Sky Petroleum (SKPI) 10-K/A 2008 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
o	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: 333-99455

SKY PETROLEUM, INC.

(Exact Name of Registrant as Specified in its Charter)

Nevada	32-0027992
(State of other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
401 Congress Avenue, Suite 1540
Austin, Texas	78701
(Address of Principal Executive Offices)	(Zip Code)

(512) 687-3427

(Registrant’s Telephone Number, including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Shares, $0.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer o
Non-Accelerated Filer o Accelerated Filer o
Smaller Reporting Company x

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $9,994,931

The number of shares of the Registrant’s Common Stock outstanding as of March 25, 2009 was 58,793,709.

EXPLANATORY NOTE

The Company is filing this amendment number one to its annual report on Form 10-K, as originally filed on March 31, 2009, to correct an inadvertent error in the Company’s Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2008 and 2007 included in the Company’s Consolidated Annual Financial Statements in Item 8 herein. The changes to the Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2008 and 2007 consists of moving the $1,018 and $3,254 “Other” entries inadvertently recorded under the column “Preferred Stock – Amount” to the correct column of “Additional Paid-in Capital”. No other disclosure in this annual report has been modified, amended or updated as a result of this amendment number one.

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Sky Petroleum, Inc.

We have audited the accompanying consolidated balance sheets of Sky Petroleum, Inc. and subsidiaries, as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sky Petroleum, Inc. and subsidiaries, as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ WHITLEY PENN LLP

Dallas, Texas

April 9, 2009

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Sky Petroleum, Inc.

Consolidated Balance Sheets

	As of December 31, 2008			As of December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	5,242,260		$	5,557,898
Inventory - oil in storage		21,796			—
Prepaids and other current assets		—			6,841
Total Current Assets		5,264,056			5,564,739
Investment in oil and gas properties, net		1,062,572			2,869,755
Fixed assets, net		1,429			3,406
Deposits and other assets		4,209			4,209
Investment in non-affiliated entity		1,000,000			1,000,000
Total Other Assets		2,068,210			3,877,370
Total Assets	$	7,332,266		$	9,442,109
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities	$	190,967		$	1,291,601
Total Liabilities		190,967			1,291,601
Commitments and contingencies
Stockholders' Equity:
Series A Preferred stock, $0.001 par value, 10,000,000 shares authorized,
none outstanding		—			—
Common stock, $0.001 par value, 150,000,000 shares authorized,
58,793,709 shares issued and outstanding		58,794			58,794
Additional paid-in capital		40,343,117			40,226,188
Accumulated deficit		(33,260,612	)		(32,134,474	)
Total Stockholders' Equity		7,141,299			8,150,508
Total Liabilities and Stockholders' Equity	$	7,332,266		$	9,442,109

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

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Sky Petroleum, Inc.

Consolidated Statements of Operations

		Year Ended December 31,
		2008			2007
Oil revenues	$	2,248,523		$	1,127,817
Expenses:
Lease operating expenses		59,716			78,032
Depletion and depreciation		1,143,990			5,578,792
Impairment expense		665,170			9,391,481
Consulting services		266,500			946,745
Stock based compensation		113,675			1,851,590
Compensation - related party		—			175,000
General and administrative		1,237,121			1,435,463
Total expenses		3,486,172			19,457,103
Net operating loss		(1,237,649	)		(18,329,286	)
Other income:
Interest income		111,511			264,568
Total other income		111,511			264,568
Net loss		(1,126,138	)		(18,064,718	)
Dividends on Preferred Stock		—			(192,500	)
Net loss applicable to common stockholders		(1,126,138	)		(18,257,218	)
Net loss per share - basic and diluted	$	(0.02	)	$	(0.33	)
Weighted average number of
common shares outstanding - basic and diluted		58,793,709			55,143,785

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

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Sky Petroleum, Inc.

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2008 and 2007

	Common Stock				Preferred Stock				Additional				Total
	Shares		Amount		Shares		Amount		Paid-in Capital		Accumulated Deficit		Stockholders' Equity
Balance at December 31, 2006		46,571,485	$	46,571		3,055,556	$	3,056	$	38,382,747	$	(13,877,256)	$	24,555,118
Preferred stock dividends		—		—		—		—		—		(192,500)		(192,500)
Stock based compensation		—		—		—		—		1,851,590		—		1,851,590
Preferred stock converted to common stock		12,222,224		12,223		(3,055,556)		(3,056)		(9,167)		—		—
Other		—		—		—		—		1,018		—		1,018
Net loss		—		—		—		—		—		(18,064,718)		(18,064,718)
Balance at December 31, 2007		58,793,709		58,794		—		—		40,226,188		(32,134,474)		8,150,508
Stock based compensation		—		—		—		—		113,675		—		113,675
Other		—		—		—		—		3,254		—		3,254
Net loss		—		—		—		—		—		(1,126,138)		(1,126,138)
Balance at December 31, 2008		58,793,709	$	58,794		—	$	—	$	40,343,117	$	(33,260,612)	$	7,141,299

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

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Sky Petroleum, Inc.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(1,126,138	)	$	(18,064,718	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock based compensation		113,675			1,851,590
Depletion and depreciation		1,143,990			5,578,792
Impairment expense		665,170			9,391,481
Changes in operating assets and liabilities -
Accounts receivable, net		—			1,140,471
Inventory - oil in storage		(21,796	)		22,195
Prepaids and other current assets		6,841			5,826
Deposits and other assets		—			(1,370	)
Accounts payable and accrued liabilities		(1,100,634	)		1,150,311
Net cash provided by (used in) operating activities		(318,892	)		1,074,578
Cash flows from investing activities:
Purchase of fixed assets		—			(803	)
Investment in non-affiliated entity		—			(1,000,000	)
Investment in oil and gas properties		—			(135,158	)
Net cash used in investing activities		—			(1,135,961	)
Cash flows from financing activities:
Other		3,254			1,018
Preferred Stock dividend payment		—			(192,500	)
Net cash provided by (used in) financing activities		3,254			(191,482	)
Net decrease in cash and cash equivalents		(315,638	)		(252,865	)
Cash and cash equivalents at beginning of year		5,557,898			5,810,763
Cash and cash equivalents at end of year	$	5,242,260		$	5,557,898
Supplemental disclosures:
Interest paid	$	—		$	—
Taxes paid	$	—		$	—
Common stock issued for preferred redemption	$	—		$	12,223

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

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Sky Petroleum, Inc.

Notes to Consolidated Financial Statements

Note 1 - Organization and Basis of Presentation

Sky Petroleum, Inc. (the "Company") was organized on August 22, 2002 (date of inception) under the laws of the State of Nevada, as The Flower Valet. On December 20, 2004, the Company amended its articles of incorporation to change its name to Seaside Explorations, Inc. Subsequently, on March 28, 2005, the Company changed its name to Sky Petroleum, Inc.

The Company is engaged in exploration and development of oil and natural gas properties of others under arrangements in which we finance the costs in exchange for interests in the oil or natural gas revenue generated by the properties. Such arrangements are commonly referred to as farm-ins to us, or farm-outs by the property owners farming out to us.

In order to manage its international oil and gas operations, the Company established two corporations in Cyprus. Bekata Limited (“Bekata”) is a wholly-owned subsidiary of Sky Petroleum, Inc. which also owns a 100% interest in Sastaro Limited (“Sastaro”). Sastaro is the entity that signed the Participation Agreement in the United Arab Emirates (“UAE”).

Sastaro entered into a Participation Agreement for the financing of a drilling program in the Mubarek field, an offshore region in a concession area surrounding Abu Musa Island in the Arabian Gulf, with Buttes Gas and Oil Co. International Inc., (“Buttes”) a wholly-owned subsidiary of Crescent Petroleum Company International Limited (“Crescent”). Under the terms of the Participation Agreement, Sastaro participates in a share of the production revenue related to two wells in an off-shore oil and gas project in the UAE, due to its funding of $25,000,000 in drilling costs. The Participation Agreement does not grant Sastaro any interest in the concession area. Sastaro’s rights are limited to receiving a share of future production revenue, if any.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary corporations, after elimination of all intercompany accounts, transactions and profits. The Company accounts for its interests in oil and gas ventures and working interests using the proportionate consolidated method. Under this method, the Company records its proportionate share of assets, liabilities, revenues and expenses.

Unless otherwise indicated or unless the context otherwise requires, all references to “Sky”, “the Company”, “we”, “us”, and “our” are to Sky Petroleum, Inc. and its consolidated subsidiaries, Sastaro and Bekata.

Note 2 - Summary of Significant Accounting Policies

The consolidated financial statements included herein, presented in accordance with accounting principles generally accepted in the United States of America and stated in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the SEC.

(a) Basis of Consolidation

The accompanying financial statements present the consolidated accounts of the Company and its wholly owned subsidiaries, Bekata and Sastaro. All intercompany account balances and transactions have been eliminated.

(b) Nature of Operations

The Company's focus is on the acquisition, development and exploitation of long-lived oil and natural gas reserves and, to a lesser extent, exploration for new oil and natural gas reserves. The Company's business activities are currently carried out primarily off-shore Sharjah, UAE.

(c) Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of unsecured accounts receivable from unaffiliated crude oil purchasers and the well operator. A substantial portion of the Company's oil reserves are located offshore off the coast of Sharjah, UAE and the Company may be disproportionately exposed to the impact of delays or interruptions of production from these wells due to mechanical problems, damages to the current producing reservoirs and significant governmental regulation, including any curtailment of production or interruption of transportation of oil or natural gas produced from the wells.

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(d) Property and Equipment

Oil and natural gas properties:

The Company uses the full cost method of accounting for its oil and natural gas producing activities. Accordingly, all costs associated with acquisition, exploration, and development of oil and natural gas reserves, including directly related overhead costs, are capitalized. Management and service fees received under contractual arrangements, if any, are treated as reimbursement of costs, offsetting the costs incurred to provide those services.

Depletion is provided using the units-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the carrying value of the assets is reduced accordingly. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins.

Under the full cost method of accounting, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling limitation is the discounted estimated after-tax future net cash flows from proved oil and natural gas properties. In calculating future net cash flows, current prices and costs are generally held constant indefinitely. The net book value of oil and natural gas properties, less related deferred income taxes is compared to the ceiling on a quarterly and annual basis. Any excess of the net book value, less related deferred income taxes, is generally written off as an expense. Under rules and regulations of the SEC, all or a portion of the excess above the ceiling may not be written off if, subsequent to the end of the quarter or year but prior to the release of the financial results, prices have increased sufficiently that all or a portion of such excess above the ceiling would not have existed if the increased prices were used in the calculations. As of December 31, 2008, the Company had accumulated impairment of $15,238,000 as a result of the full cost ceiling test for the years 2006 through 2008. As of December 31, 2008, the net carrying value of the Company's investment in oil and gas properties is approximately $1,063,000.

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

Other Property and Equipment:

Maintenance and repairs are charged to operations. Renewals and betterments are capitalized to the appropriate property and equipment accounts.

Upon retirement or disposition of assets other than oil and natural gas properties, the cost and related accumulated depreciation are removed from the accounts with the resulting gains or losses, if any, recognized in income. Depreciation of other property and equipment is computed using the straight-line method based on the estimated useful lives of the property and equipment.

(e) Income Taxes

The Company accounts for federal income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on previously recorded deferred tax assets and liabilities resulting from a change in tax rates is recognized in operating results in the period in which the change is enacted.

As of January 1, 2007, the Company adopted the Financial Accounting Standards Board ("FASB") Interpretation No. 48 (“FIN 48”)Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 Accounting for Income Taxes. The current Company policy classifies any interest recognized on an underpayment of income taxes as interest expense and classifies any statutory penalties recognized on a tax position taken as other general and administrative expense. There was no interest or other general and administrative expense accrued or recognized related to income taxes for the years ended December 31, 2008 and 2007. The Company has not taken a tax position that, if challenged, would have a material effect of the financial statements or the effective tax rate for the twelve-months ended December 31, 2008 and 2007, or during the prior three years applicable under FIN 48. The Company has determined it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months. The Company is currently subject to a three year statute of limitations by major tax jurisdictions.

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(f) Inventory

Inventory consists of crude oil held in storage tanks.  Inventories are stated at the lower of actual cost or market based on the average cost method.

(g) Investments

Investments in non-affiliated companies with a less than 20% ownership interest, no significant influence, and market prices are not readily available, are accounted for under the cost method.

(h) Stock-Based Compensation

The Company measures all share-based payments, including grants of employee stock options, using a fair-value based method in accordance with SFAS No. 123R Share-Based Payments. The cost of services received in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the grant date fair value of those awards amortized over the requisite service period.

(i) Basic and Diluted Net Loss Per Share

Net loss per share is presented in accordance with SFAS No. 128,Earnings per Share. Basic net loss per share is computed based on the weighted average shares of common stock outstanding for the period.  Common stock equivalents which represent stock options have been excluded from the computation of diluted net loss per share at December 31, 2008 and 2007 as their effect is anti-dilutive.

(j) Use of Estimates in the Preparation of Consolidated Financial Statements

Preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The oil and natural gas reserve estimates, and the related future net cash flows derived from those reserves, are used in the determination of depletion expense and the full cost ceiling test and are inherently imprecise. Actual results could differ from those estimates. 

(k) Fair value of financial instruments

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes.

(l) Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all demand deposits, money market accounts and certificates of deposit purchased with an original maturity of three months or less to be cash equivalents.

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(m) Revenue Recognition

Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes oil and natural gas revenue based on the amount of oil and natural gas sold to purchasers. As of December 31, 2008 and 2007, the Company did not have any oil or natural gas imbalances recorded. The Company does not recognize revenues until they are realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller's price to the buyer is fixed or determinable; and, (iv) collectability is reasonably assured.

(n) Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R will become effective as of the beginning of the Company's year beginning January 1, 2009. The impact that adoption of SFAS No. 141R will have on the Company's consolidated financial statements will depend on the nature, terms and size of business combinations that occur after the effective date.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will become effective as of the beginning of the Company's year beginning January 1, 2009. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.

In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 110, Share-Based Payment. SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of the expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. SAB 110 was effective January 1, 2008. The Company has used the “simplified” method to estimate the expected term for share option grants as it does not have enough historical experience to provide a reasonable estimate. The Company will continue to use the “simplified” method until it has enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110. The adoption of SAB 110 did not have a material impact on its consolidated balance sheets, consolidated statements of operations and cash flows.

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). In February 2008, the FASB issued FSP No. 157-2, Effective Date of FASB Statement No.157, which provides a one-year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 only with respect to financial assets and liabilities, as well as any other assets and liabilities carried at fair value. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes how to measure fair value based on a three-level hierarchy of inputs, of which the first two are considered observable and the last unobservable.

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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The Company’s investment in non-affiliated entity is classified as Level 3 in the fair value hierarchy. The adoption of this statement did not have a material impact on the Company’s consolidated results of operations or financial condition. The Company does not currently expect the application of the fair value framework established by SFAS 157 to non-financial assets and liabilities measured on a non-recurring basis to have a material impact on the consolidated financial statements. However, the Company will continue to assess the potential effects of SFAS 157 as additional information becomes available.

Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option on any assets or liabilities not previously carried at fair value under SFAS 159.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities— An Amendment of FASB Statement No.133 (“SFAS 161”). The objective of SFAS 161 is to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material impact on the Company’s consolidated financial condition and results of operations. However, the Company believes it will likely be required to provide additional disclosures as part of future financial statements, beginning with the first quarter of 2009.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (“FSP 142-3”), Determination of the Useful Life of Intangible Assets, which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. FSP 142-3 requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset. FSP 142-3 also requires the disclosure of the weighted-average period prior to the next renewal or extension for each major intangible asset class, the accounting policy for the treatment of costs incurred to renew or extend the term of recognized intangible assets and for intangible assets renewed or extended during the period, if renewal or extension costs are capitalized, the costs incurred to renew or extend the asset and the weighted-average period prior to the next renewal or extension for each major intangible asset class. FSP 142-3 is effective for financial statements for fiscal years beginning after December 15, 2008. The adoption of FSP 142-3 is not expected to have a material impact on the Company’s financial condition and results of operations.

Note 3 - Investment in Oil and Gas Properties

On May 18, 2005, the Company entered into a Participation Agreement with Buttes, whereby the Company provided cash in the amount of $25,000,000, to be used for drilling costs associated with two oil wells located in the Arabian Gulf in exchange for a variable percentage of future production revenue. Pursuant to the Participation Agreement, the Company provided capital to Buttes in developmental increments. Upon commencement of production, which occurred in May 2006, the Company was to receive a preferred 75% of combined production revenue until such time as the Company recouped its total investment, and thereafter an incremental decrease of production revenue to 40%, until the Company has recouped two times its initial investment, and thereafter at 9.2%.

As of December 31, 2008, Buttes incurred drilling costs totaling approximately $53,000,000, exceeding the original cost estimates and funding by the Company of $25,000,000, and thus reducing the Company’s preferred share of combined production revenue from 75% to 35.32% until such time as the Company has recouped its total investment, and thereafter an incremental decrease of production revenue to 18.84% until the Company has recouped two times its initial investment, and thereafter at 4.33%.

The Company's operating costs are capped at $3.00 per barrel and royalty fees are 14.5% of gross production revenues under the Participation Agreement.

As of December 31, 2008 and 2007, the Company's investment in oil and gas properties consisted of:

	2008			2007
Evaluated Properties:
Mubarek K2-ST4 Well	$	13,173,901		$	13,173,901
Mubarek H2 Well		13,457,501			13,457,501
Accumulated Depletion		(10,331,287	)		(9,189,274	)
Impairment		(15,237,543	)		(14,572,373	)
Total	$	1,062,572		$	2,869,755

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As of December 31, 2008, the Company has capitalized drilling and completion costs incurred for the Mubarek H2 well of $13,457,501 and the Mubarek K2-ST4 well of $13,173,901. Based on the December 31, 2008 reserve report prepared by Energy Services Group Dubai (“ESG”) proven developed reserves, net to the Company's interest were 30,301 barrels of oil. During the years ended December 31, 2008 and 2007, depletion expense of $1,142,013 and $5,576,927, respectively, was recorded.   The depletion amortization rate per equivalent unit of production (bbls) was $57.02 and $205.37 for the years ended December 31, 2008 and 2007, respectively.

In addition, the reserve report estimated the net present value of recoverable reserves from the Mubarek H2 and K2-ST4 wells, discounted at 10%, to be $1,062,572 at December 31, 2008. Based on this information the Company recorded a full cost ceiling impairment expense of $665,170 to properly reflect the carrying value of its oil and gas properties at December 31, 2008.

There were no costs excluded from the impairment calculation at December 31, 2008.

Note 4 - Revenue Entitlement Adjustment

On May 18, 2005, we announced that our wholly-owned subsidiary, Sastaro, entered into a Participation Agreement with Buttes. Under the terms of the Participation Agreement, Sastaro had the right to participate in a share of the future production revenue by contributing up to $25 million in drilling and completion costs related to two wells in an off-shore oil and gas project in the UAE. The project is located in the Ilam/Mishrif reservoir of the Mubarek Field area near Abu Musa Island in the Arabian Gulf, which we refer to as the “Concession Area”. The Participation Agreement does not grant Sastaro any interest in the Concession Area other than the right to receive a share of future production revenue.

The Participation Agreement obligated Sastaro to pay $25 million in drilling and completion costs related to two wells. As of March 31, 2006, Sastaro had paid Buttes the full $25 million commitment. Buttes is responsible for carrying out all drilling and completion work related to the wells. In addition, under the Participation Agreement, if Buttes decides to drill additional wells in the Concession Area, we will have the option to participate in these wells and, upon exercise of the option, will be obligated to pay 100% of the drilling and completion costs of any of these wells.

Under the Participation Agreement, if Buttes estimated that the drilling and completion costs of the second well increased the total drilling and completion costs of the two wells above $25 million, Sastaro would have the option, but not the obligation, to pay these additional costs. Upon exercising this option, Sastaro would become obligated to pay the total costs of the second well whether above or below Buttes’ estimate. As of December 31, 2008, Buttes reported that the drilling and completion costs for the Mubarek H2 and K2-ST4 wells totaled approximately $53 million.

Sastaro did not exercise its option to pay the additional costs as reported by Buttes and subsequently, Sastaro’s entitlement interest was retroactively decreased from 75% to 34.67%, starting with the first sales dated September 11, 2006 until October 31, 2008 when it increased to 35.32% as a result of a reduction in costs from proceeds received from the sale of unused equipment.

Note 5 — Stockholders' Equity

On April 20 2007, we issued 12,222,224 shares of common stock upon the conversion of all 3,055,556 shares of Series “A” Preferred Stock. The Company is no longer obligated to make dividend payments on any Series “A” Preferred Stock.

Note 6 — Stock Options

On July 26, 2005, the Company adopted the Sky Petroleum, Inc. Non-U.S. Stock Option Plan (the "Non-U.S. Plan"), effective as of April 1, 2005. The Non-U.S. Plan authorizes the issuance of stock options to acquire up to 10% of the Company's issued and outstanding shares of common stock.

On August 25, 2005, the Company adopted the Sky Petroleum, Inc. 2005 U.S. Stock Incentive Plan (the "U.S. Plan"). The U.S. Plan authorizes the issuance of stock options and other awards to acquire up to a maximum of 3,321,600 shares of the Company's common stock (less the number of shares issuable upon exercise of options granted by the Company under all other stock incentive plans on the date of any grant under the U.S. Plan). The U.S. Plan provides for the grant of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended), options that are not incentive stock options, stock appreciation rights and various other stock-based grants.

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For the years ended December 31, 2008 and 2007, the Company recorded $113,675 and $1,851,590, respectively, of compensation expense based on its use of the Black Scholes model to estimate the grant-date fair value of these unit option awards. No options were exercised during the years ended December 31, 2008 or 2007; therefore, the intrinsic value of options exercised during 2008 and 2007 is $0. As of December 31, 2008 and 2007, there was a total of $0 and $905,041, respectively, of unrecognized compensation costs related to the non-vested portion of these unit option awards. Compensation expense is based upon straight line amortization of the grant-date fair value over the vesting period of the underlying unit option. Since the Company is a relatively new public company and has minimal trading history, it has used an estimated volatility factor of approximately 88% for options previously issued (there were no options issued in 2008 or 2007) based upon a representative group of publicly-traded companies in the energy industry and employed the Black Scholes method to estimate the grant-date fair value to be amortized over the vesting periods of the unit options awarded.

Information regarding stock options outstanding as of December 31, 2008 is summarized below:

Shares Underlying Options Outstanding					Shares Underlying Options Exercisable
Range of Exercise Prices	Shares Underlying Options Outstanding	Weighted Average Remaining Contractual Life		Weighted Average Exercise Price	Shares Underlying Options Exercisable		Weighted Average Exercise Price
$0.50	66,667	0.33	$	0.50	66,667	$	0.50
$1.00	833,332	2.09	$	1.00	833,332	$	1.00
$1.29 - $1.88	800,000	6.03	$	1.44	800,000	$	1.44

The aggregate intrinsic value of exercisable options as of December 31, 2008 and 2007 was $0.

The following is a summary of stock option activity for 2008 and 2007:

	Number Of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contract Life (Years)
Balance, December 31, 2006		4,183,333		$	1.07
Options cancelled		(483,334	)		1.00
Options granted		—			—
Options exercised		—			—
Balance, December 31, 2007		3,699,999		$	1.08		4.13
Options cancelled		(2,000,000	)	$	0.98
Options granted		—			—
Options exercised		—			—
Balance, December 31, 2008		1,699,999		$	1.19		3.87
Exercisable, December 31, 2008		1,699,999		$	1.19		3.87

Note 7 — Income Taxes

For the years ended December 31, 2008 and 2007, the Company had net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2008, the Company has accumulated operating losses totaling approximately $33.3 million. The net operating loss carry forwards will begin to expire in 2019 if not utilized. The Company has recorded net operating losses in each year since its inception through December 31, 2008. Based upon all available objective evidence, including the Company's loss history, management believes it is more likely than not that the net deferred assets will not be fully realized. Therefore, the Company has provided a valuation allowance against its deferred tax assets at December 31, 2008 and 2007.

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Non-current deferred tax assets were as follows for the date indicated:

	December 31,
	2008			2007
Net operating losses	$	9,950,104		$	9,597,851
Less: valuation allowance		(9,950,104	)		(9,597,851	)
Net non-current deferred tax asset	$	-		$	-

All of the Company's current oil and gas activities are located offshore off the coast of Sharjah, UAE and there are no income taxes due as no earnings or dividends were distributed or repatriated.

Undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign countries.

The Company and its wholly owned subsidiaries have not filed required foreign and U.S. tax returns due for the years ended December 31, 2005 through 2007.  No material tax liability is anticipated however the Company will not be in compliance until such reporting is made. Management has engaged with qualified firms to identify and prepare delinquent tax returns for filing. No accrual has been made for potential tax liabilities, penalties or interest.

The extent of the Company's U.S. operations is limited to its corporate finance, corporate governance, and investor relations functions as well as professional fees paid to U.S. based attorneys and accountants and other consultants. The total of these U.S. based expenditures was approximately $673,000 and $682,000 in 2008 and 2007, respectively.

A reconciliation between the income tax benefit determined by applying the applicable Federal statutory income tax rate to the pre-tax loss is as follows for the period indicated:

	Year Ended December 31,
	2008			2007
Tax benefit at statutory income tax rate	$	(394,148	)	$	(6,322,651	)
Stock based compensation		39,786			648,057
Other		2,109			700
Change in valuation allowance		352,253			5,673,894
Tax benefit reported	$	-		$	-

Note 8 - Related Party Transactions

During 2008 and 2007, the Company had a Consulting and Business Development Agreement with ESG, a related party whose owner was a director on the Company’s board during these periods. The director resigned effective May 31, 2008. For the five months ended May 31, 2008, the Company recorded consulting expense of $87,900 and for the year ended December 31, 2007 of $908,000, related to this contract. At December 31, 2007, $168,000 of these consulting fees were included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. In February 2008, the Company signed a new agreement with ESG to remain in effect indefinitely until such time either party gives notice to end said agreement.

Note 9 - Investment in Non-Affiliated Entity

We have acquired a minority stake in the development of an oilfield in the Komi Republic of the Russian Federation by acquiring a 3.9% interest, subject to dilution, in Pechora Energy through its UK parent company, Concorde Oil & Gas Plc. (which we refer to as Concorde). This acquisition is essentially a carried interest as the Company will not be required to contribute additional funds as Concorde intends to fund the field development through debt and production revenues rather than further shareholder equity. Pechora Energy holds the production license for the Luzskoye field in the Komi Republic, where it is carrying out appraisal drilling on the field. Production has increased as a result of drilling these new wells and through the work-over existing wells. The reserves and final development plan are being determined. The Company also has the right to participate in any other acquisitions Concorde makes in the Timan Pechora Basin.

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Note 10 - Supplemental Financial Information for Oil and Gas Producing Activities (Unaudited)

The following tables set forth supplementary disclosures for oil and gas producing activities in accordance with SFAS No. 69Disclosure about Oil and Gas Producing Activities. All of our operations are directly related to oil and gas producing activities located offshore in the Arabian Gulf off of the coast of Sharjah, UAE.

Capitalized Costs Relating to Oil and Gas Producing Activities:

	2008			2007
Evaluated Properties:
Mubarek K2-ST4 Well	$	13,173,901		$	13,173,901
Mubarek H2 Well		13,457,501			13,457,501
Accumulated Depletion		(10,331,287	)		(9,189,274	)
Impairment		(15,237,543	)		(14,572,373	)
Total	$	1,062,572		$	2,869,755

Costs Incurred in Oil and Gas Producing Activities:

For the Years Ended December 31:	2008		2007
Acquisition of proved properties	$	—	$	—
Acquisition of unproved properties		—		—
Development costs		—		135,158
Exploration costs		—		—
Total Costs Incurred	$	—	$	135,158

Results of Operations from Oil and Gas Producing Activities:

	Year Ended December 31,
	2008			2007
Oil and gas revenues	$	2,248,523		$	1,127,817
Production costs		(59,716	)		(78,032	)
Exploration expenses		—			—
Depletion and depreciation		(1,143,990	)		(5,578,792	)
Impairment		(665,170	)		(9,391,481	)
Result of oil and gas producing operations before income taxes		379,647			(13,920,488	)
Provision for income taxes		—			—
Results of Oil and Gas Producing Operations	$	379,647			(13,920,488	)

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Proved Reserves

Our proved oil reserves have been estimated by petroleum reserve engineers in Dubai as of December 31, 2008 and 2007, whom were affiliated with the Company through a mutual director until May 2008. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history, and changes in economic factors. Our proved reserves are summarized in the table below.

	Crude Oil Bbls
Reserves as of December 31:	2008			2007
Beginning of the period		39,906			108,788
Revisions of previous estimates		10,424			72,954
Extensions and discoveries		—			31,228
Production		(20,029	)		(27,156	)
End of the period		30,301			39,906

Standardized Measure

The standardized measure of discounted future net cash flows (“standardized measure”) and changes in such cash flows are prepared using assumptions required by the FASB. Such assumptions include the use of year-end prices for oil and gas and year-end costs for estimated future development and production expenditures to produce year-end estimated proved reserves. Discounted future net cash flows are calculated using a 10% rate.

As of December 31, 2008, pursuant to the Participation Agreement, the Company is not liable for estimated well abandonment costs or net of salvage. Therefore, no abandonment costs are considered as part of the calculation of the full cost pool at December 31, 2008.

The standardized measure does not represent management's estimate of our future cash flows or the value of proved oil and gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, year-end prices used to determine the standardized measure of discounted cash flows are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data.

Price and cost revisions are primarily the net result of changes in year-end prices, based on beginning of year reserve estimates. Quantity estimate revisions are primarily the result of the extended economic life of proved reserves and proved undeveloped reserve additions attributable to increased development activity. The reserve report prepared as of December 31, 2008 used an estimated sales price of $40.00 per barrel of oil for 2009, increasing linearly to $55.00 per barrel in 2012.

The standardized measure of the Company's proved crude oil and natural gas reserves at December 31, 2008 and 2007 was as follows:

At December 31:	2008			2007
Future cash inflows	$	1,252,051		$	3,365,242
Less: Future operating expenses		(106,319	)		(140,295	)
Future development costs		-			-
Future income taxes		-			-
Future net cash flows		1,145,732			3,224,947
10% annual discount		(83,160	)		(355,192	)
Standardized measure of discounted net cash flows	$	1,062,572		$	2,869,755

No income taxes have been provided above as future net cash flows are expected to be less than the Company's tax basis in the properties. Future operating costs for 2008 include a 14.5% royalty expense.

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Changes in the Standardized Measure

Changes in the standardized measure of the Company's proved crude oil and natural gas reserves for the years ended December 31, 2008 and 2007 were as follows:

	2008			2007
Future cash inflows	$	(2,113,191	)	$	(3,162,031	)
Less: Future operating costs		33,976			241,419
Future development costs		—			—
Future income taxes		—			—
Future net cash flows		(2,079,215	)		(2,920,612	)
10% annual discount		272,032			1,124,862
Standardized measure of discounted net cash flows	$	(1,807,183	)	$	(1,795,750	)

No income taxes have been provided above because none are expected to be due because the future net cash flows are expected to be less than the Company's basis in the properties.

	2008			2007
Balance - beginning of year	$	2,869,755		$	4,665,505
Sales, net of operating expenses		(2,299,080	)		(1,957,817	)
Extensions and discoveries		—			14,970,221
Accretion of discount		(83,160	)		(355,192	)
Net changes in prices and productions costs		639,013			1,153,290
Revisions of prior estimates		(63,956	)		(15,606,252	)
Balance - end of year	$	1,062,572		$	2,869,755

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PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit Number	Description
3.1(1)	Articles of Incorporation
3.2(2)	Amendment to Articles of Incorporation
3.3(2)	Amendment to Articles of Incorporation
3.4(6)	Certificate of Designation of Rights and Preferences of Series A Preferred Stock
3.5(1)	Bylaws
10.1(1)	Lease Agreement
10.2(3)	Participation Agreement between Sastaro Limited and Buttes Gas and Oil Co. International Inc.
10.3(5)	Independent Contractor Services Agreement and a Confidentiality Agreement, effective April 1, 2005, for the services of Mr. Noonan as our Vice President Corporate
10.4(4)	Stock Option Plan - Non-U.S. residents
10.5(4)	2005 U.S. Stock Incentive Plan - U.S. residents
10.6(7)	Form of Subscription Agreement used by selling stockholders in July 26, 2005 and August 25, 2005 private placements
10.7(12)	Consulting Agreement between the Company and Energy Services Group Dubai dated February 1, 2008
10.8(9)	Option Agreement between the Company and Ian Baron
23.1	Consent of Whitley Penn LLP
23.2(13)	Consent of Energy Services Group Dubai
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act

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32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

⁽¹⁾  Previously filed with Form SB-2 on September 12, 2002

⁽²⁾  Previously filed with Form 10-KSB on March 31, 2005

(3)	Previously filed with Form 10-QSB on August 22, 2005
(4)	Previously filed with Form SB-2 (SEC File No. 333-127940) on August 30, 2005
(5)	Previously filed with Form SB-2/A Amendment No. 1 (SEC File No. 333-127940) on September 9, 2005
(6)	Previously filed as exhibit 3.1 to the Form 8-K filed on September 22, 2005
(7)	Previously filed with Form SB-2/A (SEC File No. 333-128285) on October 12, 2005
(8)	Previously filed with Form 10-QSB on November 15, 2005.
(9)	Previously filed with Form SB-2 on February 13, 2006.
(10)	Previously filed with Form S-1/A on June 12, 2006.
(11)	Previously filed with Form 10-QSB on August 15, 2006.

⁽¹²⁾  Previously filed with Form 8-K on March 4, 2008.

⁽¹³⁾  Previously filed with Form 10-K on March 31, 2009.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	SKY PETROLEUM, INC.
April 13, 2009	By:	/s/ KARIM JOBANPUTRA Karim Jobanputra Chief Executive Officer

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