UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

_________________________

FORM 10-QSB

Amendment No 3

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005
	OR
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ______________________

Commission file number 000-28345

Big Sky Energy Corporation

  (Exact name of small business issuer as specified in its charter)

NEVADA	72-1381282
(Jurisdiction of incorporation)	(I.R.S. Employer Identification No.)
Suite 750, 440 – 2nd Avenue SW Calgary, Alberta, Canada T2P 5E9
(Address of principal place of business or intended principal place of business)

(403) 234-8282
(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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    Ö       No          

The number of outstanding common shares, with $0.001 par value, of the registrant at June 30, 2005 was 98,458,565 and 97,963,400 on November 14, 2005.

Transitional Small Business Disclosure Format (check one): Yes           No     Ö     

Big Sky Energy Corporation

INDEX TO THE FORM 10-QSB

For the quarterly period ended June 30, 2005

			PAGE
PART I	FINANCIAL INFORMATION		3
	ITEM 1.	FINANCIAL STATEMENTS (unaudited) (amended and restated)	4
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Operations and Deficit	5
		Condensed Consolidated Statements of Stockholders’ Equity	6
		Condensed Consolidated Statements of Cash Flows	10
		Notes to the Condensed Consolidated Financial Statements	12
	ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
	ITEM 3.	CONTROLS AND PROCEDURES	39
Part II	OTHER INFORMATION		40
	ITEM 1.	LEGAL PROCEEDINGS	40
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	41
	ITEM 5.	OTHER INFORMATION	41
	ITEM 6.	EXHIBITS	41
		SIGNATURES	44

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Big Sky Energy Corporation

Almaty, Kazakhstan

We have reviewed the condensed consolidated balance sheet of Big Sky Energy Corporation as of June 30, 2005, and the related condensed consolidated statements of operations and deficit, stockholders’ equity and cash flows for the three-month period ended June 30, 2005, included in the accompanying Securities and Exchange Commission Form 10-QSB/A3 for the period ended June 30, 2005.  We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  These interim financial statements are the responsibility of the Company’s management.

A review of interim financial information consists principally of applying analytical procedures 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 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 reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

BDO Kazakhstanaudit, LLP

Almaty, Kazakhstan

November 1, 2005

PART I

Big Sky Energy Corporation (“Big Sky” or the “Company”) is filing this Amendment No. 3 to its Annual Report on Form 10-QSB/A for the year ended June 30, 2005 (this “Amendment”) to reflect the amendment and restatement of its Consolidated Financial Statements for the year ended December 31, 2004 and the interim period ended June 30, 2005 to reflect adjustments determined to be necessary as a result of an internal investigation of the treatment of certain portions of an farm-out agreement entered into by one of its subsidiaries.

The Quarterly Report on Form 10-QSB for the period ended June 30, 2005 was initially filed with the Securities and Exchange Commission on August 22, 2005 and Amendment No. 1 thereto was filed on August 29, 2005. This Amendment No. 3 on Form 10-QSB/A is being filed to reflect restatements of the following financial statements:

•

Consolidated balance sheets as at June 30, 2005 and December 31, 2004;

•

Consolidated statements of cash flows for the period ended June 30, 2005;

•

and to make certain conforming changes.

Big Sky Energy Corporation is filing this Amendment No. 3 to its Form 10-QSB of June 30, 2005 - for the following reason:

Subsequent to the issuance of the Company’s unaudited June, 30 2005 financial statements, the Company’s management determined that its belief that no obligation would exist to repay ABT Ltd. for costs they incurred or advanced to KoZhan LLP in relation to the Morskoe oil field under the farm-out agreement signed October 12, 2004 (see Note 10), should Ministry approval not be received on the transfer of 45% of the subsurface rights of the Morskoe licence to ABT Ltd., was incorrect, and that in fact an obligation would exist to repay ABT Ltd. for all costs incurred or advanced by them relating to the Morskoe oil field should Ministry approval not be received.  As a result, the “Short-Term Interest Free Loan From ABT Ltd” liability account, the “Oil and Gas Properties” asset account and the “Other Current Asset” account were understated in the amounts of $1,174,423, $1,088,263, and $86,160 respectively as previously reported on the Consolidated Balance Sheets as at December 31, 2004 included in the June 30, 2005 Form 10-QSB. Also, the “Short-Term Interest Free Loan from ABT Ltd” liability account and the “Oil and Gas Properties” asset account were understated in the amount of $1,088,263 as previously reported on the Consolidated Balance Sheets as at June 30, 2005 included in the June 30, 2005 Form 10-QSB. The error described above also resulted in an understatement in cash flow from financing activities in the amount of $334,000 and an overstatement in cash flow from investing activities in the amount of $334,000 in the Cumulative Period from Date of Inception column on the Consolidated Statements of Cash Flows. The Consolidated Balance Sheets as at June 30, 2005 and December 31, 2004 and the Consolidated Statements of Cash Flows in the Cumulative Period from Date of Inception February 1, 2000 to June 30, 2005 column has been restated to correct these previous misstatements.  This restatement does not impact on earnings or equity.

The Form 10-QSB as filed on June 30, 2005 was not reviewed by either our former or current independent registered public accounting firms.  This amendment has been submitted for review to our current independent registered public accounting firm and review letter evidencing such review is included herewith.

3

ITEM 1.  FINANCIAL STATEMENTS

BIG SKY ENERGY CORPORATION
(a Development Stage Enterprise)
Condensed Consolidated Balance Sheets (unaudited)
(Expressed in United States Dollars)
			June 30, 2005 (Restated, see Note 26)	December 31, 2004 (Restated, see Note 26)
ASSETS
CURRENT
	Cash and cash equivalents		5,827,209	983,734
	Restricted cash		76,040	63,040
	Advances to related parties		111,325	21,351
	Interest and other receivables		154,028	142,865
	Other current asset (Note 6)			86,160
	Prepaid expenses		1,830,905	484,983
			7,999,507	1,782,133
CAPITAL ASSETS
	Long-term advances		-	320,885
	Advances to related parties		-	24,439
	Property and equipment (Note 7)		446,013	384,077
	Oil and gas properties (Notes 5, 8)		27,010,224	23,246,345
			$35,455,744	$25,757,879
LIABILITIES
CURRENT
	Accounts payable and accrued liabilities (Notes 9, 15)		1,086,977	761,158
	Short-term interest free loan from ABT LTD (Note 10)		1,426,582	1,340,423
	Obligations for social sphere development (Note 11)		1,401,000	1,401,000
	Obligations for professional training of personnel (Note 12)		289,200	289,200
	Obligations for acquisition of the right for geological    information use (Note 13)		758,265	758,265
	Due to related parties (Note 22)		25,565	25,590
			4,987,589	4,575,636
LONG-TERM
	Obligations for social sphere development (Note 11)		1,346,187	1,255,325
	Obligations for professional training of personnel    (Note 12)		324,692	304,641
	Obligations for historical cost reimbursement (Note 14)		1,058,866	981,674
	Asset retirement obligation (Note 16)		467,607	435,868
	Deferred income tax liability (Note 17)		4,806,906	4,806,906
			12,991,847	12,360,050
COMMITMENTS AND CONTINGENCIES (NOTE 24)
STOCKHOLDERS' EQUITY
	Common stock (Note 18)		156,878	126,538
		$0.001 par value, shares authorized: 150,000,000;
		shares issued and outstanding: 98,458,565 (December
		31, 2004 – 68,119,460)
	Additional paid in capital		61,720,926	43,484,352
	Deferred compensation		(4,341,242)	(27,926)
	Deficit accumulated during development stage		(35,072,665)	(30,185,135)
			22,463,897	13,397,829
			$35,455,744	$25,757,879

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

BIG SKY ENERGY CORPORATION
(a Development Stage Enterprise)
Condensed Consolidated Statements of Operations & Deficit (unaudited)
(Expressed in United States Dollars)
									Cumulative
									Period From
									Inception
			Three Months Ended			Six Months Ended			February 1,
			June 30,			June 30,			2000 to
			2005	2004		2005	2004		June 30, 2005
			$	$		$	$		$
GENERAL AND ADMINISTRATIVE EXPENSES
	(including non-cash compensation (recovery) of $493,100 for the three months ended June 30, 2005 (2004 – ($177,541)) and $873,150 for the six months ended June 30, 2005 (2004 - $14,179)		(2,563,352)	(817,914)		(4,652,301)	(1,584,446)		(21,134,820)
AMORTIZATION			(21,175)	(63,293)		(47,111)	(93,526)		(3,576,998)
ACCRETION			(117,910)	(36,153)		(219,843)	(36,153)		(467,231)
			(2,702,437)	(917,360)		(4,919,255)	(1,714,125)		(25,179,049)
FOREIGN EXCHANGE GAIN (LOSS)			(220,205)	(7.093)		(55,211)	(7,093)		(282,149)
INTEREST INCOME			70,588	413		86,936	2,235		502,549
LOSS FROM CONTINUING OPERATIONS			(2,852,054)	(924,040)		(4,887,530)	(1,718,983)		(24,958,649)
DISCONTINUED OPERATIONS
IMPAIRMENT OF ASSETS									(8,628,623)
LOSS IN BIG SKY NETWORK CANADA LTD.			--	--		--	--		(181,471)
LOSS IN SHEKOU JOINT VENTURE			--	--		--	--		(609,607)
LOSS IN CHENGDU JOINT VENTURE			--	--		--	--		(1,141,793)
GAIN ON SALE OF SHEKOU			--	--		--	--		125,798
GAIN ON SALE OF BIG SKY NETWORK CANADA LTD.			--	--		--	--		179,935
INCOME (LOSS) ON DISCONTINUED OPERATIONS			--	(13,315)		--	(25,331)		141,745
NET LOSS			(2,852,054)	(937,355)		(4,887,530)	(1,744,314)		(35,072,665)
DEFICIT, BEGINNING OF PERIOD			(32,220,611)	(24,200,046)		(30,185,135)	(23,393,087)		-
DEFICIT, END OF PERIOD		$	(35,072,665)	$(25,137,401)	$	(35,072,665)	$(25,137,401)	$	(35,072,665)
LOSS PER SHARE
	Basic and diluted	$	(0.03)	$            (0.02)	$	(0.05)	$           (0.04)
SHARES USED IN COMPUTATION
	Basic and diluted		98,237,202	41,615,500		88,604,545	43,234,825

5

BIG SKY ENERGY CORPORATION (a Development Stage Enterprise) Condensed Consolidated Statements of Stockholders’ Equity (unaudited) (Expressed in United States Dollars)
						Deficit
						Accumulated
				Additional		during the	Total
		Common Stock		Paid-in	Deferred	Development	Stockholders’
		Shares	Amount	Capital	Compensation	Stage	Equity
			$	$	$	$	$
Balance,		1,509,850	59,971	-	-	-	59,971
	February 1, 2000
Issue of common stock
	for the outstanding
	Shares of China
	Broadband (BVI)
	Corp.	13,500,000	13,500	696,529	-	-	710,029
Stock issued pursuant to
	private placement
	Agreements at $0.20
	per share	500,000	500	98,835	-	-	99,335
Stock issued pursuant to
	private placement
	Agreements at $1.00
	per share	1,530,000	1,530	1,518,289	-	-	1,519,819
Stock issued pursuant to
	private placement
	agreement at $7.50 per
	Share	1,301,667	1,302	9,696,236	-	-	9,697,538
Acquisition of the shares
	of Big Sky Network
	Canada Ltd.	1,133,000	1,133	8,496,367	-	-	8,497,500
Issuance of warrants		-	-	44,472	-	-	44,472
Non-cash compensation		-	-	15,235	-	-	15,235
Deferred compensation		-	-	65,381	(65,381)	-	-
Amortization of deferred
	compensation	-	-	-	7,386	-	7,386
Net loss		-	-	-	-	(3,597,180)	(3,597,180)
Balance,
	December 31, 2000	19,474,517	$    77,936	$ 20,631,344	$      (57,995)	$(3,597,180)	$17,054,105
Deferred compensation		-	-	1,030,708	(1,030,708)	-	-

6

Issuance of warrants		-	-	277,775	-	-	277,775
Amortization of deferred
	compensation	-	-	-	369,037	-	369,037
Net loss		-	-	-	-	(14,074,665)	(14,074,665)
Balance,
	December 31, 2001	19,474,517	77,936	21,939,827	(719,666)	(17,671,845)	3,626,252
Amortization of deferred
	compensation	-	-	-	326,191	-	326,191
Deferred compensation		-	-	139,289	(139,289)	-	-
Alternative
	Compensation Plan	-	-	163,463	-	-	163,463
Issuance of common
	stock to settle legal
	fees	42,124	-	21,062	-	-	21,062
Stock issued pursuant to
	private placement
	agreements at $0.25
	per share	2,997,160	2,997	644,364	-	-	647,361
Net loss		-	-	-	-	(2,591,480)	(2,591,480)
Balance,
	December 31, 2002	22,513,801	80,933	22,908,005	(532,764)	(20,263,325)	2,192,849
Amortization of deferred
	compensation	-	-	-	1,541,174	-	1,541,174
Deferred compensation		-	-	2,016,920	(2,016,920)	-	-
Alternative
	Compensation Plan	682,802	683	(683)	-	-	-
Stock issued pursuant to
	private placement
	agreements at $0.25
	per share	7,900,000	7,900	1,916,232	-	-	1,924,132
Net loss						(3,129,762)	(3,129,762)
Balance,
	December 31, 2003	31,096,603	89,516	26,840,474	(1,008,510)	(23,393,087)	2,528,393
Amortization of deferred
	compensation	-	-	-	758,264	-	758,264
Deferred compensation		-	-	(46,500)	46,500	-	-

7

Stock issued pursuant to
	private placement
	agreements at $0.25
	per share		100,000	100	24,900	-	-	25,000
Stock issued pursuant to
		private placement
		agreements at $0.50
		per share	24,340,000	24,340	11,515,168	-	-	11,539,508
Stock issued pursuant to
	purchase of BSEK		8,000,000	8,000	2,280,000	-	-	2,288,000
Stock issued pursuant to
	acquisition of BSEK
	royalty interest		681,475	681	415,019	-	-	415,700
Stock issued pursuant to
	acquisition of BSEK
	minority interest		3,500,000	3,500	2,551,500	-	-	2,555,000
Options exercised			101,666	102	4,982	-	-	5,084
Options cancelled			-	-	(175,820)	175,820	-	-
Warrants exercised			299,716	299	74,629	-	-	74,928
Net loss			-	-	-	-	(6,792,048)	(6,792,048)
Balance,
	December 31, 2004		68,119,460	126,538	43,484,352	(27,926)	(30,185,135)	13,397,829
Amortization of deferred
	compensation		-	-	-	5,050	-	5,050
Deferred compensation			-	-	5,564,910	(5,564,910)	-	-
Stock issued pursuant to
	private placement
	agreements at $0.50		27,250,000	27,250	12,716,145	-	-	12,743,395
Stock issued pursuant to
	stock awards		750,000	750	374,250	-	-	375,000
Options exercised			1,700,000	1,700	83,300	-	-	85,000
Warrants Exercised			9,600	10	4,790	-	-	4,800
Net loss			-	-	-	-	(2,035,476)	(2,035,476)
Balance,
	March 31, 2005		97,829,060	156,248	62,227,747	(5,587,786)	(32,220,611)	24,575,598
Amortization of deferred
	compensation		-	-	-	493,100	-	493,100
Deferred compensation			-	-	(390,000)	390,000	-	-

8

Options exercised		150,000	150	7,350	-	-	7,500
Options cancelled				(363,444)	363,444		-
Warrants Exercised		479,505	480	239,273	-	-	239,753
Net loss		-	-	-	-	(2,852,054)	(2,852,054)
Balance,
	June 30, 2005	98,458,565	156,878	61,720,926	(4,341,242)	(35,072,665)	22,463,897

The accompanying notes are an integral part of these condensed consolidated financial statements.

9

BIG SKY ENERGY CORPORATION
(a Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows (unaudited)
(Expressed in United States Dollars)
										Cumulative
										Period From
										Date of
										Inception
				Three Months Ended			Six Months Ended			February 1,
				June 30,			June 30,			2000 to
				2005	2004		2005	2004		June 30, 2005
CASH FLOWS RELATED TO THE										(Restated,    see Note 26)
	FOLLOWING ACTIVITIES
OPERATIONS
Net loss from continuing operations			$	(2,852,054)	$   (924,040)	$	(4,887,530)	$(1,718,983)	$	(24,958,649)
Income from discontinued operations					(13,315)		-	(25,331)		(10,114,016)
Adjustment for:
	Extinguishment of debt			-	21,924			21,924		(1,422,225)
	Depreciation and amortization			21,175	63,293		47,111	93,526		3,576,998
	Accretion			117,910	36,153		219,843	36,153		467,231
	Unrealized foreign exchange gain			--	--		--	--		70,831
	Impairment of assets			--	--		--	--		8,628,623
	Loss in Big Sky Network Canada Ltd.			--	--		--	--		337,202
	Loss in Shekou joint venture			--	--		--	--		609,607
	Loss in Chengdu joint venture			--	--		--	--		1,141,793
	Gain on sale of Big Sky Network Canada Ltd.			--	--		--	--		(179,935)
	Gain on sale of Shekou joint venture			--	--		--	--		(125,798)
	Non-cash stock compensation (Note 19)			493,100	(177,541)		873,050	14,179		4,098,371
	Issuance of Common Shares for settlement
		of legal fees		--	--		--	--		21,062
Changes in operating assets and liabilities, net of the        effect of acquisitions
	Restricted cash			(13,000)	--		(13,000)	--		(76,040)
	Interest and other receivable			(122,223)	(94,113)		17,915	(117,172)		(129,413)
	Prepaid expenses			(784,263)	(97,933)		(1,323,893)	(72,635)		(1,803,202)
	Accounts payable and accrued liabilities			(655,257)	556,222		(762,442)	343,847		(929,239)
				(3,794,612)	(629,350)		(5,828,846)	(1,424,491)		(20,786,799)
INVESTING
	Oil and gas properties			(1,803,957)	(408,699)		(2,209,994)	(453,784)		(3,601,460)
	Fixed asset additions			(74,558)	(121,117)		(108,135)	(202,310)		(1,157,026)
	Advances paid			--	--		--	--		(320,885)
	Advances (repayments) to related parties			(58,954)	1,357		(89,973)	(1,108)		(1,426,729)
	Proceeds from sale of Shekou joint
		venture (net of costs)		--	--		--	--		2,029,200
	Investment in Chengdu joint venture			--	--		--	--		(1,935,590)
	Acquisition of Big Sky Network Canada Ltd.			--	--		--	--		(2,395,828)
	Acquisition of Big Sky Energy Kazakhstan Ltd.			--	--			339,353		339,353

10

	Acquisition of Vector Energy West LLP, net of      cash acquired			(4,506,502)			(4,506,502)		(4,506,502)
	Changes in non-cash working capital:
	Other current asset (Note 6)		--	--		--	--		(86,160)
	Increase in short-term interest free loan to ABT		--	--		--	--		840,423
			(1,937,469)	(5,034,961)		(2,408,102)	(4,824,351)		(12,221,204)
FINANCING
	Issue of common stock for cash		247,253	6,851,676		13,962,029	6,880,009		40,853,989
	Stock issuance costs			(215,512)		(881,606)	(215,512)		(1,698,777)
	Advances from ABT Ltd. (Note 10)		-	--		-	--		500,000
	Repayment of advances for share subscriptions			(250,000)			(250,000)		(250,000)
	Repayment of debt			(570,000)			(570,000)		(570,000)
			247,253	5,816,164		13,080,423	5,844,497		38,835,212
NET DECREASE (INCREASE) IN CASH
	AND CASH EQUIVALANTS		(5,484,828)	151,853		4,843,475	(404,345)		5,827,209
CASH AND CASH EQUIVALENTS,
	BEGINNING OF PERIOD		11,312,037	512,253		983,734	1,068,451		-
CASH AND CASH EQUIVALENTS,
	END OF PERIOD	$	5,827,209	664,106	$	5,827,209	664,106	$	5,827,209

The accompanying notes are an integral part of these condensed consolidated financial statements.

11

BIG SKY ENERGY CORPORATION

(a Development Stage Enterprise)

Notes to the Condensed Consolidated Financial Statements (unaudited)

(Expressed in United States Dollars)

1.

BASIS OF PRESENTATION

The condensed consolidated financial statements included herein have been prepared by Big Sky Energy Corporation  (the “Corporation”) without audit in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the United States Securities and Exchange Commission, except for the December 31, 2004 Balance Sheet which has been derived from the audited financial statements filed with the Corporation’s Annual Report on Form 10-KSB.  These financial statements are condensed and do not include all disclosures required for annual financial statements and accordingly, these financial statements and the notes thereto should be read in conjunction with the Corporation’s Annual Report on Form 10-KSB for the year ended December 31, 2004.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, considered necessary to present fairly the Corporation’s condensed financial position at June 30, 2005 and the condensed consolidated results of operations and cash flows for the three-month and six month periods ended June 30, 2005 and 2004.

2.

NATURE OF OPERATIONS

Late in 2003, the Corporation began investing in oil and gas assets in preparation for transition from its Internet service business in China, a transition which concluded December 9, 2004 with the sale of Big Sky Network Canada Ltd. to Big Sky Energy Canada Ltd., to become an oil and gas exploration and production company.  During 2004, the Corporation acquired KoZhaN LLP (“KoZhaN”) and Vector Energy West LLP (“Vector”).  By acquiring these companies the Corporation gained a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan, located close to infrastructure and transportation..  In the fourth quarter of 2004, the Corporation spudded its first well, Morskoe # 10. The drilling completion and the testing of Morskoe #10 will be followed by the drilling or working over of additional wells offsetting Morskoe #10.

The Corporation is also intent on farming out selected high risk exploration targets.  Initially, the Corporation focused its partnership initiatives on China’s major national oil and gas production and service companies and since has expanded its farm-out discussions to include established multinational energy companies.   The Corporation’s strategy is a broad spectrum low risk approach to risk management in an inherently high risk business sector.

The Corporation believes that these activities will lead to a sustainable platform on which to build the Corporation in Kazakhstan.  In addition to building a base in Kazakhstan, the Corporation is trying to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.  

The Corporation raised over US$12 million of new common equity in 2004 and an additional $13.7 million in February 2005. While access to the capital markets is always subjective, the current levels of energy prices support investor interest in financing new projects. The Corporation is basing its growth strategies on attaining a sustainable level of cash flow from low risk energy development of existing licenses while securing additional licenses subject to available financing on economic terms.  

On March 18, 2005, our former auditors noted that the Corporation’s operating losses since inception raised substantial doubts about its ability to continue as a going concern.

3.

ACCOUNTING POLICIES

Accounting policies as disclosed in the Corporation’s Annual Report on Form 10-KSB for the year ended December 31, 2004 have not changed.

12

Basis of Presentation

These consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, Big Sky Energy Kazakhstan (BSEK) and Big Sky Energy Atyrau (BSEA).  The equity method of accounting is used for companies in which the Corporation has significant influence, which generally means common stock ownership of at least 20% and not more than 50%. The Corporation used the equity method to account for its joint venture investments in the Shekou JV (which was sold in 2002) and the Chengdu JV (sold in 2004). Big Sky Network Canada Ltd. (BSN) was accounted for as a majority-controlled subsidiary until April 25, 2000. For the period April 26, 2000 to September 28, 2000, while the Corporation owned 50% of BSN, BSN was accounted for using the equity method.  For the period since September 29, 2000, BSN has been accounted for as a wholly owned subsidiary and all inter-company accounts and transactions have been eliminated. On December 9, 2004 BSN was sold.

Restricted Cash

The amount of $76,040 is maintained on deposit to secure corporate credit card balances and as a deposit on oil and gas operations.

Stock-based compensation

The Company applies the intrinsic value method allowed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") in accounting for its stock option plans. Under APB 25, compensation expense resulting from awards under variable plans is measured at each reporting period as the difference between the quoted market price and the exercise price; the cost is recognized over the period the employee performs related services.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

		Three Months Ended June 30,		Six Months Ended June 30,
		2005	2004	2005	2004
		$	$	$	$
Net loss, as reported		(2,852,054)	(937,355)	(4,887,530)	(1,744,314)
Add: Stock-based employee compensation
	recovery (expense) included in reported
	net loss, net of related tax effects	475,500	195,011	479,400	42,908
Deduct: Total stock-based employee
	compensation recovery (expense) determined under
	fair value based method for all awards,
	net of related tax effects	(819,080)	(5,209)	(819,080)	(18,630)
Pro forma net loss		(3,195,634)	(747,553)	(5,227,210)	(1,720,036)
Loss per share:
	Basic and diluted – as reported	(0.03)	(0.02)	(0.05)	(0.04)
	Basic and diluted – pro forma	(0.03)	(0.02)	(0.06)	(0.04)

The fair value of stock options used in computing the pro forma net loss and basic loss per common share was estimated at grant date, determined by the Black-Scholes option pricing model with the following assumptions:

13

	2005	2004
Dividend yield	0%	0%
Expected volatility	150%	190%
Risk free interest rate	3.5%	3.93%
Expected option life	3 years	5 years

Net loss per share

Basic loss per share ("EPS") excludes dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (warrants to purchase common stock and common stock options) were exercised or converted into common stock, using the treasury stock method.

Potential shares of common stock in the diluted EPS computation are excluded in net loss periods, as their effect would be anti-dilutive. In 2005, 14,914,610 options and warrants were excluded in the calculation of net loss per share.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates could include the allowance for potentially uncollectible accounts receivable and a valuation allowance for deferred tax assets. Actual results could differ from those estimates.

Impact of Recent and Pending Accounting Pronouncements

In November 2004, the EITF ratified Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations”. The EITF reached a consensus that classification of a disposed of or held-for-sale component as a discontinued operation is only appropriate if the ongoing entity (i) expects to have no continuing “direct” cash flows, and (ii) does not retain or expect to retain an interest, contract or other arrangement sufficient to enable it to exert significant influence over the disposed component’s operating and financial policies after the disposal transaction. Application of this consensus did not have a material impact on the Corporation’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, that will require compensation costs related to share-based payment transactions to be recognized in financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. The standard replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. It is effective for small business issuers for the first interim or annual reporting period beginning after December 15, 2005, meaning that the Corporation will apply the guidance to all employee awards of share-based payment granted, modified or settled in the first quarter of 2006. The Corporation is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

In December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion 29, Accounting for Non-monetary Transactions.  This amendment eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance.  Under Statement 153, if a non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss.  This statement is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005.  The Corporation is reviewing the guidance to determine the potential impact, if any, on its consolidated financial statements.

14

In May of 2005, the FASB issued Statement 154, Accounting Changes and Error Corrections.  This statement changes the method of accounting for accounting changes and error corrections by requiring that the cumulative effect of the change to assets and liabilities is recorded in retained earnings and not included in the current period income statement.  The Corporation is reviewing the guidance to determine the potential impact, if any, on its consolidated financial statements

4.

CONTINUING OPERATIONS

These consolidated financial statements have been prepared on a going concern basis.  The Corporation has acquired an oil and gas business and must make certain capital expenditures during the course of the next year and future years (see Note 24).  The Corporation's ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  The outcome of these matters cannot be predicted with any certainty at this time.  These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Corporation be unable to continue as a going concern.

During 2004, the Corporation utilized cash for management and corporate administrative activities of approximately $200,000 per month. In 2005, corporate and administrative costs will be higher due to increased business activity in Kazakhstan.  Taking into account prepaid lease rentals for office space, monthly expenditures for corporate and administrative costs are estimated at $450,000 per month. Management anticipates that the Corporation currently has sufficient working capital to fund this level of operations through December 2006. Current cash resources are not anticipated to be sufficient to fund the next phase of the Corporation’s development, including its expansion in the oil and gas business, and it will consider seeking additional private equity or debt financing. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Corporation’s objective, or result in commercial success. The Corporation cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subsidiaries will be commercially successful.

The ability of the Corporation to survive will depend on its ability to finance, acquire, explore for and produce oil and natural gas on a profitable basis.  The Corporation's operations may also be adversely affected by significant political, economic and social uncertainties in Kazakhstan and in other countries in which it may acquire oil and gas operations. Kazakhstan has emerged from the former Soviet Union with a viable, independent economy and is open to foreign investment.  Kazakhstan is rich in a variety of minerals and raw materials.  The economy is evolving from centrally planned towards a free market.  Government policies favoring foreign investment may change, commodity prices may decline and political disruptions may occur in the region.  These factors may impact the Corporation’s ability to conduct its business, the results of its operations and its financial condition and its right to pay dividends.  

5.

BUSINESS COMBINATION

Big Sky Energy Kazakhstan Ltd.

On January 12, 2004, the Corporation acquired 100% of the issued and outstanding share capital of BSEK.  The Corporation issued 8,000,000 shares of common stock at a deemed price of $0.286 per share, being the trading price of the Corporation’s shares at the date of announcing the transaction, for total consideration including transaction costs of $2,288,000.  Among the sellers of the BSEK shares was a company which held 80% of those shares and which was wholly-owned by Kai Yang, the brother of the Corporation’s President, and of which Matthew Heysel, the Chairman and Chief Executive Officer of the Corporation, and Daming Yang, President of the Corporation, were directors and senior officers.  BSEK holds a 90% interest in KoZhaN, which holds the rights to explore for and produce oil and natural gas from three properties in the Republic of Kazakhstan.  The acquired net assets at fair value of BSEK and consideration given were as follows:

15

Oil and gas properties	$	6,341,710
Other capital assets		3,424
Current assets, including cash of $339,353		342,431
Loan receivable from BSEK		(1,154,941)
Other current liabilities		(968,753)
Non-current liabilities		(2,275,871)
Net assets acquired	$	2,288,000
Consideration, 8,000,000 common shares issued	$	2,288,000

The oil and gas properties consist of subsurface use rights to previously-discovered hydrocarbon deposits

Results of operations of BSEK have been included in the consolidated statement of operations of the Corporation from the period January 12, 2004.  On January 30, 2004, BSEK entered into a subscription and escrow agreement with a third-party to issue common shares from treasury to this third-party.  The shares were being held in escrow pending receipt of the full amount of the subscription proceeds totaling $2,300,000.  On June 28, 2004, the subscription agreement was cancelled and the $250,000 deposit, which had been received in the third quarter of 2003, was refunded.  

Vector Energy West LLP

On May 11, 2004, the Corporation, through its 75% owned subsidiary, BSEA, completed the acquisition of 100% of the issued and outstanding charter capital of Vector (a Kazakhstan limited liability partnership). BSEA was incorporated under the laws of Alberta on April 8, 2004 with the Corporation subscribing to 75% of the total shares issued on incorporation. The acquired net assets at fair value of Vector and consideration given would be as follows:

Oil and gas properties	$	11,112,756
Current assets, including cash of $109		5,123
Loan payable		(548,076)
Other current liabilities		(1,308,250)
Non-current liabilities		(4,754,942)
Net assets acquired	$	4,506,611
Consideration, paid in cash	$	4,506,611

The oil and gas properties include previously discovered hydrocarbon deposits as well as subsurface use rights over the remainder of the acreage.

Big Sky Energy Atyrau Ltd.

On November 10, 2004 the Corporation purchased the 25% minority interest in BSEA. The Corporation issued 3,500,000 shares of common stock at a deemed price of $0.73 per share, being the trading price of the Corporation’s shares at the date the transaction was announced, for total consideration of $2,550,000. BSEA holds 100% of the charter capital of Vector, a Kazakhstan limited liability partnership.  The purchase price of $2,550,000 and a related deferred income tax liability of $894,250 has been ascribed to oil and gas properties.

Pro-forma disclosure

SFAS 141 requires disclosure on a pro-forma basis as though the business combination had occurred at the beginning of the period.  There were no material transactions for the period from January 1, 2004 through June 30, 2004 in BSEK and there were no material transactions for the period from January 1, 2004 through June 30, 2004 in Vector, other than accretion expense of $75,665.

For the three months ended June 30, 2004, the Company has determined the following pro-forma information for the BSEK and BSEA business combination:

16

June 30, 2004	As reported	Adjustments	Pro-forma
Revenue	$ 33,185	$ -	$ 33,185
Net loss	$ (937,359)	$ (25,000)	$ (962,355)
Loss per share	$ (0.02)	$ -	$ (0.02)

For the six months ended June 30, 2004, the Company has determined the following pro-forma information for the BSEK and BSEA business combination:

June 30, 2004	As reported	Adjustments	Pro-forma
Revenue	$ 64,548	$ -	$ 64,548
Net loss	$ (1,744,314)	$ (80,000)	$ (1,824,314)
Loss per share	$ (0.04)	$ -	$ (0.04)

6.

OTHER CURRENT ASSET

Other current asset represents an advance made by the Company to ABT Ltd. to cover 50% of the costs of a dam construction related to the Morskoe oil field. The advance was made to ABT Ltd. to satisfy the terms of a farm-out agreement entered into by the Company with ABT Ltd. (see Note 10).

7.

PROPERTY AND EQUIPMENT

Property and equipment consist of:

	June 30,  2005	December 31, 2004
	$	$
Vehicles	83,054	-
Furniture and fixtures	262,681	325,297
Computer hardware and software	139,224	46,382
Leasehold improvements	178,042	178,041
	663,001	549,720
Accumulated amortization	(216,988)	(165,643)
	446,013	384,077

8.

OIL AND GAS PROPERTIES

Oil and gas properties are comprised of the following:

	June 30, 2005	December 31, 2004
	(As Restated)	(As Restated)
	$	$
Subsurface use rights and expenses	6,208,911	6,208,911
Acquisitions costs	14,145,677	14,145,677
Royalty interest	415,700	415,700
Construction Works	840,423	840,423
Drilling costs	5,399,513	1,635,634
Oil and gas properties	27,010,224	23,246,345

9.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The following amounts are included in accounts payable and accrued liabilities:

	June 30, 2005	December 31, 2004
	$	$
Trade accounts payable	918,012	413,271

17

Professional fees	106,565	98,802
Office lease	53,356	80,323
Withholding taxes	9,044	114,363
Other	-	54,399
	$1,086,977	$761,158

10.

SHORT-TERM INTEREST FREE LOAN FROM ABT LTD

On October 12, 2004, KoZhaN entered into two (2) agreements with ABT Ltd. LLP – an Agreement on Partial Transfer of the Subsoil Use Right (the “Transfer Agreement”) and Agreement No. 1. (“Agreement No. 1”). These two (2) agreements set the terms and conditions of the transfer by KoZhaN of forty-five percent (45%) of its interest in the subsoil use right in the Morskoe oil field (the “Interest”).

Pursuant to Agreement No. 1, ABT is providing consideration for the Interest that consists of performance of certain construction works and up to 50% of the costs incurred in connection with Well No. 10 in the Morskoe oil field that are not deemed to be associated with the “drilling works” of such well.

Also pursuant to Agreement No. 1, ABT agreed to provide a loan of up to $550,000 for the drilling works associated with Well No. 10. “Drilling works” was defined as all costs associated with the drilling, completing, equipping, coring, logging, perforating and test of Well No. 10. This loan is required to be repaid only in the case of discovery of oil and production from the Morskoe oil field.

The transfer of the Interest is subject to approval by the Ministry of Energy and Mineral Resources of Kazakhstan (the “MEMR”), which has not yet been received.

The Company has recorded the amount of $840,423 paid by ABT in performance of the construction works and the amount of $86,160 paid by ABT as its 50% portion of costs incurred in connection with Well No. 10 that are not deemed to be drilling works, as an amounts loaned to the Company by ABT. In the event that the transfer of the Interest is approved by the MEMR, these amounts will be converted into amounts received as consideration for the Interest transferred to ABT.

The amounts received from ABT towards the drilling works, which as of December 31, 2004, equaled $500,000, have been recorded by the Company as a loan, to be repaid from production. In the event that no oil is discovered or produced by the Company from the Morskoe oil field, this loan will be removed from the Company’s records as a forgiven loan pursuant to the terms of Agreement No. 1. The Company has the obligation to repay the amount of $500,000 to ABT Ltd. should the farm out agreement not be approved by the Ministry.

As at June 30, 2005 the short-term interest free loan due to ABT consisted of the following:

	June 30,     2005	December 31, 2004
	$	$
Construction Works incurred by ABT	840,423	840,423
Payments for Drilling Works advanced by ABT	500,000	500,000
Dam construction costs incurred by ABT	86,160	-
	1,426,583	1,340,423

11.

OBLIGATIONS ON SOCIAL SPHERE DEVELOPMENT

In accordance with the Subsurface Use Contracts, the Corporation is committed to contribute to social sphere development of Astana and Atyrau cities in the total amount of $3,030,000 for all oilfields during the exploration phase.  All Subsurface Use Contracts establish the exploration phase as 6 years from 2003 to 2009, and the production phase as 25 years from 2009 to 2034. During the term ended, June 30, 2005, the Corporation had not made any payments. These payments are due over the period from 2003 to 2008.  Management believes that the Corporation will meet this

18

 obligation within the exploration phase and payment timing will not terminate or deteriorate terms of the Subsurface Use Contracts. Payment of these obligations is to be made according to a payment schedule agreed to between the Corporation and the Government. The non-current portion of these obligations is discounted at 15% being the estimated credit-adjusted risk free discount rate, giving a total discounted obligation of $2,747,187. The accretion expense for the three month period ended June 30, 2005 was $46,226 (2004 -$330) and the six month period ended June 30, 2005 was $90,862 (2004 -$21,781).

12.

OBLIGATIONS FOR PROFESSIONAL TRAINING OF PERSONNEL

		June 30, 2005		December 31, 2004
Within one year	$	289,200	$	289,200
In the second to the fifth inclusive		389,800		389,800
Total obligations		679,000		679,000
Less: discount on obligations on professional training of personnel		(65,108)		(85,159)
Present value of obligations on professional training of personnel		613,892		593,841
Amount due for settlement within one year		289,200		289,200
Amount due for settlement after one year		324,692		304,641
Total	$	613,892	$	593,841

The Company recorded obligations on professional training of personnel as prescribed by the Subsurface Use Contracts.  In accordance with the Subsurface Use Contracts, the Corporation is obliged to finance professional training of Kazakhstani personnel recruited for the Subsurface Use Contract’s operations at the rate of not less than 1% of the total amount of minimal investments.  Under the Subsurface Use Contracts, the total amount of minimal investments was established at $53,900,000 during their exploration phase.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate.  The accretion expense for the three month period ended June 30, 2005 was $11,149 (2004 -$6,994) and the six month period ended June 30, 2005 was $20,051 (2004 -$6,994).

13.

OBLIGATIONS FOR ACQUISITION OF THE RIGHT FOR THE GEOLOGICAL INFORMATION USE

In accordance with the Agreements on acquisition of the right on the geological information use # 710 and # 711 dated January 21, 2002, the Corporation is obliged to pay an additional amount for the right of geological information use if KoZhaN attracts foreign investors.  On May 11, 2004, BSEA acquired 100% of the shares in Vector’s charter fund. Accordingly, Vector recognized additional obligations on acquisition of the right on the geological information use as at June 30, 2005 in the amount of $758,265 (December 31, 2004, $758,265).

14.

OBLIGATIONS FOR HISTORICAL COSTS REIMBURSEMENT

The Corporation through its purchase of Vector is unavoidably obliged to reimburse $7,784,034, which represents historical costs incurred by the Republic of Kazakhstan for the Liman-2 oilfield pursuant to the terms of the Subsurface Use Contract # 1076 dated December 28, 2002 and the Agreement on acquisition of the right on the geological information use # 711 dated January 21, 2002. Payment of these obligations should be made according to a payment schedule agreed between Vector and the Government. These payments are due from 2012 to 2027 and should be paid quarterly in equal installments.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate, giving a present value of obligation of $1,058,866 as at June 30, 2005.  The accretion expense for the three month period ended June 30, 2005 was $44,480 (2004 -$4,964) and the six month period ended June 30, 2005 was $77,192 (2004 -$4,964).

19

15.

SIGNATURE BONUSES AND PENALTY PAYABLE

In accordance with the Subsurface Use Contracts there was an obligation to pay signature bonuses in total of $1,000,000 for acquiring the subsurface use rights for all three fields. These bonuses were due for payment within 30 days after signing the Subsurface Use Contracts.

Penalties accrued on delaying the payment of the signature bonuses for those oilfields amounted to $61,739. These penalties are included in trade accounts payable.

16.

ASSET RETIREMENT OBLIGATION

Management determined that an asset retirement obligation should be recognized for future abandonment costs of 93 wells drilled at Morskoe, Liman -2 and Atyrau  fields  before the Corporation signed the Subsurface Use Contracts, but which were not properly plugged and abandoned by the previous leaseholders .  Management believes that this obligation is likely to be settled at the end of the exploration phase.

As at December 31, 2004, undiscounted future cash flows that will be required to satisfy the Corporation’s liability by 2009 and 2028 for the Liman-2 field is $930,000.  After application of a 15% credit-adjusted risk free discount rate, the present value of the Corporation’s liability at June 30, 2005 is $467,607.  During the three months ended June 30, 2005, the Corporation recorded an accretion expense of $16,056 (2004 - $Nil) and for the six months ended June 30, 2005 $31,739 (2004 - $704) was recorded.

17.

INCOME TAX

The Corporation did not provide any current or deferred U.S. federal or foreign income tax provision or benefit because it has experienced operating losses since inception. The Corporation is not liable for any state taxes.

	June 30, 2005		December 31, 2004
Loss before income taxes	$	4,887,530	$	6,792,048
Composite statutory income tax rate		35.0%		35.0%
Expected income tax recovery	$	(1,710,635)	$	(2,377,000)
Tax benefit not recognized		1,710,635		2,377,000
Income tax expense (recovery)	$	-	$	-

Deferred taxation reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for statutory tax purposes in the respective countries.

The deferred income tax liability is comprised of the following:

	June 30, 2005	December 31, 2004
	$	$
Temporary differences
Oil and gas property values	13,734,017	13,734,017
Total temporary differences	13,734,017	13,734,017
Statutory tax rate	35%	35%
Total	4,806,906	4,806,906
Current  portion	-	-
Non-current portion	4,806,906	4,806,906
Total	4,806,906	4,806,906

20

At June 30, 2005, the Corporation had a net operating loss of approximately $19,410,000 (December 31, 2004 - $15,650,000) for U.S. federal purposes. Utilization of the net operating loss, which expires on various dates starting in 2007, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended.  Due to the uncertainty of utilizing these net operating losses, the Corporation has made a valuation allowance of an amount equal to the related deferred tax asset.

	June 30, 2005	December 31, 2004
	$	$
Net operating loss carry forward balance	19,410,000	15,650,000
Composite statutory tax rate	35.0%	35.0%
Deferred tax asset	6,793,500	5,477,800
Valuation allowance	(6,793,500)	(5,477,800)
	-	-

18.

COMMON STOCK

In February of 2005, the Corporation issued 27,250,000 shares of common stock in connection with a private placement for gross proceeds of $13,625,000. The costs associated with the private placement includes a finders fee of 6% of the gross proceeds received by the Corporation and warrants with an exercise price of $0.50 issued to the finders that equal 6% of the shares issued under the private placement. The total share issue costs were $1,955,180.

In March of 2005, the Corporation issued 750,000 shares of common stock under the Stock Awards Plan to the Chief Executive Officer (500,000 shares) and the Chief Financial Officer (250,000 shares) at a deemed price of $0.50 per share for net compensation costs of $375,000.

In March of 2005, the Corporation issued 1,700,000 shares of common stock to four option holders who exercised their options under the Corporations 2002 Stock Awards Plan. The Corporation realized proceeds of $85,000.

In March of 2005, 9,600 shares of common stock were issued for the exercise of 9,600 warrants. The Corporation realized proceeds of $4,800.

In April of 2005, the Corporation issued 150,000 shares of common stock to one option holder who exercised the  options under the Corporations 2002 Stock Awards Plan. The Corporation realized proceeds of $7,500.

In April of 2005, 479,505 shares of common stock were issued for the exercise of 479,505 warrants. The Corporation realized proceeds of $239,753.

19.

STOCK AWARD PLAN

Under the Stock Option Plan (the “Plan”), the Corporation has reserved 15,000,000 shares of common stock for issuance under options granted to eligible persons.  As at June 30, 2005, 10,650,000 are issued and outstanding with a further 4,000,000 granted subject to an increase in the allocation of shares to the 2000 Stock Award Plan to be presented to the shareholders at the next Annual Meeting.

Under the Plan, options to purchase common stock may be granted to employees, directors, officers and certain consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 110% of fair market value for incentive stock options where the employee who, at the time of grant, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Corporation.  These options expire three to five years from the date of grant and may be fully exercisable immediately, or may be exercisable according to a schedule or conditions specified by the Nominating and Compensation Committee.

21

Option activity under the Plan is as follows:

	2005 Number of Options
Opening Balance – December 31, 2004	6,175,000
Granted	9,150,000
Expired	-
Exercised	(1,850,000)
Cancelled	(725,000)
Closing Balance, June 30, 2005	12,750,000
Options available for granting	298,334
Options exercised	1,951,666
Option Plan Total	15,000,000

Additional information regarding options outstanding as of June 30, 2005 is as follows:

Options Outstanding and Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
0.15	300,000	3.2	$0.15
0.05	3,800,000	2.3	$0.05
0.56	100,000	4.0	$0.56
0.89	1,000,000	2.7	$0.89
0.50	7,550,000	2.7	$0.50
	12,750,000	2.6	$0.39

For the three months ended June 30, 2005, $17,600 of compensation expense has been recognized (2004 - $17,470) in the consolidated financial statements for non-employee stock option grants.  For the six months ended June 30, 2005, $22,650 of compensation expense has been recognized (2004 - $57,087).  For the three months ended $475,500 (2004 – $195,011) of compensation awards has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.   For the six months ended $475,500 (2004 – $42,908) of compensation awards has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.

20.

WARRANTS

The Corporation has previously issued the following warrants.  Each warrant can be exchanged for 1 common share at the exercise price noted.

Date of Grant	Number of Warrants	Exercise Price	Expiry Date
May 2004	69,000	$0.50	May 2007
July 2004	2,210	$0.50	January 2006
September 2004	134,400	$0.50	January 2006
November 2004	348,000	$0.50	January 2006
February 2005	1,611,000	$0.50	February 2007
	2,164,610	$0.50

During 2005, 1,611,000 (2004 – 1,042,715) warrants were granted at a price of $0.50 per share under the terms of an agency agreement in connection with a private placement. In February 2005, 9,600 warrants were exercised for cash proceeds of $4,800. In April 2005, 479,505 warrants were exercised for cash proceeds of $239,753 and 50,000 warrants expired.

22

21.

ALTERNATIVE COMPENSATION PLAN

On March 22, 2002 the Board of Directors approved the Alternative Compensation Plan to provide opportunities for officers, directors, employees and contractors to receive all or a portion of their compensation in the form of shares of common stock instead of cash. The Alternative Compensation Plan was approved at our Annual Shareholders’ Meeting held on June 14, 2002. The Plan allowed for maximum compensation of 2,000,000 shares.  This maximum was reached in the third quarter of 2002 and an expense in the amount of $163,463, relating to the future issuance of 2,000,000 shares of common stock, was accrued under the Alternative Compensation Plan in 2002.  Shares are issued upon request of the beneficiaries and no further compensation cost is recorded at that time.  During 2005, no shares were issued under the Alternative Compensation Plan, leaving a balance of 1,317,198 shares still to be issued at June 30, 2005.

22.

RELATED PARTY TRANSACTION

On June 30, 2005, the Corporation owed $134,349 to Matthew Heysel, the Chairman and Chief Executive Officer arising from business travel expenditures paid personally.

On June 30, 2005 the Corporation owed $10,000 to Glenn Van Doorne, the former Executive Vice President, for a consulting service contract.

The Corporation has been unable to establish a bank account in Beijing.  Each month, the Corporation transfers funds to Kai Yang, the brother of the President and a consultant to BSN, who is resident in Beijing, to cover the costs of maintaining an office in Beijing.  During the period, the Corporation advanced $180,000 to Kai Yang and he disbursed the full amount for salaries, office rental, professional fees, travel, and other office administration expenses of the Corporation.  Kai Yang retained no part of these funds.

Big Sky Energy Canada Ltd.

At the time of the acquisition of BSEK, Matthew Heysel and Daming Yang were directors and officers of Big Sky Energy Canada Ltd. and the Corporation and Mr. Kai Yang held all the outstanding shares of Big Sky Energy Canada Ltd.  As at December 31, 2004, Matthew Heysel and Daming Yang were no longer directors nor officers of Big Sky Energy Canada Ltd. On March 10, 2004, Daming Yang’s brother, Wei Yang, was appointed to the board and was given full voting and dispositive control over all shares held by Big Sky Energy Canada Ltd.

During the period ended June 30, 2005 the Corporation advanced $10,000 to Big Sky Energy Canada for a balance of $32,767 owing to the Corporation.

During the period ended June 30, 2005 the Corporation advanced $28,398 to Big Sky Energy Aral, a corporation with common directors.

In March 2005, $80,000 was paid to a company affiliated with Mr. Bruce Gaston , a director since December 3, 2004 for introductions to potential investors who subsequently participated in the $13.7 million raised by the Corporation in February 2005.

23.

FAIR VALUE OF FINANCIAL INSTRUMENTS

As at June 30, 2005 the related method of determining fair value and carrying value of the Corporation’s financial instruments were as follows: the fair value of current assets and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments. The Corporation is exposed to market, credit and currency risks arises in the normal course of the Corporation’s business. Derivative financial instruments are not used to reduce exposure to the above risks.

Concentration of credit risk – Financial instruments that potentially expose the Corporation to concentrations of credit risk consist primarily of cash and cash equivalent. Management of the Corporation believes the likelihood of incurring material losses due to concentration of credit risk is remote.

Interest rate risk – The Corporations potential interest rate risk is minimal and management considers the risk insignificant.

23

Foreign currency risk – The Corporation undertakes transactions denominated in foreign currencies. Accordingly, these activities may result in foreign currency exposure. The Corporation does not hedge it’s foreign currency risk.

24.

COMMITMENTS AND CONTINGENCIES

The Corporation recorded expenses for rental payments under operating leases, net of amounts recovered from sub-lessees, totaling $72,688 for the three months ended June 30, 2005 and $135,241 for the six months ended June 30, 2005. Minimum lease payments under operating leases for the period ending June 30 are as follows:

	$
2005	174,900
2006	125,650
2007	48,250
	348,800

The Corporation is subject to potential litigation in the normal course of operations.  There are no claims currently pending that management considers would materially affect the Corporation’s financial position or results of operations.

Operating environment – The Corporation’s principal business activities are within the Republic of Kazakhstan. Laws and regulations affecting businesses operating in the Republic of Kazakhstan are subject to rapid changes and KoZhaN’s assets and operations could be at risk due to negative changes in the political and business environment.

Taxation – The taxation system in the Republic of Kazakhstan is constantly changing and subject to inconsistent application, interpretation and enforcement. There have been many new tax and foreign currency laws and related regulations introduced in recent years, which are not always clearly written and whose interpretation and application is subject to the opinions of the local tax authorities. Non-compliance with Kazakhstan laws and regulations can potentially lead to the imposition of penalties and fines, the amounts of which can be significant.

Environmental matters – The Corporation believes it is currently in compliance with all existing Kazakhstan environmental laws and regulations. However, Kazakhstan environmental laws and regulations may change in the future. The Corporation is unable to predict the timing or extent to which these environmental laws and regulations may change. Such change, if it occurs, may require KoZhaN to modernize technology to meet more stringent standards.

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Financial Commitments and Contingencies – KoZhaN

The Corporation, through its interest in KoZhaN, has the following commitments and contingencies.  As these commitments and contingencies are subject to the commencement of commercial production and the Corporation can not determine at this time when it will commence commercial oil and gas production operations, the likelihood of payment of the following commitments and contingencies is currently indeterminable. Consequently no amounts have been recorded as provisions in these financial statements for the following commitments and contingencies:

a)	Commitment to repay historical costs of the Government – In accordance with the Subsurface Use Contracts the Corporation is obliged to reimburse to the Government for historical costs incurred during preparation of certain geological information on the Morskoe, Karatal and Dauletaly oilfields.  The total amount reimbursable is $3,756,422. Of this amount, $116,178 was paid in 2002-2003. The remaining amount of $3,640,244 is expected to be settled by equal quarterly installments during 20 years after the Corporation enters into the production phase on these oilfields. If commercial production does not commence, no further payments become due in this respect.
b)	Commitments to contribute to social development of Astana and Atyrau – In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest an equivalent of $850,000 during the production phase for the development of the social sector of Atyrau and Astana cities in the Republic of Kazakhstan.
c)	Commitment to develop local personnel– In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest not less than 1% of total investments for professional development of the local personnel involved in works under the Subsurface Use Contracts
d)	Liquidation fund – In accordance with the Subsurface Use Contracts, the Corporation is obliged to establish a liquidation fund to finance the adequate disposal of the Corporation’s oil and gas operations in the amount of 1% of operating costs.  The Corporation is also obliged to apply for approval of this fund with the Government under the contracts, including budget of disposal costs, no later than 2 years before the end of the exploration phase and start of the production phase. Although the Corporation has not yet carried out major exploration activities to date, the Corporation has recorded an asset retirement obligation for certain wells in these financial statements. Upon achieving an agreement with the Government, this asset retirement obligation may be considered as part of the contractually required liquidation fund.
	-	Upon awarding of a new tender for subsurface use rights, KoZhaN shall pay a $0.05 bonus based on total oilfield reserves as defined in the State Balance of Reserves (Oil) of Kazakhstan as of January 1, 2000, equivalent to proven recoverable reserves.
e)	Contingencies related to purchase of geological information from the Government – In accordance with the Purchase Agreements concluded with the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan on July 10, 2002, the Corporation may incur a penalty for delaying payment for the geological information purchases from the Government relating to the Morskoe, Karatal and Dauletaly oilfields at a rate of 10% per annum. Payments for the geological information purchase for the Karatal and Dauletaly oilfields were made by the Corporation with a significant delay. Management believes that the obligation for the penalty is not probable and thus no provision has been recognized in the financial statements for this amount.
f)	Commitment to make payments based on production – Arising from BSEK’s acquisition of KoZhaN interest, the Corporation is committed to make the following payments to the non-controlling partners of KoZhaN, as a group, upon achieving the following production milestones, where production is calculated after deducting the government’s share of production, if any, and where one tonne equals seven barrels of oil:

25

	-	$100,000 after the receipt by KoZhaN of payment in full for two sales of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN.  Each sale shall not be less than 4,000 tonnes of oil;
	-	$300,000 after the receipt by KoZhaN of payment in full for a cumulative production of 40,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;
	-	$400,000 after the receipt by KoZhaN of payment in full for a cumulative production of 150,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;
	-	$500,000 after the receipt by KoZhaN of payment in full for a cumulative production of 250,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;
		-	$0.35 per barrel if the price of oil is equal to or less than $14.00;
		-	$0.75 per barrel if the price of oil is greater than $14.00 and less than or equal to $18.00;
		-	$1.00 per barrel if the price of oil is greater than $18.00 and less than or equal to $22.00; or
		-	$1.50 per barrel if the price of oil is greater than $22.00
g)	Investment commitments – In accordance with the Subsurface Use Contracts KoZhaN is obliged to invest a minimum of $69,000,000 over the period covered by the Subsurface Use Contracts. An amount of $14,000,000 should be invested during the exploration phase. All three Subsurface Use Contracts establish the exploration phase as 6 years from 2003 to 2009, and the production phase as 25 years from 2009 to 2034.  The governments’ objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the license holder, including drilling new wells and seismic activity. The government will measure the degree to which the Corporation has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of the Corporation towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.
h)	Commercial discovery bonus – In accordance with the Subsurface Use Contracts, the Corporation is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of proved reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan.  As at June 30, 2005, a commercial discovery has not been made as so no accrual for any bonus has been made in these financial statements.
i)	Commitments related to transfer of 45% share in Morskoe oil field – On October 12, 2004 KoZhaN signed an agreement which states that ABT Ltd., subject to approval of the Ministry of Energy and Mineral Resources of Republic of Kazakhstan, which approval is still pending,  became the owner of 45% of any crude oil, gas and any other mineral resources (including mineral resources produced during the exploration and probation exploitation periods) and have right to dispose such mineral resources at its own discretion. In addition, KoZhaN assumed obligation to provide financing of Drilling Works of $150,000 and 50% of all other costs, not specified as Construction Works and Drilling Works.

26

Other Contingencies

a)

Non-compliance with the Subsurface Use Contracts – The Government has the right to suspend these contracts or even cancel them if the Corporation is in material breach of obligations and commitments under the Subsurface Use Contracts. In accordance with the Subsurface Use Contracts signed on February 17, 2003 the Corporation was obliged to commence exploration activities within 60 days after signing the Contracts. However, as at June 30, 2005, the Corporation had not started exploration activities on the Karatal and Dauletaly oilfields. In the case of failure to remedy such violations, these Subsurface Use Contracts can be terminated by the Government, which may affect recoverability of capitalized costs of approximately $1.2 million related to Dauletaly and Karatal oilfields. The corporation expects to conduct new exploration activities in the two license areas in 2005, and may farmout portions of these licenses to third parties in 2005, in order to fulfill its obligations under the Subsurface Use Contracts.

b)

Commitment to sell produced oil in Kazakhstan – In accordance with the Subsurface Use Contracts, the Corporation is obliged to sell 100% of oil produced during the exploration stage, and 20% of oil produced during the production stage, to oil refineries located in Kazakhstan.

Financial Commitments and Contingencies – Vector Energy West  LLP

The Corporation, through its interest in Vector, has the following commitments and contingencies.  As these commitments and contingencies are subject to the commencement of commercial production and the Corporation can not determine at this time when it will commence commercial oil and gas production operations, the likelihood of payment of the following commitments and contingencies is currently indeterminable. Consequently, no amounts have been recorded as provisions in these financial statements for the following commitments and contingencies:

a)	Non-compliance with the Subsurface Use Contracts – The Government has the right to suspend or cancel these Subsurface Use Contracts if KoZhaN is in material breach of the obligations and commitments under the Subsurface Use Contracts. In accordance with the letter # 14-04-38 27 dated May 26, 2004 the Corporation was notified by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (the “Competent Body”) that the Corporation had failed to comply with the terms of the Contract # 1076 dated December 28, 2002 on exploration of hydrocarbons in the Liman-2 oilfield, in the following way:
	-	To carry out the Minimal Work Program during the exploration phase;
	-	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
	-	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
	-	To contribute funds to the Atyrau region for social programs and programs on infrastructure development;
	-	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
	-	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and
	-	To establish and make contributions to the Liquidation Fund.
	In accordance with the letter # 14-04-38 28 dated May 26, 2004 the Corporation was notified by the Competent Body that the Corporation had failed to comply with the terms of the Contract # 1077 dated December 28, 2002 on exploration of hydrocarbons in the Atyrau oilfield, in the following way:

27

	-	To carry out the Minimal Work Program during the exploration phase;
	-	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
	-	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
	-	To contribute funds to the Atyrau region for social programs and programs on infrastructure development;
	-	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
	-	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and
	-	To establish and make contributions to the Liquidation Fund.
	Accordingly, under both Notices the Corporation was required by July 31, 2004 to remedy these deficiencies and to submit all required documents as confirmation of fulfillment of its obligations and actions taken to remedy these deficiencies and to report on corrective and preventive actions undertaken against any further breach of contractual obligations.
	As at June 30, 2005, Management has discharged part of commitments and is continuing remediation of certain violations of the Subsurface Use Contracts:
	1.	Submit the Annual Work Program to the Competent body and report on the progress of the Minimal Work Program implementation. On June 9, 2004, the Partnership’s Annual Work Program for 2004 was approved by the Competent Body for both oilfields. The Annual Work Program for 2005 will be determined in October 2004 and finalized with the Competent Body in November 2004;
	2.	Contribute funds to Atyrau region for social programs and programs for infrastructure development. It was agreed to defer this to the end of 2004;
	3.	Develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body. The Corporation has appointed AIG as its Insurance Underwriter but as at the date of these financial statements the Business, Property and Liability Risk Insurance Program has not yet been submitted to the Competent Body;
b)	Investment commitments – In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest a minimum of $53,900,000 over the period covered by the Subsurface Use Contracts. The Subsurface Use Contract # 1076 dated December 28, 2002 establishes the exploration phase as 6 years from 2003 to 2008. The Subsurface Use Contract # 1077 dated December 28, 2002 establishes the exploration phase as 5 years from 2003 to 2007 and the production phase as 20 years from 2008 to 2028.  The governments’ objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the licence holder, including drilling new wells and seismic activity. The government will measure the degree to which the Corporation has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of the Corporation towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.
c)	Commitment to reimburse historical costs of the Government – In accordance with the Subsurface Use Contract, the Corporation is obliged to reimburse to the Government for historical costs incurred at the expense of the Government on the Atyrau oilfield. The total amount reimbursable is $22,507,380. From this amount, $112,537 was paid to the Government in 2003. The remaining amount of $22,394,843 is expected to be settled according to a payment schedule to be agreed between the Corporation and the Government not later than 120 days after approval of the hydrocarbon reserves. However, in the event that no approval of the hydrocarbon reserves is received, there will be no liability upon the Corporation in respect of the remaining amount of $22,394,843. No approval of the hydrocarbon reserves has been applied for or received as at June 30, 2005 and December 31, 2004 and so no provision in respect of the remaining amount has been made in these financial statements.

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d) Commercial discovery bonus – In accordance with the Subsurface Use Contracts, the Corporation is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of approved recoverable reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan. However, in the event that no approval of the hydrocarbon reserves is received, there will be no liability upon the Corporation in respect of the commercial discovery bonus. No approval of the hydrocarbon reserves has been applied for or received as at June 30, 2005 and December 31, 2004 and so no provision in respect of the commercial discovery bonus has been made in these financial statements.

25.

SUBSEQUENT EVENTS

On July 4, 2005, the Corporation entered into a Master Consulting Service Agreements with Schlumberger Logelco Inc. and Landmark Consulting (a Halliburton Company) to provide geological, geophysical and engineering support for its efforts to develop its holdings in Kazakhstan.  Under these Consulting Service Agreements, the Company will present specific assignments to Schlumberger and Landmark at preferred fees and have access to their proprietary software.

On July 18, 2005, the Corporation announced a private placement of up to 25,000,000 shares of common stock at a price of $1.00 per share (or in the case of Canadian investors, potentially issue securities that are in the form of Special Warrants convertible into common shares on the filing of a prospectus in Canada). The Corporation has also agreed to grant Agents, Westwind Partners, an option, exercisable at any time up to 30 days following the closing of the offering, to increase the size of the offering by an additional 10,000,000 common shares.   Subsequent to this private placement being announced, on July 29, 2005, the Corporation, by resolution of the Board of Directors, increased the potential size of this financing to up to 42,000,000 shares of common stock (the "Shares") (or in the case of Canadian investors, securities that are in the form of Special Warrants convertible into Shares on the filing of a prospectus in Canada).  This financing is scheduled to close on August 16, 2005.

On July 28, 2005, the Board of Directors, by unanimous resolution, approved the issuance of 3,000,000 additional options to S.A. Sehsuvaroglu, our Chief Executive Officer, such additional options to be subject to the Corporation achieving 6,000 barrels of net production by the end of November, 2005.  These options are also subject to the approval by the shareholders of the Corporation of an increase in the authorized share capital of the Corporation and an increase in the number of shares allotted to the Corporation’s Stock Award Plan.

On August 1, 2005, the Corporation, through its wholly-owned subsidiary, Big Sky Energy Kazakhstan Ltd., entered into a Sale Purchase agreement to acquire the outstanding 10% interest in its subsidiary KoZhaN LLP for US$1.25 million. This purchase is subject to the relevant approvals of the Ministry of Energy and Mineral Resources (MEMR) of Kazakhstan, which are anticipated directly. KoZhaN owns the Morskoe, Dauletaly, and Karatal licenses, which are located in the pre-Caspian basin in western Kazakhstan.  The purchase price of US $1.25million is payable upon the approval of the Ministry being received.

On August 8, 2005, the Board of Directors, by unanimous resolution, voted to grant immediate vesting to options held by the Chief Executive Officer, the Chief Financial Officer and the Executive Chairman of the Board in recognition of their success in raising capital in the July 18th Private Placement.

29

26.

RESTATEMENT

Subsequent to the issuance of the Company’s unaudited June, 30 2005 financial statements, the Company’s management determined that its belief that no obligation would exist to repay ABT Ltd. for costs they incurred or advanced to KoZhan LLP in relation to the Morskoe oil field under the farm-out agreement signed October 12, 2004 (see Note 10), should Ministry approval not be received on the transfer of 45% of the subsurface rights of the Morskoe licence to ABT Ltd., was incorrect, and that in fact an obligation would exist to repay ABT Ltd. for all costs incurred or advanced by them relating to the Morskoe oil field should Ministry approval not be received.  As a result, the “Short-Term Interest Free Loan to ABT Ltd” liability account, the “Oil and Gas Properties” asset account and the “Other Current Asset” account were understated in the amounts of $1,174,423, $1,088,263, and $86,160 respectively as previously reported on the Consolidated Balance Sheets as at December 31, 2004 included in the June 30, 2005 Form 10-QSB. Also, the “Short-Term Interest Free Loan from ABT Ltd” liability account and the “Oil and Gas Properties” asset account were understated in the amount of $1,088,263 as previously reported on the Consolidated Balance Sheets as at June 30, 2005 included in the June 30, 2005 Form 10-QSB. The error described above also resulted in an understatement in cash flow from financing activities in the amount of $334,000 and an overstatement in cash flow from investing activities in the amount of $334,000 in the Cumulative Period from Date of Inception column on the Consolidated Statements of Cash Flows. The Consolidated Balance Sheets as at June 30, 2005 and December 31, 2004 and the Consolidated Statements of Cash Flows in the Cumulative Period from Date of Inception February 1, 2000 to June 30, 2005 column has been restated to correct these previous misstatements.  This restatement does not impact earnings or equity.

The changes to the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as at June 30, 2005 and December 31, 2004 can be summarized as follows:

Affected Statements & Accounts	Period ended June 30, 2005		At December 31, 2004 & Cumulative Period From Date of Inception (for Statements of Cash Flows)
	As Previously Reported	As Restated	As Previously Reported	As Restated
Balance Sheets:
Other current asset	-	-	-	86,160
Total Current assets	-	-	1,695,973	1,782,133
Oil and gas properties	25,921,961	27,010,224	22,158,082	23,246,345
Total Assets	34,367,481	35,455,744	24,583,455	25,757,879
Short-term interest free loan from ABT Ltd	338,319	1,426,582	166,000	1,340,423
Total Current Liabilities	3,899,326	4,987,589	3,401,213	4,575,636
Total Liabilities	11,903,584	12,991,847	11,185,627	12,360,050
Total Liabilities and Equity	34,367,481	35,455,744	24,583,455	25,757,879
Statements of Cash Flows:
Financing:
Advance from ABT Ltd.	172,319	-	338,319	500,000
Total Cash Flow from    Financing	13,252,742	13,080,423	38,673,531	38,835,212
Investing:
Capital Expenditure-oil  and gas properties	(2,382,313)	(2,209,994)	(2,685,516)	(3,601,460)
Cash flow from non-cash working capital:
Advance to ABT Ltd.	-	-	-	(86,160)
Increase in short-term loan interest free    loan from ABT Ltd	-	-	-	840,423
Total Cash Flow from Investing	(2,580,421)	(2,408,102)	(12,059,523	(12,221,204)

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ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

   AND RESULTS

FORWARD-LOOKING STATEMENTS

Included in this report are various forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," "continue," "believe" or other similar words.  We have made forward-looking statements with respect to the following, among others: our goals and strategies; our ability to earn sufficient revenues; our ability to continue as a going concern; and our future revenue performance and our future results of operations.  These statements are forward-looking and reflect our current expectations.  These forward-looking statements are subject to a number of risks and uncertainties, some of which are beyond our control.  Some of the key factors that have a direct bearing on our results of operations are:

- Changes in general political, social, economic and business conditions in China and Kazakhstan;

- Economic and political uncertainties affecting the capital markets;

- Changes in technology and the Internet marketplace in China;

- The business of exploration, development, production and refining of oil and natural gas reserves, the levels of those reserves and the marketing of crude oil and refined products and the ability to increase the quality of refined products;

- Fluctuations in oil and gas and refined product prices;

- Our ability to manage our growth;

- Changes in business strategy or development plans;

- Our future capital needs;

- Changes in, or failure to comply with, government regulations or changes in interpretation, application or enforcement of government regulations;

- Costs arising from environmental liability; and

- Our ability to manage currency fluctuations.

The factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements. Therefore, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The following financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated amended and restated financial statements and notes to such consolidated amended and restated financial statements included in this report.  We have derived the statements of operations data and the information as at and for the three month period ended June 30, 2005 and 2004 from unaudited condensed consolidated amended and restated financial statements and from our audited consolidated amended and restated financial statements for the year ended December 31, 2004.

The Balance Sheet Data for 2004 summarized below has been restated due to a correction of an error. Please refer to Note 26 of the Notes to the Amended and Restated Consolidated Financial Statements (unaudited) for a description of the restatement.

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SUMMARY FINANCIAL DATA

Statement of Operations Data:

	THREE MONTH PERIOD ENDED JUNE 30, 2005	THREE MONTH PERIOD ENDED JUNE 30, 2004	SIX MONTH PERIOD ENDED JUNE 30, 2005	SIX MONTH PERIOD ENDED JUNE 30, 2004	PERIOD FROM FEBRUARY 1, 2000 TO JUNE 30, 2005
Loss from Continuing Operations	($2,852,054)	($924,040)	($4,887,530)	($1,718,983)	($24,958,649)
Loss from Discontinued Operations	-	($13,315)		($25,331)	($10,114,016)
Net Loss	($2,852,054)	($937,355)	($4,887,530)	($1,744,314)	($35,072,665)
Basic and diluted (loss) per share	($0.03)	($0.02)	($0.05)	($0.04)	-
Basic and diluted weighted average common shares outstanding	98,237,202	41,615,500	88,604,545	43,234,825	-

Balance Sheet Data:

	June 30, 2005 (As Restated)	December 31, 2004 (As Restated)
Cash and cash equivalents	$5,827,209	$983,734
Working capital	$3,011,918	($2,793,503)
Total assets	$35,455,744	$25,757,879
Total stockholders’ equity	$22,463,897	$13,397,829

NATURE OF OPERATIONS

In 2004, Big Sky began investing in oil and gas assets with the stated intention becoming an oil and gas exploration and production company.   This transition was concluded December 9, 2004 with the sale of Big Sky Network Canada Ltd.  In early 2004, we acquired KoZhaN LLP (“KoZhaN”) and Vector Energy West LLP (“Vector) which acquisitions gained Big Sky a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan, located close to infrastructure and transportation.   

In the fourth quarter of 2004, Big Sky spudded its first well, Morskoe # 10 and during the first three months of 2005, we achieved our near term objectives which included the completion of drilling and testing of Morskoe #10.  The next phase of work, the drilling or working over of additional wells offsetting Morskoe #10 is currently underway.  

We are also intent on farming out selected high risk exploration targets and we are currently undertaking farm out discussions with established multinational energy companies.   We believe that these activities will lead to a sustainable platform on which to build Big Sky in Kazakhstan and enable Big Sky to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.

On April 19, 2005, Big Sky executed a Letter of Intent with Sun Drilling LLP wherein Sun Drilling LLP agreed to provide turnkey drilling services for a minimum of two wells in the Morskoe Field on behalf of KoZhaN and a minimum of 10 wells in the Atyrau Block for Vector.  The drilling schedule for Morskoe is set to commence in approximately May 2005 with the Atyrau block drilling schedule projected to start in July/August 2005.

Big Sky raised over $13.7 million in equity capital in the first three months of 2005 and anticipates the completion of a private placement raising approximately $42m in Q2-Q3 2005. During 2004, Big Sky raised US$12 million of new common equity.  While access to the capital markets is always subjective, the current levels of energy prices support investor interest in financing new projects. Big Sky is basing its growth strategies on attaining a sustainable level of cash flow from energy development of existing licenses while securing additional licenses subject to available financing on economic terms.  

32

RESULTS OF OPERATIONS

Revenues

For the first six months of 2005 and during all of 2004, Big Sky did not earn revenues. We have added oil and gas properties through the acquisition of KoZhaN and Vector; however these properties are currently undeveloped and consequently did not provide revenue during the period.

Expenses

During the three months ended June 30, 2005 and 2004, we incurred operating expenses of $2,563,352and $817,914 respectively.  The following table provides a breakdown of operating expenses by category.

General Operating Expenses

	THREE MONTH PERIOD ENDED JUNE 30, 2005	THREE MONTH PERIOD ENDED JUNE 30, 2004	SIX MONTH PERIOD ENDED JUNE 30, 2005	SIX MONTH PERIOD ENDED JUNE 30 2004	PERIOD FROM FEBRUARY 1, 2000 TO JUNE 30, 2005
Office Costs	$2,459,300	724,734	4,365,342	1,354,095	17,918,271
Professional Services	$101,668	28,606	202,431	103,744	2,926,881
Investor Relations	$2,384	64,574	84,528	126,607	1,499,779
Extinguishment of debt	$-	$-	-	-	(1,422,225)
Miscellaneous	$-	$-	-	-	212,114
TOTAL	$2,563,352	817,914	4,652,301	1,584,446	21,134,820

Office costs include the costs of executive management and administrative consultants, rent, insurance, travel, and general office costs associated with maintaining business offices in China, Canada and Kazakhstan.  For the three months ended June 30, 2005, office costs have increased over the same period in 2004 due to additional consulting costs relating to the acquisition of additional subsidiaries during the year, the substantial increase in Kazakhstan operations and additional costs of management.

Professional services include accounting, audit and legal advisory costs.  Professional costs have increased in the second  quarter of 2005 compared to the same period in 2004.  This increase is primarily due to an increase in corporate activity.

Amortization and depreciation expense recorded during the second quarter of 2005 and 2004 resulted from the depreciation of office equipment and leasehold improvements.  No depletion was recorded on oil and gas assets, and oil and gas related accretion expenses were incurred.

We record the fluctuations in the fair value of certain unexercised stock options as a deferred compensation asset (reported as a reduction of stockholders’ equity on the balance sheet). This asset is amortized over the life of the stock options as non-cash compensation expense. The non-cash compensation expense in the second quarter of 2005 was $493,100 (2004 - $17,470).

Summary of Non-cash Compensation Expense:

	Expense $	Unamortized Deferred Compensation $
Options
Options granted June 2004	3,900	15,532
Options granted February 2005	489,200	4,325,710
Total	$493,100	$4,341,242

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Losses

Since we are in the development stage, all losses accumulated since inception is considered as part of our development stage activities.

Discontinued Operations

In December 2004, we sold our 100% shareholding in Big Sky Network Canada Ltd., which held our remaining assets in China, Big Sky Chengdu Technology Services Ltd, 100% owned, and our interest in the Sichuan Huayu Big Sky Network Ltd. joint venture, 50% owned. With this sale, we exited the Internet business in China. The sale of Big Sky Network Canada is presented as a discontinued operation in our amended and restated financial statements.

CAPITAL EXPENDITURES AND INVESTMENTS

Material Commitments for Capital Expenditures

As a result of the acquisition of KoZhaN and Vector, we have acquired significant commitments for future capital expenditure. The majority or these commitments are not required to be settled until we are in the production phase, at which time we expect to have sufficient cash-flows from production to meet these commitments and will rely primarily on production cash-flows to meet future capital expenditures. If the future cash flows from production are insufficient to meet these commitments, we will likely have to rely on additional equity financing.  

Certain commitments relating to KoZhaN require capital expenditure prior to the production phase. These include investment commitments of $16.43 million.  We anticipate we will be able to meet these capital costs through a number of financing alternatives. The investment commitment of $16.43 million is required to be spent in exploration phase in the Republic of Kazakhstan during the exploration phase, which is expected to last until approximately 2009.  We plan to finance this commitment through a combination of the sale of exploration related production and future equity financing.   The government’s objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the license holder, including drilling new wells and seismic activity. The government will measure the degree to which Big Sky has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of Big Sky towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure. The Vector and KoZhaN work commitments are measured by actual work undertaken and completed. The cost to complete the work can be lower, or higher, than the estimated cost. Actual cost is not the determining factor in meeting work commitment obligations. As the undertaken work commitments in 2005 are higher than those defined in the Hydrocarbon Contracts, Vector and KoZhaN expects to apply to the government to amend the commitment to the lesser amounts defined in the Hydrocarbon Contracts

Commercial discovery bonuses will be equal to 0.1% of the value of proved reserves if found.  We anticipate that any commercial discovery bonus will be small enough to be financed out of our working capital.

LIQUIDITY AND CAPITAL RESOURCES

During the second quarter of 2005, Big Sky utilized cash for management and corporate administrative activities of approximately $4690,000 per month.  Management anticipates that Big Sky currently has sufficient working capital to fund a minimum level of operations through December 2006. Current cash resources are not anticipated to be sufficient to fund the work commitment for existing licenses, acquire producing properties or additional licenses. To that end, Big Sky has sought additional private equity or debt financing. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve Big Sky’s objective, or result in commercial success.

In February 2005, we raised an additional $13.7 million of common equity from institutional investors and accredited private investors in Europe, Russia, USA and Canada under a private placement.  This private placement was subsequently extended to accept further investors up to a total financing of approximately $42,000,000. This private placement is tentatively scheduled to complete August 16, 2005.

34

As of June 30, 2005, we had cash and cash equivalents of $5,827,209 that were included in the working capital surplus of $3,011,918.  This compared to a working capital deficit of $2,793,503 at December 31, 2004.

In February 2005, Big Sky closed on a private placement which raised $13,625,000.  Big Sky issued 27,250,000 shares of common stock at a price of $0.50 per share.   We paid a finders fee of 6% in cash and warrants equal to 6% of the shares of common stock issued for a total cost of $817,140.  1,634,280 Warrants to purchase 1,634,280 shares of common stock at $0.50 per share were also issued.

On a consolidated basis, our minimum cash requirement for maintenance of operations, without conducting a drilling program or acquisitions of other potential fields, is estimated at approximately $450,000 per month in 2005.  With the acquisition of KoZhaN and Vector and our diversification into oil and natural gas exploration and production, we anticipate that we will be required to raise additional capital to fund future exploration and development programs or farm out some of our interest in various higher risk/cost projects to third parties.  Such farm-outs would be intended to cover up to 100% of project costs in return for a percentage interest in the project.

On October 12, 2004, KoZhaN entered into two (2) agreements with ABT Ltd. LLP – an Agreement on Partial Transfer of the Subsoil Use Right (the “Transfer Agreement”) and Agreement No. 1. (“Agreement No. 1”). These two (2) agreements set the terms and conditions of the transfer by KoZhaN of forty-five percent (45%) of its interest in the subsoil use right in the Morskoe oil field (the “Interest”).

Pursuant to Agreement No. 1, ABT is providing consideration for the Interest that consists of performance of certain construction works and up to 50% of the costs incurred in connection with Well No. 10 in the Morskoe oil field that are not deemed to be associated with the “drilling works” of such well.

Also pursuant to Agreement No. 1, ABT agreed to provide a loan of up to $550,000 for the drilling works associated with Well No. 10. “Drilling works” was defined as all costs associated with the drilling, completing, equipping, coring, logging, perforating and test of Well No. 10. This loan is required to be repaid only in the case of discovery of oil and production from the Morskoe oil field.

The transfer of the Interest is subject to approval by the Ministry of Energy and Mineral Resources of Kazakhstan (the “MEMR”), which has not yet been received.

The Company has recorded the amount of $840,423 paid by ABT in performance of the construction works and the amount of $86,160 paid by ABT as its 50% portion of costs incurred in connection with Well No. 10 that are not deemed to be drilling works, as an amounts loaned to the Company by ABT. In the event that the transfer of the Interest is approved by the MEMR, these amounts will be converted into amounts received as consideration for the Interest transferred to ABT.

The amounts received from ABT towards the drilling works, which as of December 31, 2004, equaled $500,000, have been recorded by the Company as a loan, to be repaid from production. In the event that no oil is discovered or produced by the Company from the Morskoe oil field, this loan will be removed from the Company’s records as a forgiven loan pursuant to the terms of Agreement No. 1. The Company has the obligation to repay the amount of $500,000 to ABT Ltd. should the farm out agreement not be approved by the Ministry.

Cash Requirements

The following aggregated information about our contractual obligations and other commitments aim to provide insight into our short and long-term liquidity and capital resource need and demands as at June 30, 2005.   Unless otherwise indicated, the majority of these contractual obligations and commitments are contingent upon our selling production.

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			Exploration phase		Production phase
Time period	Total	Within 1 year	1 - 3 years	3 - 5 years			Over 5 years
Estimated dates		2005	2006 – 08	2009-10
Production levels (tonnes of oil) (One tonne of oil equals approximately 7.4 barrels)		694,000				694,000
Operating leases	$348,800	$174,900	$173,900	$Nil			$Nil
Historical costs (Owed to Kazakhstan Government)	11,424,278	-	-	-			11,424,278
Short-term interest free loan from ABT Ltd.	1,426,583	1,426,583
Social sphere development liability (Astana and Atyrau)	3,030,000	-	-	-			3,030,000
Social development commitment (Astana and Atyrau)	1,389,000	-	-	-			1,389,000
Investment commitment (Including investment in local personnel)	121,900,000	1,500,000*	3,000,000*	8,500,000*			108,900,000
Liquidation fund (Obligations incurred to date)	280,000	-	-	-			280,000
Commercial production milestone payments	1,300,000	-	-	-			1.300,000
Total	$140,858,661	$3,101,483	$3,173,900	$ 8,500,000			$126,323,278

* As disclosed in Note 24 (g) to the consolidated amended and restated financial statements, we are obliged to spend $14,000,000 during the exploration phase, which is expected to end in 2009. As we are entitled to make these payments at any point over the exploration period, the timing of payments presented in the table reflects management’s estimate as to when these expenditures will be incurred by us.

The following commitments have been excluded based on the inability to estimate the timing

* As disclosed in Note 24 to the consolidated amended and restated financial statements, we are obliged to spend $16.43 million during the exploration phase, which is expected to end in 2009. As we are entitled to make these payments at any point over the exploration period, the timing of payments presented in the table reflects management’s estimate as to when these expenditures will be incurred by us.

The following commitments have been excluded based on the inability to estimate the timing of payment and or the dollar amount of the future payments:

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1.

Quarterly payments to the non-controlling partners in KoZhaN – these payments will be charged based net sales of oil, in accordance with the following schedule:

- $0.35 per barrel if the price of oil is equal to or less than $14.00;

- $0.75 per barrel if the price of oil is greater than $14.00 and less than or equal to $18.00;

- $1.00 per barrel if the price of oil is greater than $18.00 and less than or equal to $22.00; or

- $1.50 per barrel if the price of oil is greater than $22.00

2.

Commercial discovery bonus – these payments to the government are required within 30 days of the approval by the State Committee of Kazakhstan of proved commercial hydrocarbon reserves. Payments amounts are currently set at 0.1% of the value assigned to the proved commercial reserves.

3.

A royalty of $1 per barrel for oil produced and sold form the Atyrau and Liman 2 licences.

PLAN OF OPERATION

Currently, our management expects that we have sufficient working capital surplus to fund our operations through December 2006, without including the costs of a drilling program or acquisitions of other potential fields,  As at June 30, 2005 Big Sky was actively engaged in a private placement with a view to raising $42million in new common equity, together with the proceeds of the financing exercise of February 2005, we expect to have sufficient working capital to fund our operations and carry out a significant portion of our annual work commitments.

Meeting our future financing requirements will be dependent on our ability to develop oil and gas farm outs or joint venture partnerships on favorable terms, our ability to access equity capital markets and, after achieving or acquiring sustainable production, our ability to maintain credit facilities from institutional lenders. We may not be able to raise additional equity when required, or we may raise the equity on terms that are dilutive to existing shareholders.

On March 18, 2005, our previous auditors noted that the Corporation’s operating losses since inception raised substantial doubts about the Corporation’s ability to continue as a going concern.

These consolidated amended and restated financial statements have been prepared on a going concern basis.  The Corporation has acquired an oil and gas business and must make certain capital expenditures during the course of the next year and future years (see Note 22).  The Corporation's ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  The outcome of these matters cannot be predicted with any certainty at this time.  These consolidated amended and restated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Corporation be unable to continue as a going concern.

During 2004, the Corporation utilized cash for management and corporate administrative activities of approximately $200,000 per month. In 2005, corporate and administrative costs will be higher due to increased business activity in Kazakhstan.  Taking into account prepaid lease rentals for office space, monthly expenditures for corporate and administrative costs are estimated at $450,000 per month. Management anticipates that the Corporation currently has sufficient working capital to fund this level of operations through December 2006. Current cash resources are not anticipated to be sufficient to fund the next phase of the Corporation’s development, including its expansion in the oil and gas business, and it will consider seeking additional private equity or debt financing. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Corporation’s objective, or result in commercial success. The Corporation cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subsidiaries will be commercially successful.

The ability of the Corporation to survive will depend on its ability to finance, acquire, explore for and produce oil and natural gas on a profitable basis.  The Corporation's operations may also be adversely affected by significant political, economic and social uncertainties in Kazakhstan and in other countries in which it may acquire oil and gas operations. Kazakhstan has emerged from the former Soviet Union with a viable, independent economy and is open to foreign investment.  Kazakhstan is rich in a variety of minerals and raw materials.  The economy is evolving from centrally planned towards a free market.  Government policies favoring foreign investment may change, commodity prices may decline and political disruptions may occur in the region.  These factors may impact the Corporation’s ability to conduct its business, the results of its operations and its financial condition and its right to pay dividends.  

37

CRITICAL ACCOUNTING ESTIMATES

Oil and Gas Properties

We follow successful efforts accounting for our oil and gas properties.  All property acquisition costs are initially capitalized to property, plant and equipment as unproved property costs.  Once proved reserves are discovered, the acquisition costs are reclassified to proved property acquisition costs.  Exploration drilling costs are capitalized pending evaluation as to whether sufficient quantities of reserves have been found to justify commercial production.  If commercial quantities of reserves are not found, exploration drilling costs are expensed.  All exploratory wells that discover potentially commercial quantities of reserves in areas requiring major capital expenditures before the commencement of production and where commercial viability requires the drilling of additional exploratory wells, remain capitalized as long as the drilling of additional exploratory wells is under way or firmly planned.  All other exploration costs, including geological and geophysical and annual lease rentals are expensed to earnings as incurred.  All development costs are capitalized as proved property costs.

Impairment of Oil and Gas Properties

Big Sky evaluates its long-lived assets, including oil and gas properties, for possible impairment by comparing the carrying values with the undiscounted future net before-tax cash flows. Among other things, this might be caused by falling oil and gas prices, a significant revision to reserve estimates, adverse changes in operating costs, tax or political environment. Asset impairment may occur if a field discovers lower than anticipated reserves, write downs of proved reserves based on field performance, significant changes in commodity prices, significant decreases in the market value of an asset, and significant change in the extent or manner of use or physical change in an asset. Impaired assets will be written down to their estimated fair values, generally their discounted future net before-tax cash flows. For proved oil and gas properties, Big Sky performs the impairment test on an individual field basis. Unproved properties are reviewed periodically to determine if there has been impairment of the carrying value with any such impairment charged to expense in the current period. We assessed our oil and gas properties for impairment at the end of 2004 and found no impairments were required based on our assumptions.

Stock Based Compensation

We account for stock-based awards to employees using the intrinsic method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees”.  Under APB 25, compensation expense is accounted for in accordance with the intrinsic method where the expense is recognized upon either the grant date, if immediately vesting; upon vesting if options vest over a period of time, as being the difference between the quoted market price and the exercise price, or if resulting from awards under variable plans, the expense is measured at each reporting period as the difference between the quoted market price and the exercise price.  We account for stock-based awards to non-employees in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”.  SFAS No. 123 requires that stock options awarded to non-employees be valued at fair value on the date of the award.  Management estimates the fair value of the stock options using the Black-Scholes option-pricing model and makes assumptions for the applicable interest rates, volatility and dividend yield.  In all cases, the calculated compensation is recognized as an expense over the period that the employee performs the related services.  For the three month period ended June 30, 2005, an amount of $493,100was recorded as non-cash stock compensation expense in respect of employee and non-employee-stock based compensation (2004 - $191,721)

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance sheet arrangements at June 30, 2005.

SUBSEQUENT EVENTS

On June 30, 2005, the Board of Directors accepted the resignation of Mr. Ruslan Tsarni as Corporate Secretary and confirmed Bruce H. Gaston, our Chief Financial Officer in role of Corporate Secretary.

Reference Footnote 25 of Condensed Consolidated Financials Statements incorporated in this filing.

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ITEM 3. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.   

Subsequent to the discovery of the accounting error which was the causation of our current restatement, we carried out an evaluation, under the supervision and with the participation of our management and Audit Committee, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures while designed to provide reasonable assurance that information required to be disclosed in the reports the Corporation files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required, were lackng in rigor and application and disclosure controls were not functioning.

The areas that require to be remediated include:

-

lack of sufficient personnel with appropriate knowledge, experience and training in US GAAP;

-

lack of clear accountability structure within the accounting function;

-

lack of clear organization and accountability structure within the accounting function, including insufficient review and supervision, combined with financial reporting systems that are not integrated between our offices in Kazakhstan and North America and our offices and those of our accountants and require substantial manual intervention;

-

lack of review process for translated material prior to insertion into the accounting records of the company;

The accounting error was not related to the process by which information is processed and disclosed but was related to the complexities of the contracts that were the subject of the accounting error. The subject-contracts were originally drafted in Russian. Upon translation into English, certain provisions of the contracts were worded in way that lead to multiple possible interpretations. This lack of clarity was the root of the cause of the accounting error.

The Corporation intends to adopt a policy that all contracts drafted in a foreign language must be translated into English and then reviewed and approved by the Corporation’s legal counsel prior to execution.  Management believes that this will ensure that specificity and clarity will be included in every contract executed by the Corporation and its subsidiaries and prevent the misinterpretation that occurred in the contracts referenced above.

As an initial step to addressing this lack of rigor and good practice, the Audit Committee conducted a recruitment exercise which culminated in the employment of Kevin Kim as Chief Accounting Officer as of August 15, 2005.

In addition, our Chief Financial Officer has engaged with our Corporate Governance and Compliance Consultant to devise and implement a sub-certification program throughout the accounting function with the long-term goal of extending this program to all business processes.

In conjunction with external service providers, we will continue to identify, develop and implement remedial measures to address these inadequacies and failures and implement best practice in our internal controls over financial reporting.

Changes in Internal Controls

The Company’s internal controls over financial reporting identified in connection with the evaluation above during the period covered by this Annual Report changed as noted above.

39

PART II

ITEM 1.  LEGAL PROCEEDINGS

Not Applicable

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

a)  Sales of Unregistered Securities

In February 2005, Big Sky raised additional common equity in a series of private placement transactions, which raised $13,625,000. Big Sky issued 27,250,000 shares of common stock at a price of $0.50 per share.  Big Sky paid a finders fee of 6% in cash and warrants equal to 6% of the shares of common stock issued. Finder’s fees of $817,140 were paid and 1,634,280 Warrants to purchase 1,634,280 shares of common stock at $0.50 per share were issued.

In April 2005, Big Sky issued 150,000 shares to an option holder, who exercised options previously granted and fully vested at an exercise price of $0.05 per common share for proceeds of $7,500.

On May 5, 2005, Big Sky signed a convertible debenture to secure a US$17.5 million facility from Sun Drilling LLP ("Sun Drilling") to finance the 2005 drilling program of its two subsidiaries, KoZhaN and Vector. KoZhaN plans to drill two wells in its Morskoe field, and Vector plans to drill ten wells in its Atyrau block in 2005, commencing approximately in May and July respectively. Sun Drilling has agreed to provide full well construction services for these wells on a turnkey basis, specified under formal drilling contracts, finalized on May 5th. The Company’s operating subsidiaries, KoZhaN and Vector, will pay 20% of Sun Drilling's pre-agreed well construction cost in cash as each well is completed and the 80% balance within one year carrying an interest charge of LIBOR plus 4% per annum.  The payment of the 80% balance is secured by convertible debentures.  Sun Drilling will have the right to convert to the Company's shares of common stock after 365 days from issue of each invoice, with the conversion price not to exceed two dollars per share.  There is an additional optional conversion clause that permits Sun Drilling LLP, upon 30 days notice, on or before the Maturity Date, to redeem the convertible debentures, in whole or from time to time in part at the option of Sun Drilling LLP, at a redemption price equal to the Conversion Price plus accrued and unpaid interest.

Each of the foregoing issuances of securities was exempt from registration due to the exemption found in Regulation S promulgated by the Securities and Exchange Commission under the Securities Act of 1933. These sales were offshore transactions since all of the offerees were not in the United States and the purchasers were outside the United States at the time of the purchase. Moreover, there were no directed selling efforts of any kind made in the Untied States neither by us nor by any affiliate or any person acting on our behalf in connection with any of these offerings. All offering materials and documents used in connection with the offers and sales of the securities included statements to the effect that the securities have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons unless the securities are registered under the Act or an exemption therefrom is available and that no hedging transactions involving those securities may not be conducted unless in compliance with the Act. Each purchaser under Regulation S certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from and we are required to refuse to register any transfer that does not comply with such requirements.

In March 2005 Big Sky issued 1,750,000 restricted shares of common stock to four option holders who exercised their options under Big Sky’s 2000 Stock Award Plan.

40

As of July 18, 2005 and still ongoing, Big Sky commenced a private placement with a view to raising $25m in new equity.  Under this private placement, up to 25,000,000 shares of common stock (or in the case of Canadian investors, potentially issue securities that are in the form of Special Warrants convertible into common shares on the filing of a prospectus in Canada) is offered to potential investors. The common shares and special warrants will be offered on a best efforts basis through a syndicate of agents led by Westwind Partners Inc. (the "Agents").  The Corporation has also agreed to grant the Agents an option, exercisable at any time up to 30 days following the closing of the offering, to increase the size of the offering by an additional 10,000,000 common shares.

This offering was scheduled to close on or about July 30, 2005, however on July 29, 2005, the Corporation announced an extension to this private placement so as to offer up to 42m shares and the private placement is tentatively scheduled to complete on or about August 16, 2005

Where appropriate, the foregoing issuances of securities was exempt from registration due to the exemption found in Regulation S promulgated by the Securities and Exchange Commission under the Securities Act of 1933. These sales were offshore transactions since all of the offerees were not in the United States and the purchasers were outside the United States at the time of the purchase. Moreover, there were no directed selling efforts of any kind made in the Untied States neither by us nor by any affiliate or any person acting on our behalf in connection with any of these offerings. All offering materials and documents used in connection with the offers and sales of the securities included statements to the effect that the securities have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons unless the securities are registered under the Act or an exemption therefrom is available and that no hedging transactions involving those securities may not be conducted unless in compliance with the Act. Each purchaser under Regulation S certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from and we are required to refuse to register any transfer that does not comply with such requirements.

Where appropriate, the foregoing issuances of securities were exempt from registration pursuant to Rule 506 of Regulation D. Neither we nor any person acting on our behalf offered or sold these securities by any form of general solicitation or general advertising. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom. Each purchaser represented to us that he was purchasing the securities for his own account and not for the account of any other persons. Each purchaser was provided with written disclosure that the securities have not been registered under the Securities Act of 1933 and therefore cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.

b)  Use of Proceeds from Sales of Registered Securities

Not Applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

Not Applicable

ITEM 5.  OTHER INFORMATION

Not Applicable

ITEM 6.  EXHIBITS

a) Exhibits.  

41

Except for contracts made in the ordinary course of business, the following are the material contracts that have been entered into by Big Sky:

Exhibit No.	Description
3.1 (1)	Certificate of Amendment to Articles of Incorporation of China Broadband Corp. filed with the Secretary of State of Nevada on December 29, 2003
3.2 (1)	Amended and Restated By-Laws of Big Sky, dated December 3, 2004.
10.1(2)	Share Exchange Agreement, dated October 27, 2003, between China Broadband Corp., Big Sky Energy Kazakhstan Ltd. and its shareholders.
10.2 (3)	Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Richard Lam
10.3 (3)	Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Daming Yang
10.4 (3)	Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and M.H. Financial Management Ltd.
10.5 (3)	Consulting Agreement dated January 1, 2004, between China Energy Ventures Corp. and Wei Yang
10.6 (4)	Share Purchase Agreement dated October 7, 2003 between Big Sky Energy Kazakhstan Ltd. and Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. – English Translation
10.7 (4)	Frame Agreement of Jointly Cooperation dated November 6, 2003 between Big Sky Energy Kazakhstan Ltd. and Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. – English Translation
10.8 (4)	Escrow Agreement dated January 30, 2004 between Big Sky Energy Kazakhstan Ltd., Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. and W. Scott Lawler
10.9 (5)	Asset Purchase Agreement dated February 27, 2004 between IbrizOil Inc. and China Energy Ventures Corp.
10.10 (6)	Contract for exploration and production of hydrocarbons at Dauletaly Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan
10.11 (6)	Contract for exploration and production of hydrocarbons at Karatal Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan
10.12 (6)	Contract for exploration and production of hydrocarbons at Morskoe Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan
10.13 (7)	Audit Committee Charter, amended November 12, 2003
10.14 (8)	Sale and Purchase Agreement between Big Sky Energy Atyrau Ltd., Batys Petroleum LLP and Glushich Victor Petrovich dated April 10, 2004
10.15 (8)	Amendment Agreement No. 1 to the Sale and Purchase Agreement Dated April 10, 2004 between Big Sky Energy Atyrau Ltd., Batys Petroleum LLP and Glushich Victor Petrovich dated April 12, 2004
10.16 (8)	Agreement for Assignment of the Creditor’s Rights between Vector Energy West LLP, Lorgate Management Inc. and Big Sky Energy Atyrau Ltd. dated April 10, 2004
10.19 (11)	Share Purchase Agreement dated December 9, 2004, by and between Big Sky Energy Corporation and Big Sky Energy Canada Ltd.
10.20 (10)	Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and M.H. Financial Management Ltd.
10.21 (10)	Consulting Agreement dated June 30, 2004, between Big Sky Energy Corporation and Daming Yang.
10.22 (10)	Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and Precise Details, Inc.
10.23 (10)	Consulting Agreement dated October  1, 2004, between Big Sky Energy Corporation and Suntree Ltd.

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10.24 (12)	Consulting Agreement dated January 19, 2005, between Big Sky Energy Corporation and A.S. Sehsuvaroglu, together with amendment.
10.25 (9)	Terms of Business Agreement dated 24 February, 2005 and executed on behalf of the Company, 7 March 2005,  between Big Sky Energy Corporation and Matrix-Regent/Matrix-Securities Limited, trading as Matrix Corporate Finance
10.26 (11)	2000 Stock Award Plan, as amended by the shareholders, December 3, 2004
10.27 (13)	Master contract - Vector Energy West LLP and Sun Drilling
10.28 (13)	Power of Attorney for William Duncan - English translation
10.29 (13)	Master contract - KoZhaN LLP and Sun Drilling
10.30  (14)	Sun Drilling LLP Convertible Debenture Term Sheet
10.31 (14)	BDO Kazakhstanaudit LLP Client Acceptance Letter
10.31 (15)	Sale Purchase Agreement between Big Sky Energy Kazakhstan Ltd. and Mr. Bolat Raimkanovich Mukashev; Mr. Garipolla  Sapayevich Kaschpov; Mr. Kadyr Karkabatovich Baikenov, Ms. Turgan Nurtayevna Asanova, and Mr. Ruslan Rakhimzhanovich Faskhutinov for the purchase of 10% of KoZhaN LLP.
31.1	Section 302 Certification – Chief Executive Officer
31.2	Section 302 Certification – Chief Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer
(1)	Previously filed on Form 10-QSB on May 21, 2004
(2)	Previously filed on Form 8-K on October 31, 2003.
(3)	Previously filed on Form SB-2 on February 19, 2004
(4)	Previously filed on Form 10-KSB on March 30, 2004.
(5)	Previously filed on Form 8-K on May 18, 2004
(6)	Previously filed on Form 10-QSB on May 21, 2004
(7)	Previously filed on Form SB-2 on July 28, 2004.
(8)	Previously filed on Form 8-K on December 14, 2004
(9)	Previously reported on Form 8-K on March 9, 2005
(10)	Previously filed on Form 8-K on March 10, 2005
(11)	Previously filed on Form 14C on October 27, 2004
(12)	Previously filed on Form 8-K on February 3, 2005
(13)	Previously filed on Form SB-2 on May 13, 2005
(14)	Previously filed on Form 8-K on May 19, 2005
(15)	Previously filed on Form 10-QSB on August 31, 2005

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Big Sky Energy Corporation
Date:  November 14, 2005	By:	/s/ S.A  Sehsuvaroglu Name:    A.S. Sehsuvaroglu Title:    Chief Executive Officer (Principal Executive Officer)
Date: November 14, 2005	By:	/s/ Bruce H. Gaston   Name:   Bruce H. Gaston Title: Chief Financial Officer (Principal Accounting Officer)

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