UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q




(Mark One)


[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended:  August 31, 2009




[  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT


For the transition period from to


Commission file number:000-52959




Sterling Oil & Gas Company


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


Nevada
20-8999059


(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)





121 W. Merino St.


PO Box 500


Upton , WY 82730


(Address of principal executive offices)




(307) 468-9368


(Issuer’s telephone number)




Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes [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 the definitions 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                                   [X]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 [  ]No[X]




State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:15,925,000 shares of common stock, $.00001 par value and 0 shares of preferred stock, $.00001 par value as of October 15, 2009
















STERLING OIL & GAS COMPANY




INDEX




PagePART 1.
FINANCIAL INFORMATIONITEM 1.
FINANCIAL STATEMENTSCondensed Balance Sheets as of  August 31, 2009 (Unaudited) and February 28, 2009
3Condensed Statements of Operations for the three months ended August 31, 2009 and 2008 and for the six months ended August 31, 2009 and 2008 and for the cumulative period from May 1, 2007 (Inception ) through August 31, 2009(Unaudited)
4Condensed Statements of Cash Flows  for the six months  ended  August 31, 2009 and 2008 and for the cumulative period  from May 1, 2007( Inception) through August 31, 2009 (Unaudited)
5Condensed Statement of Shareholders’ Equity for the three months ended August 31, 2009 and for the cumulative period from May 1, 2007 (Inception) through August 31, 2009 (Unaudited)
6Notes to Unaudited Condensed Financial Statements
7ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13ITEM 4T.
CONTROLS AND PROCEDURES
17PART II.
OTHER INFORMATION
17ITEM 1.
Legal Proceedings
17ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17ITEM 3.
Default Upon Senior Securities
17ITEM 4.
Submission of Matters to a Vote of Security Holders
17ITEM 5.
Other Information
17ITEM 6.
EXHIBITS
18SIGNATURES
19


2




ITEM 1.
FINANCIAL STATEMENTS.




Sterling Oil & Gas Company(An Exploration Stage Company)Condensed Balance SheetsAugust 31, 2009

February 28,Assets
(Unaudited)

2009Current assets:Cash and cash equivalents
$187,139

$66,321Total current assets
187,139

66,321Oil and Gas Properties-Unevaluated Properties, full cost method (less $256,424 and $483,855 impairment, respectively)
310,241

713,619Total Assets
$497,380

$779,940Liabilities and Shareholders’ EquityAccounts payable
$2,895

$2,585Shareholders’ equity:Preferred stock, $.00001 par value; 100,000,000 shares authorized, 0 sharesissued and outstanding
--

--Common stock, $.00001 par value; 100,000,000 shares authorized,15,925,000 shares issued and outstandingat August 31, 2009 and February 28, 2009, respectively.
159

159Additional paid-in capital
2,280,932

2,267,782Deficit accumulated during development stage
(1,786,606)

(1,490,586)Total shareholders’ equity
494,485

777,355Total Liabilities and Shareholders’ Equity
$497,380

$779,940





See accompanying notes to condensed financial statements.




3




Sterling Oil & Gas Company(An Exploration Stage Company)Condensed Statements of Operations(Unaudited)For the Three Months ended
August 31,
For the Six Months ended
August 31,
May 1, 2007
(Inception)
Through
August 31,2009

2008

2009

2008
2009Revenues
$--

$--

$--

$--

$--Costs and expensesPersonnel costs
19,726

69,542

27,278

175,602

268,756Professional fees
4,940

67,887

37,568

108,188

266,450Impairment and
abandonment of unproved
properties
228,482

--

228,482

--

1,228,337Other general and
administrative
2,362

1,669

3,228

14,164

32,312Operating loss
(255,510)

(139,098)

(296,556)

(297,954)

(1,795,855)Other income (expense)Interest income
421

565

536

2,665

9,249Net loss
$ (255,089)

$ (138,533)

$ (296,020)

$ (295,289)

$ (1,786,606)Basic and diluted loss per share
$(0.02)

$(0.01)

$(0.02)

$(0.02)Weighted average common
shares outstanding, basic and
diluted
15,925,000

15,070,652

15,925,000

15,035,326




See accompanying notes to condensed financial statements.


4


Sterling Oil & Gas Company(An Exploration Stage Company)Condensed Statements of Cash Flows(Unaudited)For the Six Months ended August 31,

For the Six Months ended August 31,

From May 1, 2007 (Inception) Through
August 31,2009

2008

2009Cash Flows From Operating Activities:Net Loss

$(296,020)

$(295,289)

$(1,786,606)Adjustments to reconcile net loss to net cash used by operating activities:Contributed services

13,150

--

52,650Impairment and abandonment of unproved properties

228,482

--

1,228,337Changes in operating assets and liabilities:Trading securities

--

260,392

--Accounts payable

310

25,553

2,895Net cash(used in)operating activities

(54,078)

(9,344)

(502,724)Cash flows from investing activities:Unevaluated oil and gas properties-purchases

(8,104)

(35,803)

(216,436)Refund of purchase deposit

--

--

80,856Undeveloped oil and gas properties-sales

183,000

--

391,233Net cash provided by, (used in)investing activities

174,896

(35,803)

255,653Cash flows from financing activities:Proceeds from the sale of common stock

--

65,000

435,000Payments for offering costs

--

--

(790)Net cash provided byfinancing activities

--

65,000

434,210Net Increase in cash andcash equivalents

120,818

19,853

187,139Cash and cash equivalents:Beginning of period

66,321

6,426

--End of period

$187,139

$26,279

$187,139Noncash investing and financing transaction:Transfer of oil and gas properties from Big Cat

$--

$--

$1,794,231




See accompanying notes to condensed financial statements.




5




Sterling Oil & Gas Company(An Exploration Stage Company)Condensed Statement of Shareholder’s Equity(Unaudited)






Common Stock

Additional Paid-in Capital

Deficit Incurred During
Exploration  Stage

TotalShares

Par value $.00001Balance,at May 1, 2007( Inception)

--

$--

$--

$--

$--Stock issued for properties transferred from Big Cat at inception, 5/1/2007, $0.1794 per share

10,000,000

100

1,794,131

–

1,794,231Private placement June 2007, $0.05 per share

5,000,000

50

249,950

–

250,000Other-contributed services

–

–

30,800

–

30,800Other costs-issuance fees





(790)



(790)Net loss

–

–

–

(740,320)

(740,320)Balance, February 29, 2008

15,000,000

150

2,074,091

(740,320)

1,333,921Public offering August 2008, $0.20 per share

325,000

3

64,997

–

65,000Public offering October 2008, $0.20 per share

600,000

6

119,994

--

120,000Other-contributed services

--

--

8,700

--

8,700Net loss

–

–

–

(750,266)

(750,266)Balance, February 28, 2009

15,925,000

159

2,267,782

(1,490,586)

777,355Other-contributed services

--

--

13,150

--

13,150Net loss

--

--

--

(296,020)

(296,020)Balance, August 31, 2009

15,925,000

$159

$2,280,932

$(1,786,606)

$494,485




See accompanying notes to condensed financial statements.






6




1.
Presentation, Organization and Nature of Operations:




Presentation




The accompanying unaudited financial statements of Sterling Oil & Gas Company  (the “Company”) at August 31, 2009 and 2008 have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial statements pursuant to instructions to Form 10-Q and Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended February 28, 2009. In management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation
to make the Company’s financial statements not misleading have been included. The results of operations for the period ended August 31, 2009 and 2008 presented are not necessarily indicative of the results to be expected for the full year. The February 28, 2009 balance sheet has been derived from the Company’s audited financial statements included in the Company’s annual report on Form 10-K for the year ended February 28, 2009.




Description of Operations




Sterling Oil & Gas Company (“Sterling”) is an independent energy company engaged in the exploration and acquisition of natural gas and crude oil prospects in the western United States.




The Company is in the exploration stage in accordance with Statement of Financial Accounting Standards (‘SFAS”) No. 7. The Company has been in the exploration stage since inception and has yet to enter revenue-producing operations. Activities since its inception have primarily involved organization and development of the Company.




2.
Liquidity:




Going Concern




As of August 31, 2009, the Company had working capital of $184,244 and shareholders’ equity of $494,485. Sterling has relied upon outside investor funds to maintain its operations and develop its business. Sterling’s plan for continuation anticipates continued funding from investors. This funding would be used for operations,
for working capital, as well as business expansion during the upcoming fiscal year. The Company can provide no assurance that additional investor funds will be available on terms acceptable to the Company and there is substantial doubt about the ability of the Company to continue as a going concern.




Sterling’s ability to continue as a going concern is dependent upon raising capital through debt or equity financing and ultimately by producing revenue and achieving profitable operations. The Company can offer no assurance that it will be successful in its efforts to raise additional proceeds or achieve profitable operations. The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business, and no adjustments have been made as a result of this uncertainty.




3.
Summary of Significant Accounting Policies:




Use of Estimates




The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of any oil and gas reserves, assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and





7


expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions it believes to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, the Company believes that its estimates are reasonable.




Cash and Cash Equivalents




Cash and cash equivalents include cash on hand, amounts held in banks and highly liquid investments purchased with an original maturity of three months or less.




Concentrations of Credit Risk




The Company’s cash equivalents and short-term investments are exposed to concentrations of credit risk.  The Company manages and controls this risk by investing these funds with major financial institutions.




Oil and Gas Properties




The Company follows the full cost method of accounting whereby all costs related to the acquisition and exploration of oil and gas properties are capitalized into a single cost center (“full cost pool”).  Such costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to
exploration activities and costs of drilling both productive and non-productive wells.  Proceeds from property sales are generally credited to the full cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. Generally, any such sale of unevaluated
properties will also be recognized on a cost recovery basis with no gain or loss.




As of August 31, 2009, the Company does not have any proven oil and gas reserves and all of its properties are unevaluated. The costs of unevaluated properties will be withheld from the depletion base until such time as they are either developed or abandoned.  Unevaluated properties are assessed at least annually by the Company
for impairment. Impairment is estimated by the Company by applying factors based on historical experience and other data such as primary lease terms of the properties, average holding periods of unproved properties, and geographic and geologic data of groupings of individually insignificant properties and projects. Therefore, any impairment of said unevaluated properties would result in an expense to the Company.




During the year ended February 28, 2009, the Company reviewed its oil and gas leaseholds and based on the sale of its interest in Cedar Resources and additional information, the Company recorded an impairment of $428,855 on its leasehold interests.




During the three months ended August 31, 2009, the Company completed a review of its oil and gas leaseholds and elected not to pay delay rentals on certain leases in the Powder River Basin of Montana and therefore abandoned the leases. The effect of abandonment of these leases was a reduction of 9,991net mineral acres to an ending 11,701
net mineral acres, which is considered a significant reduction in our oil and gas properties. As a result, the Company wrote off $152,321 against its impairment reserve and recorded an abandonment of unproved properties expense of $228,482 to reflect the reduction in acreage.




Depletion of exploration and development costs and depreciation of production equipment is computed using the units of production method based upon estimated proved oil and gas reserves.   Total well costs, if and when drilled, will be transferred to the depletable pool even when multiple targeted zones have not been fully evaluated.  For
depletion and depreciation purposes, relative volumes of oil and gas production and reserves are converted at the energy equivalent rate of six thousand cubic feet of natural gas to one barrel of crude oil.






8


Under the full cost method of accounting, capitalized oil and gas property costs, less accumulated depletion and net of deferred income taxes (full cost pool), may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves less the future cash outflows associated
with the asset retirement obligations that have been accrued in the balance sheet plus the cost, or estimated fair value, if lower of unproved properties and the costs of any properties not being amortized.  Should the full cost pool exceed this ceiling, an impairment is recognized.  The present value of estimated future net revenues is computed by applying current oil and gas prices to estimated future production of proved oil and gas reserves as of period end, less estimated future expenditures
to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions.  However, subsequent commodity price increases may be utilized to reduce or eliminate any impairment.




Asset Retirement Obligations




The Company will follow the provisions of SFAS No. 143, Accounting for Asset Retirement (ARO) Obligationsat such time it acquires or drills oil and gas wells.  The estimated fair value of the future costs associated with dismantlement, abandonment and
restoration of oil and gas properties will be recorded when incurred, generally upon acquisition or completion of a well.  The net estimated costs will be discounted to present values using a risk adjusted rate over the estimated economic life of the oil and gas properties.  Such costs will be capitalized as part of the related asset.  The asset will be depleted on the units-of-production method on a field-by-field basis.  The associated liability will be classified in
other long-term liabilities in the accompanying balance sheets.  The liability will be periodically adjusted to reflect (1) new liabilities incurred, (2) liabilities settled during the period, (3) accretion expense, and (4) revisions to estimated future cash flow requirements.  The accretion expense will be recorded as a component of depreciation, depletion and amortization expense in the accompanying statements of operations.  As of August 31, 2009 and February 28, 2009, the Company
has no ARO obligation.




Income Taxes




Income taxes are accounted for by recognizing deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax basis of assets, liabilities and carryforwards. Deferred tax assets are recognized for the expected future
effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefit which, more likely than not, are not expected to be realized.




On March 1, 2008 we adopted Financial Accounting Standards Board (FASB) Interpretation No.48, Accounting for Uncertainty in Income Taxes -- An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in
the financial statements in accordance with SFAS No.109. Tax positions must meet a "more-likely-than-not" recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. We have identified no significant uncertain tax positions as of August 31, 2009. The cumulative effect of adopting FIN 48 has resulted in no FIN 48 liability on the balance sheet. The total amount of unrecognized tax benefits as of the date of adoption was zero.




We recognize interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties related to uncertain tax positions were accrued as of August 31, 2009 and February 28, 2009.




Risks and Uncertainties




Historically, oil and gas prices have experienced significant fluctuations and have been particularly volatile in recent years.  Price fluctuations can result from variations in weather, levels of regional or national production and demand, availability of transportation capacity to other regions of the country and various other
factors.  Increases or decreases in prices received could have a significant impact on future results.




9


Fair Value of Financial Instruments




The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The fair market value of these financial instruments approximates or is equal to the book value.




Net Loss Per Share




Basic net loss per share is computed using the weighted average number of common shares outstanding during the period.  Contingently issuable shares are included in the computation of basic net income (loss) per share when the related conditions are satisfied.  Diluted net income (loss) per share is computed using the
weighted average number of common shares and potentially dilutive securities outstanding during the period.  Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.




As of August 31, 2009 the Company had 15,925,000 shares of common stock outstanding and warrants for the purchase of 3,425,000 shares. As of August 31, 2008 the Company had 15,325,000 shares of common stock outstanding and warrants for the purchase of 2,825,000 shares. The warrants were excluded from the calculation of diluted earnings
per share for both years, due to the fact that they were anti-dilutive.




Reclassifications




Certain amounts for the period from Inception (May 1, 2007) to August 31, 2008 have been reclassified to conform to the August 31, 2009 presentation. Such reclassifications had no effect on net loss.




Other Comprehensive Income




The Company does not have any material items of other comprehensive income for the six months ended August 31, 2009 or August 31, 2008.  Therefore, total comprehensive income (loss) is the same as net income (loss) for these periods.




Recently Issued Accounting Pronouncements




In July 2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles-A Replacement of FASB Statement No. 162”. The objective of SFAS 168 is to replace SFAS 162 and to establish the
Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements. The Codification is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We do not anticipate the adoption of SFAS 168 will have a significant impact on our financial statements.




In June 2009 the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)”,the Board’s objective in issuing this Statement is to improve financial reporting by enterprises involved with variable interest entities. The Board undertook
this project to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about the application
of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective for the first annual reporting period that begins after November 15, 2009. We do not anticipate the adoption of SFAS 167 will have a significant impact on our financial statements.




In June 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets”, the Board’s objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting
entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.   The Board undertook this project to address (1) practices that have developed since the issuance of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. SFAS 166 is effective for the first annual reporting period that begins after November 15, 2009. We do not anticipate the adoption of SFAS 166 will have a significant
impact on our financial statements.




10
 Subsequent Events




The Company has evaluated subsequent events through October 15, 2009, the date which the financial statements were available to be issued.




4.
Oil and Gas Property Acquisitions:




During the three months ended August 31, 2009 the Company paid delay rentals on its Montana leases in the amount of $7,152.




During the three months ended August 31, 2008, the Company paid delay rentals and title work expenses on our joint venture in the amount of $29,262.




During the three months ended August 31, 2009, the Company completed a review of its oil and gas leaseholds and elected not to pay delay rentals on certain leases in the Powder River Basin of Montana and therefore abandoned the leases. The effect of abandonment of these leases was a reduction of 9,991net mineral acres to an ending 11,701
net mineral acres, which is considered a significant reduction in our oil and gas properties. As a result, the Company wrote off $152,321 against its impairment reserve and recorded an abandonment of unproved properties expense of $228,482 to reflect the reduction in acreage.




During the six months ended August 31, 2009, the Company paid joint venture title work costs, and delay rentals of $8,104compared to $35,803 for the six months ended August 31, 2008.




5.
Related Party Transactions:




During the three months ended August 31, 2009, certain officers of Big Cat Energy Corporation, an affiliated public company, performed part time management duties for the Company. The Company did not pay cash for these services, however, the Company recorded the services at a fair market value as consulting fees and additional paid-in
capital. Contributed services were $1,100 for the three months ended August 31, 2009 compared to no contributed services for the same period in 2008.




The amount of contributed services for the six months ended August 31, 2009 were $13,150 compared to no contributed services for the same period in 2008.




6.
Shareholders’ Equity:




There were no equity transactions during the six months ended August 31, 2009.




11


During the three months ended August 31, 2008 the Company sold 325,000 units for $.20 per unit, each unit consisting of one free trading share of its common stock and one warrant to purchase one share of free trading common stock exercisable at $.50 per share.  The Company received proceeds of $65,000 from the sale of units. The offering was
made as part of the Form S-1 Post Effective Amendment 3 which became effective on July 14, 2008. Following the above sale, the Company’s outstanding common stock increased to 15,325,000 shares.




In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company’s Own Stock,” (EITF 00-19) and the terms of the warrants and the transaction documents, the warrants were determined to represent an equity transaction and therefore the fair value of the warrants
are contained within the equity section and not separately recorded apart from the common shares issued as part of the private placement.




7.
Income Taxes:




The federal net operating loss (NOL) carryforward of approximately $1,497,000 as of August 31, 2009 begins to expire in 2028.  Internal Revenue Code Section 382 places a limitation on the amount of taxable income which can be offset by NOL carryforwards after a change in control
(generally greater than 50% change in ownership) of a loss corporation.  Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 limitation.  Due to these “change in ownership” provisions, utilization of NOL carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods.  We have not performed a Section 382 analysis.  However, if performed, Section
382 may be found to limit potential future utilization of our NOL carryforwards.




We have established a full valuation allowance against the deferred tax assets because, based on the weight of available evidence including our continued operating losses, it is more likely than not that all of the deferred tax assets will not be realized.  Because of the full valuation allowance, no income tax expense or benefit
is reflected on the statement of operations.




On March 1, 2008 we adopted FASB Interpretation No.48, Accounting for Uncertainty in Income Taxes -- An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance
with SFAS No.109. Tax positions must meet a "more-likely-than-not" recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. We have identified no significant uncertain tax positions as of August 31, 2009. The cumulative effect of adopting FIN 48 has resulted in no FIN 48 liability on the balance sheet. The total amount of unrecognized tax benefits as of the date of adoption was zero.




No interest and penalties related to uncertain tax positions were accrued at August 31, 2009.




8.
Commitments and Contingencies:




Environmental Issues– The Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental clean up of well sites or other environmental
restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof.  If the Company acquires existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated.  Should it be determined that a liability exists with respect to any environmental clean up or restoration, the liability to cure such a violation could fall upon the Company.  Management
believes its properties, all of which are currently unevaluated, are operated in conformity with local, state and federal regulations.  No claim has been made, nor is the Company aware of any uninsured liability which the Company may have, as it relates to any environmental clean up, restoration or the violation of any rules or regulations relating thereto.





12


ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations






Forward-Looking Statements




This Quarterly Report includes certain statements that may be deemed to be “forward-looking statements that reflect our current views with respect to future events and financial performance. All statements included in this Quarterly Report,
other than statements of historical facts, address matters that we reasonably expect, believe or anticipate will or may occur in the future. Forward-looking statements may relate to, among other things:





our future financial position, including working capital and anticipated cash flow;




the risks of the oil and gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas;




market demand;




risks and uncertainties involving geology of oil and gas deposits;




the uncertainty of any reserve estimates and reserves life;




the uncertainty of estimates and projections relating to any production, costs and expenses;




potential delays or changes in plans with respect to exploration or development projects or capital expenditures;




fluctuations in oil and gas prices;




health, safety and environmental risks;




uncertainties as to the availability and cost of financing; and




the possibility that government policies or laws may change or governmental approvals may be delayed or withheld.




Other sections of this Quarterly Report may include discussion of additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors
emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.




Our forward looking statements contained in this Quarterly Report are made as of the respective dates set forth in this Quarterly Report. Such forward-looking statements are based on the beliefs, expectations and opinions of management as of the date the statements are made. We do not intend to update these forward-looking statements, except
as required by law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.




13


Plan of Operations




For the fiscal year ending February 28, 2010, the Company’s plan of operation is to evaluate new oil and gas projects that are available to the Company and evaluate utilization of the Company’s existing Montana leasehold interests.   The Company presently has 11,701 leasehold net mineral acres.  Our
ability to explore and develop our acreage or to acquire other acreage for development and to maintain existing acreage depends upon our ability to raise additional capital through equity fundraising and/or borrowing.  Depending upon available funds, we may conduct our own field tests or exploration on one or more of our properties in
Montana to determine the appropriate structure for possible development.    There is limited historical financial information about our current operations upon which to base an evaluation of our performance. We are in development stage operations and have not generated any revenues from current operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital
resources, the current lack of product production, and possible cost overruns due to price and cost increases in services and products. Further, we have no assurance that future financing will be available to us on acceptable terms to enable us to develop the business of the Company. If financing is not available on satisfactory terms, we may be unable to continue, develop or expand our operations. Equity financing could result in additional dilution to existing shareholders.




Results of Operations




Three Months Ended August 31, 2009 compared to the Three Months Ended August 31, 2008.




We reported a net loss for the three months ended August 31, 2009 of $255,089 compared to net loss of $138,533 for the period three months ended August 31, 2008. The net loss for the three months ended August 31, 2009 included a non-cash loss on abandonment of leaseholds of $228,482.




We had personnel expense of $19,726 for the three months ended August 31, 2009 compared to $69,542 for the three months ended August 31, 2008.




Our other general and administrative costs were $2,362 during the three month period ended August 31, 2009 compared to $1,669 for the same period in 2008.




We had $4,940 of professional fess, $1,100 of which were non-cash, during the three months ended August 31, 2009, compared to $67,887 for the three months ended August 31, 2008. The professional fees in 2009 and 2008 are for required SEC filings and legal fees associated with
Company stock offerings.




Six Months Ended August 31, 2009 compared to the Six Months Ended August 31, 2008




We reported a net loss for the six months ended August 31, 2009 of $296,020 compared to net loss of $295,289 for the six months ended August 31, 2008.




We had personnel expense of $27,278 in the six months ended August 31, 2009 compare to $175,602 for the six months ended August 31, 2008. The difference is due to a reduction in salaries being paid in the six months ended August 31, 2009.




Our other general and administrative costs were $3,228 during the six month period ended August 31, 2009. There was $14,164 of general and administrative expense for the six months ended August 31, 2008.




We had $37,568 of professional fess during the six months ended August 31, 2009, compared to $108,188 of professional fees for the six months ended August 31, 2008. The professional fees in 2009 and 2008 are for required SEC filings and legal fees associated with Company stock offerings.





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Liquidity and Capital Resources




As of August 31, 2009, we had working capital of $184,244, and it is uncertain whether this amount will be sufficient to fund operations. Therefore, we may seek additional sources of capital for the coming year.




For the six months ended August 31, 2009, we used net cash from operations of $54,078. Cash used in operations was primarily a result of our net loss offset by non cash loss on leaseholds, compared to cash used in operations of $9,344 for the six months ended August 31, 2008 which was primarily due to our net loss offset by trading securities
activity.




Cash provided by investing activities was $174,896 for the six months ended August 31, 2009, primarily from the sale of the Company’s interest in Cedar Resources, compared to cash used of $35,803 for the six months ended August 31, 2008, primarily from payment of delay rentals.




There were no net cash effects from financing activities for the six months ended August 31, 2009 compared to cash provided of $65,000 for the six months ended August 31, 2008




Financial Instruments and Other Information




As of August 31, 2009 and February 28, 2009 we had cash and cash equivalents, accounts payable and accrued liabilities, which are each carried at approximate fair value due to the short maturity date of those instruments. Unless otherwise noted,
it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.




Critical Accounting Polices and Estimates




Use of Estimates in the Preparation of Financial Statements




The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of any oil and gas reserves, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions it believes to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, the Company believes that its estimates are reasonable.




Oil and Gas Properties




The Company follows the full cost method of accounting whereby all costs related to the acquisition and exploration of oil and gas properties are capitalized into a single cost center (“full cost pool”).  Such costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to
exploration activities and costs of drilling both productive and non-productive wells.  Proceeds from property sales are generally credited to the full cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. Generally, any such sale of unevaluated
properties will also be recognized on a cost recovery basis with no gain or loss.




As of August 31, 2009, the Company does not have any proven oil and gas reserves and all of its properties are unevaluated. The costs of unevaluated properties will be withheld from the depletion base until such time as they are either developed or abandoned.  Unevaluated properties are assessed at least annually by the Company
for impairment. Impairment is estimated by the Company by applying factors based on historical experience and other data such as primary lease terms of the properties, average holding periods of unproved properties, and geographic and geologic data of groupings of individually insignificant properties and projects. Therefore, any impairment of said unevaluated properties would result in an expense to the Company.




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During the year ended February 28, 2009, the Company reviewed its oil and gas leaseholds and based on the sale of its interest in Cedar Resources and additional information, the Company recorded an impairment of $428,855 on its leasehold interests.




During the three months ended August 31, 2009, the Company completed a review of its oil and gas leaseholds and elected not to pay delay rentals on certain leases in the Powder River Basin of Montana and therefore abandoned the leases. The effect of abandonment of these leases was a reduction of 9,991net mineral acres to an ending 11,701
net mineral acres, which is considered a significant reduction in our oil and gas properties. As a result, the Company wrote off $152,321 against its impairment reserve and recorded an abandonment of unproved properties expense of $228,482 to reflect the reduction in acreage.




Depletion of exploration and development costs and depreciation of production equipment is computed using the units of production method based upon estimated proved oil and gas reserves.   Total well costs, if and when drilled, will be transferred to the depletable pool even when multiple targeted zones have not been fully evaluated.  For
depletion and depreciation purposes, relative volumes of oil and gas production and reserves are converted at the energy equivalent rate of six thousand cubic feet of natural gas to one barrel of crude oil.




Under the full cost method of accounting, capitalized oil and gas property costs, less accumulated depletion and net of deferred income taxes (full cost pool), may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves less the future cash outflows associated
with the asset retirement obligations that have been accrued in the balance sheet plus the cost, or estimated fair value, if lower of unproved properties and the costs of any properties not being amortized.  Should the full cost pool exceed this ceiling, an impairment is recognized.  The present value of estimated future net revenues is computed by applying current oil and gas prices to estimated future production of proved oil and gas reserves as of period end, less estimated future expenditures
to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions.  However, subsequent commodity price increases may be utilized to reduce or eliminate any impairment.




Risks and Uncertainties




Historically, oil and gas prices have experienced significant fluctuations and have been particularly volatile in recent years.  Price fluctuations can result from variations in weather, levels of regional or national production and demand, availability of transportation capacity to other regions of the country and various other
factors.  Increases or decreases in prices received could have a significant impact on future results.




Recently Issued Accounting Pronouncements:




In July 2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles-A Replacement of FASB Statement No. 162”. The objective of SFAS 168 is to replace SFAS 162 and to establish the
Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements. The Codification is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We do not anticipate the adoption of SFAS 168 will have a significant impact on our financial statements.




In June 2009 the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)”,the Board’s objective in issuing this Statement is to improve financial reporting by enterprises involved with variable interest entities.
The Board undertook this project to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about
the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective for the first annual reporting period that begins after November 15, 2009. We do not anticipate the adoption of SFAS 167 will have a significant impact on our financial statements.




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In June 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets”, the Board’s objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting
entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.   The Board undertook this project to address (1) practices that have developed since the issuance of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. SFAS 166 is effective for the first annual reporting period that begins after November 15, 2009. We do not anticipate the adoption of SFAS 166 will have a significant
impact on our financial statements.




Off-Balance Sheet Arrangements




From time-to-time, we may enter into off-balance sheet arrangements and transactionsthat can give rise to off-balance sheet obligations. As of August 31, 2009 and February 28, 2009, there were no off–balance sheet arrangements.




ITEM 4T.
CONTROLS AND PROCEDURES




Based on an evaluation required by paragraph (b) of  §240.13a–15 of the effectiveness of the registrant's disclosure controls and procedures (as defined in §240.13a–15(e)), the Company’s principal executive officer and principal financial officer concluded that, as of August 31, 2009, its disclosure
controls and procedures are effective.




There were no changes in the Company’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting during the fiscal quarter ended August 31, 2009.






PART II.  OTHER INFORMATION




ITEM 1. Legal ProceedingsNone




ITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsNone




ITEM 3. Defaults Upon Senior SecuritiesNone




ITEM 4. Submission of Matters to a Vote of Security HoldersNone




ITEM 5. Other Information None  17


ITEM 6.
EXHIBITS.





Exhibits
Document Description31.1
Section 302 Certification of Principal Executive Officer.31.2
Section 302 Certification of Principal Financial Officer.32.1
Section 906 Certification of Chief Executive Officer.32.2
Section 906 Certification of Chief Financial Officer.




































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SIGNATURES




In accordance with Section 13 or 15(d) of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 7th day of October, 2009.




Sterling Oil & Gas CompanyBY:
TIMOTHY BARRITTTimothy Barritt
President and Principal  Executive OfficerBY:
RICHARD STIFELRichard G. Stifel
CFO and Principal Financial Officer
























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