**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-QSB/A**
 AMENDMENT
        NO. 1
 
 (Mark
        One)
 
 [X]
              QUARTERLY
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934
 
 For
        the
        quarterly period ended March 31, 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 May
        10, 2007, 15,034,961, 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].
  This
        Amended Form 10-QSB is being filed by the
        Registrant to include dated signatures of its Chief Executive Officer under
        "Signatures" below and its Chief Executive Officer and Chief Financial Officer
        under Exhibits 31.1, 32.1, 31.2, and 32.2, attached hereto.  This Amended
        Form 10-QSB also corrects various formatting errors which were present in
        our
        Form 10-QSB for the period ended March 31, 2007, as originally filed.
 
  
  **PART
        I. FINANCIAL INFORMATION**
 
 **ITEM
        1. FINANCIAL STATEMENTS**





**SIBERIAN
      ENERGY GROUP INC.**


**(A
      Development Stage Company)**





**C** **ONDENSED** **CONSOLIDATED**


**FINANCIAL
      STATEMENTS**





**March
      31, 2007**
























-2-





**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                FIRM**











The
      Board
      of Directors and Stockholders


Siberian
      Energy Group Inc.








We
      have
      reviewed the accompanying condensed consolidated balance sheet of Siberian
      Energy Group Inc. (a development stage company) as of March 31, 2007, and the
      related condensed consolidated statements of operations, stockholders' equity,
      and cash flows for the three months ended March 31, 2007 and 2006, and the
      cumulative period of development stage activity (January 1, 2003 through March
      31, 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


May
      10,
      2007


-3-





SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)**Condensed
                Consolidated Balance Sheets****(Unaudited)****March
                31,**
            
            December
                31,**2007**
            
            2006**Assets****Current
                assets:**Cash
            
            **$**
            **8,920**
            
            $
            1,435Management
                fee receivable
            
            
            **55,000**
            
            
            110,000Prepaid
                expenses and other
            
            
            **171,281**
            
            
            5,272**235,201**
            
            
            116,707Investment
                in joint venture
            
            
            **-**
            
            
            -Oil
                and gas properties, unproved
            
            
            **2,700,000**
            
            
            2,700,000Property
                and equipment, net
            
            
            **2,489**
            
            
            2,565**$**
            **2,937,690**
            
            $
            2,819,272**Liabilities
                and Stockholders' Equity****Current
                liabilities:**Accounts
                payable:Related
                party - stockholders
            
            **$**
            **322,357**
            
            $
            362,166Related
                party - Baltic Petroleum, interest at 14%
            
            
            **52,113**
            
            
            50,615Others
            
            
            **214,108**
            
            
            459,561Accrued
                payroll
            
            
            **357,698**
            
            
            1,011,788**946,276**
            
            
            1,884,130**Stockholders'
                equity:**Common
                stock - authorized 100,000,000 shares, $.001 par value,15,093,095
                and 14,112,961 issued and outstanding
            
            
            **15,093**
            
            
            14,113Additional
                paid-in capital
            
            
            **7,960,247**
            
            
            6,593,829Accumulated
                deficitPre-development
                stage
            
            
            **(449,785**
            **)**
            
            (449,785
            )Development
                stage
            
            
            **(5,527,663**
            **)**
            
            (5,218,570
            )Accumulated
                other comprehensive income (loss)
            
            
            **(6,478**
            **)**
            
            (4,445
            )**1,991,414**
            
            
            935,142**$**
            **2,937,690**
            
            $
            2,819,272*See
                accompanying notes.*


-4-





SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)For
                the**Condensed
                Consolidated Statements of Operations**
            
            
            
            
            
            cumulativeperiod
                ofDevelopmentStage
                Activity-January
                1, 2003throughMarch
                31,For
                the three months ended March 31,
            
            **2007**
            
            2006
            
            2007Revenues
                and other income:Management
                fees from joint venture
            
            **$
                165,000**
            $  
                75,000
            $  
                600,000Gain
                from entrance into joint venture
            
            **-**
            -
            364,479Other
            
            **-**
            -
            6,382**165,000**
            75,000
            970,861Expenses:Salaries
            
            **83,643**
            33,311
            1,961,710Professional
                and consulting fees
            
            **202,388**
            155,716
            2,852,034Rent
                and occupancy
            
            **12,385**
            9,737
            188,628Depreciation
                and amortization
            
            **82**
            86
            102,799Finance
                charges and interest
            
            **1,499**
            3,848
            59,875Marketing
                and other
            
            **174,096**
            191,491
            1,333,478Total
                expenses
            
            **474,093**
            394,189
            6,498,524Loss
                before income taxes
            
            **309,093**
            319,189
            5,527,663Provision
                for income taxes (benefit)
            
            **-**
            -
            -Net
                loss (development stage)
            
            **$
                309,093**
            $
                319,189
            $
                5,527,663Basic
                and diluted loss per common share
            
            **$     (0.02)**
            $   
                (0.03)
            $     
                (0.61)Weighted
                average number of basic and dilutedcommon
                shares outstanding
            
            **14,241,408**
            11,621,219
            9,066,626*See
                accompanying notes.*






-5-




SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)**Condensed
                Consolidated Statements of Stockholders' Equity**For
                the cumulative period of Development Stage Activity - January 1,
                2003
                through March 31, 2007Common
                  StockNumber
                  of Shares
            Par
                Value
            Additional Paid-InCapitalBalance,
                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 three months - 2007Foreign
                currency translation adjustmentShares
                issued for geological data
            
            
            
            
            200,000
            200
            285,800Shares
                issued for professional services
            
            
            
            
            780,134
            780
            1,080,618Balance,
                March 31, 2007
            
            
            
            
            15,093,095
            $
                15,093
            $
                7,960,247*See
                accompanying notes.*








-6-


AccumulatedOtherAccumulated
            
            Comprehensive
            
            
            
            ComprehensiveDeficit
            
            Income
                (Loss)
            
            Total
            
            Loss$                                          
                    (449,785)
            
            $
            -
            
            $
            (14,687
            )(422,516)
            
            
            -
            
            
            (422,516
            )
            $
            (422,516
            )-
            
            
            -
            
            
            -$                                             
                 (872,301)
            
            
            -
            
            $
            (437,203
            )(833,567)
            
            
            -
            
            
            (833,567
            )-
            
            
            (53,120
            )
            
            (53,120
            )
            $
            (886,687
            )-
            
            
            -
            
            
            750,000-
            
            
            -
            
            
            10,000-
            
            
            -
            
            
            34,426$                                            (1,705,868)
            
            $
            (53,120
            )
            $
            (529,464
            )(882,151)
            
            
            
            
            
            (882,151
            )-
            
            
            50,614
            
            
            50,614
            
            $
            (831,537
            )-
            
            
            -
            
            
            138,750-
            
            
            -
            
            
            212,500-
            
            
            -
            
            
            217,000$                                              (2,588,019)
            
            $
            (2,506
            )
            $
            (792,751
            )(3,080,336)
            
            
            -
            
            
            (3,080,336
            )-
            
            
            (1,939
            )
            
            (1,939
            )
            $
            (3,082,275
            )-
            
            
            -
            
            
            45,500-
            
            
            -
            
            
            2,237,000-
            
            
            -
            
            
            1,686,491-
            
            
            -
            
            
            841,177-
            
            
            -
            
            
            -$                                              (5,668,355)
            
            $
            (4,445
            )
            $
            935,142(309,093)
            
            
            
            
            
            (309,093
            )(2,033
            )
            
            (2,033
            )
            $
            (311,126
            )-286,000-1,081,398$                                              (5,977,448)
            
            $
            (6,478
            )
            $
            1,991,414








-7-


SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)For
                the**Condensed
                Consolidated Statements of Cash Flows**
            
            
            
            
            
            cumulativeperiod
                ofDevelopmentStage
                Activity-January
                1, 2003****
            
            
            
            through****
            
            
            
            March
                31,For
                the three months ended March 31,
            
            **2007**
            
            2006
            
            2007**Cash
                flows from operating activities:**Net
                loss (development stage)
            
            **$**
            **(309,093**
            **)**
            $
            (319,189
            )
            $
            (5,527,663
            )Adjustments
                to reconcile net loss to net cash flows fromoperating
                activities:Depreciation and amortization
            
            
            82
            
            
            86
            
            
            102,799Common
                stock and warrants issuedfor
                professional services and salaries
            
            
            **1,367,398**
            
            
            193,000
            
            
            4,233,816Gain
                from entrance into joint venture
            
            
            **-**
            
            
            -
            
            
            (364,479
            )Changes
                in other current assets and current liabilities:Prepaid
                expenses and other assets
            
            
            **(111,015**
            **)**
            
            (50,000
            )
            
            (379,679
            )Accounts
                payable and accrued expenses
            
            
            **(937,854**
            **)**
            
            152,658
            
            
            2,937,114**Net
                cash flows from (for) operating activities**
            
            
            **9,518**
            
            
            (23,445
            )
            
            1,001,908**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
            
            
            **-**
            
            
            -
            
            
            (4,231
            )Cash
                received in acquisition
            
            
            **-**
            
            
            -
            
            
            6Cash
                received from entrance into joint venture
            
            
            **-**
            
            
            -
            
            
            175,000**Net
                cash flows for investing activities**
            
            
            **-**
            
            
            -
            
            
            (1,128,936
            )**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
            
            
            **(2,033**
            **)**
            
            (821
            )
            
            (6,478
            )Net
                increase (decrease) in cash
            
            
            **7,485**
            
            
            (10,266
            )
            
            8,920Cash
                - beginning
            
            
            **1,435**
            
            
            11,551
            
            
            -Cash
                - ending
            
            **$**
            **8,920**
            
            $
            1,285
            
            $
            8,920*See
                accompanying notes.*





-8-


SIBERIAN
                ENERGY GROUP INC. (A Development Stage Company)





**Notes
                to Condensed Consolidated Financial Statements**




**1.
      Basis of Presentation:**





The
      accompanying unaudited condensed 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 March 31, 2007. These financial
      statements should be read in conjunction with the Company’s audited consolidated
      financial statements and notes thereto. Interim operating results are not
      necessarily indicative of operating results for any future interim period or
      the
      full year.





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





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
      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 (the Joint Venture) 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. Operations of the Joint Venture,
      which is currently drilling its first well on Privolny block and continues
      geological exploration works throughout the territory of its seven licenses
      covering in total 1 million acres, are funded via loans provided to the Joint
      Venture and ZNG by a financing company wholly owned by Baltic. Loans are
      guaranteed by the Joint Venture’s holdings in ZNG. As of March 31, 2007 the
      total amounts provided through such loans to the Joint Venture and ZNG were
      equal to $13.6 million plus accrued interest of approximately $1.4 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. It is anticipated that the Joint Venture
      and ZNG will enter into new loan agreements for approximately $10.6 million
      covering drilling and geological works through the end of 2007. The loans will
      not be dilutive to the Company’s ownership in ZNG. In connection with the
      funding provided by Baltic, ZNG entered into a gross override royalty agreement
      with Baltic.





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





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


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


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


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


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






-9-


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





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





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





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





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





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





**3.
      Income Taxes:**





At
      March
      31, 2007, the Company has estimated U.S. tax net operating loss carryforwards
      totaling approximately $4,200,000. These carryforwards may be used to offset
      future taxable income, and expire in varying amounts through 2027. No tax
      benefit has been reported in the financial statements, however, because the
      Company believes there is at least a 50% chance that the carryforwards will
      expire unused. Accordingly, the $849,000 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 March 31, 2007.





**5.
      Going Concern:**





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





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





For
      the
      cumulative period ended March 31, 2007, the Company has obtained cash financing
      from organizing stockholders and employees in the form of loans, advances,
      and
      deferred salaries. However, there can be no certainty as to availability of
      continued financing in the future. Failure to obtain sufficient financing may
      require the Company to reduce its operating activities. A failure to continue
      as
      a going concern would then require stated amounts of assets and liabilities
      be
      reflected on a liquidation basis which could differ form the going concern
      basis.








-10-




**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 MARCH
        31,
        2007.
 
 Investors
        should also take note of the fact that some of the more technical terms relating
        to the Company's operations as described below are explained in greater detail
        under exhibit 99.1, incorporated by reference hereto.
 
 **BUSINESS
        DEVELOPMENT:**
 
 Siberian
        Energy Group Inc. was formed as a Nevada corporation on August 13, 1997,
        as
        Advanced Rehab Technology Corporation. Subsequently, on March 9, 2001, the
        Company changed its name to Talking Cards, Inc.; on February 12, 2002, the
        Company changed its name to Oysterking Incorporated; on December 3, 2002,
        the
        Company changed its name to 17388 Corporation Inc., at which point the
        controlling interest of the Company was sold and a new board of directors
        was
        appointed; on May 5, 2003, the Company changed its name to Trans Energy Group
        Inc.; and on December 3, 2003, the Company changed its name to Siberian Energy
        Group Inc.
 
 On
        September 17, 1999, the Company affected a 1-for-30 reverse stock split.
        A
        subsequent 3-for-1 forward split was consummated on October 2, 2000. 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. In contemplation
        of
        the Company's acquisition of a Russian oil and gas exploration company, the
        Company changed its name to Trans Energy Group, Inc.
 
 On
        May 9,
        2003, the Company entered into an Acquisition Agreement (the "Acquisition
        Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation
        ("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant
        to the Acquisition Agreement, the Company acquired a 51% interest in ZNG
        by
        issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004,
        the
        Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares
        of
        the Company's common stock, making ZNG a wholly owned subsidiary of the Company.
        ZNG holds seven (7) oil and gas licenses (see "Patents, Trademarks and Licenses"
        below) for the rights to prospect, explore, drill and remove oil and gas
        (the
        "Exploration Rights") in the eastern parts of Kurgan Province in Russia.
        The
        Company had no affiliation with ZNG prior to the acquisition in May
        2003.
 
 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.
  -11-
  
 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 proceeded 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 ("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
        Agreement). From October 14, 2005 to December 13, 2006, the Company had no
        oil
        and gas operations except through its ownership of 50% of ZNG, Ltd. On December
        13, 2006, the Company entered into an Interest Purchase Agreement with Key
        Brokerage, whereby the Company purchased 100% of the issued and outstanding
        common stock of Kondaneftegaz, LLC (“KNG”), a Russian limited liability company,
        which was created in 2004 for the purpose of oil and gas exploration in the
        Khanty-Mansiysk district of Western Siberia, Russia. KNG has previously applied
        for 10 exploration and production licenses for parcels located within the
        existing oil deposits of the Khanty-Mansiysk district, in Russia, four of
        which
        are expected to be auctioned off during the second or third quarter of 2007.
 
 Moving
        forward the Company plans to focus on the exploration and potential development
        of any licenses acquired by KNG through government auctions in fiscal 2007
        and
        working with its partner in the Joint Venture, Baltic Petroleum (E&P)
        Limited ("BP" or "Baltic"), to continue the oil and gas exploration activities
        through their co-ownership of the Joint Venture and ZNG.
 
 **Description
        of KNG**
 
 On
        December 13, 2006, we entered into an Interest Purchase Agreement (the "Purchase
        Agreement") with Key Brokerage LLC ("Key Brokerage"), pursuant to which we
        purchased 100% of the stock of Kondaneftegaz LLC ("KNG"), a Russian limited
        liability company, which was created in 2004 for the purpose of oil and gas
        exploration in the Khanty-Mansiysk district of Western Siberia, Russia. In
        addition to acquiring 100% of the stock of KNG, we are receiving the geological
        information package on the Karabashski zone of Khanty-Mansiysk Autonomous
        district (Tuymen region of Russian Federation) ("Geological Data"). The
        Geological Data is included in the total purchase price discussed
        below.
 
 From
        2005
        through 2007 KNG applied for a total of 15 exploration and production licenses
        in the Khanty-Mansiysk district of Russia. We believe that through auctions
        and/or tenders, KNG may obtain licenses to four of the licensed areas during
        the
        second or third quarters of 2007. We also believe four other license areas
        will
        be auctioned off during the third or fourth quarter of 2007; however, the
        remaining other auction/tender dates are currently undetermined.
 
 The
        Purchase Agreement consummated the transactions contemplated by the Option
        Agreement (the "Key Brokerage Option"), which we entered into with Key Brokerage
        in September 2006. In consideration for agreeing to the Key Brokerage Option,
        we
        granted Key Brokerage 250,000 warrants to purchase shares of our common stock
        at
        an exercise price of $2.20 per share, exercisable for up to two (2) years
        from
        the date of the Key Brokerage Option (the "Key Brokerage Warrants") in September
        2006.
  -12-
  In
        connection with the purchase of KNG, we received certain geological information,
        including well logs, surveys and structural maps regarding the Karabashsky
        zone
        of the Khanty-Mansiysk district, which an independent appraisal valued at
        approximately $2,700,000.
 
 In
        consideration for the transfer of 100% of the stock of KNG, we issued Key
        Brokerage an aggregate of 1,900,000 restricted shares of our common stock
        valued
        at approximately $2,700,000, which value approximated the value of geological
        information relevant to the license blocks applied for by KNG.
 
 **Description
        of ZNG**
 
 ZNG
        was
        created to explore and develop new hydrocarbon fields and oil and gas properties
        in the Kurgan region of Southwest Siberia, Russia. ZNG has compiled data
        in the
        Eastern part of the Kurgan region by analyzing prior geological, geophysical
        and
        lithographic exploration works in the region, data, maps, and reports from
        12
        test wells drilled between 1979-1986, profile sections, correlation schemes,
        and
        geographic maps of the region. ZNG has also obtained core samples from
        parametric wells drilled in prior years on the licensed areas and adjacent
        territories in the Eastern part of Kurgan region during the initial search
        for
        oil and gas in the region, and performed analysis of the data provided by
        the
        samples.
 
 In
        March
        2003, ZNG acquired four 5-year exploration licenses through a government
        tender,
        which licenses expire in March 2008, and which licenses are for concessions
        covering a total territory of 643,000 acres. Upon expiration of the licenses,
        ZNG will have, subject to the signing of the Subsoil Legislation, preferential
        right to apply for the full production license for the term of 25
        years.
 
 The
        Mokrousovsky license is the largest of the four licenses, encompassing a
        total
        of 240,000 acres, followed by the West Suersky, which covers 230,000 acres,
        the
        Privolny, which covers 123,000 acres, and the Orlovo-Pashkovsky license,
        which
        covers 50,000 acres.
 
 In
        June
        2006, through participation in governmental auctions, ZNG successfully obtained
        three more oil and gas licenses in the Kurgan region of Siberia, Russia:
        the
        Yuzhno-Voskresensky, Petuhovsky and Lebyazhevsky parcels. The new licenses
        are
        for the period of 25 years and allow both exploration and production on the
        licensed areas. The total cost paid at the auctions for the three new licenses
        by ZNG was approximately $425,000.  The
        acquisition of the three new licenses increased the total area covered by
        the
        licenses held by ZNG from 643,000 acres to over 1 million acres. All seven
        licensed areas are located in the Eastern part of Kurgan region, have
        well-developed infrastructure, including close proximity to the major oil
        pipeline, and have available existing prior geological data.
 
 ZNG
        also
        has outstanding applications for two more parcels in the same area -
        Zapadno-Petukhovsky and Orlovo-Pashkovsky-2. The anticipated auction dates
        for
        these licenses are currently unknown and there can be no assurance that ZNG
        will
        be awarded the licenses to the parcels at auction.
 
 Following
        detailed data collection, survey and seismic testing, ZNG will proceed with
        development of the most promising licenses first. As of March 2007, ZNG has
        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 Mokrousovky block (approximately 340 linear kilometers) using
                  Bazneftgeophisica;
  ·
              Performed
                  gravimetric surveys on the West-Suersky
                  block;
  -13-
  ·
              Completed
                  approximately 2,106 linear kilometers of gas seismotomographic
                  and
                  geochemical surveys performed by Exotrad on the Privolny, Mokrousovsky,
                  West-Suersky, Orlovo-Pashkovky, 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, two robust drilling prospects have been
                  identified in the northern part of the Privolny block;
                  and
 
 
 **Seismic
        Interpretation On 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 has been 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.
  
 **Drilling
                  On The Privolny Block**
                
                Drilling
                  of the first prospect located in the Privolny block is under way.
                  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.
                  ZNG
                  believes that this will provide an improved analysis to create
                  a work
                  program including the drilling of at least two more exploration
                  wells. ZNG
                  expects to provide a geological update during the second or third
                  quarters
                  of 2007, which period of time is needed to drill and process data
                  from the
                  2,000 meter deep well.
                
                ZNG's
                  Board of Directors decided to drill up to four exploration wells
                  in
                  connection with the recent Seismotomographic surveys and high definition
                  2D seismic shot over geochemical anomalies in Privolny and Mokrousovsky
                  blocks. At least two of these wells are proposed to be drilled
                  in northern
                  locations in the Privolny block and the other two wells are proposed
                  to be
                  drilled on the Mokrousovsky block.
                
                In
                  the event that the wells prove successful in establishing the presence
                  of
                  hydrocarbons, of which there can be no assurance, the Board of
                  Directors
                  of ZNG intends that production testing will be supervised by a
                  leading
                  firm of reservoir evaluation consultants and the Board will then
                  determine
                  the most appropriate means of commercializing the license
                  blocks.
   -14-
 **Joint
        Venture**
 
 Operating
        activities 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.
 
 On
        November 9, 2005, ZNG entered into a New Loan with Caspian (the "New Loan").
        Under the loan agreement, Caspian Finance Limited ("Caspian") agreed to provide
        a loan of up to $6,874,325 representing the assumed commitment under a prior
        loan equal to $1,739,658, of which ZNG had received $1,110,624 as of November
        9,
        2005, and a new commitment of up to $5,134,667, to be used for operations
        in the
        Kurgan region in 2005 and through the first half of 2006. The New Loan is
        available to ZNG until the sixth anniversary of the date of the New Loan,
        or
        November 9, 2011 (the "Term"). On January 16, 2007, ZNG entered into an
“Addition to the Loan Agreement of November 9, 2005,” with Caspian,
        whereby ZNG agreed to increase the amount of the New Loan from $6,874,325
        to $8,874,325 under the same terms and conditions as the New Loan. The New
        Loan
        had a total outstanding balance, including principal and accrued interest
        of
        $9,289,219 as of April 27, 2007.
  Interest
        on any amounts loaned under the New Loan bears interest at the following
        rates,
        calculated and accrued 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. 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.
   -15-
 
 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.
  The
        total
        budget for the exploration program and further seismic studies, which the
        Board
        has proposed to shoot on ZNG's Lebyazhevsky licensed block, totals approximately
        $8 million British pounds or $15 million US dollars. The funds were raised
        by
        BP's parent via a placement of shares. ZNG is currently in the process of
        entering into new loan agreements covering such funds. 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.”
 
 **Deed
        of Agreement**
 
 On
        July
        26, 2006, we entered into a Deed of Agreement with Baltic Petroleum (E&P)
        Limited ("BP" or "Baltic") and ZNG. Pursuant to the Deed of Agreement, BP
        agreed
        to allow the drawdown by ZNG, within 10 days of the date of the Deed of
        Agreement, of certain funds from Caspian under the New Loan,
        including:
 
 o
              $185,000
                  to be paid to Business Standard, which was owed to Business Standard
                  from
                  ZNG in consideration for Business Standard assisting ZNG with the
                  process
                  of the granting of the three oil and gas licenses awarded to ZNG
                  in June
                  2006;o
              $170,000
                  to be paid to Mr. Victor Repin (a significant shareholder of the
                  Company)
                  and Sergey Potapov (a Director of the Company) in final settlement
                  of
                  amounts due to them by ZNG; 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.
 
 The
        Deed
        of Agreement also contemplated ZNG's entry into a further loan agreement
        with
        Caspian (assuming Caspian is able to raise such financing on terms acceptable
        to
        BP), substantially with the same terms as the New Loan (other than due dates
        and
        interest amounts), whereby Caspian would provide ZNG funds for seismic drilling
        and work programs of approximately $12,000,000 (the "Additional
        Loan").
 
 The
        Deed
        of Agreement also provided that upon the entry into the Additional Loan,
        we, BP
        and ZNG will enter into a gross override royalty agreement, whereby ZNG will
        grant a gross override royalty ("GOR") to BP equal to 3% of the gross turnover
        on all production of oil and gas at the wellhead in Kurgan by ZNG until BP
        has
        received in aggregate $20,000,000 from such GOR (the "GOR Sum"). In December
        2006, ZNG entered into a Gross Overriding Royalty Agreement with Baltic,
        which
        is described in greater detail below.
 
 On
        January 16, 2007, ZNG entered into an “Addition to the Loan Agreement of
        November 9, 2005,” with Caspian, whereby Caspian agreed to increase the amount
        of the New Loan from $6,874,325 to $8,874,325 under the same terms and
        conditions as the New Loan. The increase in the new loan was intended to
        allow
        continuous cash flow to ZNG for its operating needs during the first two
        quarters of 2007 until the companies enter into the anticipated loan agreements
        to finance the current program of seismic studies and drilling of the first
        four
        (4) planned wells in ZNG's license blocks, two of which are planned for
        2007.
  Baltic
        agreed to pay additional fees of $300,000 in connection with consulting services
        rendered in connection with the acquisition of the licenses by ZNG during
        the
        year ended December 31, 2006. The $300,000 expense was added to the total
        amounts loaned by Baltic to the Joint Venture.
 -16-
 **Gross
        Overriding Royalty Agreement**
 
 In
        December 2006, ZNG entered into a Gross Overriding Royalty Agreement (the
        “Royalty Agreement”) with Baltic, which was contemplated by the Deed of
        Agreement dated July 26, 2006, described above and entered into in connection
        with the addition to the New Loan, described above. The Royalty Agreement
        provided that ZNG would grant Baltic a gross overriding royalty interest
        equal
        to 3% of ZNG’s interest in any and all 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), which amount has not been paid as of the date of this filing, and
        50,068 options to purchase shares of our common stock at $0.63 per share
        which
        were granted to Mr. Peara on March 6, 2006 and a commission of $6,673 (1%
        of
        Baltic's $667,313 investment in the Joint Venture in the first quarter of
        2006),
        and 17,561 options to purchase shares of our common stock at $0.67 per share
        for
        the first quarter of 2006, which were granted to Mr. Peara on March 31, 2006,
        which options contain a cashless exercise provision.
 
 On
        June
        30, 2006, in connection with our agreement with AEF, we agreed to grant AEF
        a
        warrant to purchase 20,412 shares of our common stock at an exercise price
        of
        $2.02, which warrants contained a cashless exercise feature. The warrants
        expire
        three years from the grant date. We were also obligated to pay AEF $23,562
        during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
        investment in the Joint Venture in the second quarter 2006).
 
 On
        September 30, 2006, in connection with our agreement with AEF, we agreed
        to
        grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
        price of $1.53 per share, which warrants contained a cashless exercise feature.
        The warrants expire three years from the grant date. We were also obligated
        to
        pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1%
        of
        Baltic's $1,830,292 investment in the Joint Venture in the third quarter
        of
        2006).
 
 On
        December 31, 2006, in connection with our agreement with AEF, we agreed to
        grant
        AEF a warrant to purchase 38,648 shares of our common stock at an exercise
        price
        of $1.44 per share, which warrants contained a cashless feature. The warrants
        expire three years from the grant date. We were also obliged to pay AEF $31,794
        during the three months ended December 31, 2006 (equal to 1% of Baltic’s
        approximately $3,197,400 investment in the Joint Venture in the fourth quarter
        of 2006).
 
 -17-
 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 obliged 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.
 
 **Consulting
        Agreement with Business Standard**
 
 On
        January 25, 2007, our Board of Directors took action to ratify the Company’s
        entry into a Consulting Agreement with Business Standard, a Russian company
        (the
“Consulting Agreement”), which Consulting Agreement provides for Business
        Standard to provide us certain consulting services in connection with
        investigating financing opportunities, assisting in the Company's day to
        day
        business management, assisting in negotiations with potential investment
        partners, as well as assisting in the application for oil and gas exploration
        and production licenses by our wholly owned subsidiary KNG or current and
        potential investee companies in the Western Siberia region of Russia. We
        agreed to pay Business Standard $15,000 per month pursuant to the Consulting
        Agreement and also agreed to issue Business Standard 200,000 shares of our
        restricted common stock as a signing bonus in connection with its entry into
        the
        Consulting Agreement and 200,000 restricted shares of common stock in connection
        with the acquisition of KNG. The Consulting Agreement ends on December 31,
        2007,
        but is automatically extended for additional one (1) year terms unless either
        party communicates its desire to terminate the agreement to the other party
        fifteen (15) days prior to the end of the then current term.
  Also
        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.
 
 **Uptick
        Capital Agreement**
 
 On
        January 31, 2007, we entered into an agreement with Uptick Capital Ltd.
        (“Uptick”), whereby Uptick agreed to assist us in developing market links and
        strategic initiatives as well as financing introductions for us as requested
        from time to time. The initial agreement was for a period of three (3) months,
        but can be renewed indefinitely thereafter for additional three (3) month
        periods, unless we provide written notice ten (10) days prior to the expiration
        of any additional three (3) month term. We agreed to issue Uptick 10,000
        shares
        of our restricted common stock for each month that the agreement with Uptick
        is
        in place. We also agreed to indemnify Uptick for certain costs and damages
        in
        connection with its performance of its duties under the Uptick agreement,
        as
        described in greater detail in the agreement.
 
 **Global
        Consulting Group Agreement**
 
 With
        an
        effective date of April 10, 2007, we entered into an agreement with The Global
        Consulting Group (“Global”), whereby Global agreed to perform investor relations
        and medial communications services for us for the period of one (1) year,
        which
        agreement is automatically renewable for additional one (1) year periods
        if not
        terminated prior as described below. Pursuant to the Global agreement, we
        agreed
        to pay Global $12,000 per month during the term of the agreement (subject
        to 3%
        yearly increases, if such agreement is not terminated prior to the one (1)
        year
        anniversary of the agreement), and pay Global one time bonuses of $5,000
        upon
        the achievement of any of the following goals: our common stock being listed
        on
        the AMEX; a valuation of our common stock of at least $40 million for more
        than
        30 days; and/or any feature story in a top tier media outlet (The Wall Street
        Journal, The New York Times or similar publication). We also agreed to pay
        Global’s reasonable out of pocket expenses, subject to prior approval for any
        expense over $300 and to indemnify Global against any losses they may incur
        as a
        result of the Global agreement up to a maximum of $10,000.
  
 -18-
 The
        Global agreement can be terminated by either party after six (6) months upon
        thirty (30) days prior written notice, and can be terminated immediately
        at any
        time due to a material breach of the agreement by either party, which breach
        is
        not cured within 15 days of notice thereof from the non-breaching party,
        and/or
        if any party becomes bankrupt or ceases to carry on business.
 
 **Exercise
        of Stock Options**
 
 On
        May 1,
        2007 at 9:00 a.m., Tim Peara, our Director, exercised 50,000 of the options
        he
        held to purchase shares of our common stock at an exercise price of $0.30
        per
        share, which options would have expired on May 1, 2007 at 5:00 p.m. if not
        previously exercised by Mr. Peara. Mr. Peara used the cashless exercise
        provision of the options and will receive 41,925 shares of our common stock
        in
        connection with the exercise of the options, based on the fair market value
        of
        the common stock on the date he exercised of $1.86. The 41,925 shares of
        common
        stock had not been issued as of May 10, 2007, and as such have not been included
        in the number of issued and outstanding shares disclosed throughout this
        report.
 
 **Amendment
        to Employment Agreement with Elena Pochapski**
 
 On
        or
        about April 2, 2007, with an effective date of April 1, 2007, we entered
        into
“Amendment 2 to the Employment Agreement Dated August 1, 2003” with Elena
        Pochapski, our Chief Financial Officer and Director,
        which amended the terms of the first amendment to Ms. Pochapski’s Employment
        Agreement, in September 2005, to provide that Ms. Pochapski’s annual salary
        shall thereafter be $75,000 per year.
 
 
 **Appointment
        of New Officer and Director**
 
 Effective
        May 1, 2007, Helen Teplitskaia was appointed as the Company’s President and as a
        Director of the Company.
 
 Helen
        Teplitskaia is Executive Vice President and Head of Eurasia Practice at Imnex
        International, Inc. She also serves as President of the American-Russian
        Chamber
        of Commerce & Industry, President of the American-Eurasian Chamber of
        Commerce, Director of the International Energy Advisory Council and Adjunct
        Associate Professor of International Business and Markets - Global Initiatives
        in Management at Northwestern University Kellogg School of Management.
  Throughout
        her career, Ms. Teplitskaia has successfully assisted a variety of government
        agencies and private sector companies, including the United States Agency
        for
        International Development, US State Department, Ministry of Foreign Affairs
        of
        the Republic of Uzbekistan, AT&T, Baker & McKenzie, Case New Holland,
        Gazprom, Gillette, HeidelbergCement, Ingersoll-Rand, Maytag, Motorola,
        Pepsi-Cola and Morgan Stanley with start-up operations in markets, direct
        investment, mergers and acquisitions, joint ventures and licensing, marketing
        research, political interfacing and media relations.
  Helen
        Teplitskaia received her BA/MIS from the St. Petersburg University of Culture
        and MBA degree from Northwestern University Kellogg School of
        Management.
 
 It
        is
        anticipated that Ms. Teplitskaia will receive shares and options for her
        services and terms of such compensation will be disclosed in the future.
 
 -19-
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        discussion and analysis of our financial condition and results of operations
        is
        based upon our unaudited financial statements, which have been prepared in
        accordance with accounting principals generally accepted in the United States.
        The preparation of these financial statements requires us to make estimates
        and
        judgments that affect the reported amounts of assets, liabilities, revenues
        and
        expenses, and related disclosure of any contingent assets and liabilities.
        On an
        on-going basis, we evaluate our estimates. We base our estimates on various
        assumptions that we believe to be reasonable under the circumstances, the
        results of which form the basis for making judgments about carrying values
        of
        assets and liabilities that are not readily apparent from other sources.
        Actual
        results may differ from these estimates under different assumptions or
        conditions.
  We
        believe the following critical accounting policy affects our more significant
        judgments and estimates used in the preparation of our financial
        statements:
 
 **Going
        Concern**
 
 The
        Company's financial statements have been prepared assuming that the Company
        will
        continue as a going concern; however, since inception of its current endeavors
        in 2003, the Company has not earned any revenues from production of hydrocarbons
        and is considered to be in the development stage, which raises substantial
        doubt
        about its ability to continue as a going concern. The Company is of the opinion
        that sufficient financing will be obtained from external sources to provide
        the
        Company with the ability to continue the process of development to achieve
        commercial production and sales of products. Since inception, the Company
        has
        obtained cash financing from organizing stockholders and employees in the
        form
        of loans, advances and deferred salaries, as well as through debt financing
        and
        more recently has received $55,000 per month in a management fee 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. If KNG is granted any or all of the 10
        licenses it applied for in November 2005 and May 2006, or the 5 additional
        licenses which it submitted applications for during the first quarter of
        2007,
        the Company anticipates conducting oil and gas exploration surveys and studies
        on those licenses.
 
 Moving
        forward, we anticipate targeting other potential long term investments in
        Russia, separate from our involvement in the Joint Venture and KNG. Currently
        we
        are evaluating different business opportunities in the oil and gas industry,
        including both development stage and revenue-producing enterprises. As of
        the
        filing of this report on Form 10-QSB, the Company is researching certain
        other
        projects which involve the potential purchase of oil and gas interests in
        Western Siberia, Russia; however no formal agreements or understandings have
        been entered into as of the filing date of this report, other than the purchase
        of KNG as described above.
 
 -20-
 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. The Company, however, can make no assurance that $55,000 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 $322,357 and $362,166
        were
        payable to the stockholders as of March 31, 2007 and March 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.
 
 **COMPARISON
        OF OPERATING RESULTS**
 
 **RESULTS
        OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007, COMPARED TO THE
        THREE
        MONTHS ENDED MARCH 31, 2006**
  We
        had
        revenues and other income of $165,000 for the three months ended March 31,
        2007,
        which was solely due to $55,000 of monthly management fees received from
        ZNG,
        Ltd. We had $75,000 of revenue and other income for the three months ended
        March
        31, 2006, due solely to $75,000 of management fees received. In November
        2006,
        the management fees we received pursuant to our Joint Venture increased from
        $25,000 per month to $55,000 per month. Revenues increased $90,000 or 120%
        for
        the three months ended March 31, 2007, compared to the three months ended
        March
        31, 2006, which increase was due solely to the $30,000 monthly increase in
        the
        management fees we receive from the Joint Venture.
 
 We
        have
        not generated any revenues to date through the sale of oil and/or
        gas.
 
 We
        had
        total expenses of $474,093 for the three months ended March 31, 2007, compared
        to total expenses for the three months ended March 31, 2006, of $394,189,
        which
        represented an increase in total expenses from the prior period of $79,904
        or
        20.3%.
 
 Total
        expenses for the three months ended March 31, 2007, included $83,643 of
        salaries; $202,388 of professional and consulting fees, including amounts
        paid
        to our legal counsel and accountants in connection with the preparation and
        filing of our annual report on Form 10-KSB, and certain warrants and shares
        granted for professional services during the three months ended March 31,
        2007
        including 400,000 shares of common stock issued to Business Standard in
        connection with the Business Standard Consulting Agreement, described above,
        465,000 shares of common stock issued to our officers and Directors in
        compensation for services rendered, and various other shares of common stock
        issued to consultants for services rendered (as described below under
“Unregistered Sales of Equity Securities”); $12,385 in rent and occupancy; $82
        of depreciation and amortization; $1,499 of finance charges and interest,
        attributable to interest paid on the advances we received from BP and other
        loans; and $174,096 of marketing and other expenses, including marketing
        and
        advertising in connection with road shows, various general and administration
        expenses relating to the day to day operations of the Company, travel and
        hotel
        expenses in connection with the research on potential business acquisitions,
        and
        the value of shares of common stock issued for investor relations services
        rendered.
  
 -21-
 The
        $83,643 of salaries for the three months ended March 31, 2007, included
        approximately $18,060 which was attributable to the our Chief Financial Officer,
        Elena Pochapski, which has been paid in full; $45,000 attributable to the
        salary
        of our Chief Executive Officer, David Zaikin, which amount was accrued; and
        certain other amounts which were paid to various other officers, Directors,
        employees and consultants.
  The
        main
        items leading to the increase in total expenses for the three months ended
        March
        31, 2007, compared to the three months ended March 31, 2006, were an increase
        of
        $50,332 or 151% in salaries, an increase of $46,672 or 30% in professional
        and
        consulting fees and a $2,648 or 27.2% increase in rent and occupancy. The
        increase in salaries is mainly attributable to the salary of David Zaikin,
        who
        previously agreed during the 2006 fiscal year, including the three months
        ended
        March 31, 2006, to not accrue salary, but who since decided as of January
        30,
        2007, to once again accrue salary from the Company .
 
 Certain
        other expenses were less during the three months ended March 31, 2007, compared
        to the three months ended March 31, 2006, including marketing and other
        expenses, which decreased by $17,395 or 9.1% from the prior period and finance
        charges and interest which decreased by $2,349 or 61% from the prior period.
 
 We
        had a
        net loss of $309,093 for the three months ended March 31, 2007, compared
        to a
        net loss of $319,189 for the three months ended March 31, 2006, a decrease
        in
        net loss of $10,096 or 3.2% from the prior period. The decrease in net loss
        was
        mainly attributable to the $90,000 or 120% increase in management fees offset
        by
        the $79,904 or 20.3% increase in total expenses, namely the increases in
        professional and consulting fees and salaries, described above, for the three
        months ended March 31, 2007, compared to the three months ended March 31,
        2006.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  We
        had
        current assets of $235,201 as of March 31, 2007, which included cash of $8,920;
        management fee receivable of $55,000, which represented amounts owed to us
        by
        ZNG, Ltd. in management fees, which amount has been paid to date; and prepaid
        expenses and other of $171,281. This represented an increase in current assets
        of $118,494 or 101%, from $116,707 of current assets as of December 31,
        2006.
 
 We
        had
        total assets of $2,937,690 as of March 31, 2007, which included current assets
        of $235,201 and non-current assets of $2,702,489. 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 $2,489
        of
        property and equipment, net.
 
 We
        had
        total liabilities of $946,276 as of March 31, 2007, which were solely current
        liabilities and which included $322,357 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 March 31, 2007; $214,108
        of
        accounts payable to Baltic in connection with the $29,000 loan advanced to
        the
        Company from Baltic, as described above under "Description of Business" and
        certain other expenses owed to Baltic; $357,698 of accounts payable to others
        for advisory and professional services rendered; and $357,698 of accrued
        payroll, which included $157,500 payable to our Chief Executive Officer,
        David
        Zaikin which included $112,500 which was owed to Mr. Zaikin for services
        rendered prior to September 2005, at which time he agreed to stop accruing
        salary until January 2007, when he provided us notice of his intent to once
        again begin accruing salary until such time as we have sufficient funds to
        pay
        such accrued salary, $90,285 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 $711,075 and a total pre development and development
        stage accumulated deficit of $5,977,448 as of March 31, 2007.
 
 Because
        our cumulative losses associated with the operations of ZNG exceeded our
        investment as of the date of the Joint Venture, ZNG is carried on our balance
        sheet at $-0- as of March 31, 2007. Our investment in ZNG will exceed $-0-
        at
        such time as ZNG has cumulative earnings sufficient to repay all loans to
        Baltic
        as provided in the Joint Venture, if ever.
   -22-
 We
        had
        $9,518 of net cash flows for operating activities for the three months ended
        March 31, 2007, which included $1,367,398 of common stock and warrants issued
        for professional services and salaries offset by $937,854 of accounts payable
        and accrued expenses, $82 of depreciation and amortization, $309,093 of net
        loss
        and $111,015 of prepaid expenses and other assets.
 
 As
        of
        March 31, 2007, ZNG had received $9,289,219 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 March 31, 2007 was $962,521, including
        accrued interest on the previous loan; however, we are currently in a dispute
        with Baltic over whether the interest on the New Loan compounds or is only
        payable upon maturity and as such, the amount of accrued interest on the
        loan is
        subject to change.
 
 Additionally,
        in July 2006, we entered into a Deed of Agreement, whereby Baltic agreed
        (funding permitting) to loan ZNG approximately $12,000,000 to be used on
        seismic
        studies, drilling and a work program, which funds have not been loaned to
        date.
 
 Under
        the
        Joint Venture, we will receive $55,000 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, we have no oil and gas operations separate
        from the Joint Venture, which has not started production and is not currently
        generating any cash from production, which makes
        it
        difficult for us to pay our maturing obligations. However, during the three
        months ended March 31, 2007, we did purchase KNG, and hope to be awarded
        oil and
        gas exploration licenses in connection with KNG during 2007. Moving forward,
        we
        believe that in the long run a number of trends will favorably affect our
        liquidity. These trends include the steady trend of economic growth in Russia
        in
        the recent years which is improving the liquidity of our potential customers,
        and may favorably impact our debt management and the increasing overall credit
        rating in Russia, which we hope will lead to increased foreign investment
        in
        Russian companies and which will benefit us as well.
  We
        are
        taking steps in an attempt to raise equity capital and/or to borrow additional
        funds. There can be no assurance that any new capital will be available to
        us or
        that adequate funds for our operations, whether from our financial markets,
        or
        other arrangements will be available when needed or on terms satisfactory
        to us,
        if at all. We have no commitments from officers, directors or affiliates
        to
        provide funding. Our failure to obtain adequate financing may require us
        to
        delay, curtail or scale back some or all of our operations. Additionally,
        any
        additional financing may involve dilution to our then-existing
        shareholders.
  -23-
  **RISK
        FACTORS**
 
 Our
        securities are highly speculative and should only be purchased by persons
        who
        can afford to lose their entire investment in our Company. If any of the
        following risks actually occur, our business and financial results could
        be
        negatively affected to a significant extent. The Company's business is subject
        to many risk factors, including the following:
 
 **RISK
        OF CONTINUING OUR BUSINESS PLAN WITHOUT ADDITIONAL**  **FINANCING.**
 
 We
        depend
        to a great degree on the ability to attract external financing in order to
        conduct future exploratory and development activities. The Company believes
        it
        can satisfy its cash requirements during the next twelve months through funding
        provided by existing stockholders and with amounts received from the Joint
        Venture (described above), including $55,000 a month which the Company is
        to
        receive from ZNG, Ltd., pursuant to the Joint Venture. Additionally, ZNG
        has
        received approximately $1,110,624 from BP pursuant to a prior loan and another
        $7,216,074 pursuant to the New Loan, which had a total outstanding balance,
        including the assumed balance of the prior loan and accrued and unpaid interest
        on the prior loan and the New Loan as of April 27, 2007, of $9,289,953, 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 $55,000 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.
 
  -24-
   **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 $309,093 for the three months ended
        March
        31, 2007 and a total accumulated deficit of $5,977,448 as of March 31, 2007.
        These factors among others indicate that the Company may be unable to continue
        as a going concern, particularly in the event that it cannot generate sufficient
        cash flow to conduct its operations and/or obtain additional sources of capital
        and financing.
 
 **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 March 31,
        2007,
        was $5,527,663, and our total cumulative deficit was $5,977,448 which included
        $449,785 of pre-development stage deficit. We had $357,698 in accrued and
        unpaid
        salaries and a working capital deficit of $711,075 as of March 31, 2007.
        The
        Company is currently being funded by existing shareholders and the $55,000
        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, nor have we 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.
  -25-
  
 **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.
 
  -26-
  **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.**
 
 Risks
        from these factors are intertwined with the risky nature inherent in the
        oil and
        gas industry. Projections on future revenues as well as costs and required
        capital expenditures are based on estimates. Business statistical analysis
        is
        used in projection of drilling success ratios, average production costs,
        world
        oil price fluctuations and their correspondence to Russian domestic market.
        If
        ZNG’s or KNG’s projections or estimates are wrong or our statistical analysis
        faulty, ZNG's or KNG’s revenues may be adversely affected which could prevent
        ZNG and/or KNG from executing their business strategy. As an investor, if
        this
        happens your securities in our Company could be adversely affected and you
        could
        lose your investment in our Company due to the fact that our only current
        oil
        and gas operations are through our 50% ownership of ZNG, Ltd., which in turn
        owns 100% of ZNG and through KNG, which has applied for, but not been awarded
        any licenses to date.
 
 **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
        new
        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.
  **AS
        THERE IS CURRENTLY ONLY A LIMITED MARKET FOR OUR COMMON STOCK, THE MARKET
        FOR
        OUR COMMON STOCK PRICE MAY 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.
  -27-
  
 **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.
  -28-
  **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.
      
  -29-
  **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**
 
 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); which amount has not been paid to 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
        January 25, 2007, our Board of Directors approved the issuance of an aggregate
        of 465,000 shares of our restricted common stock to our current officers
        and
        Directors in consideration for services rendered to the Company during the
        year
        ended December 31, 2006, as follows:
 
 o
              350,000
                  shares of our restricted common stock to David Zaikin, our Chief
                  Executive
                  Officer and Director 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;o
              50,000
                  shares of our restricted common stock to Elena Pochapski, our Chief
                  Financial Officer and Director as a bonus for her services rendered
                  during
                  the year ended December 31, 2006;o
              20,000
                  shares of our restricted common stock to Timothy Peara, our Director,
                  as a
                  bonus for his services rendered during the year ended December
                  31,
                  2006;o
              25,000
                  shares of our restricted common stock to Oleg Zhuravlev, our Director,
                  as
                  a bonus for his services rendered during the year ended December
                  31,
                  2006;o
              10,000
                  shares of our restricted common stock to Vladimir Eret, our Director,
                  as a
                  bonus for his services rendered during the year ended December
                  31, 2006;
                  and
  -30-
  
 o
              10,000
                  shares of our restricted common stock to Sergei Potapov, our Director,
                  as
                  a bonus for his services rendered during the year ended December
                  31,
                  2006.
 
 We
        claim
        an exemption from registration afforded by Section 4(2) of the Securities
        Act of
        1933 since the foregoing issuances of shares did not involve a public offering,
        the recipients took the shares for investment and we took steps to restrict
        the
        transfer of the shares. No underwriters or agents were involved in the foregoing
        issuances and no underwriting discounts or commissions were paid by
        us.
 
 On
        January 25, 2007, in connection with our ratification of the Business Standard
        Consulting Agreement, we approved the issuance of an aggregate of 400,000
        shares
        of our restricted common stock to Business Standard in consideration for
        Business Standard’s entry into the Consulting Agreement and in consideration for
        Business Standard’s services rendered to us in connection with our acquisition
        of Kondaneftegaz. We claim an exemption from registration afforded by Section
        4(2) of the Securities Act of 1933 since the foregoing issuance of shares
        did
        not involve a public offering, the recipient took the shares for investment
        and
        we took steps to restrict the transfer of the shares. No underwriters or
        agents
        were involved in the foregoing issuance and no underwriting discounts or
        commissions were paid by us.
 
 Also
        on
        January 25, 2007, we approved the issuance of 20,000 shares of our restricted
        common stock to Lyudmila Shirko, in consideration for services rendered to
        us in
        connection with our operations during the year ended December 31, 2006. We
        claim
        an exemption from registration afforded by Section 4(2) of the Securities
        Act of
        1933 since the foregoing issuance of shares did not involve a public offering,
        the recipient took the shares for investment and we took steps to restrict
        the
        transfer of the shares. No underwriters or agents were involved in the foregoing
        issuance and no underwriting discounts or commissions were paid by
        us.
  On
        January 31, 2007, we issued 20,000 shares of our restricted common stock
        to
        Investor Relations Group Inc., in consideration for investor relations services
        rendered.   We claim an exemption from registration afforded by Section
        4(2) of the Securities Act of 1933 since the foregoing issuance of shares
        did
        not involve a public offering, the recipient took the shares for investment
        and
        we took steps to restrict the transfer of the shares. No underwriters or
        agents
        were involved in the foregoing issuance and no underwriting discounts or
        commissions were paid by us.
 
 On
        February 15, 2007, the Board of Directors agreed to issue 4,000 restricted
        shares of the Company's common stock to Ann L. Stephenson Group, in
        consideration of investor relations services rendered to the Company in January
        2007, and 3,000 restricted shares of common stock to Friedland Capital, in
        connection with the Company's participation at Friedland's New York investment
        conference in 2007.   We claim an exemption from registration afforded by
        Section 4(2) of the Securities Act of 1933 since the foregoing issuances
        of
        shares did not involve a public offering, the recipients took the shares
        for
        investment and we took steps to restrict the transfer of the shares. No
        underwriters or agents were involved in the foregoing issuances and no
        underwriting discounts or commissions were paid by us.
 
 In
        March
        2007, we issued 10,000 shares of our restricted common stock to Investor
        Relations Group Inc., in consideration for investor relations services rendered.
          We claim an exemption from registration afforded by Section 4(2) of the
        Securities Act of 1933 since the foregoing issuance of shares did not involve
        a
        public offering, the recipient took the shares for investment and we took
        steps
        to restrict the transfer of the shares. No underwriters or agents were involved
        in the foregoing issuance and no underwriting discounts or commissions were
        paid
        by us.
 
 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.
        We
        claim an exemption from registration afforded by Section 4(2) of the Securities
        Act of 1933 since the foregoing issuance of shares did not involve a public
        offering, the recipient took the shares for investment and we took steps
        to
        restrict the transfer of the shares. No underwriters or agents were involved
        in
        the foregoing issuance and no underwriting discounts or commissions were
        paid by
        us.
  -31-
  
 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 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
        April
        2007, we issued 35,000 restricted shares of common stock to Uptick Capital
        in
        connection with the agreement with Uptick Capital entered into in January
        2007
        (as described above) for services rendered during the months of February,
        March,
        April and half of May 2007. We claim an exemption from registration afforded
        by
        Section 4(2) of the Securities Act of 1933 since the foregoing issuance of
        shares did not involve a public offering, the recipient took the shares for
        investment and we took steps to restrict the transfer of the shares. No
        underwriters or agents were involved in the foregoing issuance and no
        underwriting discounts or commissions were paid by us.
 
 On
        May 1,
        2007 at 9:00 a.m., Tim Peara, our Director, exercised 50,000 of the options
        he
        held to purchase shares of our common stock at an exercise price of $0.30
        per
        share, which options would have expired on May 1, 2007 at 5:00 p.m. if not
        previously exercised by Mr. Peara. Mr. Peara used the cashless exercise
        provision of the options and will receive 41,925 shares of our common stock
        in
        connection with the exercise of the options, based on the fair market value
        of
        the common stock on the date he exercised of $1.86. The 41,925 shares of
        common
        stock had not been issued as of May 10, 2007, and as such have not been included
        in the number of issued and outstanding shares disclosed throughout this
        report.
        We will claim an exemption from registration afforded by Section 4(2) of
        the
        Securities Act of 1933 since the foregoing issuance of shares will not involve
        a
        public offering, the recipient will take the shares for investment and we
        will
        take steps to restrict the transfer of the shares. No underwriters or agents
        will be involved in the foregoing issuance and no underwriting discounts
        or
        commissions will be paid by us.
 
 **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES**
 
 None.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 None.
 
 **ITEM
        5. OTHER INFORMATION**
 
 None.
 
 **ITEM
        6. EXHIBITS 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, 2005
  -32-
 10.5(1)
                Pledge
                    and Security Agreement between Siberian Energy Group, Inc. and
                    Baltic
                    Petroleum Limited dated April 28, 200510.6(2)
                Option
                    Agreement with Baltic Petroleum Limited dated April 28,
                    200510.7(2)
                License
                    Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                    dated
                    April 28, 200510.8(2)
                Loan
                    Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited
                    dated
                    April 28, 200510.9
                    (2)
                Guarantee
                    by Siberian Energy Group, Inc. dated April 28, 200510.10
                    (2)
                Pledge
                    and Security Agreement between Siberian Energy Group, Inc. and
                    Baltic
                    Petroleum Limited dated April 28, 200510.11
                    (3)
                Clarification
                    to the Contract of Purchase and Sale of the Share in Charter
                    Capital of
                    LLC "Zauralneftegaz" dated 15 May 200410.12
                    (3)
                Agreement
                    with Business - Standard (translated from Russian
                    version)10.13
                    (3)
                Supplementary
                    Agreement to Business - Standard Agreement (translated from Russian
                    version)10.14
                    (3)
                Supplementary
                    Agreement No. 2 to Business - Standard Agreement (translated
                    from Russian
                    version)10.15
                    (3)
                Deed
                    of Amendment between ZNG and BP10.16
                       (3)
                Deed
                    of Amendment between the Company and BP10.17
                    (4)
                Joint
                    Venture Shareholders' Agreement with Baltic Petroleum (E&P)Limited and
                    Zauralneftegaz Limited dated October 14, 200510.18
                    (5)
                Amendment
                    to the Employment Agreement Dated August 1, 2003, with Elena
                    Pochapski10.19
                    (5)
                Form
                    of Waiver Agreement10.20(6)
                Loan
                    Agreement between OOO Zauralneftegaz and Caspian Finance
                    Limited10.21(6)
                Deed
                    of Novation between Baltic Petroleum Limited, Caspian Finance
                    Limited and
                    OOO Zauralneftegaz10.22(6)
                Deed
                    of Release10.23(6)
                Release
                    of Pledge10.24(6)
                Guarantee10.25(6)
                Debenture10.26(6)
                Agreement
                    for the Pledge of the Participatory Interest in OOO Zauralneftegaz
                    (Russian translation removed)10.27(6)
                Sale
                    and Purchase Agreement10.28(8)
                Option
                    Agreement with Key Brokerage
  -33-
 10.29(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*
                Amendment
                    No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
                    Pochapski31.1*
                Certificate
                    of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
                    Act of 200231.2*
                Certificate
                    of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
                    Act of 200232.1*
                Certificate
                    of the Chief Executive Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.2*
                Certificate
                    of the Chief Financial Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200299.1(7)
                Glossary
  *
        Filed
        herein.
 
 (1)
        Filed
        as Exhibit 10.1, 10.2, 10.3, 10.4 and 10.5 to the Company's Form 8-K filed
        with
        the Commission on May 20, 2005, and incorporated herein by
        reference.
 
 (2)
        Filed
        as Exhibits to the Company's Form 8-K filed with the Commission on May 20,
        2005,
        and incorporated herein by reference.
 
 (3)
        Filed
        as Exhibits to the Company's Report on Form 10-QSB, filed with the Commission
        on
        August 22, 2005, and incorporated herein by reference.
 
 (4)
        Filed
        as Exhibits to the Company's Report on Form 8-K, filed with the Commission
        on
        October 28, 2005, and incorporated herein by reference.
 
 (5)
        Filed
        as Exhibits to our Report on Form 10-QSB for the period ending September
        31,
        2005, which was filed with the Commission on November 21, 2005, and is
        incorporated herein by reference.
 
 (6)
        Filed
        as Exhibits to our Report on Form 8-K, filed with the Commission on December
        2,
        2005, and incorporated herein by reference.
 
 (7)
        Filed
        as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December
        31,
        2005, and incorporated herein by reference.
 
 (8)
        Filed
        as Exhibits to our Report on Form 8-K, filed with the Commission on September
        19, 2006, and incorporated herein by reference.
 
 (9)
        Filed
        as an Exhibit to our Report on Form 10-QSB, filed with the Commission on
        November 14, 2006, and incorporated herein by reference.
  (10)
        Filed as an Exhibit to our Form 8-K filed with the Commission on February
        20,
        2007, and incorporated herein by reference.
 
 (11)
        Filed as Exhibits to our Report on Form 10-KSB filed with the Commission
        on
        February 2, 2007, and incorporated herein by reference.
 
 -34-
 **b)
        Reports on Form 8-K:**
 
 We
        filed
        the following reports on Form 8-K during the period covered by this
        report:
 
 o
              February
                  20, 2007 - To report that the Company’s Board of Directors agreed to seek
                  a listing on the Frankfurt Exchange.o
              February
                  20, 2007 - To report the Company’s entry into a Consulting Agreement with
                  Business Standard, and the issuance of various shares of restricted
                  common
                  stock to officers, directors and consultants of the
                  Company.
 
  -35-
  **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:
                  May 15, 2007
              By:*/s/
                  David Zaikin***David
                  ZaikinChief
                  Executive Officer
 
 
  -36-