Summary of SKY PETROLEUM, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

NOTE: Certain parts of the following Item 2. Plan of Operation reflect the effects of the restatement of our consolidated financial statements for the three and six months ended June 30, 2007.

Description of Property

Our principal corporate and executive offices are located at 401 Congress Avenue, Suite 1540, Austin, Texas 78701. Our telephone number is (512) 687-3427. We rent our office space. We do not currently maintain any investments in real estate, real estate mortgages or securities of persons primarily engaged in real estate activities, nor do we expect to do so in the foreseeable future.

Management's Discussion and Analysis

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report.

This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis the company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the company does not believe such differences will materially affect our financial position or results of operations. Critical accounting policies, the policies the company believes are most important to the presentation of its financial statements and require the most difficult, subjective and complex judgments, are outlined below in "Critical Accounting Policies," and have not changed significantly.

In addition, certain statements made in this report may constitute "forward-looking statements". These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Except for historical information, the matters set forth herein, which are forward-looking statements, involve certain risks and uncertainties that could cause actual results to differ. Potential risks and uncertainties include, but are not limited to, the success of the current infill drilling programs, Sky Petroleum's ability to access opportunities, the contemplated continued production at the Mubarek field, our expectations related to the Sir Abu Nu'Ayr Island Project, the competitive environment within the oil and gas industry, the extent and cost effectiveness with which Sky Petroleum is able to implement exploration and development programs in the oil and gas industry, obtaining drilling equipment on a timely fashion, commodity price risk, and the market acceptance and successful technical and economic implementation of Sky Petroleum's intended plan. Forward-looking statements can be identified by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although Sky Petroleum believes that the expectations reflected in the forward-looking statements are reasonable, the company cannot guarantee future results, levels of activity, performance or achievements.

Overview

Our primary business is to identify opportunities to either make direct property acquisitions or to fund exploration or development of oil and natural gas properties of others under arrangements in which we will 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.

We were incorporated in the state of Nevada in August, 2002 as The Flower Valet. In 2004, we began to reassess our business plan and to seek business opportunities in other industries, including the oil and gas industry. On December 20, 2004, at our annual meeting of stockholders, our stockholders approved an amendment to our Articles of Incorporation, changing our name from The Flower Valet to Seaside Exploration, Inc. Subsequently, on March 28, 2005, we changed our name from Seaside Exploration, Inc. to Sky Petroleum, Inc. and began actively identifying opportunities to make direct property acquisitions and to fund exploration and development of oil and natural gas properties.

As part of our business strategy, we, through our wholly-owned subsidiary, 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 has the right to participate in a share of the future production revenue by contributing $25 million in drilling costs related to two wells in an off-shore oil and gas project in the United Arab Emirates. Pursuant to the Participation Agreement, we have the right of first refusal to participate in an exploration program to be conducted by an affiliate of Buttes in a concession located in the offshore waters around Sir Abu Nu'Ayr Island. The island of Sir Abu Nu'Ayr, which sits in the center of the concession area, is part of the Emirate of Sharjah but is located in the offshore territory of Abu Dhabi. The option expired on May 17, 2008. 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.

Mubarek H2 Well

Since the Mubarek H2 well was completed in the second quarter of 2006, it has produced a total of approximately 132,961 gross barrels as of June 30, 2008. During the second quarter of 2008, the Mubarek H2 well produced approximately 8,489 gross barrels and has averaged 93 barrels of oil per day. Actual production may vary from our forecasts or estimates, and does not include any additional production from other Mubarek wells, planned or contemplated, if any.

Mubarek K2-ST4 Well

The Mubarek K2-ST4 well was drilled on the northwest part of the field proximal to the K1 location. Mubarek K1 was drilled as Thamama producer (a deeper gas condensate reservoir underlying the Ilam/Mishrif) and electric log readings over the Ilam/Mishrif section indicated a good oil saturated reservoir. Drilling of the K2-ST4 well commenced during the second quarter of 2007.

Since the Mubarek K2-ST4 well was completed, it has produced a total of approximately 75,705 gross barrels as of June 30, 2008. During the second quarter of 2008, the Mubarek K2-ST4 well produced approximately 15,458 barrels and has averaged 170 barrels of oil per day. On June 18, 2008 the K2-ST4 well was shut in to inspect and repair the flexible gas lift line between the J and K platforms. In early August, while pressure testing the initial repair, Crescent determined the line had suffered a catastrophic failure. Subsequent diving and surface inspection confirmed the line had been damaged beyond repair. Crescent is in the process of evaluating options to replace the line and will report the results of that investigation to the company. Actual production may vary from our forecasts or estimates, and does not include any additional production from other Mubarek wells, planned or contemplated, if any.

Other Projects

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 in Pechora Energy through its UK parent company, Concorde Oil & Gas Plc. ("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 will be determined following the results of the current appraisal drilling program. The Company also has the right to participate in any other acquisitions Concorde makes in the Timan Pechora Basin.

Plan of Operation

Our plan of operation and business strategy is to focus on producing or near-production oil and gas properties in the Middle East, North Africa and the Former Soviet Union (FSU). We intend to seek niche opportunities through the contacts of our officers and

directors in the region. We intend to limit our administrative and overhead expenses by seeking operating partners and participating in projects as non-operator. We intend to use contractors or consultants as much and where possible.

As the Company has sufficient working capital, our goal during the next twelve months ending June 30, 2009 is to assess and obtain additional joint venture opportunities in new regions.

The strategic overview of Sky Petroleum is as follows:

• To identify opportunities to participate in oil and gas projects in the Middle East, North Africa, South East Asia and the FSU through strategic participation agreements, farm-ins or joint ventures.

• To focus initially on lower risk development or exploitation projects in areas with known oil or natural gas reserves / production and infrastructure.

• To participate as a non-operator on projects with working operators with experience in a specific region.

• To raise sufficient capital to fund our operations and to establish ongoing production revenue.

Our plan of operation includes the following goals during the next twelve months:

• Evaluate new farm-in / joint venture opportunities in the Middle East, North Africa, South East Asia and the FSU.

• Participate in our project with Pechora Energy.

There can be no assurance that we will successfully implement our business strategy or meet our goals during the next twelve months, if ever.

Overall Performance

As discussed in the overview, the Company revised its business plan in late 2004 to seek business opportunities in other industries, including the oil and gas industry. In early 2005, the Company moved ahead with this strategy and commenced to add staff and raise capital. This plan took several months to proceed and in the second quarter of 2005, we added consultants familiar with the oil and gas business, signed a Participation Agreement to drill wells in the United Arab Emirates and commenced raising capital.

The variances in comparable financial and operating results for the three months ended June 30, 2008 versus the same periods in 2007 may appear disproportionate as a result of production from the Mubarek K2-ST4 well commencing in the fourth quarter of 2007.

Operations

Restatement of Consolidated Financial Statements

Management determined that the Company's audited consolidated financial statements for the period ended June 30, 2007 required restatement of certain amounts and balances presented as a result of the following (i) an error in following the Company's revenue recognition criteria, (ii) an error in calculating depletion, (iii) an error in recording stock based compensation, and
(iv) an error and reclassification in general and administrative expenses.

Comparison of the three months ended June 30, 2008 with the three months ended June 30, 2007

For the three months ended June 30, 2008, we had a net income of $1,484,843 as compared to a net loss of $600,804 for the three months ended June 30, 2007. We had revenue of $2,248,523 during the second quarter of 2008 from the Mubarek H2 and K2-ST4 wells compared to $1,233,982 for the second quarter of 2007 due to 51% increase in volume and the price of oil increased from $66 per barrel in April 2007 to $132 per barrel in June 2008. Additionally, there was a 59% decrease in operating expenses, from $1,909,803 for the second quarter of 2007 to $792,023 during the second quarter of 2008.

Operating expenses were lower in the second quarter of 2008 as compared with the second quarter of 2007 largely as a result of a decrease in stock-based compensation offset by slightly higher depletion based on unit production from both wells. Stock-based compensation decreased to a negative $236,973 for the three months ended June 30, 2008 as compared to $644,697 for the three

months ended June 30, 2007 as a result of options being forfeited due to resignations from the board of directors. Depletion and depreciation increased to $510,977 for the three months ended June 30, 2008 as compared to $325,478 for the three months ended June 30, 2007.

Excluding stock-based compensation and depletion and depreciation, expenses for the second quarter of 2008 decreased $421,609 or approximately 45% as compared to the same quarter in 2007 primarily due to lower consulting and professional fees related to renegotiation of our consulting agreement with ESG on January 31, 2008. Included in expense is consulting services of $32,938 as compared to $293,719 for the second quarter of 2007; investor relations expenses of $86,293 compared to $106,824, respectively; professional fees of $195,336 compared to $228,712, respectively; directors fees of $68,550 compared to $63,300, respectively; and other general and administrative expenses of $75,186 compared to $120,385, respectively. There was no related party compensation expense in the second quarter 2008 compared to $52,500 in 2007.

Additionally, we had lower interest income during the three months ended June 30, 2008, of $28,342 as compared to the three months ended June 30, 2007 of $75,017. This income is primarily from short-term investments of the Company's excess cash during the period which decreased between 2008 and 2007 as funds were used in the drilling activities as well as lower interest rates carried on invested cash.

Comparison of the six months ended June 30, 2008 with the six months ended June 30, 2007

For the six months ended June 30, 2008, we had net income of $107,034 as compared to a loss of $2,142,545 for the six months ended June 30, 2007. We had revenue of $2,248,523 during the first two quarters of 2008 as compared to $1,233,982 during the first two quarters of 2007 due to 51% increase in volume and the price of oil increased from $66 per barrel in April 2007 to $132 per barrel in June 2008. Operating expenses for the six months ended June 30, 2008 were $2,208,015 compared to $3,518,540 for the six months ended June 30, 2007.

Operating expenses included depletion and depreciation expense of $1,170,636 for the six months ended June 30, 2008 as compared to $917,151 for the six months ended June 30, 2007 and lease operating expense of $59,716 for the six months ended June 30, 2008 as compared to $74,188 for the six months ended June 30, 2007. Operating expenses for the first two quarters of 2008 also included stock-based compensation of $33,997 as compared to $1,198,032 for the first two quarters of 2007; consulting services of $158,000 compared to $499,841, respectively; investor relations expenses of $151,740 compared to $116,555, respectively; professional fees of $321,730 compared to $256,147, respectively; directors fees of $121,800 compared to $100,800, respectively; and general and administrative expenses of $190,396 compared to $250,826, respectively. There was no related party compensation expense in 2008 compared to $105,000 in 2007.

Additionally, we had lower interest income during the six months ended June 30, 2008 of $66,526 as compared to the six months ended June 30, 2007 of $142,013. This income is primarily arising from short-term investments of the Company's excess cash during the period which decreased between 2008 and 2007 as funds were used in the drilling activities.

Cash used in operating activities was $1,095,368 during the six months ended June 30, 2008, as compared to cash flows provided of $1,278,927 for the comparable period in 2007. The increase in cash used in operating activities during 2008 was due to recording a receivable due from Buttes of $1,198,113 and accounts payable & accrued expenses of $1,186,187 offset by non-cash charges consisting of increased depletion and depreciation of $1,170,636 as compared to $917,151 for 2007 and a reduction in stock-based compensation of $33,997 as compared to $1,198,032 for 2007 as a result of options forfeited due to resignations from the board of directors. We used total cash of $1,095,615 during the six months ended June 30, 2008 as compared to cash provided of $85,624 for the comparable period in 2007. Total cash decreased to $4,462,283 at June 30, 2008 versus $5,896,388 at June 30, 2007. We had $247 in other financing activities during 2008 compared to a $192,500 payment of dividend on Series A" Preferred Stock in 2007.

Liquidity and Capital Resources

A component of our operating plan is the ability to obtain additional capital through additional equity and/or debt financing to fund future additional prospects. Our only source of internal operating cash flow, if any, will be derived from our participation interest in the Mubarek Field, if the project is successful.

Since inception, we have financed our cash flow requirements through the issuance of common stock and preferred stock. As we expand our activities, we may from time to time experience net negative cash flows from operations pending receipt of periodic receipt of sales proceeds. The Company may use excess cash investments, debt or equity financing to augment working capital.

As of June 30, 2008, we have raised approximately $38,000,000 through private placements of shares of common stock and shares of convertible preferred stock as well as through the conversion of convertible debt.

Net cash used by operating activities during the six months ended June 30, 2008 was $1,095,368 as compared to net cash provided of $1,278,927 for the comparable period in 2007. Total assets as of June 30, 2008 were $8,396,705 compared to total assets of $9,442,109 as of December 31, 2007. Stockholders' equity as of June 30, 2008 was $8,291,292 compared to stockholders' equity of $8,150,508 as of December 31, 2007. The decrease in assets was primarily due to (i) depletion for the Mubarek wells, (ii) use of cash and cash equivalents, offset by (iii) receivable related to oil lift. The Company had $5,584,559 of working capital at June 30, 2008 compared to $4,273,138 at December 31, 2007.

As of June 30, 2008, we had current assets of $5,689,972 including cash and cash equivalents of $4,462,283 of which $4,260,459 was held in time deposits. We had current liabilities of $105,413.

The Company follows the full cost method of accounting for its oil and gas operations whereby exploration and development expenditures are capitalized. Such costs may include geological and geophysical, drilling, equipment and technical consulting directly related to exploration and development activities. Costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired.

As of June 30, 2008, the Company has capitalized drilling and completion costs incurred for the Mubarek H2 and Mubarek K2-ST4 wells of $13,457,501 and $13,173,901, respectively. Based upon the December 31, 2007, reserve report prepared by ESG, who was considered an affiliate of the Company at the time the report was prepared due to a director of the Company, who has since resigned, having an ownership interest in ESG, proved developed reserves net to the Company's interests were 39,906 barrels of oil. During the quarter ended June 30, 2008, 7,099 barrels of oil net to the Company's interest were produced from the Mubarek H2 and K2-ST4 wells, resulting in depletion expense of $510,482 being recorded.

We believe that we have sufficient working capital to meet our currently anticipated expenditure levels for the next 12 months. Total stockholder equity was $8,291,292 at June 30, 2008.

Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies searching for opportunities in the oil and gas industry. Such risks include, but are not limited to, our ability to secure a drilling rig, our ability to successfully drill for hydrocarbons, commodity price fluctuations, delays in drilling or bringing production, if any, on line, an evolving business model and unpredictable availability of qualified oil and gas exploration prospects and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and development plan, successfully identify future drilling locations, continue to rely on Buttes efforts, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have material adverse effect on our business prospects, financial condition and results of operations.

During the six-month period ended June 30, 2008, we had no material transactions affecting our liquidity and capital resources.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Inflation

The price of oil has gone from $66 per bbl in April 2007 to $132 per bbl in June 2008 which has had a significant positive impact on our oil revenues.

Critical Accounting Policies

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 revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.

Fair value of financial instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2008 and 2007. The respective carrying value of certain on-balance sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents and investments. Fair values were assumed to approximate carrying values for cash, cash equivalents and payables because they are short term in nature and their carrying amounts approximate fair values as they are payable on demand.

Investment in oil and gas properties

The Company follows the full cost method of accounting for oil and gas operations whereby exploration and development expenditures are capitalized. Such costs may include geological and geophysical, drilling, equipment and technical consulting directly related to exploration and development activities. The aggregate of net capitalized costs and estimated future development costs is amortized using the unit of production method based on estimated proved oil and gas reserves.

Advances for oil and gas interests are transferred to oil and gas properties as actual exploration and development expenditures are incurred. This commenced in January 2006.

Costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are assessed periodically and any impairment is transferred to costs subject to depletion. No such impairments have been identified by management.

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 as adjusted for qualifying cash flow hedges. 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, 2007, the Company had an accumulated impairment of $14,572,373 as a result of the full cost ceiling test.

Revenue is recognized in the period in which title to the petroleum or natural gas transfers to the purchaser.

Income taxes . . .