UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x   ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
fiscal year ended December 31, 2009





OR





 ̈   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
file no.  0-30502





JOHN
D. OIL AND GAS COMPANY


(Exact
name of Registrant as specified in its charter)





MARYLAND
                  94-6542723(State
      or other jurisdiction of  incorporation or
      organization)
                  (I.R.S.
      Employer Identification
No.)





8500 STATION STREET, SUITE
345, MENTOR, OHIO 44060


(Address
of principal executive office)





Registrant’s
telephone number, including area code:   (440)
255-6325





Securities
registered pursuant to Section 12(b) of the Exchange
Act:  NONE


Securities
registered pursuant to Section 12(g) of the Exchange Act:  SHARES OF
COMMON STOCK





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





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





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 has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.) Yes o No  ̈





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





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  ̈    Smaller
reporting company x





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





On March
18, 2010, the aggregate market value of the voting and non-voting common equity
held by non-affiliates was $427,644 computed as the average bid and asked price
of $.08 per share times the total shares held by non-affiliates of
5,345,549.  The Registrant had 9,067,090 shares of common stock
outstanding on March 18, 2010.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 15, 2010 are incorporated by reference into Part
III of this 10-K.





JOHN D.
OIL AND GAS COMPANY


INDEX TO
ANNUAL REPORT


ON FORM
10-K





PagePART
      IGlossary
      of Terms
                3Item
      1.
                Business
                5Item
      1A.
                Risk
      Factors
                7Item
      2.
                Properties
                13Item
      3.
                Legal
      Proceedings
                15PART
      IIItem
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer’s
      Purchases of Equity Securities
                16Item
      7.
                Management's
      Discussion and Analysis of Financial Condition  and Results of
      Operations
                17Item
      8.
                Consolidated
      Financial Statements and Supplementary Data
                25Item9A(T).
                Controls
      and Procedures
                25Item
      9B.
                Other
      Information
                27PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                27Item
      11.
                Executive
      Compensation
                27Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                27Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                27Item
      14.
                Principal
      Accountant Fees and Services
                27PART
      1VItem
      15.
                Exhibits
      and Financial Statement Schedules
                28


2


PART
I





Glossary
of Terms





As
commonly used in the natural gas and oil industry and as used in this Annual
Report on Form 10-K, the following terms have the following
meanings:





Bbl. One stock tank barrel or
42 U.S. gallons liquid volume.





Development
well.  A well drilled within the proved area of a natural gas
or oil reservoir to the depth of a stratigraphic horizon known to be
productive.





Developed
acres.  Acres spaced or assigned to productive
wells.





Dry hole or
well.  A well found to be incapable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such production
would exceed production expenses and taxes.





Field.  An area
consisting of a single reservoir or multiple reservoirs all grouped on or
related to the same individual geological structure feature and/or stratigraphic
condition.





Gross acres or gross
wells.  The total acres or wells, as the case may be, in which
a working interest is owned.





Mcf.  One thousand
cubic feet.





Mcfe.   One
thousand cubic feet equivalent, determined using the ratio of six Mcf of natural
gas to one Bbl of crude oil, condensate or natural gas liquids.





Net acres or net
wells.  The sum of the fractional working interests owned in
gross acres or gross wells, as the case may be.





Oil.  Crude oil,
condensate and natural gas liquids.





Productive well. A well that
is found to be capable of producing hydrocarbons in sufficient quantities such
that proceeds from the sale of such production exceeds production expenses and
taxes.





Proved developed reserves.
Reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods.  Additional natural gas and
oil expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery are included in “proved developed reserves” only after
testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be
achieved.





Proved
reserves.  Proved natural gas and oil reserves are the
estimated quantities of natural gas, natural gas liquids and crude oil which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions, i.e. prices based on the average of the first day of each
month in the previous year and costs as of the date the estimate is
made.  Prices include consideration of changes in existing prices
provided only by contractual arrangements, but not on escalations based on
future conditions.





Proved undeveloped drilling
location.  A site on which a development well can be drilled
consistent with spacing rules for purposes of recovering proved undeveloped
reserves.


3


Proved undeveloped reserves or
PUDs.  Reserves that are expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion.  Reserves on undrilled
acreage are limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled.  Proved reserves for
other undrilled units are claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation.  Estimates for proved undeveloped reserves are not
attributed to any acreage from which an application of fluid injection or other
improved recovery techniques is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same
reservoir.





Reservoir.  A
porous and permeable underground formation containing a natural accumulation of
produce-able natural gas and/or oil that is confined by impermeable rock or
water barriers and is individual and separate from other reserves.





Standardized
Measure.  Standardized Measure is the present value of
estimated future net revenues to be generated from the production of proved
reserves, determined in accordance with the rules and regulations of the SEC
(using prices and costs in effect as of the date of estimation) without giving
effect to non-property related expenses such as general and administrative
expense, debt service and future income tax expenses or to depreciation,
depletion and amortization and discounted using an annual discount rate of
10%.  Our Standardized Measure does not include future income tax
expenses.





Successful well.  A
well capable of producing natural gas and/or oil in commercial
quantities.





Undeveloped
acreage.  Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.





Working
interest.  The operating interest that gives the owner the
right to drill, produce and conduct operating activities on the property and a
share of production.





Workover.  Operations
on a producing well to restore or increase production.


4


Item
1.  Business





John D.
Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the “Company”), is a
corporation organized under the laws of the State of Maryland.





The
Company was originally a self-storage company from 1999 to 2005 when it sold all
but two of its facilities.  By May 2007, one self-storage
facility in
Painesville remained which generated revenue through self-storage rentals and
retail leases. In 2006, the Companyentered into the business of
extracting and producing oil and natural gas products, drilling oil and natural
gas wells in Northeast Ohio.  The Company currently has fifty-eight
producing wells.  The Company cannot guarantee success under the new
business plan as drilling wells for oil and natural gas is a high-risk
enterprise and there is no guarantee the Company will become
profitable.





Oil
and Natural Gas Overview.





The
Company had redirected its efforts to oil and natural gas exploration to
increase cash flow and enhance shareholder value.  At December 31,
2009, the Company had fifty-eight wells in production.  The Company’s
wells are mostly operator-owned by John D. Oil and Gas Company, although there
are a limited number of joint interest wells.





We are
also an owner and the managing member of Kykuit Resources, LLC (“Kykuit”), which
leases natural gas and oil rights to 203,842 net acres located in the Montana
Breaks area of Montana.  The partnership has drilled eight wells which
have not shown any production to date.





Oil and Natural Gas Competition.The industry is intensely competitive, and we compete with other
companies that have significantly greater resources.  Our ability to
acquire additional properties and to discover reserves in the future will be
dependent upon our ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. Many of our larger
competitors not only drill for and produce natural gas and oil, but also carry
on refining operations and market petroleum and other products on a regional,
national or worldwide basis. These companies may be able to pay more for natural
gas and oil properties and evaluate, bid for and purchase a greater number of
properties than our financial or human resources permit. In addition, these
companies may have a greater ability to continue drilling activities during
periods of low natural gas and oil prices and to absorb the burden of present
and future federal, state, local and other laws and regulations. Our inability
to compete effectively with larger companies could have a material adverse
impact on our business activities, financial condition and results of
operations.





Oil and Natural Gas Environmental
and Other Regulations.The oil and natural gas business is
regulated extensively at the federal, state and local
levels.  Environmental and other governmental laws and regulations
have increased the costs to plan, design, drill, install, operate and abandon
natural gas and oil wells.  Under these laws and regulations, industry
participants could be liable for personal injuries, property damage and other
damages.  These laws and regulations may:





·
            require
      the acquisition of various permits before drilling
    commences;


·
            require
      the installation of expensive pollution control
  equipment;


·
            restrict
      the types, quantities and concentration of various substances that can be
      released into the environment in connection with drilling and production
      activities;


·
            limit
      or prohibit drilling activities on lands lying within wilderness, wetland
      and other protected areas;


·
            require
      remedial measures to prevent pollution from former operations, such as pit
      closure and plugging of abandoned
wells;


·
            impose
      substantial liabilities for pollution resulting from operations;
      and


·
            with
      respect to operations affecting federal lands or leases, require
      preparation of a resource management plan, an environmental assessment,
      and/or an environmental impact
statement.





Failure
to comply with these laws and regulations could result in the suspension or
termination of operations and subject companies to administrative, civil and
criminal penalties.  Moreover, public interest in environmental
protection has increased in recent years, and environmental organizations have
opposed, with some success, certain drilling projects.


5


The
environmental laws and regulations applicable to the Company and its operations
include, among others, the following United States federal laws and
regulations:





·
            Clean
      Air Act, and its amendments, which governs air
  emissions;


·
            Clean
      Water Act, which governs discharges to waters of the United
      States;


·
            Comprehensive
      Environmental Response, Compensation and Liability Act, which imposes
      liability where hazardous releases have occurred or are threatened to
      occur;


·
            Energy
      Independence and Security Act of 2007, which prescribes new fuel economy
      standards and other energy saving
measures;


·
            National
      Environmental Policy Act, which governs oil and gas production activities
      on federal lands;


·
            Resource
      Conservation and Recovery Act, which governs the management of solid
      waste;


·
            Safe
      Drinking Water Act, which governs the underground injection and disposal
      of wastewater; and


·
            U.S.
      Department of Interior regulations, which impose liability for pollution
      cleanup and damages.





On the
state level, significant change in the Ohio oil and natural gas industry
occurred in September 2004.  House bill 278 became the effective law
of Ohio, which recognizes the Ohio Division of Mineral Resources Management, or
“DMRM,” as the sole and exclusive authority to regulate the permitting, location
and spacing of oil and gas wells.  The result was the effective
elimination of township and municipal regulation that significantly disrupted
new oil and natural gas development.  The change streamlines
previously cumbersome permitting and regulation imposed by townships and
municipalities, since a centralized agency, the DMRM now handles all permitting
and enforces the laws regulating drilling and producing activities.





Self-Storage
Overview.





As of
December 31, 2009, the Company owned and operated one self-storage facility
which includes retail and office space located in Painesville,
Ohio.  The Painesville self-storage facility was acquired in October
of 2000 with 31,660 of rentable square footage situated on 3.20 acres including
363 units with outside space available for parking vehicles.  The
self-storage units are inside and difficult to rent due to limited accessibility
by using an elevator or stairs.  In addition, the Painesville building
facility has 21,985 square feet of office and retail space to
lease.





The
self-storage facility is operated through a partnership agreement between
Liberty Self-Stor Ltd. (“Ltd”) and John D. Oil and Gas Company.  Ltd
has a 70.1% equity interest and the Company has a 29.9% equity interest in the
operating partnership of LSS I Limited Partnership (“LSS I”).  The
members of Ltd consist of Richard M. Osborne, Chairman and Chief Executive
Officer of the Company, Thomas J. Smith, a director and the former President and
Chief Operating Officer of the Company, and Retirement Management Company, an
Ohio corporation owned by Mr. Osborne.  These members have Class A
limited partnership interests that are redeemable for cash or, at the election
of the Company, convertible into shares of the Company’s stock based on an
exchange factor.   The current exchange factor is .1377148 of a
share for each unit. LSSI’s losses reduced the
initial investment to a receivable and therefore the Company wrote-off the
minority interest in 2006 as it was deemed not to be collectible.





Investment
Policy.





Management,
in its sole discretion, may change or modify the Company’s investment
objective.  The Company is taxed as a C Corp.





Activities of the
Company.Subject to Maryland law, the Company has the ability
to:





·
            issue
      senior securities;


·
            borrow
      money;


·
            make
      loans;


·
            underwrite
      securities of other issuers;


·
            engage
      in the purchase or sale of
investments;


·
            offer
      securities in exchange for
property;


6


·
            repurchase
      or otherwise reacquire its shares or other securities;
  and


·
            provide
      annual reports and other reports to stockholders which contain annual
      audited financial statements.





The
Company could borrow money necessary to acquire properties, could offer
preferred senior securities, could offer interests of the operating partnership
in exchange for properties, and prepare annual reports with audited financial
statements. The Company has no current plans to engage in any of the other
listed activities. During each of the last three years, the Company filed annual
and quarterly reports with the SEC.  The Company’s ability to engage
in any of the above activities is subject to change without the approval of
stockholders.





Subsequent
Events.





As
previously disclosed, on August 20, 2009, RBS Citizens, N.A., d/b/a Charter One
(“Charter One”), the holder of the Company’s $9.5 million line of credit,
received a judgment in its favor against the Company, Mr. Osborne and the
Richard M. Osborne Trust, jointly and severally, for the amount of $9.5 million
plus interest and late charges as well as attorneys’ fees, costs and other
amounts payable under the line of credit.  Charter One has requested
that the court appoint a receiver for the Company.  A hearing on the
appointment of a receiver for the Company is currently scheduled for April 16,
2010.





During
the month of February 2010, LSS I received a letter from the Lake County Board
of Revision and Lake County Auditor reducing the taxable values on two parcels
at the Painesville facility from 2006 through 2009.  The Company will
record approximately $157,000 of other income in 2010 from the receipt of a cash
refund and reduction in accrued real estate taxes.





Principal
Offices.





The
Company’s principal executive offices are located at 8500 Station Street, Suite
345, Mentor, Ohio 44060 and its telephone number is 440-255-6325.





Federal Income
Tax.





Effective
January 1, 2006, the Company became a “C” Corporation for tax
purposes.





Employees.





The
Company currently employs six full-time and one part-time
employee.  None of the Company’s employees are covered by a collective
bargaining agreement.  The Company considers its employee relations to
be excellent.





Item
1A.  Risk Factors




Risks
Related to Our Oil and Natural Gas Business




The
report of our independent registered public accounting firm questions our
ability to continue as a going concern.




Our
independent auditors have indicated in their audit report for the year ended
December 31, 2009 in an explanatory paragraph that, due to our recurring losses
and our outstanding debt of $10.6 million that is currently due and in default,
there is substantial doubt about our ability to continue as a going
concern.  Our financial statements do not include any adjustment that
might result from the outcome of this uncertainty.  See Note 2 - Going
Concern of the Company’s Consolidated Financial Statements for more
information.  If the Company is unable to continue as a going concern
you will lose your investment.


7




In
the event we are unable to refinance our line of credit which is currently due
and in default or obtain substitute financing, we may not be able to continue as
a going concern.




At
December 31, 2009, our outstanding debt totaled over $10.6 million, including a
$9.5 million line of credit with Charter One.  The line of credit is
guaranteed by Mr. Osborne, our CEO and Chairman of the Board.  Our
line of credit matured on August 1, 2009.  On August 20, 2009, Charter
One received a judgment in its favor against the Company, Mr. Osborne and the
Richard M. Osborne Trust, jointly and severally, for the amount of $9.5 million
plus interest and late charges as well as attorneys’ fees, costs and other
amounts payable under the line of credit.  We do not have the
available cash to repay the line of credit.  If we are unsuccessful in
refinancing the line of credit or if we are unsuccessful in obtaining substitute
financing, there is substantial doubt about our ability to continue as a going
concern.  The accompanying financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.  If we cannot continue as a going concern, your
investment in the Company could become devalued or even worthless.




Charter
One, the holder of the Company’s $9.5 million line of credit, has requested that
a receiver be appointed for the Company.




Charter
One has requested that the court appoint a receiver for the Company and a
hearing on the appointment of a receiver is currently scheduled for April 16,
2010.  If a receiver is appointed, the receiver would oversee the
Company’s operations and assets.




In
the event that LSS I is unable to cure the defaults with respect to the First
Merit mortgage or obtain substitute financing, we may lose our investment in LSS
I, including the Painesville property.




At
December 31, 2009, LSS I had a $1.1 million mortgage outstanding on the
Painesville self-storage facility.  On August 24, 2009, the Company
received a letter from First Merit Bank, N.A., the holder of the $1.2 million
mortgage on the Painesville self-storage property in which the Company has a
29.9% interest.  The letter constituted formal notice to LSS I that,
pursuant to certain cross-default provisions, certain defaults, including Mr.
Osborne’s debt with First Merit and the Charter One judgments, must be cured
within five days or the mortgage would become accelerated, without further
notice or demand, and fully due and payable.  LSS I does not have the
available cash to repay the First Merit mortgage.  If the defaults
with respect to the First Merit mortgage are not cured, the Company could lose
its investment in LSS I, including the Painesville property.




If
we are unable to refinance our existing debt or obtain financing in the amounts
and on terms acceptable to us or we are unable to meet our future cash
commitments, we may be unable to continue our business and as a result may be
required to scale back or cease operations of our business, the result of which
would be that you could lose some or all of your investment.





In
addition, we require substantial capital expenditures to maintain and/or grow
oil and gas production and reserves.  To date, we have been dependent
on debt financing to meet our cash requirements and have incurred losses
totaling approximately $2.7 million for the year ended December 31, 2009, our
fourth consecutive year of net losses.  As of December 31, 2009, we
reported negative net working capital.  We do not expect to be
profitable in 2010.  We can provide no assurance that actual cash
requirements will not exceed our estimates.  In particular, additional
capital may be required in the event that:





·
            drilling
      and completion costs for further wells increase beyond our
      expectations;


·
            market
      prices for our production decline beyond our
  expectations;


·
            production
      levels do not meet our expectations;
or


·
            we
      encounter greater costs associated with general and administrative
      expenses.





The
occurrence of any of these events could adversely affect our ability to meet our
business plans.





At
December 31, 2009 and December 31, 2008, our outstanding debt totaled over $10.6
million, including our $9.5 million line of credit with Charter
One.  The line of credit is guaranteed by Mr. Osborne, our CEO and
Chairman of the Board.  Our line of credit matured on August 1,
2009.  On August 20, 2009, Charter One received a judgment in its
favor against the Company, Mr. Osborne and the Richard M. Osborne Trust, jointly
and severally, for the amount of $9.5 million plus interest and late charges as
well as attorneys’ fees, costs and other amounts payable under the line of
credit.  We do not have the available cash to repay the line of
credit.


8


We depend
on debt or equity financing to pay for our exploration and
operations.  The current economic environment makes it more difficult
to obtain equity financing on acceptable terms to address our liquidity
issues.  Capital may not continue to be available if necessary to meet
these continuing costs, or if capital is available that it will be on terms
acceptable to us.  In addition, we may not be able to meet our future
cash commitments.





If we are
unable to obtaining financing in the amounts and on terms acceptable to us or if
we are unable to meet our future cash commitments, we may be unable to continue
our business and as a result may be required to scale back or cease operations
of our business, the result of which would be that you could lose some or all of
your investment.  In addition, if we are unsuccessful in refinancing
the line of credit or obtaining substitute financing, we may be unable to
continue our business and as a result may be required to scale back or cease
operations of our business, the result of which would be that you could lose
some or all of your investment.





We
had a material weakness in our internal control over financial reporting and
therefore, we may not be able to accurately report our financial results or
prevent fraud.





In our
annual report on Form 10-K, we are required to furnish a report by our
management on our internal control over financial reporting under Section 404 of
the Sarbanes-Oxley Act of 2002.  Such report contains, among other
matters, an assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year, including a statement as
to whether or not our internal control over financial reporting was
effective.  A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.  Our size and staff limitations have prevented us from
being able to employ sufficient resources to enable us to have an adequate level
of supervision and segregation of duties within the internal control
system.  At times, we have one person responsible for processing
transactions and reporting them.  This lack of segregation of duties
led our management to conclude that as of December 31, 2009:





·
            our
      internal controls over financial reporting were not effective,
      and


·
            our
      disclosure controls and procedures are not effective to give reasonable
      assurance that the information required to be disclosed in reports that we
      file under the Exchange Act are recorded, processed and reported as and
      when required.





Our
failure to maintain effective internal controls could harm our operating results
or cause us to fail to meet certain reporting
obligations.  Ineffective internal controls could also cause investors
to lose confidence in our reported financial information, which could have a
negative effect on our stock.




Our
Revenues will depend on natural gas prices.




Our
revenue, profitability and cash flow depend upon the prices and demand for
natural gas.  The natural gas market is very volatile and the current
drop in market prices has significantly affected our financial results and may
impede our growth.  This decline in the current market price severely
affects the viability of drilling in this market, because the lower cash flow
makes it economically difficult to incur the high costs of drilling a
well.  Developments in federal regulation pertaining to the sale,
transportation and marketing of natural gas also will continue to impact future
pricing and natural gas contracts.





The price
we receive for our natural gas production will be determined by the availability
of favorable purchase contracts, market forces, as well as short and long-term
volume commitments.  Our current plan will be to analyze available
markets, with consideration of both price and terms, and to enter into those
arrangements we believe to be in the best interest of the Company.  We
believe market fluctuations can be partly stabilized by effectively combining
long-term gas purchase agreements and spot market sales.  We expect
that we will be able to sell all natural gas produced from our wells to either
utility companies, marketing affiliates of pipeline companies, natural gas
marketing firms, or a variety of industrial or commercial consumers of natural
gas.  However, we cannot guarantee our strategy will be
effective.


9




Natural
gas markets are subject to many factors.




The
deliverability and price of natural gas are subject to supply and demand market
forces as well as the effects of state and federal regulatory policies and
developments.  Prices for natural gas may fluctuate widely in response
to relatively minor changes in the supply of and demand for natural gas, market
uncertainty and a variety of additional factors that are beyond our control,
such as:





·
            the
      domestic and foreign supply of and demand for natural
  gas;




·
            the
      price and level of foreign imports;




·
            the
      level of consumer product demand;




·
            weather
      conditions;




·
            overall
      domestic and global economic
conditions;




·
            political
      and economic conditions in natural gas and oil producing countries,
      including those in the Middle East and South
  America;




·
            the
      ability of members of the Organization of Petroleum Exporting Countries to
      agree to and maintain oil price and production
  controls;




·
            the
      impact of the U.S. dollar exchange rates on natural gas and oil
      prices;




·
            technological
      advances affecting energy
consumption;




·
            domestic
      and foreign governmental regulations and
  taxation;




·
            the
      impact of energy conservation
efforts;




·
            the
      proximity and capacity of natural gas pipelines and other transportation
      facilities; and




·
            the
      price and availability of alternative
fuels.





Prices
received for natural gas produced in the Appalachian Basin are generally higher
than national averages due to the proximity to markets in the Northeast but
remain subject to the seasonal market forces.  In the past, the prices
of natural gas have been extremely volatile, and we expect this volatility to
continue.




Locations
that we decide to drill may not be productive.




The cost
of drilling, completing and operating a well is often uncertain, and cost
factors can adversely affect the economics of a well.  Our efforts
will be uneconomic if we drill dry holes or wells that are productive but do not
produce enough to be commercially viable after drilling, operating and other
costs.  These wells may need to be written-down.  The
Company expects to conduct its drilling programs in the Appalachian Basin into
sandstone formations of the Clinton group and similar
formations.  These formations frequently are characterized by low
permeability, rapid production decline assuming unrestricted production, and
other geological characteristics which may limit the profit potential of wells
drilled to these target formations.  Although many wells drilled to
these formations are completed, it is possible for a productive well to provide
an amount of revenue which is insufficient to return the costs incurred in
drilling and completing the well.




Actual
quantities and present value of our proved reserves may prove to be lower than
we have estimated.





This
report contains estimates of our proved reserves and the estimated future net
revenue from our proved reserves.  Determining these estimates is a
complex process with estimates based upon various assumptions relating to review
and decisions about engineering and geological data for each well. These
estimates are particularly sensitive to lower market prices which tend to reduce
reserves since average or lower producing wells may not produce enough to offset
the expenses needed to operate the wells.  At December 31, 2009 and
2008, the Company was significantly affected by lower market prices and showed
higher depletion expense than in prior years.


10




Our
development operations require substantial capital expenditures.




The
natural gas and oil industry is capital intensive.  We make and expect
to continue to make substantial capital expenditures in our business for the
development, production and acquisition of natural gas reserves.  We
have financed capital expenditures primarily with equity infusions from existing
investors, cash flow from operations and proceeds from loans.  We
cannot guarantee that these sources of funds will be adequate to fund our
capital needs.




We
face significant competition.





The
natural gas and oil industry is intensely competitive, and we compete with other
companies that have significantly greater resources.  Our ability to
acquire additional properties and to discover reserves in the future will be
dependent upon our ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment.  Many of
our larger competitors not only drill for and produce natural gas and oil, but
also carry on refining operations and market petroleum and other products on a
regional, national or worldwide basis.  These companies may be able to
pay more for natural gas and oil properties and evaluate, bid for and purchase a
greater number of properties than our financial or human resources
permit.  In addition, these companies may have a greater ability to
continue drilling activities during periods of low natural gas and oil prices
and to absorb the burden of present and future federal, state, local and other
laws and regulations.  Our inability to compete effectively with
larger companies could have a material adverse impact on our business
activities, financial condition and results of operations.




We
depend on a third party to manage our business.





We have
an agreement with Great Plains Exploration, LLC (“Great Plains”) to manage our
oil and natural gas operations.  Great Plains is owned by Richard M.
Osborne, our Chairman and CEO.  Great Plains assists in the drilling
process, tends our wells, transports our natural gas and purchases and resells
our production as well.  On August 20, 2009,  Charter One
received a judgment in its favor against Great Plains, Oz Gas, Ltd. and Mr.
Osborne, jointly and severally, for the amount of $21.2 million plus interest
and late charges as well as attorneys’ fees, costs and other amounts payable
under those loan agreements.  Charter One has asked for the
appointment of a receiver for Great Plains and the hearing is currently
scheduled for March 25, 2010.  If Great Plains fails to provide us
with these services, or if the timeliness and quality of Great Plains’ services
are not adequate, our business would be negatively impacted.




Our
business depends on gathering and transportation facilities owned by
others.




The
marketability of our natural gas production depends in part on the availability,
proximity and capacity of gathering and pipeline systems owned by third
parties.  The amount of natural gas that can be produced and sold is
subject to curtailment in certain circumstances, such as pipeline interruptions
due to scheduled and unscheduled maintenance, excessive pressure, physical
damage to the gathering or transportation system, or lack of contracted capacity
in the system.  The curtailments arising from these and similar
circumstances may last from a few days to several months.  To the
extent that the Company’s wells are shut-in, even temporarily, revenues
otherwise available to the Company will be reduced accordingly.




We
depend on a key customer for sales of our natural gas.




We sell
all of our natural gas production to Great Plains, which in turn sells a
significant portion of our production volume to a limited number of
customers.  To the extent these customers reduce the volume of natural
gas that they purchase from Great Plains, we might not be able to advantageously
sell all of our production.


11




Our
business is hazardous.




Hazards
such as geological unconformities, unexpected pressures and other unforeseen
conditions are sometimes encountered in drilling wells.  On occasion,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could reduce funds available for drilling,
resulting in the loss of properties of the Company.  We may be
subjected to liability for pollution and other damages or may lose a significant
portion of our properties due to hazards against which we cannot insure or may
not elect to insure because of prohibitive premium costs or for other
reasons.  Government regulations relating to environmental matters
also could increase our costs of doing business or require us to cease
operations in certain areas.  We will require an independent drilling
contractor to insure against hazards and other risks normally encountered in its
business.  However, there can be no assurance as to the extent and the
cost of such coverage.  An uninsured claim against us could reduce our
capital significantly or cause us to alter or terminate our drilling
program.




The
oil and natural gas industry is highly regulated.




Our
operations are regulated extensively at the federal, state and local
levels.  Environmental and other governmental laws and regulations
have increased the costs to plan, design, drill, install, operate and abandon
natural gas and oil wells.  Under these laws and regulations, we could
also be liable for personal injuries, property damage and other
damages.  Failure to comply with these laws and regulations could
result in the suspension or termination of our operations and subject us to
administrative, civil and criminal penalties.  Moreover, public
interest in environmental protection has increased in recent years, and
environmental organizations have opposed, with some success, certain drilling
projects.





Risks
Related to the Company




We
need to raise additional capital, which may not be available to us and may limit
our operations or growth.





We need
additional capital to fund the implementation of our business
plan.  We cannot provide assurances that any necessary subsequent
financing will be obtained.  The Company’s future liquidity and
capital requirements are difficult to predict as they depend upon many factors,
including the success of its drilling operations and competing market
developments.  We may need to raise additional funds in order to meet
working capital requirements or additional capital expenditures or to take
advantage of other opportunities.  We cannot be certain that the
Company will be able to obtain additional financing on favorable terms or at
all.  If we are unable to raise needed capital, our growth and
operations may be impeded.  In addition, if we raise additional
capital by selling additional shares of common or preferred stock, your
percentage ownership in the Company will be diluted.




We
have a limited history of operating the oil and natural gas assets we have
acquired.




In
considering whether to invest in the Company, an investor should consider that
we commenced our oil and gas operations in January 2006 and there is only
limited historical financial and operating information available on which to
base an evaluation of our performance.  We may fail to implement our
business model and strategy successfully or revise our business model and
strategy should industry conditions and the competition within the industry
change.




Our
management team owns a controlling interest in the Company.




Richard
M. Osborne, our Chairman and CEO, and Thomas J. Smith, former president and a
current board member, own or control an aggregate 41.0% of our outstanding
shares, or 52.3% if their partnership units in LSS I were converted into
shares.  Accordingly, management possesses a near controlling vote on
all matters submitted to a vote of our shareholders and has the ability to elect
all members of our board of directors and to control our management and
affairs.  This concentration of ownership may have the effect of
preventing or discouraging transactions involving an actual or a potential
change of control of our Company, regardless of whether a premium is offered
over then-current market prices.


12




Our
management team is subject to various conflicts of interest.




Great
Plains, a company owned by Richard M. Osborne, our Chairman and CEO, manages our
oil and natural gas business and purchases all of our natural gas
production.  Great Plains loaned the Company $600,000 in the first
quarter of 2009 which was repaid in the third quarter of 2009 to fund the
Company’s ongoing capital requirements.  We lease our executive
offices from OsAir, Inc., a company owned by Mr. Osborne.  Mr. Osborne
is the sole manager of Liberty Self-Stor II, Ltd., which makes trucks available
for short-term rental to the public at our self-storage facility and also
provides other merchandise at this facility.




These
arrangements create inherent conflicts of interest, although we believe that the
terms we receive from Mr. Osborne’s companies are competitive with those we
would receive from unaffiliated companies.  In addition, members of
our management team are participating in other affiliated oil and natural gas
drilling enterprises or organizations or associations formed for the development
of oil and natural gas properties, some of which may be competitive with the
Company.  The Company may compete with these other companies for drill
sites and customers to purchase their products, creating further conflicts of
interest.  Management is not restricted in the conduct of any of these
additional activities.  No specific method for the resolution of these
or other conflicts of interest has been devised.





Item
2.  Properties





The
Company’s principal executive offices are located at 8500 Station Street, Suite
345, Mentor, Ohio 44060.  These offices are leased from OsAir, Inc., a
company owned by Mr. Osborne.  The lease was extended for a three year
term on March 26, 2009 at $2,000 per month from $1,350 per month, through April
1, 2012.





Oil
and Natural Gas Wells





At
December 31, 2009, the Company had fifty-eight wells in
production.  The wells are mostly operator-owned by John D. Oil and
Gas Company, although there are a limited number of wells in which we own a
joint interest.  All of our wells are located in Northeast
Ohio.  Reports were filed in 2009 to federal authorities providing
total proved net oil and natural gas reserves and production, although no
reports were filed in 2008.





The
following table presents the net oil and natural gas production, net sales,
average sale price and average unit costs per mcfe for the periods
indicated:





2009
                    
                    
                    2008Net
      ProductionNatural
      Gas  (mcf)
                    
                    
                    698,731
                    
                    
                    
                    515,106Oil
      (bbl)
                    
                    
                    9,186
                    
                    
                    
                    9,685Natural
      Gas Equivalent (mcfe)
                    
                    
                    753,847
                    
                    
                    
                    573,216Net
      SalesNatural
      Gas
                    
                    $
                    3,348,750
                    
                    
                    $
                    3,915,208Oil
                    
                    
                    362,918
                    
                    
                    
                    652,879Total
      Sales
                    
                    $
                    3,711,668
                    
                    
                    $
                    4,568,087Average
      Sale PriceNatural
      Gas   (mcf)
                    
                    $
                    4.79
                    
                    
                    $
                    7.60Oil
      (bbl)
                    
                    $
                    39.51
                    
                    
                    $
                    67.41Natural
      Gas Equivalent (mcfe)
                    
                    $
                    4.92
                    
                    
                    $
                    7.97Average
      Unit Costs per mcfeWell
      operating expenses
                    
                    $
                    687,182
                    
                    
                    $
                    575,675Average
      Cost/mcfe
                    
                    $
                    0.91
                    
                    
                    $
                    1.00




13




Estimated Proved
Reserves.The preparation of our natural gas and oil reserve
estimates were completed in accordance with our prescribed internal control
procedures, which include verification of input data delivered to our
third-party reserve specialist, as well as a multi-functional management
review.
  The
following table presents the Company’s estimated gross proved oil and natural
gas reserves, which are all located in the continental United States, based on
reserve reports prepared by Schlumberger Data and Consulting Services in 2009
and Wright & Company, Inc. in 2008.  The reserves calculated at
December 31, 2009 were impacted by lower pricing as was true in the prior
year.  Effective for the year end 2009, SEC reporting rules require
that year-end reserve calculations and future cash inflows be based on the
simple average of the first day of the month price for the previous twelve month
period.  The prices for 2009 used in the above table were $3.867 per
MMBTU and $61.18 per BBL.  The prices used for 2008 were based on the
spot price at December 31, 2008 of $5.710 per MMBTU and $44.60 per
BBL.  Additionally production was up in 2009 with 5 wells going online
in 2009 and one very strong producing well in late 2008.
  The
technical person responsible for review of our reserve estimates at Schlumberger Data and Consulting
Services and Wright & Company, Inc. meets the
requirements regarding qualifications, independence, objectivity and
confidentiality set forth in the Standards Pertaining to Estimating and Auditing
of Oil and Gas Reserves Information promulgated by the Society of Petroleum
Engineers. Neither of
these firms own an interest in our properties or is employed on a contingent fee
basis. The Schlumberger report was prepared in accordance with generally
accepted petroleum engineering and evaluation principles and is attached as
Exhibit 99.1 to this Annual Report on Form 10-K.


2009
                  
                  
                  2008Natural
      Gas
                  
                  
                  Oil
                  
                  
                  Natural
      Gas
                  
                  
                  Oil(MCF)
                  
                  
                  (BBLs)
                  
                  
                  (MCF)
                  
                  
                  (BBLs)Proved
      developed and undeveloped reserves:Beginning
      of year
                  
                  
                  2,146,600
                  
                  
                  
                  17,500
                  
                  
                  
                  2,646,000
                  
                  
                  
                  37,300Revision
      of previous estimates, extensions and other additions
                  
                  
                  792,000
                  
                  
                  
                  17,600
                  
                  
                  
                  (699,900
                  )
                  
                  
                  (13,900
                  )Net
      reserve additions
                  
                  
                  272,900
                  
                  
                  
                  2,900
                  
                  
                  
                  715,600
                  
                  
                  
                  3,800Production
                  
                  
                  (698,700
                  )
                  
                  
                  (9,200
                  )
                  
                  
                  (515,100
                  )
                  
                  
                  (9,700
                  )End
      of year
                  
                  
                  2,512,800
                  
                  
                  
                  28,800
                  
                  
                  
                  2,146,600
                  
                  
                  
                  17,500Proved
      developed reserves:Beginning
      of year
                  
                  
                  2,146,600
                  
                  
                  
                  17,500
                  
                  
                  
                  2,646,000
                  
                  
                  
                  37,300End
      of year
                  
                  
                  2,512,800
                  
                  
                  
                  28,800
                  
                  
                  
                  2,146,600
                  
                  
                  
                  17,500





Productive Wells.The
following table presents the information relating to the productive wells in
which we owned a working interest during the periods
indicated.  Productive wells consist of producing wells and wells
capable of production.  The Company’s wells are drilled to produce
natural gas with oil being a by-product.  Gross wells are the total
number of producing wells in which we have an interest, and net wells are the
sum of our fractional working interests owned in gross wells.


2009
                  
                  
                  2008Gross
                  
                  
                  Net
                  
                  
                  Gross
                  
                  
                  NetProductive
      Wells:Operated
                  
                  
                  53
                  
                  
                  
                  51
                  
                  
                  
                  49
                  
                  
                  
                  47Non-Operated
      Properties
                  
                  
                  5
                  
                  
                  
                  2
                  
                  
                  
                  5
                  
                  
                  
                  2Total
                  
                  
                  58
                  
                  
                  
                  53
                  
                  
                  
                  54
                  
                  
                  
                  49





Drilling Activity.The
Company began its drilling activity in 2006, concentrating its efforts on
development properties.  The following table presents information
relating to wells completed during the periods indicated:





2009
                  
                  
                  2008Gross
                  
                  
                  Net
                  
                  
                  Gross
                  
                  
                  NetGross
      wells:Productive
                  
                  
                  4
                  
                  
                  
                  4
                  
                  
                  
                  12
                  
                  
                  
                  12Dry
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  1Total
                  
                  
                  5
                  
                  
                  
                  5
                  
                  
                  
                  13
                  
                  
                  
                  13





The
Company’s drilling activity significantly declined in 2009 due to less available
cash.  The Company anticipates a continued slowing of its drilling
program in 2010.  The decline in the current market price severely
affects the viability of drilling, and our lower cash flow makes it economically
difficult to incur the high costs of drilling a well.


14


Developed and Undeveloped
Acreage.The
following presents information relating to developed and undeveloped acreage
that the Company currently has leased.  Developed are those properties
that are currently drilled and undeveloped acreage relates to lease acres on
which wells have not been drilled or completed.





Developed Acreage
                    
                    
                    Undeveloped AcreageGross
                    
                    
                    Net
                    
                    
                    Gross
                    
                    
                    NetGeographic
      Area:Ohio
                    
                    
                    2,806
                    
                    
                    
                    2,806
                    
                    
                    
                    2,914
                    
                    
                    
                    2,914





Present Activities.As
of December 31, 2009, the Company’s drilling activities have become minimal
until it has cash flow to handle the drilling costs.





Leases.  The rights
to drill an oil and natural gas well on a parcel of property are dependent on
the producer securing a land lease for the mineral rights to drill for the oil
and natural gas.  Typically the lease agreement will rent the rights
to the minerals on the property for a specific time frame, varying from one to
ten years. An executed lease with a producer gives exclusive rights for drilling
on the property and another agreement cannot be signed until it has
expired.





Insurance.  The
Company has purchased a commercial liability policy to cover its oil and natural
gas activities.  The Company’s management uses its discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to acquiring appropriate insurance on the Company’s investments at a
reasonable cost and on suitable terms.





Depreciation.  Development
costs of proved oil and natural gas properties, including estimated
dismantlement, restoration and abandonment costs and acquisition costs, are
depreciated and depleted on a well by well basis by the units-of-production
method using estimated proved developed reserves.





Item
3.  Legal Proceedings.





On August
20, 2009, the Company received a declaration of default with respect to the $9.5
million line of credit under the Loan and Security Agreement, as amended, dated
March 28, 2008, by and among the Company, Richard M. Osborne and Charter One
(the “Loan Agreement”).  The notice of default demanded immediate
payment of all amounts outstanding under the Loan Agreement.





In
addition, on August 20, 2009, Charter One  received a judgment in its
favor against the Company, Mr. Osborne and the Richard M. Osborne Trust (of
which Mr. Osborne is the sole trustee), jointly and severally, for the amount of
$9.5 million plus interest as of August 14, 2009 in the amount of $7,026, plus
interest at the rate of $543 per diem from August 14, 2009, plus late charges in
the amount of $475,842 as of August 14, 2009, plus attorneys’ fees, costs and
other amounts payable under the Loan Agreement.  Additional
information is available in the Company’s Form 8-K, dated August 20, 2009, and
filed with the SEC on August 26, 2009.




The Loan
Agreement is guaranteed by Richard M. Osborne, the Company’s Chairman of the
Board and Chief Executive Officer.  As of December 31, 2009, the
Company was current with its interest payments on the line of
credit.




The
Company is still negotiating with Charter One with respect to the $9.5 million
line of credit.  However, if the Company is unsuccessful in
refinancing the line of credit or if the Company is unsuccessful in obtaining
substitute financing, there is substantial doubt about the Company’s ability to
continue as a going concern.





In
addition, Charter One has asked the court to appoint a receiver for the
Company.  A hearing is currently scheduled for April 16,
2010.


15


Charter
One also received a judgment in its favor against Great Plains Exploration, LLC,
Oz Gas, Ltd. and Richard M. Osborne, jointly and severally, for the amount of
$21,211,495, plus interest and late charges as well as attorneys’ fees, costs
and other amounts payable under those loan agreements.  Great Plains
Exploration, LLC and OzGas, Ltd are companies owned or controlled by Mr.
Osborne.  The Company has an agreement, dated January 1, 2006, with
Great Plains Exploration, LLC for well operations and to sell natural gas and
oil production net of pipeline transportation costs.





Additionally,
LSS I received a letter dated August 24, 2009 from First Merit Bank, N.A., the
holder of the $1.2 million mortgage on the Painesville self-storage property in
which the Company has 29.9% minority interest.  The letter from First
Merit Bank, N.A. constituted formal notice to LSS I that, pursuant to
cross-default provisions contained in the mortgage documents, certain defaults,
including defaults under Mr. Osborne’s debt with First Merit and the Charter One
judgments discussed above, must be cured within five days or the mortgage would
become accelerated, without further notice or demand, and fully due and
payable.  LSS I has been current with its payments on the
mortgage.  LSS I is still negotiating with First Merit but does not
have the available cash to repay the mortgage.  If the defaults with
the First Merit mortgage are not cured, the Company could lose its investment in
LSS I including the Painesville property.





PART
II





Item
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities.





Market Information.The
Company’s shares of common stock, $0.001 par value per share, trade on the
Over-the-Counter Bulletin Board Market, or OTCBB, under the symbol
“JDOG.”





The following table sets forth the high
and low closing sale prices as reported on the OTCBB for the Company’s common
stock for each quarter within the Company’s last two fiscal
years.  Because the Company’s common stock is traded on the OTCBB,
these quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.





2009
                    
                    HIGH
                    
                    
                    LOWFirst
      Quarter
                    
                    $
                    0.40
                    
                    
                    $
                    0.15Second
      Quarter
                    
                    
                    0.20
                    
                    
                    
                    0.10Third
      Quarter
                    
                    
                    0.20
                    
                    
                    
                    0.05Fourth
      Quarter
                    
                    
                    0.18
                    
                    
                    
                    0.072008
                    
                    HIGH
                    
                    
                    LOWFirst
      Quarter
                    
                    $
                    0.89
                    
                    
                    $
                    0.57Second
      Quarter
                    
                    
                    1.50
                    
                    
                    
                    0.57Third
      Quarter
                    
                    
                    1.10
                    
                    
                    
                    0.60Fourth
      Quarter
                    
                    
                    0.85
                    
                    
                    
                    0.17





Holders.As of
February 22, 2010, the Company’s shares of common stock were held of record by
approximately 1,622 shareholders.  We estimate that an additional 700
stockholders own stock in their accounts at brokerage firms and other financial
institutions.





Dividends.The Company paid
no cash distributions to its stockholders during 2009 and
2008.  However, the Company declared and paid $108,000 and $85,140 in
preferred stock dividends for the year ended December 31, 2009 and 2008,
respectively.  The Company is restricted by its loan agreement with
RBS Citizens d/b/a Charter One from paying dividends on its common stock or
making cash distributions to its stockholders and from paying dividends in
excess of those regularly accruing on not more than two million dollars of
preferred stock.


16


Issuance of Common
Stock.  In December of 2008, the Board of Directors of the
Company granted each of its five outside board members 9,615 shares of common
stock valued at $0.26 per share.  The total shares awarded of 48,075
were issued as partial compensation for their board participation in
2008.  The Company did not issue common stock to its directors during
2009.





Issuance of Preferred
Stock.The Company sold an aggregate of 1,350 shares of its
Series A Convertible Preferred Shares in a private placement to a total of nine
accredited investors during the first six months of 2008.  All Series
A Preferred Shares were sold at a price of $1,000 per share for a total of
$1,350,000 with no underwriting discounts or commissions, as no underwriters
were used to facilitate the transactions.  The Company did not issue
Preferred Shares during 2009.





Warrant to Purchase
Stock.  On June 20, 2008, the Company granted a warrant to
purchase 50,000 shares of common stock to Richard M. Osborne in return for Mr.
Osborne providing collateral for the Company’s credit facility with Charter
One.




Purchases of Common
Stock.  The Company did not purchase any shares of its common
stock in 2009 or 2008.




Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





John D.
Oil and Gas Company, formerly Liberty Self-Stor, Inc. is a corporation organized
under the laws of the State of Maryland.





The
Company was originally a self-storage company from 1999 to 2005 when it sold all
but two of its facilities.  By May 2007, one self-storage
facility in
Painesville remained which generates revenue through self-storage rentals and
retail leases. In 2006, the Companyentered into the business of
extracting and producing oil and natural gas products, drilling oil and natural
gas wells in Northeast Ohio.  The Company currently has two segments:
one composed of the remaining self-storage facility located in Painesville, Ohio
and one that is drilling oil and natural gas wells in Northeast
Ohio.





The
Company anticipates continuing to slow its drilling program in
2010.  The decline in the current market price severely affects the
viability of our drilling because our lower cash flow makes it economically
difficult to incur the high costs of drilling a well.  The Company
cannot guarantee success under our business plan as drilling wells for oil and
natural gas is a high-risk enterprise and there is no guarantee the Company will
become profitable.




The
Company recorded a loss on its books of $588,309 to the Kykuit equity
investment.  This loss represents an 85% impairment of the exploratory
wells on Kykuit’s books with the Company’s partnership percentage applied before
tax.  The Company believes that the Kykuit investment may be
profitable, and it could recoup this write-down.




The
Company has been and still is in the process of attempting to renegotiate its
$9.5 million and in default line of credit for the Charter One loan that matured
August 1, 2009.  However, as discussed in “Legal Proceedings” in this
Form 10-K and in Note 5 “Line of Credit and Long Term Debt” to the Consolidated
Financial Statements, Charter One has received a judgment against the
Company.





Critical
Accounting Policies





The
Company’s discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  A “critical accounting policy” is one which
is both important to the portrayal of a company’s financial condition and
results, and requires management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.  The Company believes the
following critical accounting policies present our more significant judgments
and estimates used in the preparation of our consolidated financial
statements.


17


Principles of
Consolidation





Pursuant
to the terms of the partnership agreement of LSS I, the Company, as sole general
partner, controls LSS I.  Accordingly, the Company accounts for its
investment in LSS I utilizing the consolidation method.  The
investment in an unconsolidated affiliate, Kykuit, is accounted for using the
equity method.  All significant inter-company transactions and
balances have been eliminated.





Accounts
Receivable





The
Company has certain trade receivables consisting of oil and natural gas sale
obligations due under normal trade terms.  The Company currently sells
its production to a related party through an oil and natural gas agreement,
extending credit on an unsecured basis to them.  In evaluating its
allowance for possible losses, the Company performs a review of outstanding
receivables.  The trade receivables outstanding are typically three
months of natural gas production due to the timing and accounting treatment by
the main distribution pipeline company in Northeast Ohio.  At December
31, 2009 and 2008, the Company’s credit evaluation indicated that it has no need
for an allowance for possible losses.





The
Company’s accounts receivable, arising from the self-storage business, are due
from individuals as well as business entities.  Tenants are required
to pay their rent on the first of each month.  Past due amounts are
those that are outstanding longer than the contractual payment
terms.  If an account is more than 75 days past due, the Company
generally writes off the balance directly to expense.  For such past
due accounts, the Company has the right to auction the contents of the rented
space, which allows for recovery of written-off balances.  Any such
recoveries are credited to income when received.





Property and
Equipment





All
property and equipment is depreciated using the straight-line method over
estimated useful lives of twenty five years for buildings and improvements and
five to seven years for furniture and equipment.




The
Company uses the successful efforts method of accounting for oil and natural gas
producing activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs, the costs of carrying and retaining unproved
properties and exploratory dry hole drilling costs, are expensed. Development
costs, including the costs to drill and equip development wells and successful
exploratory drilling costs to locate proved reserves, are
capitalized.  Upon sale or retirement of a proved property, the cost
and accumulated depreciation and depletion and amortizations are eliminated from
property accounts and the resultant gain or loss is recognized.




Exploratory
drilling costs are capitalized when incurred pending the determination of
whether a well has found proved reserves. If a well is determined to be
successful, the capitalized drilling costs will be reclassified as part of the
cost of the well. If a well is determined to be unsuccessful, the capitalized
drilling costs will be charged to expense in the period the determination is
made.  The Company is involved in exploratory drilling only to the
extent that it is a partner of Kykuit, which is doing exploratory drilling in
Montana.  The Company is an owner and managing member of Kykuit, an
unconsolidated affiliate.




Development costs of proved oil and
natural gas properties, including estimated dismantlement, restoration,
abandonment costs and acquisition costs, are depreciated and depleted on a well
by well basis by the units-of-production method using estimated proved developed
reserves.  The costs of oil and natural gas properties are
periodically assessed for impairment.





Asset
Impairment





The
Company reviews its self-storage property and capitalized well costs for
impairment when events or changes in circumstances indicate the carrying amounts
of the properties may not be recoverable.  When such conditions exist,
management estimates future cash flows from operations and ultimate disposition
of the individual properties.  If the estimated undiscounted future
cash flows are less than the carrying amount of the asset, an adjustment to
reduce the carrying amount to the related property’s estimated fair market value
would be recorded and an impairment loss would be recognized.  The
Company wrote off the costs related to one well amounting to $145,444 in 2009
and two wells amounting to $491,224 in 2008.


18


Asset Retirement
Obligation





The
Company accounts for its asset retirement obligations in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”) which requires the fair value of an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made.  For the Company, asset retirement obligations
primarily relate to the abandonment, dismantling and plugging of oil and natural
gas wells.  The present value of the estimated asset retirement cost is
capitalized as part of the long-lived asset.  The capitalized asset
retirement cost is depreciated and the asset retirement obligation is accreted
over the estimated life of the well.  The current portion of the asset
retirement obligation as of December 31, 2009 and 2008, was $0 and $30,000,
respectively and is included in accrued expenses.  The Company plugged
two wells during 2009 and four wells during 2008.





Revenue
Recognition





The
Company recognizes revenue from its oil and natural gas interests in producing
wells as oil and natural gas is sold to a purchaser at a fixed or determinable
price when delivery has occurred, title and risk of loss have transferred to the
purchaser and the collectability of revenue is reasonably
assured.  The Company has a management agreement with a related party
to transport the Company’s natural gas production through the related party’s
pipeline and include this natural gas with the related party’s natural gas in
order to fulfill production contracts they currently have in
place.  The actual funds are typically received within three months
due to the accounting treatment by the main distribution pipeline company in
Northeast Ohio.





Income
Taxes





Effective
January 1, 2006, the Company became a “C” Corporation for tax
purposes.





In
establishing a provision for income taxes, the Company must estimate when in the
future certain items will affect taxable income.  Deferred taxes are
recorded for future tax consequences of events that have been recognized in the
financial statements or tax returns, based upon enacted tax laws and
rates.  Deferred tax assets are recognized subject to management’s
judgment that realization is more likely than not.





The
Company has net operating loss carry forwards (NOLS) and a valuation allowance
to offset any tax effects.  The Company has no unrecognized tax
benefits and therefore, there was no effect on the Company’s effective tax
rate.  Any tax penalties or interest expense will be recognized in
income tax expense.  No interest and penalties were accrued as of
December 31, 2009 or 2008, or paid during the periods then ended.  The
Company does not anticipate a significant change over the next twelve months to
any tax liability.





The
Company is open to federal and state tax audits until the applicable statute of
limitations expire.  There are currently no federal or state income
tax examinations underway for the Company.  The tax years 2006 through
2009 remain open to examination by the major taxing jurisdictions in which we
operate, although no material changes to unrecognized tax positions are expected
within the next twelve months.  The Company does, however, have prior
year net operating losses which remain open for examination.





Liquidity
and Capital Resources





Liquidity
represents the Company's ability to generate sufficient amounts of cash to meet
its financial commitments.  The Company believes that cash flow from
operating and financing activities will not be sufficient to meet its
anticipated operating requirements on a short-term basis.





The
Company requires substantial capital expenditures to maintain and/or grow
production and reserves.  We depend on debt or equity financing to pay
for exploration and operations.  The current economic environment
makes it more difficult to obtain debt or equity financing on acceptable terms
to address our liquidity issues.  Capital may not continue to be
available if necessary to meet these continuing costs, or if capital is
available, it may not be on terms acceptable to us.


19


The
Company’s $9.5 million line of credit with Charter One matured on August 1,
2009.  On August 20, 2009, Charter One received a judgment in its
favor against the Company, Mr. Osborne and the Richard M. Osborne Trust, jointly
and severally for $9.5 million plus interest and late charges.  If the
Company is unsuccessful in refinancing the line of credit or if it is
unsuccessful in obtaining substitute financing, there is substantial doubt about
the Company’s ability to continue as a going concern.Charter One has requested
that the court appoint a receiver for the Company.  A hearing on the
appointment of a receiver is currently scheduled for April 16,
2010.





Additionally,
the Company received a letter dated August 24, 2009 from First Merit Bank, N.A.,
the holder of the $1.2 million mortgage on the Painesville self-storage property
owned by LSS I in which the Company has 29.9% minority interest.  The
letter from First Merit Bank, N.A. constituted formal notice to LSS I that,
pursuant to cross-default provisions contained in the mortgage documents,
certain defaults, including defaults under Mr. Osborne’s debt with First Merit
and the Charter One judgment discussed above, must be cured within five days or
the mortgage would become accelerated, without further notice or demand, and
fully due and payable.  LSS I had been current with its payments on
the mortgage.  However, LSS I does not have the available cash to
repay the mortgage.





The
Company is still negotiating with Charter One and First
Merit.  However, if the defaults with the First Merit mortgage are not
cured, the Company could lose its investment in LSS I, including the Painesville
property.  If the Company is unsuccessful in refinancing the line of
credit or if the Company is unsuccessful in obtaining substitute financing,
there is substantial doubt about the Company’s ability to continue as a going
concern.





The items
affecting operating cash flow and cash and cash equivalents are discussed more
fully in the “Material Changes in Results of Operations” section.





The
Company’s current assets decreased $1,030,934 or
64.7%, to $562,127 at December 31, 2009 from $1,593,061 at December 31,
2008.  Current assets at December 31, 2009 were lower than at December
31, 2008 largely due to the decrease in accounts receivable from related parties
which was affected by the lower pricing of natural gas and oil production in
2009 and the receipt of advance funds from Great Plains toward production
receivables.





The
Company’s current liabilities decreased $767,247, or 6.4% to
$11,261,976 at December 31, 2009, from $12,029,223 at
December 31, 2008.  The decrease is largely the result of payment of
outstanding accounts payable.





The Company had a positive
cash flow from operating activities of $865,896 for the year ended December 31,
2009 compared to a positive cash flow of $1,920,860 for the year ended December
31, 2008. The decrease in cash flow provided by operating activities was largely
due to payment of outstanding accounts payable.





The Company had a negative
cash flow from investingactivities of $696,252 for the year ended
December 31, 2009 compared to a negative cash flow of $2,994,016 for the year
ended December 31, 2008. The year ended 2008 was higher due to higher
expenditures for drilling new oil and natural gas wells.





The
Company had a negative cash flow from financing activities of $225,873 for the year ended
December 31, 2009 compared to a positive cash flow of $1,120,978 for the
year ended December
31, 2008.  The positive cash flow for the year ended December
31, 2008 was largely due to the receipt of proceeds from a private stock
offering.





The
following table sets forth the maturity dates and the total of the Company’s
long-term debt and line of credit as of December 31, 2009, as well as future
commitments under the Company’s office space lease.


PaymentsDuebyPeriodContractualObligations
                        
                        Lessthan1year
                        
                        
                        1-3years
                        
                        
                        4-5years
                        
                        
                        TotalLong-Term
      Debt
                        
                        $
                        1,145,174
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1,145,174Line
      of Credit
                        
                        
                        9,497,024
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,497,024Operating
      Lease*
                        
                        
                        24,000
                        
                        
                        
                        30,000
                        
                        
                        
                        -
                        
                        
                        
                        54,000Total
      Contractual Cash Obligations
                        
                        $
                        10,666,198
                        
                        
                        $
                        30,000
                        
                        
                        $
                        -
                        
                        
                        $
                        10,696,198


20


*The
operating lease for office space is leased from OsAir, Inc., a company owned by
Mr. Osborne.  The lease was extended for a three year term on March
26, 2009 at $2,000 per month from $1,350 per month, through April 1, 2012, which
is reflected in the above table.





The items
affecting operating cash flow and cash and cash equivalents are discussed more
fully in the “Material Changes in Results of Operations” section.





Material
Changes in Results of Operations





Revenues
from Operations





Total
revenues from operations decreased $838,268, or 17.2%, to $4,045,245 for the
year ended December 31, 2009, compared to $4,883,513 for the same period in
2008.  Although the Company has contracts for prices higher than the
current market, the current contracts are lower than the previous year’s
contracts.  Therefore, the decrease is due to lower prices for
naturalgas and oil
production in 2009 offset partially by increased production from more wells
going on line.





Expenses
from Operations





Total
operating expenses decreased $352,630, or 5.0%, to $6,741,490 for the year ended
December 31, 2009 from $7,094,120 for the same period in 2008.  This
decrease is primarily attributable to a decrease in depreciation, depletion and
amortization and impairment expenses compared to the same period in
2008.  Additionally interest expense decreased with the swap maturing
and lower interest rates in 2009 than 2008, as well as, salary expense
decreasing in general and administrative expenses due to staff reductions in
2009.  These decreases were partially offset by increased legal and
professional expense in 2009 compared to 2008 due to the payment to Charter One
of $50,000 for a third party to review the books and operations of the Company
and legal fees as part of the line of credit loan negotiations.  Also,
the loss for the unconsolidated affiliate, Kykuit, included a write-down on the
equity investment of $588,309.





Interest
expense decreased $133,396, or 22.9%, to $448,558 for the year ended December
31, 2009 compared to $581,954 for the same period in 2008.Interest expense
was lower in 2009 partially due to the maturity of the swap agreement in August
2009 and lower interest rates in 2009 compared to 2008.





Accretion
expense for the year ended December 31, 2009 was $45,905 compared to $44,742 for
the same period in 2008.





Oil and
natural gas production costs increased $111,507, or 19.4%, to $687,182 for the
year ended December 31, 2009 compared to $575,675 for the same period in
2008.  The increase is primarily the result of an increase in water
hauling and payment of county production taxes in 2009 compared to
2008.





Legal and
professional fees increased $122,912, or 50.2%, to $367,854 for the year ended
December 31, 2009 compared to $244,942 for the same period in 2008.The increase is
partially due to the payment to Charter One of $50,000 for a third party to
review the books and operations of the Company as part of the line of credit
loan audit and partially due to additional legal expenses relating to the
Charter One loan negotiations.





Property
taxes and insurance expenses decreased $22,109, or 13.9%, to $137,492 for the
year ended December 31, 2009 compared to $159,601 for the same period in
2008.  While property taxes increased, insurance expense decreased
when the Company did not renew its Directors and Officers insurance plan in
2009.





General
and administrative expenses decreased $122,754, or 13.9%, to $762,982 for the
year ended December 31, 2009 compared to $885,736 for the same period in 2008.
The decrease in general
and administrative expenses is largely due to a decrease in employees, although
corporate office rent, meals and entertainment and travel expense increased
slightly.





On June
20, 2008, the Company granted a warrant to purchase 50,000 shares of common
stock (the “Warrant”) to Richard M. Osborne in return for Mr. Osborne providing
collateral for the Company’s credit facility with Charter One.  The
Warrant has an exercise price of $1.00 per share and a term of five
years.  The fair value of the warrant was approximately $48,000 at the
date of grant, estimated using the Black-Scholes-Merton option pricing model.
The Company has not granted any other warrants during 2009.


21


Loss from
unconsolidated affiliate expense increased $621,793 to $650,420 for the year
ended December 31, 2009 compared to $28,627 for the same period in
2008.  Kykuitexpenses increased $33,484 largely due to expensing expired leases in
Montana.  The remainder of the increase was due to recording a loss on
the investment of $588,309.





Bad debt
expense for the year ended December 31, 2009 was $2,157 compared to $43,517 for
the same period in 2008.  The Company typically writes off a minimal
amount of receivables in the self-storage business.  However, the
Company wrote off a receivable of $40,027 for a retail lease in the Painesville
facility in the second quarter of 2008 that appeared unlikely the Company would
be able to collect.





Impairment
and dry well costs from operations for the year ended December 31, 2009 was
$145,444 compared to $491,224 for the same period in 2008.  The
Company wrote off the costs related to one well amounting to $145,444 in 2009
and two wells amounting to $491,224 in 2008.  Impairments and dry
wells could happen in future years, particularly in an aggressive drilling
program or when market prices of production is very low, as is the current
case.





Depreciation,
depletion and amortization expenses decreased $493,744, or 12.7%,
to $3,381,114 for the year ended December 31, 2009 compared to $3,874,858 for
the same period in 2008.The decrease is partially the result
of new increased reserve remaining life information calculated by a third party
petroleum engineer.





Net
Loss





The
Company had a net loss from operations of $2,696,245, for
the year ended December 31, 2009 compared to a net loss of $2,210,607 for the
same period in 2008.Although production quantities were higher in 2009
with more wells on line, the net loss increased partially due to lower prices
for production and partially due to the decrease in the value of the Kykuit
investment.





Net
Loss attributable to Non-Controlling Interest





The
Company had a net loss attributable to its non-controlling interest in LSS I of
$81,544 for the year ended December 31, 2009 and a net loss of $170,567 for the
same period in 2008.  The self storage facility typically has a loss
due to its difficulty in renting units that have limited access through the use
of an elevator.  In 2008 the Company had a bad debt write-off of
$40,027.  In 2009, the Company increased revenue by approximately
$21,000 with new retail renters and renewed lease
contracts.  Additionally the Company reduced staff, lowering payroll
expense by approximately $46,000.  Lower interest rates on the First
Merit Loan decreased interest expense by $38,000, only slightly offsetting the
lower expenses were $19,000 of higher legal expenses relating to the Charter One
loan negotiations.





Net
Loss attributable to John D. Oil and Gas Company





The
Company had a net loss attributable to John D. interests of $2,614,701 for the
year ended December 31, 2009 compared to a net loss of $2,040,040 for the same
period in 2008.  The net loss for both years was significant due to
the market price for natural gas steadily decreasing, causing revenues to drop
and reserve calculations to increase depletion expense.  The loss in
2009 was also increased due to the loss incurred on the Kykuit equity
investment.





Interest
Rate Risk





Interest
rate risk is the risk that interest rates will increase, which will result in an
increase in the Company’s interest expense on its variable rate
loans.





The loan
on the Painesville facility and the Charter One line of credit, totaling
approximately $10.6 million, are tied to variable interest rates.  If
the Company’s interest rates on the loans were to increase by 1% per year, the
Company’s interest expense would increase approximately $106,000 on an annual
basis.  The Company’s line of credit was previously fixed through the
use of an interest rate swap until August 2009 which had minimized the
risk.  However if interest rates increase, the Company’s results of
operations may be materially and adversely affected.


22


Off-Balance
Sheet Arrangements





The
Company had one off-balance sheet arrangement at December 31, 2009, with respect
to its investment in Kykuit.  While the Company is not liable for the
contribution obligations of other members of Kykuit, the Company is investing
additional funds since other members are not investing at this
time.  During 2009 and 2008, the Company invested $514,414 and
$466,950, respectively, in Kykuit as part of their cash calls and to make up the
difference for members not investing.





Forward-Looking
Statements





Statements
that are not historical facts, including statements about the Company’s
confidence in its prospects and strategies and its expectations about growth,
are forward-looking statements that involve risks and
uncertainties.  These risks and uncertainties, many of which are
beyond our control, may include statements about our:





·
            our
      ability to continue as a going
concern;




·
            liquidity
      and our ability to meet our debt
obligations;




·
            business
      strategy;




·
            financial
      strategy;




·
            drilling
      locations;




·
            natural
      gas and oil reserves;




·
            realized
      natural gas and oil prices;




·
            production
      volumes;




·
            lease
      operating expenses, general and administrative expenses and finding and
      development costs;




·
            future
      operating results; and




·
            plans,
      objectives, expectations and
intentions.





All of
these types of statements, other than statements of historical fact, included in
this report are forward-looking statements.  In some cases, you can
identify forward-looking statements by terminology such as “may,” “will,”
“could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,”
“believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,”
the negative of these terms or other comparable terminology.





The
forward-looking statements contained in this report are largely based on our
expectations, which reflect estimates and assumptions made by our
management.  These estimates and assumptions reflect our best judgment
based on currently known market conditions and other
factors.  Although we believe these estimates and assumptions to be
reasonable, they are inherently uncertain and involve a number of risks and
uncertainties that are beyond our control.  In addition, management’s
assumptions about future events may prove to be inaccurate. We caution all
readers that the forward-looking statements contained in this report are not
guarantees of future performance, and we cannot assure any reader that such
statements will be realized or the forward-looking events and circumstances will
occur.  Actual results may differ materially from those anticipated or
implied in the forward-looking statements due to factors listed in the “Risk
Factors” section and elsewhere in this report.  All forward-looking
statements speak only as of the date of this report.  We do not intend
to publicly update or revise any forward-looking statements as a result of new
information, future events or otherwise.  These cautionary statements
qualify all forward-looking statements attributable to us or persons acting on
our behalf.





Income
Taxes





Effective
January 1, 2006, the Company became a “C” Corporation for tax
purposes.


23


At
December 31, 2009 and 2008, the Company had net operating loss carry forwards
(NOLS) for future years of approximately $15.9 million and $15.4 million,
respectively.  These NOLS will expire at various dates through
2028.  Utilization of the NOLs could be limited if there is a
substantial change in ownership of the Company and is contingent on future
earnings.  In addition, the Company has a $41,187 alternative minimum
tax (AMT) credit that carries forward indefinitely.





The
Company has provided a valuation allowance equal to 100% of the total net
deferred asset in recognition of the uncertainty regarding the ultimate amount
of the net deferred tax asset that will be realized.





Recently Issued Accounting
Pronouncements





Accounting
Standards Codification





In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles (“the Codification”) or (“ASC”) as the single source of
authoritative nongovernmental GAAP.  All existing accounting standard
documents, such as FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and other related accounting
literature have been superseded by the Codification.  Rules and
interpretive releases of the United States Securities and Exchange Commission
(“SEC”) under the authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants.  All other accounting
literature is considered non-authoritative. The Codification reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure.  The FASB will not issue new
standards in the form of Statements, FASB Staff Position, or Emerging Issues
Task Force Abstracts; instead, it will issue Accounting Standards
Updates.  The FASB will not consider Accounting Standards Updates as
authoritative in their own right; these updates will serve only to update the
Codification, provide background information about the guidance, and provide the
basis for conclusions on the change(s) in the Codification.  The
switch to the ASC affects the way companies refer to GAAP in financial
statements and accounting policies.  Citing particular content in the
ASC involves specifying the unique numeric path to the content through the
Topic, Subtopic, Section and Paragraph structure.  This Codification
is effective for financial statements issued for reporting periods that ended
after September 15, 2009.  At this time the Company has decided to
present new accounting pronouncements with no standard references.





Oil
and Gas Reporting





In
December 2008, the SEC released a final rule, "Modernization of Oil and Gas
Reporting," which amends the oil and gas reporting requirements. The key
revisions to the reporting requirements include: using a 12-month average price
to determine reserves; including nontraditional resources in reserves if they
are intended to be upgraded to synthetic oil and gas; ability to use new
technologies to determine and estimate reserves; and permitting the disclosure
of probable and possible reserves. In addition, the final rule includes the
requirements to report the independence and qualifications of the reserve
preparer or auditor; file a report as an exhibit when a third party is relied
upon to prepare reserve estimates or conduct reserve audits; and to disclose the
development of any proved undeveloped reserves (PUDs), including the total
quantity of PUDs at year-end, material changes to PUDs during the year,
investments and progress toward the development of PUDs and an explanation of
the reasons why material concentrations of PUDs have remained undeveloped for
five years or more after disclosure as PUDs. The accounting changes resulting
from changes in definitions and pricing assumptions should be treated as a
change in accounting principle that is inseparable from a change in accounting
estimate, which is to be applied prospectively. The final rule is effective for
annual reports for fiscal years ending on or after December 31, 2009. Early
adoption was not permitted.  The adoption of this standard had an
impact on the Company’s financial position and results of
operations.  The 12-month average pricing for the year for natural gas
sold at the Henry Hub, LA was $3.867 and West Texas Intermediate oil at Cushing,
OK was $61.18, where the previous calculations would have been higher based on
the last day of December 2009.  The lower pricing increased our
depletion expense in 2009.  The Company’s depletion rate continues to
be extremely high.





Effective
upon its issuance in September 2009, the Company adopted an accounting standards
update on “Extractive Activities – Oil and Gas”.  This accounting standards
update represents a technical correction to an existing SEC Observer comment
regarding “Accounting for Gas-Balancing Arrangements”.  The adoption of
this accounting standard update did not have a material impact on the Company’s
financial statements.


24


In
January 2010, an accounting standard update was issued on “Oil and Gas
Estimations and Disclosures”.  This update
aligns the current oil and natural gas reserve estimation and disclosure
requirements of the Extractive Activities for Oil and Gas with the changes
required by the SEC final rule, as discussed above.  This update
expands the disclosures required for equity method investments, revises the
definition of oil and natural gas producing activities to include nontraditional
resources in reserves unless not intended to be upgraded into synthetic oil or
natural gas producing activities.  This update also amends the
definition of proved oil and natural gas reserves to require 12-month average
pricing in estimating reserves, amends and adds definitions in the Master
glossary that is used in estimating proved oil and natural gas quantities and
provides guidance on geographic area with respect to disclosure of information
about significant reserves.  It is effective for entities with annual
reporting periods ending on or after December 31, 2009.  The Company
adopted this update on December 31, 2009.





Other-Than-Temporary
Impairments





In April
2009, a new accounting standard was issued regarding the recognition of
other-than-temporary impairments of investments in debt securities, as well as
financial statement presentation and disclosure requirements, for when to
recognize a write-down through earnings versus other comprehensive
income.  The standard was effective for interim and annual periods
ending after June 15, 2009.  The adoption of this standard did not
have a material impact on the Company’s financial position, results of
operations or cash flows.





Consolidation
of Variable Interest Entities





In June
2009, a new accounting standard was issued in order to change financial
reporting by enterprises involved with variable interest entities
(“VIEs”).  The standard replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a VIE with an approach focused on identifying which enterprise has
the power to direct the activities of a VIE and the obligation to absorb losses
of the entity or the right to receive the entity’s residual
returns.  This standard is effective for fiscal years beginning after
November 15, 2009.  The adoption of this standard did not have a
material impact on the Company’s financial position, results of operations or
cash flows.





Measuring
Liabilities at Fair Value





In August
2009, a new accounting standard was issued concerning measuring liabilities at
fair value.  The new standard provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using certain valuation techniques.  Additionally, it clarifies that a
reporting entity is not required to adjust the fair value of a liability for the
existence of a restriction that prevents the transfer of the
liability.  This new guidance is effective for the first reporting
period after its issuance, however earlier application is
permitted.  The adoption of this standard did not have a material
impact on the Company’s financial position, results of operations or cash
flows.





The
Company reviewed all other recently issued, but not yet effective, accounting
pronouncements and does not believe any such pronouncements will have a material
impact on the financial statements.





Item
8.  Financial Statements and Supplementary Data





The
Company’s Report of Independent Registered Public Accounting Firm and
Consolidated Financial Statements are filed as part of this report.





Item
9A(T).  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures


25


As of
December 31, 2009, the Company’s principal executive officer and principal
financial officer, evaluated the effectiveness of the design and operation of
the Company’s disclosure controls and procedures as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended.  Based on this
evaluation, our chief executive officer and chief financial officer each
concluded that the Company’s disclosure controls and procedures were not
effective in light of the identification of a material weakness in the Company’s
internal controls over financial reporting as discussed below.





Management’s
Report on Internal Control over Financial Reporting





The
management of the Company is responsible for establishing and maintaining an
adequate system of internal control over financial reporting as such term is
defined in Exchange Act Rule 13a-15(f) .  The Company’s internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our
Consolidated Financial Statementsfor external purposes in
accordance with generally accepted accounting principles defined in the Exchange
Act.





A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the registrant’s annual or interim financial
statements will not be prevented or detected on a timely basis.





We
carried out an evaluation under the direction of our chief executive officer and
chief financial officer, of the effectiveness of our internal control over
financial reporting. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in
“Internal Control over Financial Reporting - Guidance for Smaller Public
Companies (2006).”  Based on that evaluation, our management concluded
that our internal controls over financial reporting were not effective as of
December 31, 2009 due to control deficiencies that constitute a material
weakness.





In
connection with management’s assessment of our internal control over financial
reporting described above, management has identified the following material
weakness in our internal control over financial reporting as of December 31,
2009:





The
Company’s size and staff limitations have prevented it from being able to employ
sufficient resources to enable the Company to have an adequate level of
supervision and segregation of duties within the internal control
system.  At times, the Company has one person responsible for
processing transactions and reporting them.  This creates certain
incompatible duties and a lack of review over the financial reporting process
that would likely fail to detect errors in spreadsheets, calculation or other
documentation.  Existing management attempts to provide oversight for
most functions but lack of personnel makes the task virtually impossible in some
situations.  In addition this lack of segregation of duties led
management to conclude that the Company’s disclosure controls and procedures
were not effective to give reasonable assurance that the information required to
be disclosed in reports that the Company files under the Exchange Act are
recorded, processed and reported as and when required.  These control
deficiencies could result in a material misstatement in our interim or annual
financial statements that would not be prevented or detected on a timely
basis.





In order
to mitigate this material weakness, all financial reports are reviewed by two of
the Company’s Board members for reasonableness.  All unexpected
results are investigated.  As soon as our finances allow, we
anticipate hiring additional accounting staff and implementing appropriate
procedures for monitoring and reviewing the work performed by the Chief
Financial Officer.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and even when determined to be effective, can
only provide reasonable assurance with respect to financial statement
preparation and presentation.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Notwithstanding
the material weakness described above, to the best of their knowledge, the
Company’s management believes that the financial statements included in this
Annual Report on Form 10-K fairly present, in all material respects, the
Company’s financial condition, results of operations and cash flows for the
periods presented in conformity with U.S. generally accepted accounting
principles.


26


Changes
in Internal Control over Financial Reporting





During
the quarter ended December 31, 2009, the Company reduced office staff which
hampered the Company’s ability to maintain adequate segregation of duties which
led to control deficiencies that constitute a material weakness in our internal
control over financial reporting.





Attestation
Report of Independent Registered Public Accounting Firm





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.





Item
9B.  Other Information





None.





PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance





The
information required by this Item 10 is incorporated herein by reference to the
Registrant’s definitive Proxy Statement, relating to its 2010 Annual Meeting
(“Proxy Statement,”) under the captions “Board of Directors,” “Executive
Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of
Ethics,” and “Audit Committee Report.”  The Proxy Statement will be
filed with the SEC no later than April 30, 2010.





Item
11.  Executive Compensation





The
information required by Item 11 is contained under the caption “Executive and
Director Compensation” in the Proxy Statement and is incorporated herein by
reference.





Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters





The
information required by Item 12 is contained under the caption “Equity
Compensation Plan Information” and  “Principal Stockholders” in the
Proxy Statement and is incorporated herein by reference.





Item
13.  Certain Relationships and Related Transactions, and Director
Independence





The
information required by Item 13 is contained under the caption “Certain
Relationships and Related Transactions” and “Director Independence” in the Proxy
Statement and is incorporated herein by reference.





Item
14.  Principal Accountant Fees and Services





The
information required by Item 14 is contained under the caption “Principal
Accounting Firm Fees” and “Audit Committee Pre-approval Policies and Procedures”
in the Proxy Statement and is incorporated herein by reference.


27


PART
IV





Item
15.  Exhibits and Financial Statement Schedules





Exhibit No.
              
              Description2.1
              
              Agreement
      and Plan of Merger, dated as of December 28, 1999, by and among Meridian
      Point Realty Trust ‘83, the Company and Liberty Self-Stor Limited
      Partnership (Exhibits A and B to the Agreement and Plan of Merger are
      Exhibits 3.1 and 3.2, respectively) (Filed as Exhibit 2.1 to Registrant’s
      Form 8-K dated January 12, 2000 and incorporated herein by
      reference.)3.1
              
              Articles
      of Incorporation of the Company (Filed as Exhibit 3.1 to Registrant’s Form
      8-K dated January 12, 2000 and incorporated herein by
      reference.)3.2
              
              Articles
      of Amendment of Articles of Incorporation of the Company dated June 27,
      2005(Filed as Exhibit 3.1 to Registrant’s Form 8-K dated July 1, 2005 and
      incorporated herein by reference.)3.3
              
              Articles
      Supplementary to John D. Oil and Gas Company’s Articles of Incorporation,
      as amended, restated and supplemented dated February 12, 2008 (Filed as
      Exhibit 3.1 to Registrant’s Form 8-K dated February 12, 2008 and
      incorporated herein by reference.)3.4
              
              Bylaws
      of the Company (Filed as Exhibit 3.2 to Registrant’s Form 8-K dated
      January 12, 2000 and incorporated herein by reference.)4.1
              
              Registration
      Rights Agreement between the Company and the Richard M. Osborne Trust
      dated February 28, 2006 (Filed as Exhibit 4.1 to Registrant’s Form 8-K
      dated February 24, 2006 and incorporated herein by
    reference.)9.1
              
              Voting
      Trust Agreement between the Company, Richard M. Osborne and Gregory J.
      Osborne dated February 16, 2006 (Filed as Exhibit 7.1 to Registrant’s Form
      SC 13D/A dated April 11, 2006 and incorporated herein by
      reference.)10.1†
              
              Amended
      and Restated 1999 Stock Option and Award Plan of the Company (Filed as
      Annex A to Registrant’s Definitive Proxy Statement filed on April 30, 2009
      and incorporated herein by reference.)10.2
              
              Lease
      between OsAir, Inc. and the Company (Filed as Exhibit 10.2 to Registrant’s
      Form 8-K dated January 12, 2000 and incorporated herein by
      reference.)10.3
              
              Lease
      between OsAir, Inc and the Company dated March 26, 2009 (Filed as Exhibit
      10.4 to Registrant’s Form 10-K dated December 31, 2008 and incorporated
      herein by reference.)10.4
              
              Agreement
      of Limited Partnership of LSS I Limited Partnership, dated December 29,
      1999.  (Filed as Exhibit 10.3 to Registrant’s Form 8-K dated
      January 12, 2000 and incorporated herein by reference.)10.5
              
              Cost
      Sharing Agreement, by and between Liberty Self-Stor, Ltd. and Liberty
      Self-Stor II, Ltd. dated December 28, 1999 (Filed as Exhibit 10.7 to
      Registrant’s Form 10-KSB, dated March 15, 2000 and incorporated herein by
      reference.)10.6
              
              Contract
      among Acquiport/Amsdell I Limited Partnership and/or its nominee, Liberty
      Self-Stor, Ltd. and Liberty Self-Stor II, Ltd dated September 7, 2004
      (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated September 10, 2004
      and incorporated herein by
reference.)


28





10.7
              
              Amended
      and Restated First Amendment to Agreement of Limited Partnership of LSS I
      Limited Partnership dated March 29, 2006 (Filed as Exhibit 10.9 to
      Registrant’s form 10-KSB, dated March 31, 2006 and incorporated herein by
      reference)10.8
              
              Stock
      Subscription Agreement between the Company and the Richard M. Osborne
      Trust dated February 28, 2006 (Filed as Exhibit 10.1 to Registrant’s Form
      8-K dated March 2, 2006 and incorporated herein by
    reference.)10.9
              
              Stock
      Subscription Agreement between the Company and Terence P. Coyne dated
      February 28, 2006 (Filed as Exhibit 10.2 to Registrant’s Form 8-K dated
      March 2, 2006 and incorporated herein by reference.)10.10
              
              Common
      Stock Purchase Warrant granted to Richard M. Osborne dated June 20, 2008
      (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated June 20, 2008 and
      incorporated herein by reference.)10.11
              
              Letter
      agreement between the Company and Great Plains Exploration, LLC relating
      to the transfer of oil and natural gas wells dated as of January 1, 2006
      (Filed as Exhibit 10.1 to Registrant’s Form 10-QSB dated March 31, 2006
      and incorporated herein by reference.)10.12
              
              Oil
      and Gas Operations and Sale Agreement between the Company and Great Plains
      Exploration, LLC dated as of January 1, 2006 (Filed as Exhibit 10.2 to
      Registrant’s Form 10-QSB dated March 31, 2006 and incorporated herein by
      reference.)10.13
              
              Amendment
      No 1 to Oil and Gas Operations and Sale Agreement between the Company and
      Great Plains Exploration, LLC dated as of November 14, 2006 (Filed as
      Exhibit 10.4 to Registrant’s Form 10-QSB dated September 30, 2006 and
      incorporated by reference.)10.14
              
              Amendment
      No. 2 to Oil and Gas Operations and Sale Agreement dated as of January 12,
      2009 by and between the Company and Great Plains Exploration, LLC (Filed
      as Exhibit 10.1 to the Registrant’s 8-K dated January 12, 2009 and
      incorporated herein by reference.)10.15
              
              Revolving
      Demand Note of the Company payable to the Richard M. Osborne Trust dated
      as of January 1, 2006 (Filed as Exhibit 10.3 to Registrant’s Form 10-QSB
      dated March 31, 2006 and incorporated herein by
  reference.)10.16
              
              Purchase
      and Sale Agreement between the Company and Buckeye Storage of Gahanna LLC
      dated as of October 5, 2006 (Filed as Exhibit 10.1 to Registrant’s Form
      8-K dated October 12, 2006 and incorporated herein by
      reference.)10.17
              
              First
      Amended and Restated Loan and Security Agreement between RBS Citizens,
      N.A., d/b/a Charter One, Richard M. Osborne and the Company, dated as of
      March 28, 2008 (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated March
      28, 2008 and incorporated herein by reference.)10.18
              
              Revolving
      Credit Note of the Company and Richard M. Osborne in favor of RBS
      Citizens, N.A., d/b/a Charter One, dated as of March 28, 2008 (Filed as
      Exhibit 10.2 to Registrant’s Form 8-K dated March 28, 2008 and
      incorporated herein by reference.)10.19
              
              Loan
      Amendment Agreement between the Company, Great Plains Exploration, LLC and
      Richard M. Osborne dated March 28, 2008 (Filed as Exhibit 10.1 to
      Registrant’s Form 10-Q dated March 28, 2008 and incorporated herein by
      reference.)10.20
              
              Assignment
      and Assumption of Lease Purchase and Sale Agreement and First Amendment of
      Lease Purchase and Sale Agreement entered into as of August 3, 2007
      between Great Plains Exploration, LLC and Kykuit Resources, LLC (Filed as
      Exhibit 10.1 to Registrant’s Form 8-K dated August 3, 2007 and
      incorporated herein by
reference.)


29





10.21
              
              Lease
      Purchase and Sale Agreement dated March 21, 2007 between Hemus, Ltd. and
      Great Plains Exploration, LLC and First Amendment to Lease Purchase and
      Sale Agreement dated July 24, 2007 (Filed as Exhibit 10.2 to Registrant’s
      Form 8-K dated August 3, 2007 and incorporated herein by
      reference.)10.22
              
              Joint
      Venture Development Agreement between Kykuit Resources, LLC and Hemus,
      Ltd, effective August 3, 2007 (Filed as Exhibit 10.3 to Registrant’s Form
      8-K dated August 3, 2007 and incorporated herein by
      reference.)10.23
              
              Assignment
      of Oil, Gas and Mineral Leases dated May 1, 2008 between Hemus, Ltd. and
      Kykuit Resources, LLC (Filed as Exhibit 10.1 to Registrant’s Form 8-K
      dated May 1, 2008 and incorporated herein by
reference.)10.24
              
              Transfer
      and Acceptance of Membership Interest dated May 29, 2008 between the
      Company and Geis Coyne Oil and Gas, LLC (Filed as Exhibit 10.2 to
      Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by
      reference.)10.25
              
              Second
      Amended and Restated Operating Agreement of Kykuit Resources, LLC dated
      May 29, 2008 (Filed as Exhibit 10.3 to Registrant’s Form 8-K dated May 1,
      2008 and incorporated herein by reference.)10.26
              
              Purchase
      and Sale Agreement dated June 11, 2008 between Macum Energy, Inc., Harold
      and Eva Holden Living Trust dated 1995, Harold and Eva Holden, Trustees,
      Winifred Gas Partnership, Goodridge Resources, Inc., Vincent T. Larse, Dr.
      David T. Larsen, Pic Productions, Inc., Stanley and Beverly Stott Living
      Trust dated 4/30/96, Stanley and Beverly Stott, Trustees, Faith Drilling
      Inc., and Kykuit Resources, LLC (Filed as Exhibit 10.4 to Registrant’s
      Form 8-K dated May 1, 2008 and incorporated herein by
      reference.)10.27
              
              Cognovit
      Promissory Note of the Company dated August 3, 2007 (Filed as Exhibit 10.4
      to Registrant’s Form 8-K dated August 3, 2007 and incorporated herein by
      reference.)10.28
              
              Cognovit
      Promissory Note of the Company dated August 28, 2007 (Filed as Exhibit
      10.1 to Registrant’s Form 8-K dated August 28, 2007 and incorporated
      herein by reference.)10.29
              
              Cognovit
      Promissory Note of the Company dated September 12, 2007 (Filed as Exhibit
      10.1 to Registrant’s Form 8-K dated September 12, 2007 and incorporated
      herein by reference.)10.30
              
              Cognovit
      Promissory Note of the Company dated October 10, 2007 (Filed as Exhibit
      10.1 to Registrant’s Form 8-K dated October 10, 2007 and incorporated
      herein by reference.)10.31
              
              Cognovit
      Promissory Note of the Company dated November 20, 2007 (Filed as Exhibit
      10.1 to Registrant’s Form 8-K dated November 20, 2007 and incorporated
      herein by reference.)10.32
              
              Cognovit
      Promissory Note of the Company dated November 30, 2007 (Filed as Exhibit
      10.1 to Registrant’s Form 8-K dated November 30, 2007 and incorporated
      herein by reference.)10.33
              
              Cognovit
      Promissory Note of the Company dated May 23, 2008 (Filed as Exhibit 10.5
      to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by
      reference.)10.34
              
              Cognovit
      Promissory Note of the Company dated May 27, 2008 (Filed as Exhibit 10.6
      to Registrant’s Form 8-K dated May 1, 2008 and incorporated herein by
      reference.)10.35
              
              Cognovit
      Promissory Note of the Company dated February 13, 2009 (Filed as Exhibit
      10.1 to Registrant’s Form 8-K dated February 13, 2009 and incorporated
      herein by reference.)


30





10.36
              
              Letter
      from Richard M. Osborne guaranteeing Charter One loan debt dated March 26,
      2009 (Filed as Exhibit 10.37 to Registrant’s Form 10-K dated December 31,
      2008 and incorporated herein by reference.)10.37
              
              Cognovit
      Promissory Note of John D Oil and Gas Company dated April 7, 2009 (Filed
      as Exhibit 10.38 to Registrant’s Form 10-K dated December 31, 2008 and
      incorporated herein by reference.)10.38
              
              Cognovit
      Promissory Note of John D Oil and Gas Company (amended) dated May 22, 2009
      (Filed as Exhibit 10.1 to Registrant’s Form 8-K dated May 27, 2009 and
      incorporated herein by reference.)10.39
              
              Purchase
      and Sale Agreement effective as of January 30, 2008 between Liberty Self
      Stor, Ltd. and Richard M. Osborne, Trustee (Filed as Exhibit 10.1 to
      Registrant’s Form 8-K dated December 28, 2007 and incorporated herein by
      reference.)10.40
              
              Operating
      Agreement of Lucky Brothers, LLC dated October 7, 2008 (Filed as Exhibit
      10.1 to Registrant’s Form 10-Q dated September 30, 2008 and incorporated
      herein by reference.)10.41
              
              Operating
      Contract between the Company, Lucky Brothers, LLC and Great Plains
      Exploration, LLC dated October 7, 2008 (Filed as Exhibit 10.2 to
      Registrant’s Form 10-Q dated September 30, 2008 and incorporated herein by
      reference.)10.42
              
              Drilling
      Contract between the Company and Great Plains Exploration, LLC dated
      October 7, 2008 (Filed as Exhibit 10.3 to Registrant’s Form 10-Q dated
      September 30, 2008 and incorporated herein by
  reference.)31.1*
              
              Section
      302 Certification of Chairman of the Board and Chief Executive Officer
      (principal executive officer) pursuant to the Sarbanes-Oxley Act of
      200231.2*
              
              Section
      302 Certification of Chief Financial Officer (principal financial officer)
      pursuant to the Sarbanes-Oxley Act of 200232.1*
              
              Certification
      of Chairman of the Board and Chief Executive Officer (principal executive
      officer) and Chief Financial Officer (principal financial officer)
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.99.1*
              
              Letter
      from Schlumberger Data & Consulting Services about Reserve
      Economics





* Filed
herewith


†
Management agreement or compensatory plan or arrangement


31


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





Dated:
      March 26, 2010
                JOHN
      D. OIL AND GAS COMPANYBy: /s/ Richard M. OsborneRichard
      M. OsborneChairman
      and Chief Executive Officer(Principal
      Executive Officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





/s/ Richard M. Osborne
              
              Dated:  March
      26, 2010Richard
      M. OsborneChairman,
      Chief Executive Officer and Director(Principal
      Executive Officer)/s/ C. Jean Mihitsch
              
              Dated:  March
      26, 2010C.
      Jean MihitschChief
      Financial Officer(Principal
      Financial and Accounting Officer)/s/Gregory J. Osborne
              
              Dated:  March
      26, 2010Gregory
      J. Osborne, President and Director/s/Thomas J. Smith
              
              Dated:  March
      26, 2010Thomas
      J. Smith, Director


32




Report
of Independent Registered Public Accounting Firm





To the
Shareholders and Board of Directors of


John D.
Oil and Gas Company





We have
audited the accompanying consolidated balance sheets of John D. Oil and Gas
Company (a Maryland corporation) and Subsidiary as of December 31, 2009 and
2008, and the related consolidated statements of operations and comprehensive
loss, shareholders' equity, and cash flows for each of the two years in the
period ended December 31, 2009.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of John D. Oil and Gas Company
and Subsidiary as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.





As more
fully described in Note 2, to the financial statements, the Company has suffered
recurring losses and has $10.6 million of debt currently due and in default that
raises substantial doubt about its ability to continue as a going
concern.  Management’s plans in regard to these matters are also
described in Note 2.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





/s/
Maloney + Novotny LLC





Cleveland,
Ohio


March 26,
2010


33


John D.
Oil and Gas Company and Subsidiary


Consolidated
Balance Sheets





December 31, 2009
                      
                      
                      December 31, 2008ASSETSCurrent
      Assets:Cash
                      
                      $
                      22,072
                      
                      
                      $
                      78,301Accounts
      Receivable
                      
                      
                      44,197
                      
                      
                      
                      40,879Accounts
      Receivable from Related Parties
                      
                      
                      478,135
                      
                      
                      
                      1,417,679Other
      Current Assets
                      
                      
                      17,723
                      
                      
                      
                      56,202Total
      Current Assets
                      
                      
                      562,127
                      
                      
                      
                      1,593,061Property
      and Equipment, Net
                      
                      
                      8,985,937
                      
                      
                      
                      12,173,673Investment
      in Unconsolidated Affiliate
                      
                      
                      705,965
                      
                      
                      
                      989,258Other
      Assets
                      
                      
                      5,495
                      
                      
                      
                      60,624TOTAL
      ASSETS
                      
                      $
                      10,259,524
                      
                      
                      $
                      14,816,616LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Line
      of Credit
                      
                      $
                      9,497,024
                      
                      
                      $
                      9,500,000Current
      Maturities of Long Term Debt
                      
                      
                      1,145,174
                      
                      
                      
                      100,504Accounts
      Payable
                      
                      
                      370,675
                      
                      
                      
                      1,332,504Accounts
      Payable to Related Parties
                      
                      
                      47,144
                      
                      
                      
                      697,377Accrued
      Expenses
                      
                      
                      201,959
                      
                      
                      
                      398,838Total
      Current Liabilities
                      
                      
                      11,261,976
                      
                      
                      
                      12,029,223Long
      Term Debt, Net of Current Maturities
                      
                      
                      -
                      
                      
                      
                      1,159,567Asset
      Retirement Obligation
                      
                      
                      680,056
                      
                      
                      
                      644,517Commitments
      and Contingencies
                      
                      
                      -
                      
                      
                      
                      -Shareholders’
      Equity:Serial
      Preferred Stock - $.001 par value: 2,000,000 shares authorized, 1,350
      shares issued and outstanding
                      
                      
                      1
                      
                      
                      
                      1Common
      Stock - $.001 par value: 50,000,000 shares authorized; 9,067,090 shares
      issued and outstanding
                      
                      
                      9,067
                      
                      
                      
                      9,067Paid-in
      Capital
                      
                      
                      30,273,239
                      
                      
                      
                      30,268,691Accumulated
      Deficit
                      
                      
                      (31,151,171
                      )
                      
                      
                      (28,428,470
                      )Accumulated
      Other Comprehensive Loss
                      
                      
                      -
                      
                      
                      
                      (133,880
                      )Total
      John D. Oil and Gas Company Shareholders’ Equity
                      
                      
                      (868,864
                      )
                      
                      
                      1,715,409Non-Controlling
      Interest
                      
                      
                      (813,644
                      )
                      
                      
                      (732,100
                      )Total
      Shareholders’ Equity
                      
                      
                      (1,682,508
                      )
                      
                      
                      983,309TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                      
                      $
                      10,259,524
                      
                      
                      $
                      14,816,616




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


34


John D.
Oil and Gas Company and Subsidiary


Consolidated
Statements of Operations and Comprehensive Loss


For The
Years Ended December 31, 2009 and 2008





2009
                
                
                2008RevenuesOil
      and Natural Gas Sales
                
                $
                3,711,668
                
                
                $
                4,568,087Self-Storage
      Operation Revenues
                
                
                333,569
                
                
                
                312,108Interest
      and Other
                
                
                8
                
                
                
                3,318Total  Revenues
                
                
                4,045,245
                
                
                
                4,883,513Operating
      ExpensesInterest
                
                
                448,558
                
                
                
                581,954Accretion
                
                
                45,905
                
                
                
                44,742Oil
      and Natural Gas Production Costs
                
                
                687,182
                
                
                
                575,675Self-Storage
      Property Operating Expense
                
                
                112,382
                
                
                
                115,671Legal
      and Professional Fees
                
                
                367,854
                
                
                
                244,942Property
      Taxes and Insurance
                
                
                137,492
                
                
                
                159,601General
      and Administrative
                
                
                762,982
                
                
                
                885,736Warrant
                
                
                -
                
                
                
                47,573Loss
      from Unconsolidated Affiliate
                
                
                650,420
                
                
                
                28,627Bad
      Debt
                
                
                2,157
                
                
                
                43,517Impairments
                
                
                145,444
                
                
                
                491,224Depreciation,
      Depletion and Amortization
                
                
                3,381,114
                
                
                
                3,874,858Total
      Operating Expenses
                
                
                6,741,490
                
                
                
                7,094,120Net
      Loss
                
                
                (2,696,245
                )
                
                
                (2,210,607
                )Net
      Loss attributable to Non-controlling Interest
                
                
                (81,544
                )
                
                
                (170,567
                )Net
      Loss attributable to John D. Oil and Gas Company
                
                $
                (2,614,701
                )
                
                $
                (2,040,040
                )Other
      Comprehensive Income (Loss):Change
      in Fair Value of Cash Flow Hedge
                
                
                133,880
                
                
                
                (133,880
                )Comprehensive
      Loss
                
                $
                (2,562,365
                )
                
                $
                (2,344,487
                )Weighted
      Average Basic and Diluted Shares Outstanding
                
                
                9,067,090
                
                
                
                9,020,859Loss
      per Common Share – Basic and Diluted
                
                $
                (0.31
                )
                
                $
                (0.25
                )





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


35


John D.
Oil and Gas Company and Subsidiary


Consolidated
Statements of Shareholders’ Equity


For The
Years Ended December 31, 2009 and 2008





Preferred
                          Stock
                        
                        
                        Common
                          Stock
                        
                        
                        Paid-in
                          Capital
                        
                        
                        Accumulated
                          Deficit
                        
                        
                        Accumulated
                          Other
                          Comprehensive
                          Income (Loss)
                        
                        
                        Non-
                          Controlling
                          Interest
                        
                        
                        TotalBalance
      at December 31, 2007
                        
                        $
                        -
                        
                        
                        $
                        9,019
                        
                        
                        $
                        28,871,616
                        
                        
                        $
                        (26,303,290
                        )
                        
                        $
                        -
                        
                        
                        $
                        (561,533
                        )
                        
                        $
                        2,015,812Preferred
      Stock Issued in PrivatePlacement,
      Net of Offering Costs
                        
                        
                        1
                        
                        
                        
                        
                        
                        
                        
                        1,332,503
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,332,504Common
      Stock Issued for Director Compensation
                        
                        
                        
                        
                        
                        
                        48
                        
                        
                        
                        12,451
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        12,499Restricted
      Common Stock Award
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        4,548
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        4,548Dividends
      Declared
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (85,140
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (85,140
                        )Director
      Warrant Issued
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        47,573
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        47,573Net
      Loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,040,040
                        )
                        
                        
                        
                        
                        
                        
                        (170,567
                        )
                        
                        
                        (2,210,607
                        )Change
      in Fair Value of Cash Flow Hedge
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (133,880
                        )
                        
                        
                        
                        
                        
                        
                        (133,880
                        )Balance
      at December 31, 2008
                        
                        $
                        1
                        
                        
                        $
                        9,067
                        
                        
                        $
                        30,268,691
                        
                        
                        $
                        (28,428,470
                        )
                        
                        $
                        (
      133,880
                        )
                        
                        $
                        (732,100
                        )
                        
                        $
                        983,309Restricted
      Common Stock Award
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        4,548
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        4,548Dividends
      Declared
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (108,000
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (108,000
                        )Net
      Loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,614,701
                        )
                        
                        
                        
                        
                        
                        
                        (81,544
                        )
                        
                        
                        (2,696,245
                        )Change
      in Fair Value of Cash Flow Hedge
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        133,880
                        
                        
                        
                        
                        
                        
                        
                        133,880Balance
      at December 31, 2009
                        
                        $
                        1
                        
                        
                        $
                        9,067
                        
                        
                        $
                        30,273,239
                        
                        
                        $
                        (31,151,171
                        )
                        
                        $
                        -
                        
                        
                        $
                        (813,644
                        )
                        
                        $
                        (1,682,508
                        )





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


36


John D.
Oil and Gas Company and Subsidiary


Consolidated
Statements of Cash Flows


For The Years Ended December 31,2009
                
                
                2008Cash
      Flows from Operating Activities:Net
      Loss
                
                $
                (2,696,245
                )
                
                $
                (2,210,607
                )Adjustments
      to Reconcile Net Loss to Net Cash Provided By Operating
      ActivitiesAccretion
                
                
                45,905
                
                
                
                44,742Loss
      from Unconsolidated Affiliate
                
                
                650,420
                
                
                
                28,627Bad
      Debt
                
                
                2,157
                
                
                
                43,517Impairments
                
                
                145,444
                
                
                
                491,224Depreciation,
      Depletion and Amortization
                
                
                3,381,114
                
                
                
                3,874,858Gain
      on Sale of Equipment
                
                
                -
                
                
                
                (199
                )Common
      Stock Issued as Compensation
                
                
                -
                
                
                
                12,499Restricted
      Common Stock Award
                
                
                4,548
                
                
                
                4,548Director
      Warrant Issued
                
                
                -
                
                
                
                47,573Changes
      in Operating Assets and Liabilities:Accounts
      Receivable
                
                
                938,738
                
                
                
                (518,794
                )Other
      Current Assets
                
                
                38,479
                
                
                
                182,633Other
      Assets
                
                
                55,129
                
                
                
                (46,730
                )Accounts
      Payable
                
                
                (1,612,062
                )
                
                
                (57,385
                )Accrued
      Expenses
                
                
                (87,731
                )
                
                
                24,354Net
      Cash Provided By Operating Activities
                
                
                865,896
                
                
                
                1,920,860Cash
      Flows from Investing Activities:Purchases
      of Property and Equipment
                
                
                -
                
                
                
                (1,437
                )Proceeds
      from Sale of Equipment
                
                
                -
                
                
                
                830Proceeds
      from Sale of Interest in Unconsolidated Affiliate
                
                
                -
                
                
                
                731,747Expenditures
      for Unconsolidated Affiliate
                
                
                (367,127
                )
                
                
                (480,222
                )Expenditures
      for Oil and Natural Gas Wells
                
                
                (329,125
                )
                
                
                (3,244,934
                )Net
      Cash Used In Investing Activities
                
                
                (696,252
                )
                
                
                (2,994,016
                )Cash
      Flows from Financing Activities:Proceeds
      from Preferred Stock Private Placement
                
                
                -
                
                
                
                1,332,504Dividends
      Paid to Preferred Stockholders
                
                
                (108,000
                )
                
                
                (85,140
                )Proceeds
      from Related Party Note Payable
                
                
                600,000
                
                
                
                500,000Principal
      Payments on Related Party Debt
                
                
                (600,000
                )
                
                
                (500,000
                )Principal
      Payments on Long Term Debt
                
                
                (117,873
                )
                
                
                (126,386
                )Net
      Cash (Used In) Provided By Financing Activities
                
                
                (225,873
                )
                
                
                1,120,978Net
      (Decrease) Increase in Cash
                
                
                (56,229
                )
                
                
                47,822Cash,  Beginning
      of Period
                
                
                78,301
                
                
                
                30,479Cash,  End
      of Period
                
                $
                22,072
                
                
                $
                78,301Supplemental
      Disclosure of Cash flow Information:Interest
      Paid on Borrowings
                
                $
                443,549
                
                
                $
                562,083





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


37


John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008





1.Summary of
Significant Accounting Policies





General





John D.
Oil and Gas Company, formerly Liberty Self-Stor, Inc. (the “Company”), is a
corporation organized under the laws of the State of Maryland.





The
Company was originally a self-storage company from 1999 to 2005 when it sold all
but two of its facilities.  By May 2007, one self-storage
facility in
Painesville remained which generates revenue through self-storage rentals and
retail leases.The self-storage facility is operated through a
partnership agreement between Liberty Self-Stor Ltd. (“Ltd”) and the
Company.  Ltd has a 70.1% equity interest and the Company has a 29.9%
equity interest in the operating partnership of LSS I Limited Partnership (“LSS
I”).  The members of Ltd consist of Richard M. Osborne, Chairman and
Chief Executive Officer of the Company, Thomas J. Smith, a director and the
former President and Chief Operating Officer of the Company, and Retirement
Management Company, an Ohio corporation owned by Mr. Osborne.  These
members have Class A limited partnership interests that are redeemable for cash
or, at the election of the Company, convertible into shares of the Company’s
stock based on an exchange factor.   The current exchange factor
is .1377148 of a share for each unit.





In 2006, the Companyentered into the business of extracting and producing oil and natural gas
products, drilling oil and natural gas wells in Northeast Ohio.  The
Company currently has fifty-eight producing wells.  The Company cannot
guarantee success under the new business plan as drilling wells for oil and
natural gas is a high-risk enterprise and there is no guarantee the Company will
become profitable.





Principles of
Consolidation





Pursuant
to the terms of the partnership agreement of LSS I Limited Partnership (“LSS
I”), the Company, as sole general partner, controls LSS
I.  Accordingly, the Company accounts for its investment in LSS I
utilizing the consolidation method.  The investment in an
unconsolidated affiliate, Kykuit Resources LLC (Kykuit) is accounted for using
the equity method.  All significant inter-company transactions and
balances have been eliminated.





Accounts
Receivable





The
Company has certain trade receivables consisting of oil and natural gas sale
obligations due under normal trade terms.  The Company currently sells
its production to a related party through an oil and natural gas agreement,
extending credit on an unsecured basis to them.  In evaluating its
allowance for possible losses, the Company performs a review of outstanding
receivables.  The trade receivables outstanding are typically three
months of natural gas production due to the timing and accounting treatment by
the main distribution pipeline company in Northeast Ohio.  At December
31, 2009 and 2008, the Company’s credit evaluation indicated that it has no need
for an allowance for possible losses.





The
Company’s accounts receivable, arising from the self-storage business, are due
from individuals as well as business entities.  Tenants are required
to pay their rent on the first of each month.  Past due amounts are
those that are outstanding longer than the contractual payment
terms.  If an account is more than 75 days past due, the Company
generally writes off the balance directly to expense.  For such past
due accounts, the Company has the right to auction the contents of the rented
space, which allows for recovery of written-off balances.  Any such
recoveries are credited to income when received.





Property and
Equipment





All
property and equipment is depreciated using the straight-line method over
estimated useful lives of twenty five years for buildings and improvements and
five to seven years for furniture and equipment.


38


John D.
Oil and Gas Company and Subsidiary
 Notes to
Consolidated Financial Statements
 For The
Years Ended December 31, 2009 and 2008




The
Company uses the successful efforts method of accounting for oil and natural gas
producing activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs, the costs of carrying and retaining unproved
properties and exploratory dry hole drilling costs, are expensed. Development
costs, including the costs to drill and equip development wells and successful
exploratory drilling costs to locate proved reserves, are
capitalized.  Upon sale or retirement of a proved property, the cost
and accumulated depreciation and depletion and amortizations are eliminated from
property accounts and the resultant gain or loss is recognized.




Exploratory
drilling costs are capitalized when incurred pending the determination of
whether a well has found proved reserves. If a well is determined to be
successful, the capitalized drilling costs will be reclassified as part of the
cost of the well. If a well is determined to be unsuccessful, the capitalized
drilling costs will be charged to expense in the period the determination is
made.  The Company is involved in exploratory drilling only to the
extent that it is a partner of Kykuit, which is doing exploratory drilling in
Montana.  The Company is an owner and managing member of Kykuit, an
unconsolidated affiliate.




Development costs of proved oil and
natural gas properties, including estimated dismantlement, restoration,
abandonment costs and acquisition costs, are depreciated and depleted on a well
by well basis by the units-of-production method using estimated proved developed
reserves.  The costs of oil and natural gas properties are
periodically assessed for impairment.





Asset
Impairment





The
Company reviews its self-storage property and capitalized well costs for
impairment when events or changes in circumstances indicate the carrying amounts
of the properties may not be recoverable.  When such conditions exist,
management estimates future cash flows from operations and ultimate disposition
of the individual properties.  If the estimated undiscounted future
cash flows are less than the carrying amount of the asset, an adjustment to
reduce the carrying amount to the related property’s estimated fair market value
would be recorded and an impairment loss would be recognized.  The
Company wrote off the costs related to one well amounting to $145,444 in 2009
and two wells amounting to $491,224 in 2008.





Asset Retirement
Obligation





The
Company accounts for its asset retirement obligations in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”) which requires the fair value of an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made.  For the Company, asset retirement obligations
primarily relate to the abandonment, dismantling and plugging of oil and natural
gas wells.  The present value of the estimated asset retirement cost is
capitalized as part of the long-lived asset.  The capitalized asset
retirement cost is depreciated and the asset retirement obligation is accreted
over the estimated life of the well.





The
following table presents the Company’s asset retirement obligation activity for
the years ended December 31:





2009
                  
                  
                  2008Asset
      retirement obligations, beginning of the year
                  
                  $
                  674,517
                  
                  
                  $
                  241,777Liabilities
      incurred during the year
                  
                  
                  -
                  
                  
                  
                  169,623Revisions
      in estimated cash flows
                  
                  
                  (14,366
                  )
                  
                  
                  243,375Liabilities
      settled during the year
                  
                  
                  (26,000
                  )
                  
                  
                  (25,000
                  )Accretion
      expense
                  
                  
                  45,905
                  
                  
                  
                  44,742Asset
      retirement obligations, end of the year
                  
                  
                  680,056
                  
                  
                  
                  674,517Less
      current liabilities
                  
                  
                  -
                  
                  
                  
                  30,000Asset
      retirement obligations, net of current maturities
                  
                  $
                  680,056
                  
                  
                  $
                  644,517





At
December 31, 2009 and December 31, 2008, the Company’s current portion of the
asset retirement obligations was $0 and $30,000, respectively and is included in
accrued expenses.  The Company plugged two wells during 2009 and
plugged four wells during 2008.


39




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




Revenue
Recognition





The
Company recognizes revenue from its oil and natural gas interests in producing
wells as oil and natural gas is sold to a purchaser at a fixed or determinable
price when delivery has occurred, title and risk of loss have transferred to the
purchaser and the collectability of revenue is reasonably
assured.  The Company has a management agreement with a related party
to transport the Company’s natural gas production through the related party’s
pipeline and include this natural gas with the related party’s natural gas in
order to fulfill production contracts they currently have in
place.  The company uses the sales method to account for any gas
imbalances recognizing revenue based on gas delivered rather than its working
interest of the gas produced.  Gas imbalances at December 31, 2009 and
2008 were not significant.





The
Company’s revenue from self-storage operations is derived primarily from monthly
rentals of self-storage units.  Rental revenue is recognized in the
period the rent is earned which is typically on a monthly basis.





The
Company also leases certain commercial space in its Painesville property under
long-term lease agreements through December 31, 2019.  Total lease
revenue related to these leases was $199,029 and $172,998 for the years ended
December 31, 2009 and 2008, respectively.  Revenue under these
long-term lease agreements is recognized on a straight-line basis over the
respective lease terms.  In June of 2008, the Company decided to
write-off an outstanding receivable of $40,027 for a leased vacant space to bad
debt expense.  While the Company has received a court judgment against
the lease holder, as of December 31, 2009, the Company had not collected the
outstanding receivable.





Future
minimum lease revenue from operations under non-cancelable leases excluding
options to renew for each of the five succeeding annual periods ending December
31 and thereafter are as follows:





2010
                  
                  $
                  215,2862011
                  
                  
                  220,5062012
                  
                  
                  208,9722013
                  
                  
                  202,9802014
                  
                  
                  184,584Thereafter
                  
                  
                  300,782$
                  1,333,110





Comprehensive
Income





The
Company accounts for its comprehensive income in accordance with GAAP which
requires disclosure of comprehensive income and its components in a full set of
financial statements.  Comprehensive income is defined as changes in
shareholders’ equity from non-owner sources and, for the Company, includes gains
and losses recognized on derivative instruments accounted for as cash flow
hedges.





Stock-Based
Compensation





On June
16, 2009 at the Company’s Annual Meeting, of the stockholders who voted, 81.7%
voted to approve amendments to the Company’s stock option plan.  The
plan was extended another ten years.





As of
December 31, 2008, 25,000 stock options of the 300,000 that may be granted were
outstanding.  No stock options were outstanding as of December 31,
2009.  Stock options totaling 10,000 were terminated in the third
quarter of 2008 and 25,000 were terminated in the second quarter of 2009 when
the employees were no longer employed by the Company.  Additionally,
the former President and Chief Operating Officer of the Company was granted
35,000 restricted shares that amortize ratably over a five year vesting period
until August of 2011.  The compensation expense recorded for the
restricted shares for the years ended December 31, 2009 and 2008 was
$4,548.


40




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




The
following table presents the stock options outstanding at December
31:





2009
                    
                    
                    2008Shares
                    
                    
                    Weighted
                      Average
                      Price
                    
                    
                    Shares
                    
                    
                    Weighted
                      Average
                      PriceOutstanding
      at beginning of year
                    
                    
                    25,000
                    
                    
                    $
                    0.56
                    
                    
                    
                    35,000
                    
                    
                    $
                    0.56Granted
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -Forfeited
                    
                    
                    25,000
                    
                    
                    
                    0.56
                    
                    
                    
                    10,000
                    
                    
                    
                    0.56Outstanding
      at end of year
                    
                    
                    -
                    
                    
                    $
                    0.56
                    
                    
                    
                    25,000
                    
                    
                    $
                    0.56Options
      available for grant
                    
                    
                    300,000
                    
                    
                    
                    
                    
                    
                    
                    275,000Exercisable
      at end of year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    25,000
                    
                    
                    $
                    0.56





On June
20, 2008, the Company granted a warrant to purchase 50,000 shares of common
stock to Richard M. Osborne in return for Mr. Osborne providing collateral for
the Company’s credit facility with RBS Citizens, N.A., d/b/a Charter One
(“Charter One”).  The warrant has an exercise price of $1.00 per share
and a term of five years.  The fair value of the warrant was
approximately $48,000 at the date of grant, estimated using the
Black-Scholes-Merton option pricing model.  Determining the fair value
of the warrant charge requires us to make highly subjective assumptions,
including expected contractual life of the warrant and the price volatility of
the underlying shares.  We estimate stock price volatility based on
the historical volatility of our stock.  The assumptions used in
calculating the fair value of the warrant represent our management’s best
estimates, but these estimates involve inherent uncertainties and the
application of management’s judgment.





Use of
Estimates





The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of our assets, liabilities,
revenues, costs and expenses, and related disclosure of contingent assets and
liabilities.  On an on-going basis, the Company evaluates all of these
estimates, including those related to the provision for possible losses,
deferred tax assets and liabilities, depreciation and depletion, and certain
accrued liabilities.  We base estimates on historical experience and
on various other assumptions that we believe reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources.  Actual results may differ from these estimates under
different assumptions or conditions.





The
Company’s financial statements are based on a number of significant estimates,
including collectability of receivables, selection of useful lives for property
and equipment and timing and costs associated with its retirement
obligations.  Estimates of economically recoverable oil and natural
gas reserve quantities and future net cash flows depend on a number of variable
factors and assumptions that are hard to predict and may vary considerably from
actual results.  In addition reserve estimates for wells with limited
or new production history are less reliable than those based on actual
production.  Estimated reserve quantities are the basis for the
calculation of depreciation, depletion and impairment of oil and natural gas
properties.





The
Company’s oil and natural gas business makes it vulnerable to changes in
wellhead prices of crude oil and natural gas.  Such prices have been
volatile in the past and can be expected to continue to be
volatile.  Proved reserves are based on current oil and natural gas
prices and estimated reserves, which is considered a significant estimate by the
Company, and is subject to change.





Fair Value of Financial
Instruments





The fair
value of the Company’s financial instruments is determined by using available
market information and appropriate valuation methodologies. The Company’s
principal financial instruments are cash, accounts receivable, accounts payable
and debt. Cash, accounts receivable and accounts payable, due to their short
maturities and liquidity, are carried at amounts which reasonably approximate
fair value. Based upon rates available for similar borrowings, the Company’s
book value approximated the fair value of its debt at December 31, 2009 and
December 31, 2008.


41




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




GAAP
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date.





GAAP
establishes a three-level hierarchy for disclosure to show the extent and level
of judgment used to estimate fair value measurements.





Level 1 –
Uses unadjusted quoted prices that are available in active markets for identical
assets or liabilities as of the reporting date.  Active markets are
those in which transactions for the asset or liability occur in sufficient
frequency and volume to provide pricing information on an ongoing
basis.





Level 2 –
Uses inputs other than Level 1 that are either directly or indirectly observable
as of the reporting date through correlation with market data, including quoted
prices for similar assets and liabilities in active markets and quoted prices in
markets that are not active.  Level 2 also includes assets and
liabilities that are valued using models or other pricing methodologies that do
not require significant judgment since the input assumptions used in the models,
such as interest rates and volatility factors, are corroborated by readily
observable data.  Instruments in this category include
non-exchange-traded derivatives, including interest rate swaps.





Level 3 –
Uses inputs that are unobservable and are supported by little or no market
activity and reflect the use of significant management
judgment.  These values are generally determined using pricing models
for which the assumptions utilize management’s estimates of market participant
assumptions.





The
tables below set forth the Company’s financial assets and liabilities that were
accounted for at fair value as of December 31, 2009 and December 31,
2008.  The tables do not include cash on hand or assets and
liabilities that are measured at historical cost or any basis other than fair
value.





Fair Value at December 31, 2009Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Item
      measured at fair value on a recurring basis:Interest
      rate swap
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    0





Fair Value at December 31, 2008Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Item
      measured at fair value on a recurring basis:Interest
      rate swap
                    
                    $
                    0
                    
                    
                    $
                    (133,880
                    )
                    
                    $
                    0





The
Company’s derivative financial instrument is an interest rate cash flow hedge in
which the Company pays a fixed rate and receives a variable interest rate that
is observable based upon a forward interest rate curve and is therefore
considered a Level 2 input.





Income
Taxes





Effective
January 1, 2006, the Company became a “C” Corporation for tax
purposes.





In
establishing a provision for income taxes, the Company must estimate when in the
future certain items will affect taxable income.  Deferred taxes are
recorded for future tax consequences of events that have been recognized in the
financial statements or tax returns, based upon enacted tax laws and
rates.  Deferred tax assets are recognized subject to management’s
judgment that realization is more likely than not.





The
Company has net operating loss carry forwards (NOLS) and a valuation allowance
to offset any tax effects.  The Company has no unrecognized tax
benefits and therefore, there is no anticipated effect on the Company’s
effective tax rate.  Any tax penalties or interest expense will be
recognized in income tax expense.  No interest and penalties were
accrued as of December 31, 2009 or 2008, or paid during the periods then
ended.  The Company does not anticipate a significant change over the
next twelve months to any tax liability.


42




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




The
Company is open to federal and state tax audits until the applicable statute of
limitations expire.  There are currently no federal or state income
tax examinations underway for the Company.  The tax years 2006 through
2009 remain open to examination by the major taxing jurisdictions in which we
operate, although no material changes to unrecognized tax positions are expected
within the next twelve months.  The Company does, however, have prior
year net operating losses which remain open for examination.





Recently Issued Accounting
Pronouncements





Accounting
Standards Codification





In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles (“the Codification”) or (“ASC”) as the single source of
authoritative nongovernmental GAAP.  All existing accounting standard
documents, such as FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and other related accounting
literature have been superseded by the Codification.  Rules and
interpretive releases of the United States Securities and Exchange Commission
(“SEC”) under the authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants.  All other accounting
literature is considered non-authoritative. The Codification reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure.  The FASB will not issue new
standards in the form of Statements, FASB Staff Position, or Emerging Issues
Task Force Abstracts; instead, it will issue Accounting Standards
Updates.  The FASB will not consider Accounting Standards Updates as
authoritative in their own right; these updates will serve only to update the
Codification, provide background information about the guidance, and provide the
basis for conclusions on the change(s) in the Codification.  The
switch to the ASC affects the way companies refer to GAAP in financial
statements and accounting policies.  Citing particular content in the
ASC involves specifying the unique numeric path to the content through the
Topic, Subtopic, Section and Paragraph structure.  This Codification
is effective for financial statements issued for reporting periods that ended
after September 15, 2009.  At this time the Company has decided to
present new accounting pronouncements with no standard references.





Oil
and Gas Reporting





In
December 2008, the SEC released a final rule, "Modernization of Oil and Gas
Reporting," which amends the oil and gas reporting requirements. The key
revisions to the reporting requirements include: using a 12-month average price
to determine reserves; including nontraditional resources in reserves if they
are intended to be upgraded to synthetic oil and gas; ability to use new
technologies to determine and estimate reserves; and permitting the disclosure
of probable and possible reserves. In addition, the final rule includes the
requirements to report the independence and qualifications of the reserve
preparer or auditor; file a report as an exhibit when a third party is relied
upon to prepare reserve estimates or conduct reserve audits; and to disclose the
development of any proved undeveloped reserves (PUDs), including the total
quantity of PUDs at year-end, material changes to PUDs during the year,
investments and progress toward the development of PUDs and an explanation of
the reasons why material concentrations of PUDs have remained undeveloped for
five years or more after disclosure as PUDs. The accounting changes resulting
from changes in definitions and pricing assumptions should be treated as a
change in accounting principle that is inseparable from a change in accounting
estimate, which is to be applied prospectively. The final rule is effective for
annual reports for fiscal years ending on or after December 31, 2009. Early
adoption is not permitted. The adoption of this standard had an impact on the
Company’s financial position and results of operations. The 12-month average
pricing for the year for natural gas sold at the Henry Hub, LA was $3.867 and
West Texas Intermediate oil at Cushing, OK was $61.18, where the previous
calculations would have been higher based on the last day of December
2009.  The lower pricing increased our depletion expense in
2009.  The Company’s depletion rate continues to be extremely
high.





Effective
upon its issuance in September 2009, the Company adopted an accounting standards
update on “Extractive Activities – Oil and Gas”.  This accounting standards
update represents a technical correction to an existing SEC Observer comment
regarding “Accounting for Gas-Balancing Arrangements”.  The adoption of
this accounting standard update did not have a material impact on the Company’s
financial statements.


43




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




In
January 2010, an accounting standard update was issued on “Oil and Gas
Estimations and Disclosures”.  This update
aligns the current oil and natural gas reserve estimation and disclosure
requirements of the Extractive Activities for Oil and Gas with the changes
required by the SEC final rule, as discussed above.  This update
expands the disclosures required for equity method investments, revises the
definition of oil and natural gas producing activities to include nontraditional
resources in reserves unless not intended to be upgraded into synthetic oil or
natural gas producing activities.  This update also amends the
definition of proved oil and natural gas reserves to require 12-month average
pricing in estimating reserves, amends and adds definitions in the Master
glossary that is used in estimating proved oil and natural gas quantities and
provides guidance on geographic area with respect to disclosure of information
about significant reserves.  It is effective for entities with annual
reporting periods ending on or after December 31, 2009.  The Company
adopted this update on December 31, 2009.





Other-Than-Temporary
Impairments





In April
2009, a new accounting standard was issued regarding the recognition of
other-than-temporary impairments of investments in debt securities, as well as
financial statement presentation and disclosure requirements, for when to
recognize a write-down through earnings versus other comprehensive
income.  The standard was effective for interim and annual periods
ending after June 15, 2009.  The adoption of this standard did not
have a material impact on the Company’s financial position, results of
operations or cash flows.





Consolidation
of Variable Interest Entities





In June
2009, a new accounting standard was issued in order to change financial
reporting by enterprises involved with variable interest entities
(“VIEs”).  The standard replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a VIE with an approach focused on identifying which enterprise has
the power to direct the activities of a VIE and the obligation to absorb losses
of the entity or the right to receive the entity’s residual
returns.  This standard is effective for fiscal years beginning after
November 15, 2009.  The adoption of this standard did not have a
material impact on the Company’s financial position, results of operations or
cash flows.





Measuring
Liabilities at Fair Value





In August
2009, a new accounting standard was issued concerning measuring liabilities at
fair value.  The new standard provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using certain valuation techniques.  Additionally, it clarifies that a
reporting entity is not required to adjust the fair value of a liability for the
existence of a restriction that prevents the transfer of the
liability.  This new guidance is effective for the first reporting
period after its issuance, however earlier application is
permitted.  The adoption of this standard did not have a material
impact on the Company’s financial position, results of operations or cash
flows.





The
Company reviewed all other recently issued, but not yet effective, accounting
pronouncements and does not believe any such pronouncements will have a material
impact on the financial statements.





Reclassifications





Certain
prior year amounts have been reclassified to conform to the December 31, 2009
presentation.  These reclassifications had no effect on net loss or
shareholders’ equity as previously reported.


44




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




2.  Going
Concern





The
Company’s independent registered accounting firm have indicated in their audit
report in an explanatory paragraph that, due to the Company’s recurring losses
and outstanding debt of $10.6 million that is currently due and in default,
there is substantial doubt about the Company’s ability to continue as a going
concern.  The Company’s consolidated financial statements have been
prepared on the assumption that the Company will continue as a going
concern.  The Company has incurred substantial losses, which have
strained its financial resources, and the Company’s liabilities exceed its
assets at December 31, 2009.  As described more fully in Note 5 “Line
of Credit and Long-Term Debt”, the Company’s $9.5 million line of credit with
Charter One was due August 1, 2009 and is in default and the Company does not
have the available cash to repay the line of credit.  The Company is
still negotiating with Charter One to refinance the line of credit or obtaining
substitute financing.  If the Company is unsuccessful, there is
substantial doubt about the Company’s ability to continue as a going
concern.





3.  Property
and Equipment





Property
and equipment consists of the following at December 31:





2009
                  
                  
                  2008Oil
      and Natural Gas Properties:Proved
      Properties
                  
                  $
                  15,667,171
                  
                  
                  $
                  13,859,634Unproved
      Properties
                  
                  
                  2,260,896
                  
                  
                  
                  3,652,790Well
      Material Inventory
                  
                  
                  50,349
                  
                  
                  
                  122,502Accumulated
      Depletion
                  
                  
                  (10,492,751
                  )
                  
                  
                  (7,103,584
                  )Total
      Oil and Natural Gas Properties
                  
                  
                  7,485,665
                  
                  
                  
                  10,531,342Other
      Property and Equipment:Land
                  
                  
                  307,780
                  
                  
                  
                  307,780Building
      and Improvements
                  
                  
                  2,357,822
                  
                  
                  
                  2,357,822Furniture
      and Equipment
                  
                  
                  173,640
                  
                  
                  
                  199,657Accumulated
      Depreciation
                  
                  
                  (1,338,970
                  )
                  
                  
                  (1,222,928
                  )Total
      Other Property and Equipment
                  
                  
                  1,500,272
                  
                  
                  
                  1,642,331Property
      and Equipment, Net
                  
                  $
                  8,985,937
                  
                  
                  $
                  12,173,673





4.  Investment
in Unconsolidated Affiliates





The
Company is an owner and managing member of an unconsolidated affiliate, Kykuit
Resources LLC, which is accounted for using the equity method of
accounting.  The Company began investing in Kykuit during the third
quarter of 2007.  In 2008, the Company sold 25% of its interest in
Kykuit at cost for approximately $1.4 million.  The Company had an
18.8% ownership in Kykuit at December 31, 2008.  Some of the Kykuit
partners opted out of further cash investments during 2009, increasing the
Company’s ownership percentage at December 31, 2009 to 20.83%.





The
investment by the Company in this venture was $989,258 which included an account
payable of $158,225 and a cumulative net book loss of $57,444 at December 31,
2008.  The investment by the Company in this venture was $705,965
which included a loss in the investment of $588,309, an account payable of
$10,490 and a cumulative net book loss of $119,556 at December 31,
2009.  The Company recorded a loss of $588,309 on the investment
representing 20.83% of an 85% reduction in the value of the exploratory wells in
Kykuit.  The following table displays the balance sheet of Kykuit at
December 31, 2009, and 2008 and the income statement for the same years
ended.


45




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008





Kykuit
      Resources LLC
                    Balance
      SheetDecember 31,
                    2009
                  
                  
                  December 31,
                    2008Current
      Assets
                  
                  $
                  115,893
                  
                  
                  $
                  210,978Unproved
      Leaseholds and Development Costs
                  
                  
                  6,957,065
                  
                  
                  
                  6,320,929Furniture
      and Fixtures, Net of Depreciation
                  
                  
                  31,747
                  
                  
                  
                  37,155Other
      Assets
                  
                  
                  24,087
                  
                  
                  
                  33,111$
                  7,128,792
                  
                  
                  $
                  6,602,173Current
      Liabilities
                  
                  $
                  832,728
                  
                  
                  $
                  1,129,350Paid
      in Capital
                  
                  
                  6,786,675
                  
                  
                  
                  5,658,891Accumulated
      Deficit
                  
                  
                  (490,611
                  )
                  
                  
                  (186,068
                  )$
                  7,128,792
                  
                  
                  $
                  6,602,173





Kykuit
      Resources LLC
                    Statement
      of OperationsDecember
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008Total
      Revenues
                  
                  $
                  -
                  
                  
                  $
                  -Total
      Expenses
                  
                  
                  304,543
                  
                  
                  
                  120,225Net
      Loss
                  
                  $
                  (304,543
                  )
                  
                  $
                  (120,225
                  )





5.  Line
of Credit and Long-Term Debt





On
September 28, 2006, the Company entered into an unsecured loan agreement for a
line of credit with a one year term with Mr. Richard Osborne and Charter One
Bank for up to $5.0 million dollars in total borrowings with interest at a rate
of 1.75% over LIBOR adjusted monthly.  The Charter One liability was
jointly loaned, so the Company and Mr. Osborne were each liable for the debt of
the other.





The loan
was subsequently revised several times until on March 28, 2008, the Company
entered into the First Amended and Restated Loan and Security Agreement (the
“Loan Agreement”) between the Company, Richard M. Osborne (the Company and Mr.
Osborne together, the “Borrowers”), and Charter One. The Loan Agreement extended
the maturity date to August 1, 2009, continuing with the original interest rate
calculation of 1.75% over LIBOR adjusted monthly. Under the agreement, only the
Company could borrow on the line of credit when any amounts are paid down
against the $9.5 million outstanding on the loan. The Company and Great Plains
Exploration LLC a company owned by Mr. Osborne (“Great Plains”), agreed that the
related party loan of $3.8 million from Great Plains was satisfied in full and
terminated upon the Company’s entry into the new Charter One loan and assumption
of the $3.8 million portion of the line of credit drawn by Mr. Osborne.
Therefore, the Company had $9.5 million in outstanding debt to Charter One and
$0 in outstanding debt to Great Plains at March 31, 2008. As part of this loan
agreement, Mr. Osborne has pledged several real estate properties that he
personally owns, to provide sufficient collateral allowing the Company to enter
into the loan agreement. The Company did not meet the reserve collateral
requirements for a $9.5 million loan without additional collateral.





The
Company’s line of credit with Charter One was almost $9.5 million, past due and
in default, at December 31, 2009 at a rate of 2.06%.  The average
balance during 2008 was $9.5 million and the weighted average interest rate was
6.13%. The average balance during 2009 was $9.5 million and the weighted average
interest rate was 2.12%.  The Company’s $9.5 million line of credit
matured on August 1, 2009.  As described more fully in the section of
this Form 10-K entitled “Legal Proceedings”, Charter One received a judgment in
its favor against the Company and Mr. Osborne related to the $9.5 million line
of credit.  The Company does not have the available cash to repay the
line of credit.  In addition, Charter One has asked the court to
appoint a receiver for the Company.  A hearing is currently scheduled
for April 16, 2010.


46




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




The
Company entered into an interest rate swap agreement for a cash flow hedge with
Charter One to mitigate its exposure to fluctuations in interest
rates.  The swap began on May 1, 2008 and ended on August 3, 2009 in
connection with the $9.5 million loan.   The value of the swap at
December 31, 2009 was $0.  The estimated fair value of the swap at
December 31, 2008 was $133,880, a liability, which is included in accrued
expenses.





The
Painesville facility is encumbered by a mortgage in the original amount of
$2,062,128, which matured on March 30, 2009.  On March 25, 2009, LSS I
received a letter of commitment from the mortgagor which stated that the loan on
the Painesville facility will be extended for five years, maturing on May 1,
2014, using a ten year amortization period at a variable rate of the 30 day
LIBOR plus 250 basis points. Monthly payments include principal of $10,370 plus
interest.  The principal amount of the loan as of December 31, 2009
and 2008 was $1,145,174 and $1,260,071, respectively.  The rate on
December 31, 2009 was 2.73%.  However, as more fully described in
“Legal Proceedings” in this Form 10-K, the holder of the $1.2 million mortgage
on the Painesville facility gave formal notice of certain defaults on August 24,
2009.  The mortgage became accelerated and fully due and
payable.  LSS I, the owner of the Painesville facility, of which the
Company has a 29.9% minority interest, does not have the available cash to repay
the mortgage.





The
Painesville loan includes the following principal amortization over the next
five years ending December 31:





2010
                  
                  $
                  124,4402011
                  
                  
                  124,4402012
                  
                  
                  124,4402013
                  
                  
                  124,4402014
                  
                  
                  647,414$
                  1,145,174





For the
years ended December 31, 2009 and 2008 respectively, the Company expensed
$427,122 and $573,055 in interest on its debt instruments.





6.  Notes
Payable to Related Party





The
Company entered into an agreement with Mr. Osborne for an unsecured revolving
demand note dated January 1, 2006.  Interest is payable annually at
the prime rate with principal being due on demand.  The revolving
demand note does not include an expiration date or a limit on the amount that
the Company may borrow.  The prime rate at December 31, 2009 was
3.25%.  There were no outstanding balances under the note at December
31, 2009 and 2008, respectively.





At
December 31, 2007, the Company had entered into loans with Great Plains (a
company owned by Richard M. Osborne) totaling $3.8 million evidenced by six
promissory notes.  The loans did not include an expiration date or a
limit on the amount that the Company could borrow.  The notes were
payable on demand and bore interest at the rate of LIBOR plus 1.75% per
year.  The Great Plains notes were satisfied in full and terminated
when the Company entered into the Charter One Loan Agreement on March 28,
2008.  Therefore, the Company had $9.5 million in outstanding debt to
Charter One and $0 in outstanding debt to Great Plains at March 31,
2008.





During
the loan negotiations with Charter One, it was anticipated that the Company
would become responsible for the $9.5 million and therefore did not record any
related party interest on the Great Plains loan for the three months ended March
31, 2008.





At June
30, 2008, the Company had $9.5 million outstanding on the Line of Credit to
Charter One and had entered into loans with Great Plains totaling $500,000
evidenced by two promissory notes.  The loans from Great Plains did
not include an expiration date or a limit on the amount that the Company could
borrow.  The notes were payable on demand and bore interest at the
rate of 8% per year.  The Great Plains notes principal balances were
fully paid by September 30, 2008. No additional borrowings occurred in the
fourth quarter of 2008 from Great Plains.


47




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




On
February 13, 2009, Great Plains loaned the Company $600,000 to fund the
Company’s ongoing capital requirements.  On July 25, 2009, the Note
and interest outstanding on the $600,000 loan from Great Plains were fully
paid.  The Company used the receipt of currently owed production funds
and additional advance monies against the production receivable to make the
payment.





Interest
expense on related party notes payable, included in total interest was $21,436 and $8,899
for the years ended December 31, 2009 and 2008, respectively.





7.  Stockholder’s
Equity





Effective
February 12, 2008, the Company filed Articles Supplementary to its Articles of
Incorporation, as amended, restated and supplemented with the State Department
of Assessment and Taxation of Maryland designating 5,000 Series A Preferred
Shares, par value $0.001 per share.  Dividends accumulate on the
Series A Preferred Shares at the rate of 8% per annum and must be paid on a
quarterly basis.  Failure to pay dividends on a timely basis results
in the imposition of a default rate of 10% per annum that continues until the
default is cured by the Company by payment of all accrued
dividends.  Further, the initial default by the Company entitles the
holders of the Series A Preferred Shares to elect, as a class, one director to
the Company’s Board of Directors who shall serve until the Series A Preferred
Shares are liquidated or converted.





The
Series A Preferred Shares have voting rights only with respect to certain
extraordinary actions that would impair the rights of holders of the Series A
Preferred Shares, such as a merger, reorganization or issuance of a class or
series of stock on parity with or senior to the Series A Preferred
Shares.  Each of the Series A Preferred Shares is convertible into
common shares by dividing the sum of $1,000 and any accrued but unpaid dividends
on the Series A Preferred Shares by the conversion price of $1.00 (the
“Conversion Price”).  The Conversion Price is proportionately
increased (or decreased, as the case may be) for combinations, stock splits and
similar events that would affect the number of shares of the Company’s common
stock outstanding.  The Series A Preferred Shares have a liquidation
preference of $1,000 per share, plus any accrued but unpaid
dividends.





The
Company sold an aggregate of 1,350 shares of its Series A Convertible Preferred
Shares in a private placement to a total of nine accredited investors during the
first six months of 2008.  All Series A Preferred Shares were sold at
a price of $1,000 per share for a total of $1,350,000 with no underwriting
discounts or commissions, as no underwriters were used to facilitate the
transactions.





In
December of 2008, the Board of Directors of the Company granted each of its five
outside board members 9,615 shares of common stock valued at $0.26 per
share.  The total shares awarded of 48,075 were issued as partial
compensation for their board participation in 2008.





The
Company did not issue stock to its directors during 2009.





8.
Warrant Issued





Pursuant
to a warrant agreement dated June 20, 2008 between the Company and Richard M.
Osborne, the Company issued a warrant to Mr. Osborne to purchase up to 50,000
shares of the Company’s common stock at $1.00 per share.  The warrant
is immediately exercisable.  The fair value of the warrant was
approximately $48,000 at the grant date, estimated on the basis of the
Black-Scholes-Merton option-pricing formula. The following assumptions were
used: expected volatility of 153.15%; risk-free interest rate of 3.57%; expected
dividend yield of 0.00% and contractual life of the warrant as 4.5
years.  The fair value of the warrant has been recorded as an increase
to additional paid in capital and expense accounts, which was fully recognized
as of June 30, 2008.


48




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




9.  Earnings/Loss
Per Share





Basic
income (loss) per share of common stock for the years ended December 31, 2009
and 2008 is determined by dividing net income (loss) less declared preferred
stock dividends by the weighted average number of shares of common stock
outstanding during the period.





The stock
options, restricted stock awards, Class A Limited Partnership conversion and
warrants for the years ended December 31, 2009 and 2008 were anti-dilutive and
had no effect on diluted earnings per share.  The Company’s Class A
Limited Partnership exchange factor is .1377148 per share.




The
Company paid no cash distributions to its common stockholders during 2009 and
2008.  However, the Company declared and paid $108,000 and $85,140 in
preferred stock dividends for the year ended December 31, 2009 and 2008,
respectively.





10.  Income
Taxes





The
reconciliation of the federal statutory income tax rate to the Company’s
effective income tax rate applicable to income from continuing operations is as
follows:





2009
                      
                      
                      2008Amount
                      
                      
                      %
                      
                      
                      Amount
                      
                      
                      %Provision
      (benefit) based on the federal statutory rate
                      
                      $
                      (889,000
                      )
                      
                      
                      (34.0
                      )
                      
                      $
                      (751,600
                      )
                      
                      
                      (34.0
                      )Increase
      in valuation allowance
                      
                      
                      889,000
                      
                      
                      
                      34.0
                      
                      
                      
                      751,600
                      
                      
                      
                      34.0$
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -





The
following table represents the Company’s significant deferred tax assets and
liabilities at December 31, 2009 and 2008:





2009
                          
                          
                          2008Deferred
      tax assetsNet
      operating loss carry forwards
                          
                          $
                          5,420,000
                          
                          
                          $
                          5,290,000AMT
      credit
                          
                          
                          41,100
                          
                          
                          
                          41,100Total
      Deferred assets
                          
                          
                          5,461,100
                          
                          
                          
                          5,331,100Deferred
      tax liabilitiesOil
      and natural gas properties, principally due to differences in
      depreciation, depletion and amortization
                          
                          
                          (1,750,000
                          )
                          
                          
                          (2,830,000
                          )Net
      Deferred tax assets
                          
                          
                          3,711,100
                          
                          
                          
                          2,501,100Valuation
      allowance
                          
                          
                          (3,711,100
                          )
                          
                          
                          (2,501,100
                          )Net
      Deferred tax assets
                          
                          $
                          -
                          
                          
                          $
                          -





At
December 31, 2009 and 2008, the Company had net operating loss carry forwards
(NOLS) for future years of approximately $15.9 and $15.4 million,
respectively.  These NOLS will expire at various dates through
2028.  Utilization of the NOLs could be limited if there is a
substantial change in ownership of the Company and is contingent on future
earnings.  In addition, the Company paid $41,187 for alternative
minimum tax (AMT) in 2006, creating a tax credit that carries forward
indefinitely.


49




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




The
Company has provided a valuation allowance equal to 100% of the total net
deferred asset in recognition of the uncertainty regarding the ultimate amount
of the net deferred tax asset that will be realized.  In 2006, the
Company began operating in the oil and natural gas business, which is subject to
many risks.  The Company also expects to continue generating tax
losses in the next few years due to timing differences.





11.  Other
Related Party Transactions





Richard
M. Osborne is the sole manager of Liberty Self-Stor II, Ltd., an Ohio limited
liability company, which is the owner of a truck rental business, which makes
trucks available for short-term rental to the general public, including tenants
of the Company’s self-storage facility, and provides for the retail sale of
locks, boxes, packing materials and related merchandise at the self-storage
facility.  The Company has entered into a cost sharing agreement with
Liberty Self-Stor II, Ltd. with respect to the sharing of employees and space at
the office of the self-storage facility for the benefit of both
companies.  The Company owed Liberty Self-Stor II, Ltd. fundsassociated with
these transactions, as well as for cash advances between the companies, which
are included in accounts receivable and accounts payable to related parties in
the accompanying consolidated balance sheets and listed in the table
below.





The
Company leases its executive offices from OsAir, Inc., a company owned by Mr.
Osborne.  The lease was extended for a three year term on March 26,
2009 at $2,000 per month from $1,350 per month, through April 1,
2012.  Rent expense totaled $22,050 and $16,200 for the years ending
December 31, 2009 and 2008, respectively and is included in general and
administrative expenses.





Effective
January 1, 2006, the Company entered into a contract with Great Plains, which is
wholly owned by Mr. Osborne, for well operations and to sell natural gas and oil
production net of pipeline transportation costs.  Additionally, the
Company has non-operator joint venture operating agreements with J. R. Smail,
Inc., a corporation owned by James R. Smail, a director of the Company until
August 26, 2009.





The
following tables summarize the related party transactions for accounts
receivable of oil and natural gas production, capitalized costs for wells,
outstanding accounts payable, revenues received and payments paid for expenses
to related parties for the periods indicated.  The accounts receivable
from various companies owned by Mr. Osborne in the accompanying consolidated
balance sheets represent amounts owed to the Company for minor cost sharing
transactions and are listed in the following table.





December 31,
                      2009
                    
                    
                    December 31,
                      2008Accounts
      Receivable Oil and Gas Sales:Great
      Plains Exploration, LLC.
                    
                    $
                    462,549
                    
                    
                    $
                    1,386,668J.R.
      Smail, Inc.
                    
                    
                    13,551
                    
                    
                    
                    30,442Liberty
      Self Stor II
                    
                    
                    727
                    
                    
                    
                    -Various
      Related Companies
                    
                    
                    1,308
                    
                    
                    
                    569$
                    478,135
                    
                    
                    $
                    1,417,679Accounts
      Payable:Great
      Plains Exploration, LLC.
                    
                    $
                    47,144
                    
                    
                    $
                    696,114Liberty
      Self Stor II
                    
                    
                    -
                    
                    
                    
                    1,263$
                    47,144
                    
                    
                    $
                    697,377




50


John D.
Oil and Gas Company and Subsidiary
 Notes to
Consolidated Financial Statements
 For The
Years Ended December 31, 2009 and 2008


For the Years Ended
                    December 31,2009
                  
                  
                  2008Capitalized
      Costs for Well Property and Equipment:Great
      Plains Exploration, LLC.
                  
                  $
                  170,410
                  
                  
                  $
                  1,422,220J.R.
      Smail, Inc.
                  
                  
                  -
                  
                  
                  
                  7,296RevenuesRevenue
      From the Sale of Oil and Natural Gas Production, net of pipeline
      transportation costs:Great
      Plains Exploration, LLC.
                  
                  $
                  3,519,851
                  
                  
                  $
                  4,197,216J.
      R. Smail, Inc.
                  
                  
                  84,265
                  
                  
                  
                  188,221Operating
      expensesWell
      Management, Water Hauling and Service Rig:Great
      Plains Exploration, LLC.
                  
                  $
                  506,337
                  
                  
                  $
                  379,301J.
      R. Smail, Inc.
                  
                  
                  41,708
                  
                  
                  
                  46,058





The
Company is an owner and managing member of an unconsolidated affiliate, Kykuit
Resources LLC, which is accounted for using the equity method of
accounting.  The Company began investing in Kykuit during the third
quarter of 2007.  The Company had an 18.8% ownership in Kykuit at
December 31, 2008.  Some of the Kykuit partners opted out of further
cash investments during 2009, increasing the Company’s ownership percentage at
December 31, 2009 to 20.83%.





The
investment by the Company in this venture was $989,258 which included an account
payable of $158,225 and a cumulative net book loss of $57,444 at December 31,
2008.  The investment by the Company in this venture was $705,965
which included an investment loss of $588,309, an account payable of $10,490 and
a cumulative net book loss of $119,556 at December 31,
2009.  Additional information is disclosed in Note 4 to these
financial statements.





Richard
M. Osborne, the Company’s Chairman and Chief Executive Officer,
and  Energy Inc., a publicly-held public utility company of which
Richard Osborne is the chairman, chief executive officer and a significant
stockholder, own interests in Kykuit.





Marc C.
Krantz, a director and secretary of the Company until August 26, 2009, is the
managing partner of the law firm of Kohrman Jackson & Krantz PLL, which
provides legal services to the Company.





12.
Financial Information Relating to Industry Segments





The
Company reports operating segments and reportable segments by business activity
according to GAAP, “Disclosure about Segments of an Enterprise and Related
Information.”  The Company includes revenues from external customers,
interest revenue and expense, depreciation, depletion and amortization and other
operating expenses in its measure of segment profit or loss.


51




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




The
Company’s operations are classified into two principal industry
segments.  The following table presents the twelve months ended
December 31, 2009 and 2008.





Twelve Months ended December 31, 2009
                  
                  Oil and Gas
                    Production
                  
                  
                  Self-Storage
                    Facilities
                  
                  
                  TotalRevenues
      from external customers
                  
                  $
                  3,711,668
                  
                  
                  $
                  333,569
                  
                  
                  $
                  4,045,237Interest
      revenue
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  8Total
      Revenue
                  
                  
                  3,711,676
                  
                  
                  
                  333,569
                  
                  
                  
                  4,045,245Interest
      Expense
                  
                  
                  412,637
                  
                  
                  
                  35,921
                  
                  
                  
                  448,558Accretion
      Expense
                  
                  
                  45,905
                  
                  
                  
                  -
                  
                  
                  
                  45,905Property
      Operating Costs
                  
                  
                  687,182
                  
                  
                  
                  112,382
                  
                  
                  
                  799,564Other
      Operating expenses
                  
                  
                  1,089,434
                  
                  
                  
                  178,894
                  
                  
                  
                  1,268,328Loss
      from Unconsolidated Affiliate
                  
                  
                  650,420
                  
                  
                  
                  -
                  
                  
                  
                  650,420Bad
      Debt
                  
                  
                  -
                  
                  
                  
                  2,157
                  
                  
                  
                  2,157Impairments
                  
                  
                  145,444
                  
                  
                  
                  -
                  
                  
                  
                  145,444Depreciation,
      depletion and amortization
                  
                  
                  3,260,576
                  
                  
                  
                  120,538
                  
                  
                  
                  3,381,114Total
      Operating Expenses
                  
                  
                  6,291,598
                  
                  
                  
                  449,892
                  
                  
                  
                  6,741,490Net
      Loss
                  
                  $
                  (2,579,922
                  )
                  
                  $
                  (116,323
                  )
                  
                  $
                  (2,696,245
                  )Property
      and Equipment additions
                  
                  $
                  329,125
                  
                  
                  $
                  -
                  
                  
                  $
                  329,125Total
      Assets
                  
                  $
                  8,790,619
                  
                  
                  $
                  1,468,905
                  
                  
                  $
                  10,259,524





Twelve Months ended December 31, 2008
                    
                    Oil and Gas
                      Production
                    
                    
                    Self-Storage
                      Facilities
                    
                    
                    TotalRevenues
      from external customers
                    
                    $
                    4,568,087
                    
                    
                    $
                    312,108
                    
                    
                    $
                    4,880,195Interest
      revenue
                    
                    
                    3,318
                    
                    
                    
                    -
                    
                    
                    
                    3,318Total
      Revenue
                    
                    
                    4,571,405
                    
                    
                    
                    312,108
                    
                    
                    
                    4,883,513Interest
      Expense
                    
                    
                    507,754
                    
                    
                    
                    74,200
                    
                    
                    
                    581,954Accretion
      Expense
                    
                    
                    44,742
                    
                    
                    
                    -
                    
                    
                    
                    44,742Property
      Operating Costs
                    
                    
                    575,675
                    
                    
                    
                    115,671
                    
                    
                    
                    691,346Other
      Operating expenses
                    
                    
                    1,117,795
                    
                    
                    
                    220,057
                    
                    
                    
                    1,337,852Loss
      from Unconsolidated Affiliate
                    
                    
                    28,627
                    
                    
                    
                    -
                    
                    
                    
                    28,627Bad
      Debt
                    
                    
                    -
                    
                    
                    
                    43,517
                    
                    
                    
                    43,517Impairments
                    
                    
                    491,224
                    
                    
                    
                    -
                    
                    
                    
                    491,224Depreciation,
      depletion and amortization
                    
                    
                    3,753,926
                    
                    
                    
                    120,932
                    
                    
                    
                    3,874,858Total
      Operating Expenses
                    
                    
                    6,519,743
                    
                    
                    
                    574,377
                    
                    
                    
                    7,094,120Net
      Loss
                    
                    $
                    (1,948,338
                    )
                    
                    $
                    (262,269
                    )
                    
                    $
                    (2,210,607
                    )Property
      and Equipment additions
                    
                    $
                    3,244,934
                    
                    
                    $
                    1,437
                    
                    
                    $
                    3,246,371Total
      Assets
                    
                    $
                    13,246,219
                    
                    
                    $
                    1,570,397
                    
                    
                    $
                    14,816,616


52




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




13.  Commitments
and Contingencies





Environmental
Matters





The oil
and gas industry is subject, by its nature, to environmental hazards and
clean-up costs.  At this time, management knows of no substantial
costs from environmental accidents or events for which it may be currently
liable.





Oil and Gas
Contracts





Effective
January 1, 2006, the Company entered into a contract with Great Plains
Exploration, LLC for well operations and sale of natural gas and oil production
to third parties.  The term of the agreement was one year from the
effective date.  It was extended as of January 1, 2007 and shall be
extended for consecutive one year periods unless terminated
earlier.  The original contract was amended November 14, 2006 and
filed as exhibit 10.4 to our Form 10-QSB for the quarter ended September 30,
2006.  The Amendment No. 1 to the Oil and Gas Operations and Sale
Agreement modified the original terms to create less cumbersome paperwork in
tracking cost sharing between the companies.





14.
Subsequent Events





As
previously disclosed, on August 20, 2009, RBS Citizens, N.A., d/b/a Charter One
(“Charter One”), the holder of the Company’s $9.5 million line of credit,
received a judgment in its favor against the Company, Mr. Osborne and the
Richard M. Osborne Trust, jointly and severally, for the amount of $9.5 million
plus interest and late charges as well as attorneys’ fees, costs and other
amounts payable under the line of credit.  Charter One has requested
that the court appoint a receiver for the Company.  A hearing on the
appointment of a receiver for the Company is currently scheduled for April 16,
2010.





During
the month of February 2010, LSS I received a letter from the Lake County Board
of Revision and Lake County Auditor reducing the taxable values on two parcels
at the Painesville facility from 2006 through 2009.  The Company will
record approximately $157,000 of other income in 2010 from the receipt of a cash
refund and reduction in accrued real estate taxes.





15.  Supplemental
Disclosures About Oil and Natural Gas Producing Activities -
Unaudited





Estimated
Proved Reserves





Users of
this information should be aware that the process of estimating quantities of
“proved” crude oil and natural gas reserves is very complex.  There
are numerous uncertainties inherent in estimating quantities of proved reserves,
including many factors beyond the control of the Company, such as additional
development activity, evolving production history and reassessment of the
viability of production under varying prices and other economic
conditions.  As a result, revision to existing estimates may
occur.





There are numerous
uncertainties inherent in estimating quantities of proved reserves and in
projecting future rates of production and timing of development expenditures
including many factors beyond the control of the Company.In
December 2008, the SEC announced that it had approved revisions designed to
modernize the oil and gas company reserves reporting requirements. In addition,
in January 2010 the FASB issued an accounting standard update to provide
consistency with the SEC rules.  See Note 1. Summary of Significant
Accounting Policies – Recently issued Accounting Pronouncements. We adopted the
rules effective December 31, 2009 and the rule changes, including those
related to pricing and technology, which are included in our reserves
estimates.  Because the Company uses year-end reserves and add back
current quarter production to calculate fourth quarter depletion expense,
adoption of these new standards had an impact on fourth quarter 2009 DD&A
expense.


53




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




Application of the new
rules resulted in the use of lower prices at December 31, 2009 for both oil
and gas than would have resulted under the previous rules, which required use of
year-end oil and gas prices.Because of the changes in
assumptions, the 2009 reserve valuations below may not be comparable to those of
prior years.The estimated future cash flows are determined
based on the prior 12 month average prices for crude oil, current allowable
prices (adjusted for periods beyond the contract period to prior 12 month
average prices) applicable to expected natural gas production, estimated
production of proved crude oil and natural gas reserves, estimated future
production and development costs of reserves and future retirement obligations
(net of salvage), based on current economic conditions, and the estimated future
income tax expense, based on year-end statutory tax rates (with consideration of
future tax rates already legislated) to be incurred on pretax net cash flows
less the tax basis of the properties involved. Such cash flows are then
discounted using a 10% rate.





The
following table presents the Company’s estimated gross proved oil and natural
gas reserves, which are all located in the continental United States and all are
based on reserve reports prepared by Schlumberger Data and Consulting Services
for 2009 and Wright & Company, Inc. for 2008:





2009
                  
                  
                  2008Natural Gas
                  
                  
                  Oil
                  
                  
                  Natural Gas
                  
                  
                  Oil(MCF)
                  
                  
                  (BBLs)
                  
                  
                  (MCF)
                  
                  
                  (BBLs)Proved
      developed and undeveloped reserves:Beginning
      of year
                  
                  
                  2,146,600
                  
                  
                  
                  17,500
                  
                  
                  
                  2,646,000
                  
                  
                  
                  37,300Revision
      of previous estimates, extensions and other additions
                  
                  
                  792,000
                  
                  
                  
                  17,600
                  
                  
                  
                  (699,900
                  )
                  
                  
                  (13,900
                  )Net
      reserve additions
                  
                  
                  272,900
                  
                  
                  
                  2,900
                  
                  
                  
                  715,600
                  
                  
                  
                  3,800Production
                  
                  
                  (698,700
                  )
                  
                  
                  (9,200
                  )
                  
                  
                  (515,100
                  )
                  
                  
                  (9,700
                  )End
      of year
                  
                  
                  2,512,800
                  
                  
                  
                  28,800
                  
                  
                  
                  2,146,600
                  
                  
                  
                  17,500Proved
      developed reserves:Beginning
      of year
                  
                  
                  2,146,600
                  
                  
                  
                  17,500
                  
                  
                  
                  2,646,000
                  
                  
                  
                  37,300End
      of year
                  
                  
                  2,512,800
                  
                  
                  
                  28,800
                  
                  
                  
                  2,146,600
                  
                  
                  
                  17,500





Capitalized
Costs Relating to Oil and Natural Gas Producing Activities





December 31,2009
                  
                  
                  2008Proved
      oil and natural gas properties
                  
                  $
                  15,667,171
                  
                  
                  $
                  13,859,634Unproved
      oil and natural gas properties
                  
                  
                  2,260,896
                  
                  
                  
                  3,652,790Well
      Material inventory
                  
                  
                  50,349
                  
                  
                  
                  122,502Total
                  
                  
                  17,978,416
                  
                  
                  
                  17,634,926Accumulated
      depreciation, depletion and amortization
                  
                  
                  (10,492,751
                  )
                  
                  
                  (7,103,584
                  )Net
      capitalized costs
                  
                  $
                  7,485,665
                  
                  
                  $
                  10,531,342





Costs
Incurred in Oil and Natural Gas Producing Activities





December 31,2009
                  
                  
                  2008Property
      acquisition costs
                  
                  $
                  3,047
                  
                  
                  $
                  2,337Development
      costs
                  
                  $
                  340,443
                  
                  
                  $
                  3,242,597


54




John D.
Oil and Gas Company and Subsidiary


Notes to
Consolidated Financial Statements


For The
Years Ended December 31, 2009 and 2008




Standardized
Measure of Discounted Future Net Cash Flows at December 31, 2009 and 2008(in
thousands of dollars)





2009
                  
                  
                  2008Future
      cash inflows from sales of oil and gas
                  
                  $
                  13,794
                  
                  
                  $
                  16,008Future
      production and development costs
                  
                  
                  (8,207
                  )
                  
                  
                  (7,531
                  )Future
      asset retirement obligations
                  
                  
                  (1,449
                  )
                  
                  
                  (1,385
                  )Future
      income tax expense
                  
                  
                  (1,407
                  )
                  
                  
                  (2,411
                  )Future
      net cash flows
                  
                  
                  2,731
                  
                  
                  
                  4,681Future
      net cash flows 10% annual discount for estimated timing of cash
      flows
                  
                  
                  (1,186
                  )
                  
                  
                  (1,159
                  )Standardized
      measure of discounted future net cash flows
                  
                  $
                  1,545
                  
                  
                  $
                  3,522





Effective
for the year end 2009, SEC reporting rules require that year-end reserve
calculations and future cash inflows be based on the simple average of the first
day of the month price for the previous twelve month period.  The
prices for 2009 used in the above table were $3.867 per MMBTU and $61.18 per
BBL.





The
prices used for 2008 were based on the spot price at December 31, 2008 of $5.710
per MMBTU and $44.60 per BBL.





Future
operating expenses are based on year end costs and assume continuation of
existing economic conditions.





Changes
in the Standardized Measure of Discounted Future Net Cash Flow (in thousands of
dollars).





2009
                  
                  
                  2008Balance,
      beginning of year
                  
                  $
                  3,522
                  
                  
                  $
                  5,891Extensions,
      discoveries and other additions
                  
                  
                  412
                  
                  
                  
                  2,164Revision
      of quantity estimates
                  
                  
                  985
                  
                  
                  
                  (4,177
                  )Sales
      of oil and gas, net of production costs
                  
                  
                  (1,936
                  )
                  
                  
                  (2,855
                  )Net
      change in prices and production costs
                  
                  
                  (1,668
                  )
                  
                  
                  (1,236
                  )Net
      change in income taxes
                  
                  
                  1,004
                  
                  
                  
                  2,367Accretion
      of discount
                  
                  
                  352
                  
                  
                  
                  589Other
                  
                  
                  (1,126
                  )
                  
                  
                  779Balance,
      end of year
                  
                  $
                  1,545
                  
                  
                  $
                  3,522





The
methodology and assumptions used in calculating the standardized measure are
those required by GAAP. It is not intended to be representative of the fair
market value of the Company’s proved reserves. The valuation of revenues and
costs does not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas
reserves.


55