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 nine months ended September 30, 2007.

Forward-Looking Statements

The information in this report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business plans and expectations. 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, 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. . Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined below, and, from time to time, in other reports we file with the Securities and Exchange Commission ("SEC"), including our annual reports on Form 10-KSB as filed on April 15, 2008. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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 consolidated financial position or results of operations. Critical accounting policies, the policies the Company believes are most important to the presentation of its consolidated financial statements and require the most difficult, subjective and complex judgments, are outlined below in "Critical Accounting Policies," and have not changed significantly.

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 140,836 gross barrels as of September 30, 2008. During the third quarter of 2008, the Mubarek H2 well produced approximately 7,875 gross barrels and has averaged 86 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

Since the Mubarek K2-ST4 well was completed in the second quarter of 2007, it has produced a total of approximately 75,705 gross barrels as of September 30, 2008. During the third quarter of 2008 the Mubarek K2-ST4 well was shut in for repairs to the gas lift line between the J and K platforms. Crescent has determined that a lightweight, flexible, non-metallic pipe will provide the best solution and estimates that repairs to the line will take three to four months to complete. 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, South East Asia, 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 September 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 September 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 September 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 September 30, 2008 with the three months ended September 30, 2007

For the three months ended September 30, 2008, we had a net loss of $536,365 as compared to a net loss of $352,537 for the three months ended September 30, 2007. We had no oil revenue during the third quarter of 2008 compared to $950,417 for the third quarter of 2007. Additionally, there was a 59% decrease in operating expenses, from $1,362,688 for the third quarter of 2007 to $559,482 during the third quarter of 2008.

Operating expenses were lower in the third quarter of 2008 as compared with the third quarter of 2007 largely as a result of a decrease in depletion and stock-based compensation offset by higher professional fees related to accounting and tax services. Stock-based compensation decreased to $53,119 for the three months ended September 30, 2008 as compared to $418,874 for the three months ended September 30, 2007 as a result of options being forfeited due to resignations from the board of directors. Depletion and depreciation decreased to $168,367 for the three months ended September 30, 2008 as compared to $280,542 for the three months ended September 30, 2007 as a result of the K2-ST4 well being shut in throughout the quarter for repairs.

Excluding stock-based compensation and depletion and depreciation, expenses for the third quarter of 2008 decreased $325,275 or approximately 49% as compared to the same quarter in 2007 primarily due to lower consulting and director fees. Included in expense is consulting services of $55,317 as compared to $189,408 for the third quarter of 2007; investor relations expenses of $80,529

compared to $100,287, respectively; professional fees of $144,808 compared to $39,675, respectively; directors fees of $0 compared to $105,450, respectively; and other general and administrative expenses of $57,342 compared to $124,489, respectively. There was no related party compensation expense in the third quarter 2008 compared to $52,500 in 2007.

Additionally, we had lower interest income during the three months ended September 30, 2008, of $23,117 as compared to the three months ended September 30, 2007 of $59,734. 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 nine months ending September 30, 2008 with the nine months ending September 30, 2007

For the nine months ended September 30, 2008, we had a net loss of $429,332 compared to a net loss of $2,495,082 for the nine months ended September 30, 2007. We had revenue of $2,248,523 during the first three quarters of 2008 as compared to $2,184,399 during the first three quarters of 2007 due to a 44% increase in volume and variation in the price of oil between $60 and $147 per barrel over the past 21 months. Operating expenses for the nine months ended September 30, 2008 were $2,767,498compared to $4,881,228 for the nine months ended September 30, 2007.

Operating expenses included depletion and depreciation expense of $1,339,003 for the nine months ended September 30, 2008 as compared to $1,197,693 for the nine months ended September 30, 2007 and lease operating expense of $59,716 for the nine months ended September 30, 2008 as compared to $125,651 for the nine months ended September 30, 2007. Operating expenses for the first three quarters of 2008 also included stock-based compensation of $87,115 as compared to $1,616,906 for the first three quarters of 2007; consulting services of $213,317 compared to $689,249, respectively; investor relations expenses of $232,269 compared to $216,842, respectively; professional fees of $466,538 compared to $295,822, respectively; directors fees of $121,800 compared to $206,250, respectively; and general and administrative expenses of $247,740 compared to $375,315, respectively. There was no related party compensation expense in the nine months ended September 30, 2008 compared to $157,500 in 2007.

Additionally, we had lower interest income during the nine months ended September 30, 2008 of $89,643 as compared to the nine months ended September 30, 2007 of $201,747. 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 $21,872 during the nine months ended September 30, 2008, as compared to cash flows provided of $1,480,587 for the comparable period in 2007. The decrease in cash used in operating activities during 2008 was due to an increase in accounts payable and accrued expenses of $1,006,873 offset by non-cash charges consisting of increased depletion and depreciation of $1,339,003 as compared to $1,197,693 for 2007 and a reduction in stock-based compensation to $87,115 as compared to $1,616,906 for 2007 as a result of options forfeited due to resignations from the board of directors. We used total cash of $22,460 during the nine months ended September 30, 2008 as compared to cash provided of $211,584 for the comparable period in 2007. Total cash decreased to $5,535,438 at September 30, 2008 versus $6,022,347 at September 30, 2007. We had $588 for cumulative translation adjustment during 2008 and $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 September 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 during the nine months ended September 30, 2008 was $22,460 as compared to net cash provided of $211,584 for the comparable period in 2007. Total assets as of September 30, 2008 were $8,092,430 compared to total assets of $9,442,109 as of December 31, 2007. Stockholders' equity as of September 30, 2008 was $7,807,704 compared to stockholders' equity of $8,150,508 as of December 31, 2007. The decrease in assets was primarily due to depletion for the Mubarek wells. The Company had $5,269,338 of working capital at September 30, 2008 compared to $4,273,138 at December 31, 2007.

As of September 30, 2008, we had current assets of $5,554,064 including cash and cash equivalents of $5,535,438 of which $5,360,459 was held in time deposits. We had current liabilities of $284,726.

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 September 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, proved developed reserves net to the Company's interests were 39,906 barrels of oil. ESG was considered an affiliate of the Company at the time the report was prepared because a director of the Company, who has since resigned, had an ownership interest in ESG. During the nine months ended September 30, 2008, 18,599 barrels of oil net to the Company's interest were produced from the Mubarek H2 and K2-ST4 wells, resulting in depletion expense of $1,337,520 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 $7,807,704 at September 30, 2008.

Recently, the poor conditions in the U.S. housing market and the credit quality of mortgage backed securities have continued and worsened in 2008, causing a loss of confidence in the broader U.S. and global credit and financial markets and resulting in the collapse of, and government intervention in, major banks, financial institutions and insurers and creating a climate of greater volatility, less liquidity, widening of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. These disruptions in the current credit and financial markets have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies. These disruptions could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all.

As our operating plan includes reliance on equity financings in order to fund future additional prospects, these current market conditions could make it difficult or impossible for us to raise necessary funds to meet our operating plan. If we are unable to obtain financing through equity investments, we will seek multiple solutions including, but not limited to, credit facilities or debenture issuances.

Currently, we have cash assets of $5,360,459 invested in time deposits with a bank in the United Arab Emirates. We do not expect these deposits to be affected by the current financial conditions and we do not anticipate that the bank in which they are deposited will fail. In the event that such a failure occurs, the deposits are guaranteed by the United Arab Emirates government for up to 10% of the deposit amount. Management continues to monitor the state of the financial markets and will make adjustments to the investment of cash assets based on the current and anticipated capital requirements of the Company, the stability of the markets, the rate of return on time deposits, money market accounts and bonds, and the levels of protection provided by such investments.

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 quarter ended September 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 varied between $60 per barrel and $147 per barrel over the past 21 months which has had a significant 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 September 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 accounts payable and accrued liabilities 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 . . .