UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ending September 30, 2008

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 000-29323

Star Energy Corporation

(Exact name of registrant as specified in its charter)


Nevada		87-0643634
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

317 Madison Avenue, New York, New York		10017
(Address of principal executive offices)		(Zip code)

(212) 500-5006

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has 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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

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

At November 5, 2008, the number of shares outstanding of the issuer’s common stock was 31,640,500 shares.

TABLE OF CONTENTS


		Page
	PART I

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007	3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2008 and 2007 and the period from re-entering the Development Stage (October 6, 2006) through September 30, 2008	4-5

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 and the period from re-entering the Development Stage (October 6, 2006) through September 30, 2008	6

	Notes to the Unaudited Condensed Consolidated Financial Statements	7-19

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20-26

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26

ITEM 4.	CONTROLS AND PROCEDURES	26-27

	PART II

ITEM 6.	EXHIBITS	27

SIGNATURES		28

INDEX TO EXHIBITS		29

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PART I – FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Condensed Consolidated Balance Sheets

September 30, 2008 and December 31, 2007

(Unaudited)


	September 30, 2008			December 31, 2007 (Audited)


ASSETS

Current
Cash	$	859		$	1,048,720
Prepaid expenses and other current assets		7,425			34,556


Total Current Assets		8,284			1,083,276

Equipment, net (note 7)		23,975			31,337

Debt Issuance Costs (note 8)		275,133			427,358


Total Assets	$	307,392		$	1,541,971


LIABILITIES
Current
Accounts payable	$	1,071,197		$	60,859
Accrued liabilities		608,149			389,297
Loans payable to related party (note 9)		35,184			—


Total Current Liabilities		1,714,530			450,156

Convertible Debentures, Net of Discount (note 10)		7,408,233			7,358,179


Total Liabilities		9,122,763			7,808,335


Commitments and Contingencies (note 12)

STOCKHOLDERS’ DEFICIT

Capital Stock (note 11)

Authorized:
5,000,000 preferred stock, par value $0.001 per share 225,000,000 common stock, par value $0.001 per share Issued and outstanding: 32,765,500 common stock (2007 - 33,865,500)		32,766			33,866

Additional Paid-in Capital		3,830,317			3,794,690

Stock Subscriptions		(78,750	)		—

Accumulated Deficit and Deficit Accumulated During the Development Stage		(12,604,312	)		(10,094,920	)

Accumulated Other Comprehensive Loss		4,608			—


Total Stockholders’ Deficit		(8,815,371	)		(6,266,364	)


Total Liabilities and Stockholders’ Deficit	$	307,392		$	1,541,971

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

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STAR ENERGY CORPORATION

(A DEVELOPMENT STAGE COMPANY)

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended September 30, 2008 and 2007

(Unaudited)


	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007


Oil and Gas Revenues	$	—		$	—


Operating Expenses
Professional fees		106,562			90,378
Salary and benefits		161,701			446,466
Office and general		43,864			50,444
Due diligence		4,634			619,153
Consulting		—			21,860
Travel		2,862			65,054
Advertising and promotion		—			39,072
Depreciation - equipment		2,589			660


Total Operating Expenses		322,212			1,333,087


Loss from Operations		(322,212	)		(1,333,087	)


Other Income (Expense)
Interest income		—			1,496
Foreign exchange loss		431			—
Gain on sale of marketable securities		—			1,697
Debenture interest		(223,427	)		(491,658	)


Total Other Income (Expense)		(222,996	)		(488,465	)


Loss Before Income Taxes		(545,208	)		(1,821,552	)

Provision for income taxes		—			—


Net Loss		(545,208	)		(1,821,552	)

Foreign currency translation adjustment		(2,263	)		—


Comprehensive Loss	$	(547,471	)	$	(1,821,552	)


Net Loss per Common Share - Basic and Diluted	$	(0.02	)	$	(0.06	)


Basic and Diluted Weighted Average Number of Common Shares Outstanding During the Period		33,183,978			29,012,833

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

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STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Condensed Consolidated Statements of Operations and Comprehensive Loss

Nine Months Ended September 30, 2008 and 2007, and the Period from

Re-entering the Development Stage (October 6, 2006) through September 30, 2008

(Unaudited)


	Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007			(Note 1) Period from Re-entering the Development Stage through September 30, 2008

Oil and Gas Revenues	$	—		$	—		$	—

Operating Expenses
Professional fees		996,530			691,436			2,301,751
Salary and benefits		527,154			1,185,395			2,211,165
Office and general		199,795			147,752			942,980
Due diligence		192,419			1,086,484			1,756,553
Consulting		32,295			1,052,876			1,104,584
Travel		29,164			108,999			168,651
Advertising and promotion		21,472			330,677			406,083
(Recovery of) expiration of rights to contract to acquire oil and gas properties (notes 6 and 11)		(155,750	)		—			1,236,750
Depreciation - equipment		7,497			660			9,881

Total Operating Expenses		1,850,576			4,604,279			10,138,398

Loss from Operations		(1,850,576	)		(4,604,279	)		(10,138,398	)

Other Income (Expense)
Interest income		3,101			6,982			25,371
Costs associated with the rescission of stock purchase agreement		—			—			(650,000	)
Debt forgiven		—			—			30,000
Foreign exchange loss		(585	)		—			(1,954	)
Gain on sale of marketable securities		—			9,017			9,678
Debenture interest		(661,280	)		(839,869	)		(1,782,208	)

Total Other Income (Expense)		(658,764	)		(823,870	)		(2,369,113	)

Loss Before Income Taxes		(2,509,340	)		(5,428,149	)		(12,507,511	)
Provision for income taxes		52			600			1,352

Net Loss		(2,509,392	)		(5,428,749	)		(12,508,863	)
Foreign currency translation adjustment		(4,608	)		—			(4,608	)

Comprehensive Loss	$	(2,514,000	)	$	(5,428,749	)	$	(12,513,471	)

Net Loss Per Common Share - Basic and Diluted	$	(0.07	)	$	(0.15	)

Basic and Diluted Weighted Average Number of Common Shares Outstanding During the Period		33,635,830			35,057,056

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

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STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2008 and 2007, and the Period from Re-entering

the Development Stage (October 6, 2006) through September 30, 2008

(Unaudited)


	Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007			(Note 1) Period from Re-entering the Development Stage through September 30, 2008

Cash Flows from Operating Activities
Net loss	$	(2,509,392	)	$	(5,428,749	)	$	(12,508,863	)
Adjustments to reconcile non-cash items:
Depreciation - equipment		7,497			660			9,777
Amortization - debt issuance costs		152,225			130,801			333,767
Amortization - debt discount		50,055			—			108,452
Stock-based compensation expense		111,527			911,782			1,402,252
Issuance of common stock for services		—			889,660			889,660
(Recovery of) expiration of rights to contract to acquire oil and gas properties		(155,750	)		—			1,236,750
Issuance of common stock for the payment of late interest on convertible debentures		—			—			42,000
Changes in non-cash working capital:
Prepaid expenses and other current assets		27,131			(75,079	)		(6,407	)
Accounts payable		1,014,810			(143,510	)		1,066,509
Accrued liabilities		218,852			130,729			609,919

Net Cash Used in Operating Activities from Continuing Operations		(1,083,045	)		(3,583,706	)		(6,816,184	)

Cash Flows from Investing Activities
Additions to equipment		—			(18,471	)		(33,721	)
Purchase of options to acquire oil and gas properties		—			(110,000	)		(110,000	)
Advances of loan receivable		—			(2,000,000	)		(3,000,000	)
Proceeds from collection of loan receivable		—			3,000,000			3,000,000

Net Cash Provided by (Used in) Investing Activities from Continuing Operations		—			871,529			(143,721	)

Cash Flows from Financing Activities
Proceeds from issuance of note payable		—			—			(30,000	)
Proceeds from issuance of convertible debentures		—			7,500,000			7,500,000
Proceeds from loan payable		—			—			1,000,000
Repayment of loan payable		—			(1,000,000	)		(1,000,000	)
Debt issuance costs		—			(550,000	)		(550,000	)
Advances from related party		—			—			(2,785	)
Proceeds from loans payable to related party		35,184			—			35,184

Net Cash Provided by Financing Activities from Continuing Operations		35,184			5,950,000			6,952,399

Cash Flows from Discontinued Operations
Operating cash flows		—			—			7,968
Investing cash flows		—			—			44,403
Financing cash flows		—			—			(44,373	)

Net Cash Provided by Discontinued Operations		—			—			7,998

Net (Decrease) Increase in Cash		(1,047,861	)		3,237,823			492
Cash - Beginning of Period		1,048,720			1,703			268

Cash - End of Period	$	859		$	3,239,526		$	760

Supplemental Disclosure of Cash Flow Information (note 14)

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

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STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

1.	Description of Business

Star Energy Corporation was organized under the laws of the State of Nevada on December 7, 1999. Star Energy Corporation and Subsidiaries (the “Company”) is seeking to acquire, explore and develop oil and gas properties, presently in Ukraine.

The Company’s operations began on July 2, 2003 when it purchased a 15% working interest and 12% net revenue interest in eight oil and gas producing wells known as the Galvan Ranch Gas Wells in Webb County, Texas.

During 2006, the Company concluded that the Galvan Ranch Gas Wells, which had generated revenues of only $55,852 in 2005 and $33,431 for the nine months ended September 30, 2006, were not meeting expectations, were without perceived growth potential and were a distraction to the Company’s ability to raise financing and grow. The Company’s then principal shareholder was not interested in pursuing a strategy of focusing on areas in Russia and the former Soviet Union, rather than the United States. Therefore, in conjunction with the Company’s acquisition of Volga-Neft Limited Company (“Volga-Neft”) described below, the Company transferred its interest in the Galvan Ranch Gas Wells to its then principal shareholder in exchange for 3,250,000 shares of the Company’s common stock, which the Company redirected to the contemporaneous acquisition of Volga-Neft.

Under its new strategy, on October 6, 2006, the Company acquired 100% of the capital stock of Volga-Neft, a Russian limited liability company primarily engaged in the processing and sale of crude oil in Samara, Russia.

On April 13, 2007, the Company was advised by the audit firm that purportedly audited the financial statements of Volga-Neft covering certain periods prior to the Company’s acquisition of Volga-Neft that such financial statements were not audited by that firm. The Company therefore concluded that those financial statements could not be relied upon, determined that certain representations, warranties and covenants made by the stockholders of Volga-Neft were untrue, and determined that other information provided to the Company with respect to the business, financial condition, operations and prospects of Volga-Neft was not reliable. Accordingly, the Company decided to seek, and obtained, rescission of the transaction through a Rescission Agreement dated June 14, 2007 among the Company, Volga-Neft and the former shareholders of Volga-Neft.

As a result of the disposition of the Galvan Ranch Gas Wells and rescission of the Volga-Neft agreement, as of October 6, 2006, the Company was considered to have re-entered the development stage. The Company has not engaged in an active business since that time.

- 7 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

2.	Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.

The Company has no current operations, is in the development stage and has not realized revenues from its planned operations. The Company has sustained losses of $2,509,392 and $5,428,749 for the nine month periods ended September 30, 2008 and 2007, respectively. As of September 30, 2008, the Company had a negative working capital of $1,706,246 (compared to a positive working capital of $633,120 at December 31, 2007) and an accumulated deficit of $12,604,312 (compared to $10,094,920 at December 31, 2007). The Company has funded operations by raising $7,500,000 through debt financing on February 9, 2007 and through issuances of capital stock. Management’s plan is to seek additional funds through future equity and/or debt financing until it achieves profitable operations from oil and gas drilling activities. Although the Company plans to seek additional financing, there can be no assurance that the Company will be able to secure financing or obtain such on satisfactory terms. The Company’s continuation as a going concern depends upon its ability to raise funds and achieve and sustain profitable operations.

The accompanying unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern.

3.	Summary of Significant Accounting Policies

The accounting policies of the Company are in accordance with U.S. generally accepted accounting principles, and their basis of application is consistent with that of the previous year. Outlined below are those policies considered particularly significant:

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles for interim financial statements and in accordance with the instructions to Form 10-Q. Accordingly, they do not include all information and notes required by U.S. generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals which, in the opinion of management, are considered necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the interim periods presented.

Results of operations for the interim periods are not necessarily indicative of results of operations for future interim periods or for the full fiscal year ending December 31, 2008. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company contained in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.

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STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

3.	Summary of Significant Accounting Policies (cont’d)

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Anglo-Ukr-Energy LLC (“AUE”) and Cosmonite Limited. All significant inter-company balances and transactions have been eliminated on consolidation.

Reporting Currency

The U.S. dollar has been used as the unit of measurement in these unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements

In April 2008, Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) on Statement of Financial Accounting Standards (“SFAS”) 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), “Business Combinations”, and other U.S. generally accepted accounting principles (“GAAP”). FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. Early adoption is prohibited. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

In May 2008, FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

- 9 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

3.	Summary of Significant Accounting Policies (cont’d)

Recent Accounting Pronouncements (cont’d)

In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

In June 2008, FASB issued FSP EITF Issue 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, “Earnings per Share”. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

In September 2008, FASB issued FSP SFAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP SFAS 133-1 and FIN 45-4”). FSP SFAS 133-1 and FIN 45-4 amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. FSP SFAS 133-1 and FIN 45-4 also amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, FSP SFAS 133-1 and FIN 45-4 clarifies the Board’s intent about the effective date of FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. FSP SFAS 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The adoption of FSP SFAS 133-1 and FIN 45-4 will have no impact on the Company’s consolidated financial statements.

In October 2008, FASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). FSP SFAS 157-3 clarifies the application of FASB Statement No. 157, “Fair Value Measurements”, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP SFAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial statements.

- 10 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

4.	Financial Instruments

Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments. The fair value of the financial instruments approximates their carrying values, unless otherwise noted.

5.	Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS 157, except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP SFAS 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:


Level 1 -		Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 -		Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 -		Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Cash and cash equivalents (level 1), accounts payable, accrued liabilities, and loan payable to related party (level 2) are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

- 11 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

6.	Option to Acquire Oil and Gas Properties

On August 1, 2007, the Company entered into separate agreements with each of Firecreek Petroleum, Inc. (“Firecreek”), a wholly-owned subsidiary of EGPI Firecreek, Inc., PJM Management, Inc. (“PJM”) and Double Coin Ltd. (“Double Coin”), pursuant to which the Company acquired from Firecreek and Double Coin any and all of their rights and interests with respect to certain projects in Ukraine, consisting of 100% of a project known as the Region Project, 51% of a project known as the Dewon ZAO Project and 100% of a project known as the Bukovyna Project (the “Projects”). Of the rights held by Firecreek and Double Coin, one was a letter of intent for AUE to acquire the Region Project for $5.5 million, the second was an oral understanding pursuant to which the Company entered into a letter of intent to acquire 51% of the Dewon ZAO Project for $40.0 million and the third was a contract for AUE to acquire the Bukovyna Project for $20.0 million. AUE was a company being formed on behalf of Firecreek and Double Coin in Ukraine to acquire the Projects. The Company was granted the right to complete, and did complete, the organization of AUE as a subsidiary of the Company. In exchange for the Company’s acquisition of the rights of Firecreek and Double Coin, the Company issued 2,100,000 shares of the Company’s common stock and paid $100,000 to Firecreek and issued 2,500,000 shares of the Company’s common stock to Double Coin. The Company issued 150,000 shares of the Company’s common stock and paid $10,000 to PJM which acted as a finder for Firecreek and Double Coin. The shares were valued at $0.27 per share for a total consideration of $1,392,500. The purchase price for the Company’s acquisition of the rights of Firecreek and Double Coin and PJM’s finder’s fee was negotiated with them and was equal to approximately 2.1% of the total purchase price that was to be paid to the owners of the Projects, based on the market value of the Company’s common stock at the time the Company entered into the agreements with Firecreek, PJM and Double Coin. Firecreek, PJM and Double Coin are not related to the Company, its officers, directors and affiliates.

The Company’s right to proceed with respect to one of these projects expired on November 10, 2007, while the rights to the other two projects expired on November 15, 2007 and November 26, 2007, respectively. The Company sought extensions from the owners of the Projects, but was unable to negotiate an extension of the letter of intent with respect to the Dewon ZAO Project (which was needed to complete due diligence and seek requisite financing for the Project), unable to obtain the due diligence materials it needed with respect to the Region Project and unable to obtain the necessary financing for the Bukovyna Project. Accordingly, the Company no longer has rights to acquire any of the Projects and, as such, the options to acquire the oil and gas properties have been completely written-off.

The Company instituted an arbitration proceeding against Firecreek and Double Coin seeking a return of the consideration paid to them. On June 30, 2008, the Company entered into separate settlement agreements with each of Firecreek, which has returned, and Double Coin, which has agreed to return, 1,100,000 and 1,125,000 shares, respectively, of the Company’s common stock that were issued in connection with the acquisition of the rights held by Firecreek and Double Coin.

- 12 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

7.	Equipment, net

Equipment is comprised of the following:


	Cost		September 30, 2008 Accumulated Depreciation		Cost		December 31, 2007 Accumulated Depreciation

Computer hardware	$	17,105	$	6,061	$	17,105	$	1,813
Computer software - accounting		6,416		750		6,416		107
Computer software - general		5,054		1,957		5,054		164
Office equipment		2,930		635		2,930		195
Furniture and fixtures		2,216		343		2,216		105

	$	33,721	$	9,746	$	33,721	$	2,384

Net carrying amount			$	23,975			$	31,337

8.	Debt Issuance Costs


	Cost		September 30, 2008 Accumulated Amortization		Cost		December 31, 2007 Accumulated Amortization

Debt issuance costs	$	608,900	$	333,767	$	608,900	$	181,542

Net carrying amount			$	275,133			$	427,358

The debt issuance costs were incurred in connection with the issuance of convertible debentures (see note 10).

9.	Loans Payable to Related Party

These loans, which were made to the Company’s wholly-owned subsidiary, AUE, by a director of AUE, are non-interest bearing, unsecured and due on demand (see note 15).

- 13 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

10.

Convertible Debentures

On February 9, 2007, the Company entered into a securities purchase agreement, whereby the Company issued $7,500,000 in principal amount of convertible debentures. The convertible debentures bear interest at 8% per annum, are secured by all the assets of the Company and mature on February 9, 2010. The debentures were originally convertible into common shares at the option of the holders, at a conversion price of $2.00 per share. In addition, the debenture holders were issued warrants which allow the holders to purchase, at any time until February 9, 2012, up to 2,437,500 common shares. The warrants were originally exercisable at an exercise price of $3.81 per share. The debentures have a conversion price adjustment clause to adjust the conversion price based on certain events, including a stock split and, with certain exceptions, stock issuances at less than the conversion price.

The rescission of the acquisition of Volga-Neft could have resulted in the acceleration of the maturity of some or all of the Company’s debentures issued in February 2007 and that otherwise would be due on February 9, 2010 or earlier upon acceleration, following an event of default, pursuant to a debentures agreement. Prior thereto, the Company, through its Chief Executive Officer, obtained the oral approval of the debenture holders. Pursuant to the terms of a registration rights agreement between the Company and the purchasers of the debentures, dated as of February 9, 2007, the Company agreed to prepare and file, by April 15, 2007, with the SEC, a registration statement for the purpose of registering for resale all of the shares of the Company’s common stock issuable upon conversion of the debentures and the exercise of the warrants. The Company has not, to date, filed the registration statement. The registration rights agreement provided that, if the Company did not file the registration statement by April 15, 2007, and if the registration statement was not declared effective by the SEC by July 15, 2007, and in certain other circumstances (including if the registration statement did not remain continuously effective except for certain limited periods for specified reasons), the Company was to pay, on the applicable date and each monthly anniversary of that date, as partial liquidated damages, 1.5% of the principal amount of the debentures then held by the debenture holders.

On October 11, 2007, the Company entered into waiver and consent agreements with the holders of the debentures, in which the debenture holders, among other things, waived all accrued liquidated damages under the registration rights agreement and agreed that future liquidated damages would not be payable if the Company filed the requisite registration statement by April 11, 2008. In consideration for such agreement by the holders of debentures in the principal amount of $5,000,000, the Company paid $302,322 to such debenture holders, with the conversion price of those debentures remaining at $2.00 per share and the warrants to purchase up to 1,625,000 shares of common stock remaining at $3.81 per share, in each case subject to potential anti-dilution adjustments. In consideration for such agreement by the holders of debentures in the principal amount of $2,500,000, the Company issued 100,000 shares of common stock to such debenture holders, reduced the conversion price of the debentures from $2.00 to $.75 per share of the Company’s common stock, and lowered the exercise price of the warrant to purchase up to 812,500 shares of common stock from $3.81 to $.75 per share until October 11, 2010, which will then revert to $3.81 per share, in each case subject to potential anti-dilution adjustments.

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STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

10.

Convertible Debentures (cont’d)

On February 28, 2008, the Company entered into waiver and consent agreements with the holders of its outstanding 8% secured convertible debentures, in which the debenture holders, among other things, deferred until April 1, 2009 interest that would otherwise be due on April 1, 2008. In consideration, the Company has agreed to pay a premium of $12,000 on April 1, 2009.

On April 9, 2008, the October 11, 2007 waiver and consent agreements were amended as the Company was unable to file the registration statement by April 11, 2008. The waiver and consent agreements were changed from the Company being required to make a late registration penalty payment if it could not file the requisite registration statement by April 11, 2008 to the Company using its reasonable best efforts to file the registration statement at the earliest possible date, provided that the penalty provisions are to be reinstated commencing on the first day following the determination by a court of competent jurisdiction that the Company failed to use its reasonable best efforts to file the registration statement. The penalties are to be capped at 10% of the principal amount of the debentures.

On June 30, 2008, the Company entered into waiver and consent agreements with the holders of its outstanding 8% secured convertible debentures, in which the debenture holders, among other things, deferred until July 1, 2009 interest that would otherwise be due on July 1, 2008. In consideration, the Company has agreed to pay a premium of $12,000 on July 1, 2009.

On September 30, 2008, the Company entered into waiver and consent agreements with the holders of its outstanding 8% secured convertible debentures, in which the debenture holders, among other things, deferred until October 1, 2009 interest that would otherwise be due on October 1, 2008. In consideration, the Company has agreed to pay a premium of $12,000 on October 1, 2009.

Discount on Debt-Relative Fair Value of Warrants

Accounting Principles Board Opinion No. 14 (“APB No. 14”) “Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants,” provides that the total proceeds from the issuance of debt with detachable stock purchase warrants should be allocated to the warrants and debt based on their relative fair values. Based on the relative fair values of the warrants, the Company recorded $200,218 as debt discount reducing the carrying value of the debt.

The debt discount is being amortized over the term of the debt. For the nine month periods ended September 30, 2008 and 2007, the amortization of debt discount was $50,055 and Nil, respectively, and is included in debenture interest in other expenses. The unamortized debt discount at September 30, 2008 was $91,766 (December 31, 2007- $141,821).

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STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

11.

Capital Stock

On June 30, 2008, the Company reached an agreement with Firecreek and Double Coin for the return of 1,100,000 and 1,125,000 shares, respectively, of the Company’s common stock valued at $155,750, as described in note 6.

Stock Options

The following table sets forth certain information concerning the Company’s stock options granted, exercised, forfeited and expired during the periods ended September 30, 2008 and December 31, 2007:


		Number of Shares Subject to Issuance		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term

Balance, January 1, 2007		—		$	—

Granted		2,550,000			0.44
Exercised		—			—
Forfeited		—			—
Expired		—			—


Balance, December 31, 2007		2,550,000			0.44	9.69 years

Granted		—			—
Exercised		—			—
Forfeited		(1,266,667	)		0.42
Expired		—			—


Balance, September 30, 2008		1,283,333		$	0.45	8.73 years


Exercisable, End of Period		399,999		$	0.45


	Range of exercise prices	Number of Shares Subject to Issuance		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term

	$0.44 - $0.58	1,283,333			$0.45	8.73 years

The compensation cost recognized for stock-based compensation was $111,527 and Nil for the nine month periods ended September 30, 2008 and 2007, respectively.

- 16 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

11.

Capital Stock (cont’d)

Stock Options (cont’d)

As of September 30, 2008 and 2007, there was $355,949 and $869,658, respectively, of unrecognized compensation cost, net of estimated forfeitures, related to all unvested stock options. The amount as of September 30, 2008 is expected to be recognized over a weighted average period of approximately 1.92 years.

12.

Commitments and Contingencies

Lease

The Company is committed to a lease which expires on November 30, 2008. Future minimum annual payment, inclusive of taxes, under this lease is as follows:


2008	$	16,800

Litigation

In December 2007, the seller of the Bukovyna Project threatened to sue the Company for $5,000,000 as a result of the failure of the Company to consummate the acquisition of that project. The Company has offered to pay $500,000, provided the Company’s lawsuit against the third party financier for wrongfully terminating the loan agreement and failing to provide the requisite funds is successful. The Company cannot estimate its possible loss, if any, or a reasonable range at this time. If, however, as a result of this potential lawsuit, the Company is required to pay significant monetary damages or settlement costs, the Company’s financial position and results of operations could be substantially harmed.

13.

Comparative Figures

Certain figures for the period ended September 30, 2007 and the period from re-entering the development stage (October 6, 2006) through September 30, 2008 have been reclassified to conform with the current period’s condensed consolidated financial statement presentation.

- 17 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

14.

Supplemental Disclosure of Cash Flow Information


	Nine months Ended September 30, 2008		Nine months Ended September 30, 2007			Period from Re-entering the Development Stage through September 30, 2008


Non-cash investing activities are as follows:
Issuance of common stock for debt issuance costs (note 8)	$	—	$	(58,900	)	$	(58,900	)
Acquisition of Volga-Neft		—		—			(11,700,000	)
Rescission of the Volga-Neft acquisition		—		11,700,000			11,700,000
Increase in loan receivable due to damages related to the Volga Neft rescission		—		(1,200,000	)		(1,200,000	)
Discount on proceeds from collection of loan receivable		—		1,200,000			1,200,000
Issuance of common stock for the purchase of the option to acquire oil and gas properties (note 6)		—		(1,282,500	)		(1,282,500	)


Total non-cash investing activities	$	—	$	10,358,600		$	(1,341,400	)


Non-cash financing activity is as follows:
Discount on convertible debentures (note 10)	$	—	$	—		$	108,451


Interest and income taxes paid during the period:

Interest	$	151,111	$	156,667		$	687,878


Income taxes	$	652	$	600		$	752

- 18 -

STAR ENERGY CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

15.

Subsequent Event

On October 24, 2008, the Company sold its interest in AUE for $9,900. The loans payable by AUE to a director of AUE were included in the sale (see note 9).

- 19 -

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and notes thereto included in this report.

Forward Looking Statements

This Management’s Discussion and Analysis and Plan of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as “may,” “should,” “anticipates,” “intends,” “expects,” “believes,” “plans,” “predicts,” “estimates,” “strategy” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These risks and uncertainties include, but are not limited to, the following, many of which are beyond our control: our ability to locate and acquire high oil and gas producing properties, or rights with respect to or interests in, high producing properties; our ability to raise additional capital to fund cash requirements for acquisitions and future operations; our ability to obtain and then maintain sufficient energy reserves to fund and maintain operations; the market for any oil and gas production we may obtain and then generate; domestic and foreign political conditions; the overall level of the supply of and demand for oil and gas; the price of imports of oil and gas; weather conditions; the price and availability of alternative fuels; the proximity and capacity of oil pipelines and other transportation facilities to any properties we may acquire or in which we may acquire rights or interests; uncertainties related to our future business prospects, including possible future acquisitions; the volatility of the stock market in general and our common stock specifically; our ability to maintain the quotation of our common stock on the Over-the-Counter Bulletin Board; and general economic conditions.

We also wish to advise readers not to place any undue reliance on the forward looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other than as required by law.

Overview

We were incorporated in Nevada on December 7, 1999. Our operations began on July 2, 2003 when we purchased a 15% working interest and 12% net revenue interest in eight oil and gas producing wells known as the “Galvan Ranch Gas Wells” in Webb County, West Texas. The wells were on five separate parcels of land spread over 425 acres of the Galvan Ranch.

During the third quarter of 2006, we came to believe that the Galvan Ranch Gas Wells, which had generated revenues of only $55,852 in 2005 and $33,431 for the nine months ended September 30, 2006, were not meeting expectations, were without perceived growth potential and were a distraction to our ability to raise financing and grow. Mr. Ruairidh Campbell, at the time a principal shareholder and one of our officers and directors, was not interested in pursuing a strategy of focusing on areas in Russia and the former Soviet Union, rather than the United States.

On October 6, 2006, we entered into an Assignment and Bill of Sale with Mr. Campbell pursuant to which we assigned to Mr. Campbell all of our interests in and to the Galvan Ranch Gas Wells. In consideration therefor, Mr. Campbell transferred to us, for cancellation and return to our authorized but unissued shares of common stock, the 3,250,000 shares of common stock owned by him. As a result, since October 6, 2006, we have no longer had any interest in the Galvan Ranch Gas Wells and are no longer engaged in the oil and gas business in the United States.

- 20 -

Under our new strategy, pursuant to a Stock Purchase Agreement, on October 6, 2006, we acquired 100% of the capital stock of Volga-Neft Limited Company, a Russian limited liability company primarily engaged in the processing and sale of crude oil in Samara, Russia (“Volga-Neft”), in consideration for our issuance to the stockholders of Volga-Neft of an aggregate of 10,000,000 shares of our common stock, representing, at the time, 25.6% of our issued and outstanding shares. Thereafter, we borrowed and advanced $3,000,000 of working capital to Volga-Neft.

On April 13, 2007, we were advised by RSM Top-Audit that the financial statements of Volga-Neft, purportedly audited by RSM Top-Audit for periods prior to our acquisition of Volga-Neft were not audited by that firm.

Under the Stock Purchase Agreement, the shareholders of Volga-Neft made numerous representations and warranties, including that Volga-Neft’s books and records were complete and correct, represented actual transactions and were maintained in accordance with sound business practice. As part of our further investigation once we were advised that RSM Top-Audit disclaimed performing an audit of the pre-acquisition financial statements of Volga-Neft, we were advised by Volga-Neft’s internal accountant that the revenues of Volga-Neft for the period January 1, 2006 through the December 31, 2006 were actually $47 million (rather than the $83 million reflected in financial statements provided to us for the shorter January 1, 2006 through October 6, 2006 period). We were also advised by an accounting firm which we intended to retain to “re-audit” Volga-Neft’s financial statements, among other things, that documents requested were not provided, that reconciliations did not exist, that no observations of inventories had occurred in the past and that some properties listed as owned by Volga-Neft may have been leased. These factors led us to conclude that the books and records of Volga-Neft were not complete and correct and were not maintained in accordance with sound business practice. These factors also put into question our ability to rely on other representations and warranties made by the stockholders of Volga-Neft. In addition, because our independent auditor was unable to audit opening balances for post-acquisition financial statements of Volga-Neft, we could not receive the comfort that a post-closing audit provides an acquirer with respect to the accuracy of representations and warranties. In lieu of retaining Volga-Neft and spending the time, effort and cost of trying to establish the degree to which breaches existed and the level of damages sustained, and then seek indemnification against the Volga-Neft stockholders in Russia, we determined that it was in our best interests to seek rescission of the Stock Purchase Agreement. By a Rescission Agreement dated June 14, 2007 among us, Volga-Neft and the individuals from whom we acquired the shares of Volga-Neft, the Stock Purchase Agreement was rescinded, we returned the shares of Volga-Neft we received to the former stockholders of Volga-Neft who, in turn, returned to us the 10,000,000 shares of our common stock that we had previously issued to them. In addition, Volga-Neft issued a $4,200,000 promissory note in our favor to repay $3,000,000 of loans we made to Volga-Neft since the acquisition and to reimburse us for costs and damages incurred by us. We, in turn, sold the promissory note to a non-related third party on a non-recourse basis for $3,000,000.

We subsequently received a report from Nixon Peabody, LLP, which was based upon certain documentation and interviews conducted with personnel made available by us, Volga-Neft and RSM Top-Audit, which report did not constitute a comprehensive analysis because a number of key witnesses and certain sources of documentary evidence were not available to Nixon Peabody. Following receipt of that report, we concluded that it is unlikely that RSM Top-Audit performed any audit of Volga-Neft’s financial statements, that RSM Top-Audit may not, in fact, have been engaged by Volga-Neft to perform an audit, and that, while actions taken by various individuals in Russia, at least one of whom was employed by RSM Top-Audit, may have resulted in our receipt of the purported audit report of RSM Top-Audit, neither we nor any of our officers or directors knew of these facts or the absence of the audits prior to RSM Top-Audit’s advice on April 13, 2007 that RSM Top-Audit had not audited the financial statements of Volga-Neft.

- 21 -

We have instituted an action against RSM Top-Audit, the international accounting network of which RSM Top-Audit is a member, certain principals of the audit firms and certain other individuals seeking, among other things, damages suffered by us as a result of the falsified audit of Volga-Neft.

As a result of the rescission, we have not included the assets, liabilities or results of operations of Volga-Neft in our financial statements for any period. Our investment in Volga-Neft from October 6, 2006 through June 14, 2007 was recorded at its cost amount using the cost method of accounting for investments described in paragraph 6a of APB No. 18, “The Equity Method of Accounting for Investments in Common Stock.” While the Rescission Agreement does not affect the rights that any third parties may have against us with respect to agreements entered into, actions taken, or transactions or events that occurred, directly by or with us, we do not believe we have any such obligations. The Rescission Agreement also did not relieve us with respect to breaches of agreements to which we are a party that may have resulted from the Rescission Agreement.

On August 1, 2007, we entered into separate agreements with each of Firecreek Petroleum, Inc. (“Firecreek”), a wholly-owned subsidiary of EGPI Firecreek, Inc., PJM Management, Inc. (“PJM”) and Double Coin Ltd. (“Double Coin”), pursuant to which we acquired from Firecreek and Double Coin any and all of their rights and interests they had with respect to certain projects in Ukraine, consisting of 100% of a project known as the Region Project, 51% of a project known as the Dewon ZAO Project and 100% of a project known as the Bukovyna Project (the “Projects”). Of the rights held by Firecreek and Double Coin, one was a letter of intent for Anglo-Ukr-Energy LLC (“AUE”) to acquire the Region Project for $5.5 million, the second was an oral understanding pursuant to which we entered into a letter of intent to acquire 51% of the Dewon ZAO Project for $40.0 million and the third was a contract for AUE to acquire the Bukovyna Project for $20.0 million. AUE was a company being formed on behalf of Firecreek and Double Coin in Ukraine to acquire the Projects. We were granted the right to complete, and did complete, the organization of AUE as our subsidiary. In exchange for our acquisition of the rights of Firecreek and Double Coin, we issued 2,100,000 shares of our common stock and paid $100,000 to Firecreek and issued 2,500,000 shares of our common stock to Double Coin. We issued 150,000 shares of our common stock and paid $10,000 to PJM which acted as a finder for Firecreek and Double Coin. The shares were valued at $0.27 per share for a total consideration of $1,392,500. The purchase price for our acquisition of the rights of Firecreek and Double Coin and PJM’s finder’s fee was negotiated with them and was equal to approximately 2.1% of the total purchase price that was to be paid to the owners of the Projects, based on the market value of our common stock at the time we entered into the agreements with Firecreek, PJM and Double Coin. Firecreek, PJM and Double Coin are not related to our officers, directors and affiliates.

Our right to proceed with respect to these Projects expired on November 10, 2007, November 15, 2007 and November 26, 2007, respectively. We sought extensions from the owners of the Projects, but were unable to negotiate an extension of the letter of intent with respect to the Dewon ZAO Project (which was needed to complete due diligence and seek requisite financing for the Project), unable to obtain the due diligence materials we needed with respect to the Region Project and unable to obtain the necessary financing for the Bukovyna Project. Accordingly, we no longer have rights to acquire any of the Projects and, as such, the options to acquire the oil and gas properties have been completely written-off.

We instituted an arbitration proceeding against Firecreek and Double Coin seeking a return of the consideration paid to them. On June 30, 2008, we entered into separate settlement agreements with each of Firecreek and DoubleCoin, pursuant to which Firecreek has returned and Double Coin has agreed to return 1,100,000 and 1,125,000 shares of our common stock, respectively, that were issued in connection with the acquisition of the rights held by Firecreek and Double Coin. The shares were valued at $.07 per share or $155,750 in aggregate.

- 22 -

During the third quarter of 2008, we realized that we could no longer sustain the operations of AUE and decided to sell our subsidiary as a cost-savings measure. On September 3, 2008, we entered into a Participation Interest Purchase Agreement, whereby we agreed to sell our interest in AUE for $9,900. The closing of this transaction occurred on October 24, 2008.

Plans for Future Operations

Prior to October 6, 2006, we were primarily engaged in domestic energy operations. We have shifted our focus entirely to operations situated in the Commonwealth of Independent States that are considered emerging markets and, particularly, are seeking to capitalize on opportunities available to us in Ukraine. With the disposition of the Galvan Ranch Wells and the rescission of the Volga-Neft acquisition, we are not currently engaged in an active business. In light of our prior experience and taking into consideration the risks inherent to operating in emerging markets, we have retained western legal, accounting and geological consultants. Although we are in discussions regarding potential acquisitions, we are not currently a party to any agreement to acquire properties or rights with respect to oil or gas properties or production.

Results of Operations

We had no active operations or sales during the first nine months of 2008 or 2007 as a result of our disposition of the Galvan Ranch Wells in October 2006 and the rescission of our acquisition of Volga-Neft.

We had a loss of $2,514,000 for the nine months ended September 30, 2008 and $547,471 for the three months ended September 30, 2008 versus a loss of $5,428,749 and $1,821,552 for the comparable periods in 2007.

Our principal operating expenses for the nine and three month reporting periods ended September 30, 2008 and 2007 were as follows:

Professional fees for the three months ended September 30, 2008 increased to $106,562 from $90,378 for the comparable period in 2007. The higher expenses in 2008 were primarily due to the incremental legal and accounting costs incurred in connection with the Securities and Exchange Commission related matters. Professional fees were $996,530 and $691,436 for the nine month periods ended September 30, 2008 and 2007, respectively. The increase was primarily due to legal and accounting services costs incurred in connection with Securities and Exchange Commission related matters, as well as legal expenses related to proceedings instituted by us against RSM Top-Audit arising out of our acquisition, and rescission of the acquisition, of Volga-Neft, against Firecreek and Double Coin related to expired acquisition rights in Ukraine, and against a third party financier who failed to provide the requisite financing for the Bukovyna Project.

Salary and benefits expenses for the quarter ended September 30, 2008 were $161,701 compared to $446,466 for the corresponding period in 2007. Salary and benefits for the nine month period ended September 30, 2008 decreased to $527,154 from $1,185,395 for the comparable period in 2007. These decreases were a result of a $268,564 and $800,255 reduction in the amortized portion of stock-based compensation costs for the 2008 three and nine month periods, respectively, primarily related to the issuance of shares to certain officers and directors, partially offset by higher employee salaries and benefits principally due to a higher staff level during the first six months of 2008.

- 23 -

Office and general expenses for the quarter ended September 30, 2008 were $43,864 compared to $50,444 for the corresponding period in 2007. The lower year-over-year expenses in this category were primarily due to a reduction in Board of Directors fees of $11,000 and insurance expenses of $12,292, and lower cost of office supplies of $7,880, partially offset by higher office rent expenses of $25,200 related to the cost of maintaining our office in Kiev, Ukraine established in September 2007. Office and general expenses for the nine months ended September 30, 2008 increased to $199,795 from $147,752 for the comparable period in 2007. This increase was principally due to higher office rent and utilities expenses of $80,951 related to the cost of maintaining our office in Kiev, Ukraine, which were partially offset by a reduction in Board of Directors fees of $13,000 coupled with lower cost of office and computer supplies of $13,256.

Due diligence expenses totaled $4,634 and $192,419 for the three and nine months ended September 30, 2008, respectively, versus $619,153 and $1,086,484 for the comparable periods in 2007. The higher expenses in 2007 reflect the accumulation and analysis of a large volume of legal, seismic and financial audit data collected in conjunction with three contemplated oil and gas projects in Ukraine.

Consulting expenses for the quarter ended September 30, 2008 were $nil compared to $21,860 for the corresponding period in 2007. Consulting expenses of $32,295 for the nine month period ended September 30, 2008 decreased from $1,052,876 in the comparable period of 2007. The 2007 expenses included $1,000,000 of consulting fees related to Volga-Neft for the nine month reporting period.

Travel expenses for the three months ended September 30, 2008 were $2,862 compared to $65,054 for the similar period in 2007. Travel expenses for the nine months ended September 30, 2008 decreased to $29,164 from $108,999 for the comparable period in 2007. These reductions were primarily due to the absence of travel costs incurred in the 2007 reporting periods stemming from trips to the Russian Federation related to our investment in Volga-Neft during the first half of the year and trips to Ukraine for due diligence gathering for potential acquisitions and the establishment of an office in Kiev, the country’s capital.

Advertising and promotion expenses for the three months ended September 30, 2008 were $nil compared to $39,072 for the corresponding period in 2007. Advertising and promotion expenses for the nine months ended September 30, 2008 decreased to $21,472 from $330,677 for the comparable period in 2007. These reductions were primarily due to the elimination of the investor relations costs, coupled with the absence of advertising expenses of $223,500 incurred in 2007 for promotional activities subsequent to the acquisition of Volga-Neft.

Depreciation expense was $2,589 and $7,497 for the three and nine month periods ended September 30, 2008, respectively, versus $660 in each of the 2007 comparable reporting periods. The increased expenses related to computer hardware and office equipment, as well as furniture and fixtures placed in service in the second half of 2007.

The recovery of costs related to the expiration of rights to contract for the purchase of oil and gas properties for the nine months ended September 30, 2008 reflects a positive adjustment of $155,750 for a partial recovery of consideration paid for the rights to three oil and gas projects in Ukraine. As these rights had expired in November 2007, the costs associated with the expired rights were written-off in 2007.

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Interest income for the three and nine months ended September 30, 2008 was $nil and $3,101, respectively, versus $1,496 and $6,982, coupled with a $1,697 and $9,017 gain on the sale of marketable securities, for the comparable periods in 2007. These decreases reflects a lower average cash balance, which was highest following our private placement in February 2007 of $7,500,000 of 8% Secured Convertible Debentures.

The foreign exchange gain of $431 in the third quarter reduced the year-to-date foreign exchange loss to $585, which resulted from the conversion of U.S. dollars to the currency of Ukraine. We incurred no such gain or loss in 2007.

Interest expense for the three and nine months ended September 30, 2008 was $223,427 and $661280, respectively, compared to $491,658 and $839,869 for the corresponding periods in 2007. The higher costs for the 2007 reporting periods reflect a $322,402 expense incurred in connection with obtaining the waivers secured from the Debenture holders of all accrued liquidated damages under the Registration Rights Agreement with respect to the common stock underlying the $7,500,000 principal amount of 8% Secured Convertible Debentures we issued on February 9, 2007, partially offset by the Debentures being outstanding for the full nine months in 2008 versus the comparable partial period in 2007. Interest expense included amortization of deferred debt issuance costs of $50,742 and $152,225, as well as debt discount of $16,685 and $50,055 for the three and nine month periods ended September 30, 2008, respectively. Amortization of deferred debt issuance costs, included in 2007 interest expense for the comparable periods, was $32,590 and $130,801, respectively, all related to the Debentures.

Liquidity and Capital Resources

In February 2007, we sold $7,500,000 principal amount of our 8% Secured Convertible Debentures to institutional investors for a total purchase price of $7,500,000 (the “Debenture Financing”). We paid Rodman & Renshaw LLC, placement agent for the Debenture Financing, $525,000 (7% of the gross proceeds from the sale of the Debentures), plus $25,000 in reimbursement of its expenses, under a placement agency agreement. Most of the cash generated from the private placement has been used to fund subsequent business activities. As of September 30, 2008, we had only $859 of cash remaining.

During the nine month period ended September 30, 2008, we used $1,083,045 to fund our operating activities compared to $3,583,706 used in the corresponding period of 2007, a reduction of $2,500,661. We used less cash in the 2008 reporting period due to a $1,014,810 increase in accounts payable versus a $143,510 decrease in the 2007 corresponding period, a difference of $1,158,320. In addition, our net loss on a cash basis was $2,343,838 and $3,495,846 for the nine months ended September 30, 2008 and 2007, respectively, which resulted in a $1,152,008 lower use of cash.

There were no investing activities for the nine months ended September 30, 2008. Investing activities during the first nine months of 2007 produced net cash of $871,529 principally from the collection of our loan to Volga-Neft of $3,000,000, which was returned to us in connection with the rescission in June 2007 of the Volga-Neft transaction. This was partially offset by a $2,000,000 loan advance made to Volga-Neft prior to the rescission and which was also returned to us as part of the loan collection, as well as our use of $110,000 to acquire the right to contract for the purchase of interests in the oil and gas projects in Ukraine and office equipment purchases of $18,471.

Financing activities during the nine months ended September 30, 2008 provided net cash of $35,184, stemming from loans made to our wholly-owned subsidiary in Ukraine, AUE, by a director of AUE. We used the proceeds of this financing to fund the operations of AUE prior to our sale of AUE for $9,900 in October 2008. Financing activities provided net cash of $5,950,000 during the first nine months of 2007, resulting from the Debenture Financing. We used $1,000,000 of the net proceeds of this financing to

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repay the loan we incurred in 2006 to fund liabilities of Volga-Neft. We received the return of this amount in connection with the rescission in June 2007 of the Volga-Neft transaction, as indicated above.

In order to sustain our business activities, we will require additional capital, through the issuance of equity or debt, until we are able to achieve profitable operations. Although we plan to seek additional financing, there can be no assurance that we will be able to secure financing or, if so, on satisfactory terms.

Off-Balance Sheet Financing

The Company has no off-balance sheet financing arrangements, within the meaning of Item 303(c) of Securities and Exchange Commission Regulation S-B.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are the controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, at the end of the period covered by this report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective for the following reasons.

•

In connection with the preparation of our Annual Report on Form 10-KSB for the year ended December 31, 2006, we identified a deficiency in our disclosure controls and procedures related to the retention, supervision and communication with the appropriate personnel involved with the audit of Volga-Neft, and in our procedures pertaining to the engagement of auditors of Volga-Neft. Management has evaluated the impact of this control deficiency on our company and has concluded that this control deficiency represents a material weakness in our controls. We caused an investigation to be taken into the events and procedures involving the Volga-Neft audit, and our controls and procedures regarding our engagement and communication with independent auditors. As a result of the investigation, our prior experience and taking into consideration the risk factors inherent to operating in emerging markets, we have retained western legal, accounting and geological consultants to aid us in our due diligence of prospective acquisitions. In addition, we hired a full-time Chief Financial Officer. We believe these measures will benefit us by reducing the likelihood of a similar event occurring in the future.

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•

In addition, we failed to timely file Current Reports on Form 8-K regarding two reportable events during 2007, which we reported in Item 8B, “Other Information,” in our Annual Report for the year ended December 31, 2007, and two Current Reports on Form 8-K regarding two reportable events during the second quarter of 2008, which we reported in Item 5, “Other Information,” in our Quarterly Report for the period ended June 30, 2008. Management, including the Company’s principal executive officer and principal financial officer, has reviewed with legal counsel the Form 8-K rules and will implement the necessary controls to timely comply with the Form 8-K requirements.

•

Due to our relatively small size and not having present operations, our chief financial officer also performs all accounting functions for us. Thus, we do not have segregation of duties which is a deficiency in our disclosure controls. We do not presently have the resources to cure this deficiency.

We are in the process of overcoming the issues we faced in connection with the Volga-Neft transaction and our failure to timely file certain periodic reports with the SEC. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports. Furthermore, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and reflects the fact that there are resource constraints such that the benefits of controls must be considered relative to their cost. Accordingly, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

Our management has not identified any change in our internal control over financial reporting that occurred during the three month period ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 6.

EXHIBITS


Exhibit No.		Description

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, this 19th day of November, 2008.

STAR ENERGY CORPORATION

/s/ Michael Kravchenko

Michael Kravchenko

Chief Financial Officer

(Principal Financial and Accounting Officer)

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EXHIBIT INDEX


Exhibit No.		Description

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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STAR ENERGY CORP 10-Q