be material
        weaknesses. Our compliance with Section 404 will require that we incur
        substantial accounting expense and expend significant management efforts.
        We
        currently do not have an internal audit group, and we will need to hire
        additional accounting and financial staff with appropriate public company
        experience and technical accounting knowledge. Moreover, if we are not able
        to
        comply with the requirements of Section 404 in a timely manner, or if we
        or our
        independent registered public accounting firm identifies deficiencies in
        our
        internal controls over financial reporting that are deemed to be material
        weaknesses, the market price of our stock could decline, and we could be
        subject
        to sanctions or investigations by the SEC or other regulatory authorities,
        which
        would require additional financial and management resources.
  -21-
  **AS
        THERE IS CURRENTLY ONLY A LIMITED MARKET FOR OUR COMMON STOCK, THE MARKET
        FOR
        OUR COMMON STOCK MAY CONTINUE TO BE ILLIQUID, SPORADIC AND
        VOLATILE.**
 
 There
        is
        currently only a limited market for our common stock, and as such, we anticipate
        that such market will be illiquid, sporadic and subject to wide fluctuations
        in
        response to several factors moving forward, including, but not limited
        to:
 
 (1)
              actual
                  or anticipated variations in our results of operations;(2)
              our
                  ability or inability to generate new revenues;(3)
              the
                  number of shares in our public float;(4)
              increased
                  competition;(5)
              the
                  political atmosphere in Russia; and(6)
              conditions
                  and trends in the oil, gas, and energy industries in
                  general.
 
 Furthermore,
        because our common stock is traded on the NASD Over The Counter Bulletin
        Board,
        our stock price may be impacted by factors that are unrelated or
        disproportionate to our operating performance. These market fluctuations,
        as
        well as general economic, political and market conditions, such as recessions,
        interest rates or international currency fluctuations may adversely affect
        the
        market price of our common stock. Additionally, at present, we have a limited
        number of shares in our public float, and as a result, there could be extreme
        fluctuations in the price of our common stock. Further, due to the limited
        volume of our shares which trade and our limited public float, we believe
        that
        our stock prices (bid, ask and closing prices) are entirely arbitrary, are
        not
        related to the actual value of the Company, and do not reflect the actual
        value
        of our common stock (and in fact reflect a value that is much higher than
        the
        actual value of our common stock). Shareholders and potential investors in
        our
        common stock should exercise caution before making an investment in the Company,
        and should not rely on the publicly quoted or traded stock prices in determining
        our common stock value, but should instead determine value of our common
        stock
        based on the information contained in the Company's public reports, industry
        information, and those business valuation methods commonly used to value
        private
        companies.
 
 **INVESTORS
        MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK DUE TO
        FEDERAL REGULATIONS OF PENNY STOCKS.**
 
 Our
        common stock will be subject to the requirements of Rule 15(g)9, promulgated
        under the Securities Exchange Act as long as the price of our common stock
        is
        below $4.00 per share. Under such rule, broker-dealers who recommend low-priced
        securities to persons other than established customers and accredited investors
        must satisfy special sales practice requirements, including a requirement
        that
        they make an individualized written suitability determination for the purchaser
        and receive the purchaser's consent prior to the transaction. The Securities
        Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
        additional disclosure in connection with any trades involving a stock defined
        as
        a penny stock.
 Generally,
        the Commission defines a penny stock as any equity security not traded on
        an
        exchange or quoted on NASDAQ that has a market price of less than $4.00 per
        share. The required penny stock disclosures include the delivery, prior to
        any
        transaction, of a disclosure schedule explaining the penny stock market and
        the
        risks associated with it. Such requirements could severely limit the market
        liquidity of the securities and the ability of purchasers to sell their
        securities in the secondary market.
 
 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.
  -22-
 
 **ITEM
        3. CONTROLS AND PROCEDURES**
 
 (a)
        Evaluation of disclosure controls and procedures. Our Chief Executive Officer
        and Principal Financial Officer, after evaluating the effectiveness of our
        "disclosure controls and procedures" (as defined in the Securities Exchange
        Act
        of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
        by
        this Quarterly Report on Form 10-QSB (the "Evaluation Date"), have concluded
        that as of the Evaluation Date, our disclosure controls and procedures are
        effective to provide reasonable assurance that information we are required
        to
        disclose in reports that we file or submit under the Exchange Act is recorded,
        processed, summarized and reported within the time periods specified in the
        Securities and Exchange Commission rules and forms, and that such information
        is
        accumulated and communicated to our management, including our Chief Executive
        Officer and Principal Financial Officer, as appropriate, to allow timely
        decisions regarding required disclosure.
 
 (b)
        Changes in internal control over financial reporting. There were no changes
        in
        our internal control over financial reporting during our most recent fiscal
        quarter that materially affected, or were reasonably likely to materially
        affect, our internal control over financial reporting.
           -23-
  
  **PART
        II - OTHER INFORMATION**
 
 **ITEM
        1. LEGAL PROCEEDINGS**
 
 In
        January 2007, we learned that certain of our former officers, Directors and
        shareholders, had attempted to transfer shares of our common stock, which
        those
        individuals had agreed to cancel in connection with the purchase of a majority
        of the Company’s outstanding shares from those individuals by our current
        officers, Directors and majority shareholders in April 2003. In February
        2007,
        we filed for a Temporary Restraining Order and Motion for Preliminary Injunction
        against those individuals in the District Court of Clark County,
        Nevada.
 
 On
        February 20, 2007, our Temporary Restraining Order and Motion for Preliminary
        Injunction was heard by the District Court of Clark County, Nevada, and we
        were
        granted an indefinite injunction without a hearing by the court. As such,
        those
        individuals who previously attempted to transfer and sell the shares which
        they
        held will be prevented from transferring or selling such shares until they
        can
        show good cause with the court why such indefinite injunction should be
        lifted.
 
 From
        time
        to time, we may become party to other litigation or other legal proceedings
        that
        we consider to be a part of the ordinary course of our business. We are not
        currently involved in legal proceedings that could reasonably be expected
        to
        have a material adverse effect on our business, prospects, financial condition
        or results of operations, other than the proceeding described above. We may
        become involved in material legal proceedings in the future.
 
 **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES**
 
 In
        June
        2007, we issued 70,000 shares of restricted common stock to our President,
        Helen
        Teplitskaia, of which 50,000 shares was a sign-on bonus in connection with
        her
        agreeing to be an officer of the Company in May 2007, and 20,000 shares were
        part of her compensation package with the Company, whereby she is to be paid
        10,000 shares per month for her service to the Company, which shares were
        issued
        for services rendered in May and June 2007. The Company claims an exemption
        from
        registration afforded by Section 4(2) of the Act since the foregoing issuance
        did not involve a public offering, the recipient took the shares for investment
        and not resale and the Company took appropriate measures to restrict transfer.
        No underwriters or agents were involved in the foregoing issuance and no
        underwriting discounts or commissions were paid by the Company.
 
 In
        June
        2007, Mr. Viktor Repin exercised 300,000 of the options he held to
        purchase  shares of our restricted common stock at an exercise price
        of $1.00 per share and  400,000 of the options he held to
        purchase  shares of our restricted common stock  at an
        exercise price of $1.05 per share. Mr. Repin used the cashless exercise
        provision of the options and received a total of 250,000 shares of our common
        stock in the name of his nominee Sergei Tomnikov, in connection with the
        exercise of the options, based on the fair market value of the common stock
        on
        the date he exercised of $1.60. The Company claims an exemption from
        registration afforded by Section 4(2) of the Act since the foregoing issuance
        did not involve a public offering, the recipient took the shares for investment
        and not resale and the Company took appropriate measures to restrict transfer.
        No underwriters or agents were involved in the foregoing issuance and no
        underwriting discounts or commissions were paid by the Company.
 
 In
        June
        2007, LLC Business Standard exercised 800,000 of the options it held to purchase
        shares of our restricted common stock at an exercise price of $1.05 per share.
        Business Standard used the cashless exercise provision of the options and
        received 275,000 shares of our common stock for it and its nominees in
        connection with the exercise of the options, based on the fair market value
        of
        the common stock on the date he exercised of $1.60. The Company claims an
        exemption from registration afforded by Section 4(2) of the Act since the
        foregoing issuance did not involve a public offering, the recipients took
        the
        shares for investment and not resale and the Company took appropriate measures
        to restrict transfer. No underwriters
 or
        agents
        were involved in the foregoing issuance and no underwriting discounts or
        commissions were paid by the Company.
  -24-
 
 On
        June
        30, 2007, in connection with our agreement with AEF, we agreed to grant AEF
        a
        warrant to purchase 55,233 shares of our common stock at an exercise price
        of
        $1.14 per share, which warrants contained a cashless feature. The warrants
        expire three years from the grant date. We claim an exemption from registration
        afforded by Section 4(2) of the Securities Act of 1933 since the foregoing
        issuance of warrants did not involve a public offering, the recipient took
        the
        warrants for investment and we took steps to restrict the transfer of the
        warrants. No underwriters or agents were involved in the foregoing grant
        and no
        underwriting discounts or commissions were paid by us.
 
 In
        July
        2007, we issued an aggregate of 190,000 restricted shares of common stock
        to
        David Zaikin, our Chief Executive Officer, and certain of his assigns, in
        consideration for services rendered during the first two quarters of 2007.
        The
        Company claims an exemption from registration afforded by Section 4(2) of
        the
        Act since the foregoing issuance did not involve a public offering, the
        recipient took the shares for investment and not resale and the Company took
        appropriate measures to restrict transfer. No underwriters or agents were
        involved in the foregoing issuance and no underwriting discounts or commissions
        were paid by the Company.
 
 In
        July
        2007, we issued an aggregate of 250,000 shares of restricted common stock
        to
        Business Standard and its nominees in consideration as a six month bonus
        for
        services rendered to the Company and its 50% owned Joint Venture,
        Zauralneftegaz, Ltd., during the first two quarters of 2007. The Company
        claims
        an exemption from registration afforded by Section 4(2) of the Act since
        the
        foregoing issuance did not involve a public offering, the recipient took
        the
        shares for investment and not resale and the Company took appropriate measures
        to restrict transfer. No underwriters or agents were involved in the foregoing
        issuance and no underwriting discounts or commissions were paid by the
        Company.
 
 In
        August
        2007, we issued an aggregate of 20,000 restricted shares of common stock
        to
        Uptick Capital, Ltd., in consideration for investor relations and consulting
        services to the Company for the months of May and June of 2007 in accordance
        with our agreement with Uptick Capital Ltd..  The Company claims an
        exemption from registration afforded by Section 4(2) of the Act since the
        foregoing issuance did not involve a public offering, the recipient took
        the
        shares for investment and not resale and the Company took appropriate measures
        to restrict transfer. No underwriters or agents were involved in the foregoing
        issuance and no underwriting discounts or commissions were paid by the
        Company.
 
 In
        August
        2007, we issued an aggregate of 50,000 restricted shares of common stock
        to
        Basics Investors Inc., in consideration for investor relations and consulting
        services rendered to the Company. The Company claims an exemption from
        registration afforded by Section 4(2) of the Act since the foregoing issuance
        did not involve a public offering, the recipient took the shares for investment
        and not resale and the Company took appropriate measures to restrict transfer.
        No underwriters or agents were involved in the foregoing issuance and no
        underwriting discounts or commissions were paid by the Company.
 
 In
        August
        2007, we issued an aggregate of 20,000 restricted shares of common stock
        to
        Helen Teplitskaia, our President in consideration for services rendered to
        the
        Company as the Company’s President, during the months of July and August 2007,
        pursuant to the terms of her employment with the Company. The Company claims
        an
        exemption from registration afforded by Section 4(2) of the Act since the
        foregoing issuance did not involve a public offering, the recipient took
        the
        shares for investment and not resale and the Company took appropriate measures
        to restrict transfer. No underwriters or agents were involved in the foregoing
        issuance and no underwriting discounts or commissions were paid by the
        Company.
 On
          September 30, 2007, in connection with our agreement with AEF, we agreed
          to
          grant AEF a warrant to purchase 51,352 shares of our common stock at an
          exercise
          price of $0.74 per share, which warrants contained a cashless feature.
          The
          warrants expire three years from the grant date. We claim an exemption
          from
          registration afforded by Section 4(2) of the Securities Act of 1933 since
          the
          foregoing issuance of warrants did not involve a public offering, the recipient
          took the warrants for investment and we took steps to restrict the transfer
          of
          the warrants. No underwriters or agents were involved in the foregoing
          grant and
          no underwriting discounts or commissions were paid by us.
 On
        November 7, 2007 the Board of Directors of the Company approved the issuance
        of
        2,000,000 shares of common stock to Key Brokerage, in connection with the
        successful acquisition of two new oil and gas exploration licenses by
        Kondaneftegaz LLC.  The shares had not been issued as of November 9,
        2007, however, so have not been included in the number of issued and outstanding
        shares disclosed throughout this report.  The Company claims an
        exemption from registration afforded by Section 4(2) of the Act since the
        foregoing issuance did not involve a public offering, the recipient took
        the
        shares for investment and not resale and the Company took appropriate measures
        to restrict transfer. No underwriters or agents were involved in the foregoing
        issuance and no underwriting discounts or commissions were paid by the
        Company.
  Disclosure
        of grant to AEF to purchase 51,532 shares effective September 30,
        2007.
 -25-
 
 The
        Company plans to issue Helen Teplitskaia, its President, an aggregate of
        30,000
        shares of common stock shortly after the filing of this report, in consideration
        for services rendered to the Company as the Company’s President, during the
        months of September, October and November 2007, pursuant to the terms of
        her
        employment with the Company. The Company plans to claim an exemption from
        registration afforded by Section 4(2) of the Act since the foregoing issuance
        will not involve a public offering, the recipient will take the shares for
        investment and not resale and the Company will take appropriate measures
        to
        restrict transfer.  As these shares have not physically been issued to
        date, they have not been included in the number of issued and outstanding
        shares
        disclosed throughout this report.
 
 **ITEM
        3. DEFAULTS UPON SENIOR
        SECURITIES**
 
 None.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 None.
 
 **ITEM
        5. OTHER INFORMATION**
  On
          or
          around August 9, 2007, the Company’s Chief Executive Officer, David Zaikin,
          entered into a Stock Purchase Agreement with LLC “Business Standard.” Pursuant
          to the Stock Purchase Agreement, Mr. Zaikin agreed to purchase 400,000
          restricted shares of the Company’s common stock from Business Standard, for
          aggregate consideration of $500,000 or $1.25 per share. The closing date
          of the
          Stock Purchase Agreement was scheduled to occur on August 30, 2007, or
          at such
          other time as the parties agree. The Stock Purchase Agreement did not close
          on
          or before August 30, 2007, and has not closed to date. The parties are
          currently
          in discussions to extend the closing of the Stock Purchase Agreement to
          January
          2008; however, no definitive amendments or extension has been entered into
          to
          date.
  Mr.
          Zaikin entered into the Stock Purchase Agreement because he personally
          believes
          that the Company’s common stock has significant value. None of the Company’s
          officers and Directors are currently selling nor do they have any immediate
          plans to sell any shares of the Company’s common stock.
 **ITEM
        6. EXHIBITS AND REPORTS ON FORM 8-K**
 
 a)
        Exhibits
 
 **Exhibit
                  No.**
              **Description
                  of Exhibit**10.1(1)
              Option
                  Agreement with Baltic Petroleum Limited dated April 28,
                  200510.2(1)
              License
                  Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                  dated
                  April 28, 200510.3(1)
              Loan
                  Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                  dated
                  April 28, 200510.4(1)
              Guarantee
                  by Siberian Energy Group, Inc. dated April 28, 200510.5(1)
              Pledge
                  and Security Agreement between Siberian Energy Group, Inc. and
                  Baltic
                  Petroleum Limited dated April 28, 200510.6(2)
              Option
                  Agreement with Baltic Petroleum Limited dated April 28,
                  2005
  
 -26-
 10.7(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
 
 -27-
 10.28(8)
              Option
                  Agreement with Key Brokerage10.29(8)
              Warrant
                  Agreement with Key Brokerage10.30(9)
              July
                  26, 2006 Deed of Agreement10.31(10)
              Consulting
                  Agreement with Business Standard10.32(11)
              Addition
                  to the Loan Agreement of November 9, 200510.33(11)
              Gross
                  Overriding Royalty Agreement10.34(12)
              Amendment
                  No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
                  Pochapski10.35(13)
              Deed
                  of Variation to the Loan Agreement Dated 9th
                  of November
                  2005, Entered into in June 200731.1*
              Certificate
                  of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
                  Act of 200231.2*
              Certificate
                  of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
                  Act of 200232.1*
              Certificate
                  of the Chief Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.2*
              Certificate
                  of the Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200299.1(7)
              Glossary
  *
        Filed
        herein.
 
 (1)
        Filed
        as Exhibit 10.1, 10.2, 10.3, 10.4 and 10.5 to the Company's Form 8-K filed
        with
        the Commission on May 20, 2005, and incorporated herein by
        reference.
 
 (2)
        Filed
        as Exhibits to the Company's Form 8-K filed with the Commission on May 20,
        2005,
        and incorporated herein by reference.
 
 (3)
        Filed
        as Exhibits to the Company's Report on Form 10-QSB, filed with the Commission
        on
        August 22, 2005, and incorporated herein by reference.
 
 (4)
        Filed
        as Exhibits to the Company's Report on Form 8-K, filed with the Commission
        on
        October 28, 2005, and incorporated herein by reference.
 
 (5)
        Filed
        as Exhibits to our Report on Form 10-QSB for the period ending September
        31,
        2005, which was filed with the Commission on November 21, 2005, and is
        incorporated herein by reference.
 
 (6)
        Filed
        as Exhibits to our Report on Form 8-K, filed with the Commission on December
        2,
        2005, and incorporated herein by reference.
  (7)
        Filed
        as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December
        31,
        2005, and incorporated herein by reference.
 
 -28-
 (8)
        Filed
        as Exhibits to our Report on Form 8-K, filed with the Commission on September
        19, 2006, and incorporated herein by reference.
 
 (9)
        Filed
        as an Exhibit to our Report on Form 10-QSB, filed with the Commission on
        November 14, 2006, and incorporated herein by reference.
 
 (10)
        Filed as an Exhibit to our Form 8-K filed with the Commission on February
        20,
        2007, and incorporated herein by reference.
 
 (11)
        Filed as Exhibits to our Report on Form 10-KSB filed with the Commission
        on
        February 2, 2007, and incorporated herein by reference.
 
 (12)
        Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission
        on
        May 15, 2007, and incorporated herein by reference.
 
 (13)
        Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission
        on
        August 14, 2007, and incorporated herein by reference.
 
 **b)
        Reports on Form 8-K:**
 
 We
        filed
        the following report on Form 8-K during the period covered by this
        report:
 
 o
              On
                  July 31, 2007, we filed a Report on Form 8-K to report our filing
                  of a
                  press release regarding the status of the well drilled by ZNG on
                  the
                  Privolny license.o
              On
                  August 10, 2007, we filed a Report on Form 8-K to report Mr. Zaikin’s
                  entry into a Stock Purchase Agreement with Business
                  Standard.
 
 -29-
  **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 **SIBERIAN
        ENERGY GROUP INC.**
 
 DATED:
                  November 19, 2007
              By:
                  */s/ David Zaikin***David
                  ZaikinChief
                  Executive Officer
 
           
 -30-