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, 2008


o Transition Report
Pursuant to Section 13or 15(d) of The Securities Exchange Act of
1934





Commission
File Number: 0-52718




OSAGE EXPLORATION &
DEVELOPMENT, INC.


(Exact
name of registrant as specified in its charter)




Delaware
            26-0421736(State
      of other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





2445 Fifth Avenue, Suite
310,San
Diego,California92101


(Address
of principal executive offices) (Zip Code)





Registrant’s
telephone no.:  (619)
677-3956





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





Securities
registered pursuant to Section 12(g) of the Exchange Act:   Common
Stock, par value $0.0001





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





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o 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 Security Exchange Act of 1934during 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 o





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 of any amendment to this
Form 10-K.  x





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





Large
Accelerated Filer oAccelerated filer oNon-accelerated filer oSmaller reporting
company x





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





The
aggregate market value of the issuer’s Common Stock held by non-affiliates of
the registrant on March 20, 2009 was approximately $1,253,387 based on the
closing price as reported on the NASD’s OTC Electronic Bulletin Board
system.





As of
March 23, 2009, there were 46,359,775 shares of Osage Exploration and
Development, Inc., Common Stock, par value $.0001, outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE




A
description of "Documents Incorporated by Reference" is contained in Part III,
Item 13.




Transitional
Small Business Disclosure Format.    Yes o   No
x









TABLE
OF CONTENTS




PART
I


Page




Item 1.
              Business
              1Item 1A.
              Risk
      Factors
              5Item 1B.
              Unresolved
      Staff Comments
              8Item 2.
              Properties
              8Item 3.
              Legal
      Proceedings
              10Item 4.
              Submission
      of Matters to a Vote of Security Holders
              10PART
      IIItem 5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              10Item 6.
              Selected
      Financial Data
              11Item 7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              11Item 7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              16Item 8.
              Financial
      Statements and Supplementary Data
              18Item 9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              18Item 9A.
              Controls
      and Procedures
              18Item 9A(T).
              Controls
      and Procedures
              18Item 9B.
              Other
      Information
              19PART
      IIIItem 10.
              Directors,
      Executive Officers and Corporate Governance
              20Item 11.
              Executive
      Compensation
              22Item 12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              23Item 13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              24Item 14.
              Principal
      Accounting Fees and Services
              25PART
      IVItem 15.
              Exhibits,
      Financial Statement Schedules
              26Signatures.
              27Financial
      Statements and Financial Statement Schedules
              F-1










Cautionary
Statement




IN
ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE “SAFE HARBOR” PROVISIONS
THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS
PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR WITH RESPECT
TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN
THIS REPORT REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS
AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED HEREIN, THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
ANTICIPATED. IN THIS REPORT, THE WORDS “ANTICIPATES,” “BELIEVES,” “EXPECTS,”
“INTENDS,” “FUTURE” AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS.
READERS ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND
NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN,
WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF.




Item 1.Business




Overview





Osage
Exploration and Development, Inc., (“Osage” or the “Company”) is an oil and
natural gas exploration and production company with proved reserves and existing
production in the country of Colombia and the state of
Oklahoma.   We are headquartered in San Diego, California with a
field office in Oklahoma City, Oklahoma and Bogota, Colombia.





Beginning
in 2007, our focus has been the country of Colombia and we anticipate most of
our future growth and investments will be in Colombia.  Colombia
accounted for approximately 92% and 0% of our total revenues for 2008 and 2007,
respectively.





Rosablanca




In June
2007, we entered into an agreement (the “Agreement”) with Gold Oil, Plc (“Gold”)
and Empesa Petrolera de Servicios y Asesorias, S.A. (“Empesa), whereby we
farmed-in to the approximately 165 square mile Rosablanca concession in Colombia
awarded by the Agencia Nacional de Hidrocarburos (“ANH”) to Gold in June,
2007.  Our decision to pursue the Rosablanca project was based on the
seismic data generated by the ANH that revealed multiple target
opportunities.  Under the Agreement, we are considered the operator of
the concession and are obligated to pay all costs associated with drilling and
testing of the first well on the Rosablanca project.  Revenues
generated from the first well were to be allocated 50% to us, 40% to Gold and
10% to Empesa.  In March 2009, we entered into an agreement (the “LEC
Agreement”) with Lewis Energy (“LEC”) whereby LEC has agreed to provide all of
the capital required to drill the first well, up to a maximum of
$3,500,000.  As part of the $3,500,000 maximum investment amount by
LEC, LEC has also agreed to reimburse us for certain amounts we have already
spent on the first well.  Under the LEC Agreement, we assigned Lewis
one-half of our 50% interest in the Rosablanca concession and have made LEC the
operator.  Under the LEC Agreement, LEC shall recoup two times its
investment in the first well (which shall not exceed $7,000,000) before we
receive any cash flow derived from the first well.  Furthermore, as
part of the LEC Agreement, we issued 5,250,000 shares of our common stock to an
affiliate of LEC.  As a result of the LEC transaction, revenues and
investments on all future wells in Rosablanca will be allocated 40% to Gold, 25%
to LEC, 25% to us and 10% to Empesa.    If any party does
not contribute its share of the costs, its revenue interest will automatically
be transferred to the party that provides the capital.




1




In August
2007, we (i) paid $1,200,000 to Gold representing the funds that Gold had
previously issued to a trust account established by the ANH to use for drilling
the first well for the Rosablanaca concession and (ii) issued a letter of credit
in the amount of $144,000 for the benefit of Gold’s bank in Colombia
representing the guarantee required by the ANH.  We were obligated to
commence drilling on the first well by December 26, 2008, which we have
done.  As of December 31, 2008, we had a balance of $537,665 in the
trust account.  Under the terms of the concession agreement with the
ANH, we have the right to explore for up to six phases, with each phase lasting
12 months.  We already performed the first phase which was to drill
the first well.  Each phase will require us to fund a new trust
account and issue a letter of credit as well as perform certain
tasks.  Phase 2 requires an establishment of a trust account for
$790,000, of which our share is $197,500, an issuance of a letter of credit in
the amount of $110,000, of which our share is $27,500 and obligated us to
perform certain seismic work.  Assuming we are still in an exploration
stage, Phases 3,4,5 and 6 each require the funding of a trust account in the
amount of $1,200,000, of which our share will be $300,000, an issuance of a
letter of credit in the amount of $144,0000, of which our share will be $36,000
and the drilling of an additional well in each phase.  The
exploitation phase of the ANH concession shall remain in effect for up to 24
years, as long as we meet our timely obligations to drill each well that we
present to the ANH. The royalty rate under this ANH contract is 8% for up to
5,000 barrels per day, increasing on a sliding scale to 25% if production
exceeds 600,000 barrels per day.  On March 23, 2009, we announced that
we have completed testing on the first well without finding producible
hydrocarbons in any of the zones evaluated.




Cimarrona





In
February 2008, we entered into a letter of intent and issued a $100,000 deposit
to acquire a minority position in certain producing oil and gas assets in
Colombia.  On April 8, 2008, we entered into a membership
interest purchase agreement (the “Purchase Agreement”) with Sunstone Corporation
(“Sunstone”) pursuant to which we acquired from Sunstone 100% of the membership
interests in Cimarrona Limited Liability company, an Oklahoma limited liability
company (“Cimarrona LLC”).  Cimarrona LLC is the owner of a 9.4%
interest in certain oil and gas assets in the Guaduas field, located in the
Dindal and Rio Seco Blocks that consist of twenty-one wells, of which seven are
currently producing, that covers 30,665 acres in the Middle Magdalena Valley in
Colombia as well as a blending facility and a pipeline with a current capacity
of approximately 30,000 barrels of oil per day.  The Purchase
Agreement was effective as of April 1, 2008.





The
purchase price consisted of 2,750,000 shares of the Company’s common stock and a
warrant to purchase 1,125,000 shares of the Company’s common stock exercisable
at $1.25 per share and expiring April 8, 2013.  The $100,000 deposit
was returned to the Company in conjunction with closing of the
transaction.  In addition, we issued 50,000 shares of common stock to
Energy Capital Solutions, LP for their role as financial advisor and $22,500 to
an individual, as a finder’s fee.   The total purchase price
attributable to the Cimarrona acquisition was $2,090,345.





The
Cimarrona property, but not the pipeline, is subject to an Ecopetrol Association
Contract (the “Association Contract”) whereby we pay Ecopetrol S.A.
(“Ecopetrol”) royalties of 20% of the oil produced.  The royalty
amount is paid in oil.  In addition to the royalty, according to the
Association Contract, Ecopetrol may, for no consideration, become a 50% partner,
once an audit of revenues and expenses indicate that the partners in the
Association Contract have a received a 200% reimbursement of all historical
costs to develop and operate the Guaduas field.  We believe that
Ecopetrol could become a 50% partner in 2009 which would effectively reduce the
cash flows generated by the property by 50%.  In addition, in 2022,
the Association Contract with Ecopetrol terminates, at which time we will have
no economic interest remaining in this property.  The property and the
pipeline are both operated by Pacific Rubiales Energy Corp. (“Pacific
Rubiales”), which owns 90.6% of the Guaduas field.  Pipeline revenues
generated from Cimarrona primarily relate to transportation costs charged to
third party oil producers, including Pacific Rubiales.





Osage,
Oklahoma





In
2005 we purchased 100 percent of the working interest and became the operator in
certain producing oil and natural gas leases located in Osage County, Oklahoma,
referred to herein as the Osage Property, which property consists of twenty
three wells, ten of which are producing wells, on 480 acres from Conquest
Exploration Company, LLC and Esso Oil Company of Oklahoma (“Esso”) for a total
consideration of $103,177.  Our agreement with Esso, which owned 6.25%
of Osage, prior to our purchase, was an oral agreement that was not reduced to
writing.  As such, Esso could dispute the sale term and third parties
may challenge our ownership which would challenge our ability to enforce our
rights to the portion purchased from Esso.  If Esso challenges the
sale, we may be required to retroactively provide Esso with 6.25% of our
proceeds received from the sale of oil since 2005 (approximately $45,671 through
December 31, 2008) and we may be required to provide Esso with 6.25% of any
future proceeds received from sale of oil in this property.  In
addition, third parties, including regulatory or governmental bodies may
challenge our ownership and/or rights in the Osage
Property.  Management does not believe that there is a material risk
that Esso would dispute the sale term.  The interest in the Osage
Property is held by Osage Energy Company, LLC, our wholly owned
subsidiary.




2





Hansford,
Texas





In
January 2007, we placed a deposit totaling $82,000 on approximately 85% of the
working interest of a natural gas property consisting of 640 acres with proved
undeveloped reserves located in Hansford County, Texas, owned by Pearl Resources
Corp.  The agreement was amended in March 2007 stipulating that unless
the Company acquires a contiguous lease by June 1, 2007 for $48,000, a second
contiguous lease by August 1, 2007 for $80,000 and place $445,180 in escrow for
drilling and completing the first well with actual commencement of drilling
prior to September 15, 2007, the seller had the right to refund 90% of all
payments received and void the agreement.  In September 2007, the
seller provided us with an extension until June 30, 2008 to fulfill all of our
obligations under the agreement.  We have not received an extension
from the seller and believe the seller will void the agreement.  We do
not believe we will receive any of the $82,000 we have invested and accordingly,
as of December 31, 2008, we have written down the value of the deposit to
zero.





Other





In
November 2007, we entered into an agreement to purchase out of bankruptcy a
working interest in an oil and gas leasehold and producing wellbore in Louisiana
for a purchase price of $1,400,000.  Upon the signing of the
agreement, we placed a deposit totaling 10% of the total purchase price, or
$140,000.  The bankruptcy court has decided it is not pursuing the
sale and we received our entire $140,000 deposit back in March
2008.  We have no further obligations for this property.





We
anticipate that will need to raise a minimum of $1,000,000 to provide for our
cash requirements for the next twelve months including costs to complete phase 2
and fund the trust account and letter of credit for phase 3 of
Rosablanca.  If we are unable to raise the entire sum and cannot
fulfill our obligations under the Rosablanca concession, we may lose the
concession and our ability to participate in other Colombian
projects.  At present, the revenues generated from Cimarrona and
Oklahoma properties are only sufficient to cover field operating expenses and a
small portion of our overhead.





Background





We were
organized September 9, 2004 as Osage Energy Company, LLC, an Oklahoma limited
liability company.  On April 24, 2006 we merged with a non-reporting
Nevada corporation trading on the Pink Sheets, Kachina Gold Corporation, which
was the entity that survived the merger.  The merger was consummated
through the issuance of 10,000,000 shares of our Common Stock.  The
financial records of the company prior to the merger are those of Osage Energy
Company, LLC.





The
Nevada corporation was incorporated under the laws of Canada on February 24,
2003 as First Mediterranean Gold Resources, Inc.  The domicile of the
company was changed to the State of Nevada on May 11, 2004.  On May
24, 2004, the name of the company was changed to Advantage Opportunity
Corp.





On March
4, 2005, the Company changed its name to Kachina Gold Corporation.  On
April 24, 2006 Kachina Gold Corporation merged with Osage Energy Company, LLC,
and on May 15, 2006 changed its name to Osage Energy Corporation.  On
July 2, 2007, the domicile of the Company was changed to the State of Delaware
and in connection therewith the name of the Company was changed to Osage
Exploration and Development, Inc.  On February 27, 2008, our stock
began trading on the NASDAQ OTC Bulletin Board market under the ticker
“OEDV.OB”





Our
principal office is located at 2445 Fifth Avenue, Suite 310 San Diego,
California  92101.  Our phone number is (619)
677-3956.




3





Distribution
Methods





We
currently generate oil sales from our production operations in Colombia and in
the state of Oklahoma.  In addition, we generate pipeline revenues
from our Cimarrona property in Colombia.  All of the oil that we
produce in Oklahoma is sold to one customer, Sunoco, Inc.  We do not
have a written agreement with Sunoco.  Sunoco picks up oil from our
tanks and pays us according to market prices at the time of pick
up.  There is significant demand for oil and there are several
companies in our area that purchase oil from small oil producers.





Currently,
we only sell oil in Colombia from the Guaduas field, where we sell all of our
oil production to Hocol, S.A. (“Hocol”).  We believe that, in the
event Hocol discontinued oil purchases, we will be able to replace this customer
with other customers who would purchase the oil at terms standard in the
industry.  All of our pipeline revenues are generated from sales
volumes attributable to Pacific Rubiales, the operator of the Cimarrona
property.  For 2008, Hocol, Pacific and Sunoco accounted for
approximately 57%, 35% and 8%, respectively, of total revenues.  For
2007, Sunoco accounted for 100% of our total revenues.





We
presently have no sales of natural gas.  Should we decide to sell our
production of natural gas, we will seek to enter into distribution agreements
that would provide for us to tap into the distribution line of a gas
distribution company, and we would be paid for our gas at the market price at
the time of delivery less any transportation charge from the gas transmission
company.  These charges can range widely from 5 percent to 30 percent
or more of the market value of the gas depending on the availability of
competition and other factors.





Research
and Development





We have
not allocated funds to conducting research and development activities, nor do we
anticipate allocating funds to research and development in the
future.





Patents,
Trademarks, Royalties, Etc.





We have
no patents, trademarks, licenses, concessions, or labor
contracts.  Currently, we only pay royalties on the Osage
Property.  In Oklahoma, we pay royalties of 18.75% of oil and gas
sales, net of taxes, to the Osage Nation.  If our production increases
to more than 100 barrels of oil per producing well per day, the royalty will
increase to 20.0%.  The leases do not expire, and royalties are owed
as long as there is production on the property.





In
Cimarrona, pursuant to an Association Contract with Ecopetrol, we pay royalties
of 20.0% of oil produced to Ecopetrol.  In the Rosablanca, under the
ANH contract, the royalty rate is 8.0% for up to 5,000 barrels per day,
increasing to 25.0% once production exceeds 600,000 barrels per
day.





Government
Approvals





We are
required to get approval from the Oklahoma Corporation Commission and the
Colombian governmental agencies before any work can begin on any well in
Oklahoma and Colombia, respectively, and before production can be
sold.  We have all of the required permits on the properties currently
in operation.





Existing
or Probable Governmental Regulations





We
currently are active in the country of Colombia and the state of
Oklahoma.  The development and operation of oil and gas properties is
highly regulated by states and/or foreign governments.  In some areas
of exploration and production, the United States government or a foreign
governmental agency regulates the industry.





Regulations,
whether state or federal or international, control numerous aspects of drilling
and operating oil and gas wells, including the care of the environment, the
safety of the workers and the public, and the relations with the owners and
occupiers of the surface lands within or near the leasehold
acreage.  The effect of these regulations, whether state or federal or
international, is invariably to increase the cost of operations.




4





The costs
of complying with state regulations include a permit for drilling a well before
beginning a project.  Other compliance matters have to do with keeping
the property free of oil spills and the plugging of wells when they no longer
produce.  If oil spills are not cleaned up on a timely basis fines can
range from a few dollars to as high as several thousand dollars.  We
utilize consultants and independent contractors to visit and monitor our
properties in Oklahoma on a regular basis to prevent mishaps and ensure prompt
attention and, if necessary, appropriate correction and remedial
activity.  The other significant cost of compliance with state
regulations is the plugging of wells after their useful life.  In most
instances, there is pumping equipment and pipe which can be salvaged to offset
some if not all of that cost.  Plugging a well consists of pumping
cement into the well bore sufficient to prevent any oil and gas zone from ever
leaking and contaminating the fresh water supply.





Costs
and Effects of Compliance with Environmental Laws





There is
a cost in complying with environmental laws that is associated with each well
that is drilled or operated, which cost is added to the cost of the
operation.  Each well will have an additional cost associated with
plugging and abandoning the well when it is no longer commercially
viable.  The estimated costs of dismantlement and abandonment of
depleted wells on our Oklahoma property are estimated to be approximately
$92,000.  As of December 31, 2008, we have not incurred any
dismantlement and abandonment costs.  However, we believe that the
salvage value of the equipment on the wells will be sufficient in amount to
offset some of such costs.





Employees





We
currently have three full-time employees, including two executives: Kim
Bradford, our President, Chief Executive Officer and Chief Financial Officer and
Greg Franklin, our Chief Geologist.  Laura Bradford, the daughter of
our President, Chief Executive Officer and Chief Financial Officer serves as our
office manager.   We also utilize third parties to provide
certain operational, technical, accounting, finance and administrative
services.  As production levels increase, we may need to hire
additional personnel or expand the use of third parties.





Facilities





We lease
approximately 1,386 square feet of modern office space in San Diego, CA as
corporate headquarters pursuant to a 36 month lease from February
2008.  We paid $3,682 per month for the first 12 months, increasing
3.5% in years 2 and 3.  In addition, we are responsible for any
increases in building operating expenses beyond 2008 base year operating
expenses.





We lease
approximately 1,000 square feet of modern office space in Oklahoma City, OK
consisting of a large conference room, three offices, a drafting room and a
storage room.  The lease is based on a verbal agreement with a third
party on a month-to-month basis for $550.





Available
Information





Our Internet website address iswww.osageexploration.com.  Our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”)
are available free of charge through our Company’s website as soon as reasonably
practical after those reports are electronically filed with, or furnished to,
the Securities and Exchange Commission.




Item
1A. Risk
Factors





Cautionary
Note on Forward Looking Statements





In
addition to the other information in this annual report the factors listed below
should be considered in evaluating our business and prospects. This annual
report contains a number of forward-looking statements that reflect our current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed below and elsewhere herein, that could cause actual
results to differ materially from historical results or those anticipated. In
this report, the words “anticipates,” “believes,” “expects,” “intends,” “future”
and similar expressions identify forward-looking statements. Readers are
cautioned to consider the specific factors described below and not to place
undue reliance on the forward-looking statements contained herein, which speak
only as of the date hereof. We undertake no obligation to publicly revise these
forward-looking statements, to reflect events or circumstances that may arise
after the date hereof.




5





Risks
Relating to Our Business





We have a history
of losses and may incur future losses





We have
incurred significant operating losses in prior years and at December 31,
2008 we had an accumulated deficit of approximately $6.16 million. We had
comprehensive losses of approximately $4.25 million and $1.79 million in 2008
and 2007, respectively. To date, we have not achieved profitability and given
the level of operating expenditures and the uncertainty of revenues and margins,
we may continue to incur losses and negative cash flows in future periods. The
failure to obtain sufficient revenues and margins to support operating expenses
could harm our business.





We
have limited operating capital





In order
to continue growth and to fund our expansion plans we will require additional
financing. The amount of capital available to us is limited, and may not be
sufficient to enable us to fully execute our growth plans without additional
fund raising. Additional financing may be required to meet our objectives and
provide more working capital for expanding our development and marketing
capabilities and to achieve our ultimate plan of expansion and full scale of
operations.  There can be no assurance that we will be able to obtain such
financing on attractive terms, if at all.





We
do not intend to pay dividends to our stockholders





We do not
currently intend to pay cash dividends on our common stock and do not anticipate
paying any dividends at any time in the foreseeable future. At present, we will
follow a policy of retaining all of our earnings, if any, to finance development
and expansion of our business.




Our
officers and directors have limited liability, and we are required in certain
instances to indemnify our officers and directors for breaches of their
fiduciary duties.





We have
adopted provisions in our Certificate of Incorporation and Bylaws which limit
the liability of our officers and directors and provide for indemnification by
us of our officers and directors to the full extent permitted by Delaware
corporate law. Our Certificate of Incorporation generally provide that our
officers and directors shall have no personal liability to us or our
stockholders for monetary damages for breaches of their fiduciary duties as
directors, except for breaches of their duties of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law, acts involving unlawful payment of dividends or unlawful stock purchases or
redemptions, or any transaction from which a director derives an improper
personal benefit. Such provisions substantially limit our stockholders’ ability
to hold officers and directors liable for breaches of fiduciary duty, and may
require us to indemnify our officers and directors.





We
face great competition.





We
compete against many other energy companies, some of which have considerably
greater resources and abilities. These competitors may have greater marketing
and sales capacity, established distribution networks, significant goodwill and
global name recognition.





Our
success depends to a significant degree upon the involvement of our management,
who are in charge of our strategic planning and operations. We may need to
attract and retain additional talented individuals in order to carry out our
business objectives.  The competition for such persons could be intense and
there are no assurances that these individuals will be available to
us.




6





Our
business is subject to extensive regulation.





Many of
our activities are subject to Colombian, federal, state and/or local regulation,
and as these rules are subject to constant change or amendment, there can be no
assurance that our operations will not be adversely affected by new or different
government regulations, laws or court decisions applicable to our
operations.





Government
regulation and liability for environmental matters may adversely affect our
business and results of operations.





Crude oil
and natural gas operations are subject to extensive international, federal,
state and local government regulations, which may be changed from time to time.
Matters subject to regulation include discharge permits for drilling operations,
drilling bonds, reports concerning operations, the spacing of wells, unitization
and pooling of properties and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of crude oil and natural gas wells below actual production capacity
in order to conserve supplies of crude oil and natural gas. There are
international, federal, state and local laws and regulations primarily relating
to protection of human health and the environment applicable to the development,
production, handling, storage, transportation and disposal of crude oil and
natural gas, byproducts thereof and other substances and materials produced or
used in connection with crude oil and natural gas operations. In addition, we
may inherit liability for environmental damages caused by previous owners of
property we purchase or lease. As a result, we may incur substantial liabilities
to third parties or governmental entities. We are also subject to changing and
extensive tax laws, the effects of which cannot be predicted. The implementation
of new, or the modification of existing, laws or regulations could have a
material adverse effect on us.





The
reserves we report in our SEC filings are estimates and my prove to be
inaccurate





There are
numerous uncertainties inherent in estimating crude oil and natural gas reserves
and their estimated values. The reserves we report in our filings with the SEC
are only estimates and such estimates may prove to be inaccurate because of
these uncertainties. Reservoir engineering is a subjective and inexact process
of estimating underground accumulations of crude oil and natural gas that cannot
be measured in an exact manner. Estimates of economically recoverable crude oil
and natural gas reserves depend upon a number of variable factors, such as
historical production from the area compared with production from other
producing areas and assumptions concerning effects of regulations by
governmental agencies, future crude oil and natural gas prices, future operating
costs, severance and excise taxes, development costs and work-over and remedial
costs. Some or all of these assumptions may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of crude oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected there from prepared by different
engineers or by the same engineers but at different times may vary
substantially. Accordingly, reserve estimates may be subject to downward or
upward adjustment. Actual production, revenue and expenditures with respect to
our reserves will likely vary from estimates, and such variances may be
material.





Crude
oil prices are highly volatile in general and low prices will negatively affect
our financial results





Our
revenues, operating results, profitability, cash flow, future rate of growth and
ability to borrow funds or obtain additional capital are substantially dependent
upon prevailing prices of crude oil. Lower crude oil and natural gas prices also
may reduce the amount of crude oil and natural gas that we can produce
economically. Historically, the markets for crude oil and natural gas have been
very volatile, and such markets are likely to continue to be volatile in the
future. Prices for crude oil and natural gas are subject to wide fluctuation in
response to relatively minor changes in the supply of and demand for crude oil
and natural gas, market uncertainty and a variety of additional factors that are
beyond our control, including: worldwide and domestic supplies of crude oil and
natural gas; the level of consumer product demand; weather conditions; domestic
and foreign governmental regulations; the price and availability of alternative
fuels; political instability or armed conflict in oil producing regions; the
price and level of foreign imports; and overall domestic and global economic
conditions.




7





At our
Oklahoma Property, we sold oil at prices ranging from $30.85 to $142.75 per
barrel in 2008 compared to a range of $53.25 to $93.75 per barrel in
2007.  In our Cimarrona property in Colombia, we sold oil at prices
ranging from $26.84 to $127.19 per barrel in 2008.





Risks
Relating to Trading in Our Common Stock





The
market price for our common stock may be volatile, and you may not be able to
sell our stock at a favorable price or at all.




Many
factors could cause the market price of our common stock to rise and fall,
including: actual or anticipated variations in our quarterly results of
operations; changes in market valuations of companies in our industry; changes
in expectations of future financial performance; fluctuations in stock market
prices and volumes; issuances of dilutive common stock or other securities in
the future; the addition or departure of key personnel; and the increase or
decline in the price of oil and natural gas.  It is possible that the
proceeds from sales of our common stock may not equal or exceed the prices you
paid for it plus the costs and fees of making the sales.





Substantial
sales of our common stock, or the perception that such sales might occur, could
depress the market price of our common stock.




We cannot
predict whether future issuances of our common stock or resales in the open
market by current stockholders will decrease the market price of our common
stock. The impact of any such issuances or resales of our common stock on our
market price may be increased as a result of the fact that our common stock is
thinly, or infrequently, traded.  The exercise of any options, warrants or
the vesting of any restricted stock that we may grant to directors, officers,
employees and consultants in the future, the issuance of common stock in
connection with acquisitions and other issuances of our common stock could have
an adverse effect on the market price of our common stock. In addition, future
issuances of our common stock may be dilutive to existing stockholders. Any
sales of substantial amounts of our common stock in the public market, or the
perception that such sales might occur, could lower the market price of our
common stock.




Our
common stock is considered to be a “penny stock” security under the Exchange Act
rules, which may limit the marketability of our securities





Our
securities are considered low-priced or "designated" securities under rules
promulgated under the Exchange Act. Under these rules, broker/dealers
participating in transactions in low-priced securities must first deliver a risk
disclosure document which describes the risks associated with such stocks, the
broker/dealers’ duties, the customer's rights and remedies, certain market and
other information, and make a suitability determination approving the customer
for low-priced stock transactions based on the customer's financial situation,
investment experience and objectives. Broker/dealers must also disclose these
restrictions in writing to the customer and obtain specific written consent of
the customer, and provide monthly account statements to the customer. The likely
effect of these restrictions is a decrease in the willingness of broker/dealers
to make a market in the stock, decreased liquidity of the stock and increased
transaction costs for sales and purchases of the stock as compared to other
securities.





Item
1B. Unresolved Staff
Comments





None





Item
2.Properties





The
principal assets of the Company consist of proved and unproved oil and gas
properties, a pipeline and oil and gas production related
equipment.  Our oil and gas properties are located in the country of
Colombia and in the state of Oklahoma.  Our pipeline is located in
Colombia.




8





Developed
oil and gas properties are those on which sufficient wells have been drilled to
economically recover the estimated reserves calculated for the
property.  Undeveloped properties do not presently have sufficient
wells to recover the estimated reserves.





The
Company's estimated future net recoverable oil and gas reserves from proved
reserves, both developed and undeveloped properties, were assembled by
independent petroleum engineers, Petrotech Engineering Ltd for the Cimarrona
Property as of December 31, 2008, Fletcher Lewis Engineers, Inc. and Raja Reddy
Petroleum for the Osage Property for 2008 and 2007, respectively and are as
follows:





Crude
      Oil (BBLs)
              
              
              Natural
      Gas (MCF)Colombia
              
              
              United
      States
              
              
              Total
              
              
              Colombia
              
              
              United
      States
              
              
              TotalDecember
      31, 2008
              
              
              327,778
              
              
              
              44,633
              
              
              
              372,411
              
              
              
              590,696
              
              
              
              -
              
              
              
              590,696December
      31, 2007
              
              
              -
              
              
              
              157,066
              
              
              
              157,066
              
              
              
              -
              
              
              
              200,922
              
              
              
              200,922




Using
year-end oil and gas prices and lease operating expenses, the estimated value of
future net revenues to be derived from the Company’s proved developed oil and
gas reserves, discounted at 10%, were $8,295,000 for the Cimarrona Property at
December 31, 2008 and $717,906 for the Osage Property at December 31,
2008.





The
Company’s net oil and gas production after royalty and other working interests
for 2008 and 2007 were as follows:




Crude
      Oil (BBLs)
              
              
              Natural
      Gas (MCF)Colombia
              
              
              United
      States
              
              
              Total
              
              
              Colombia
              
              
              United
      States
              
              
              TotalDecember
      31, 2008
              
              
              23,491
              
              
              
              3,376
              
              
              
              26,867
              
              
              
              -
              
              
              
              -
              
              
              
              -December
      31, 2007
              
              
              
              
              
              
              5,649
              
              
              
              5,649
              
              
              
              -
              
              
              
              -
              
              
              
              -


The
Company’s average gross sales prices per barrel of crude oil and production
costs per equivalent barrel for 2008 and 2007 were as follows:




Average
      Sales Price
              
              
              Average
      Production CostsColombia
              
              
              United
      States
              
              
              Combined
              
              
              Colombia
              
              
              United
      States
              
              
              CombinedDecember
      31, 2008
              
              $
              89.37
              
              
              $
              99.05
              
              
              $
              90.71
              
              
              $
              27.66
              
              
              $
              19.82
              
              
              $
              26.58December
      31, 2007
              
              $
              -
              
              
              $
              67.66
              
              
              $
              67.66
              
              
              
              
              
              
              $
              16.98
              
              
              $
              16.98




The
following summarizes the developed leasehold acreage held by the Company as of
December 31, 2008 and 2007.  Gross acres are the total number of acres
in which the Company has a working interest.  Net acres are the sum of
the Company’s fractional interests owned in the gross
acres.  Developed acreage is acreage in which we have leased the
mineral rights for oil & gas and have drilled or re-worked
wells.





Developed
      Acreage
              
              
              Developed
      AcreageGross
      Acreage
              
              
              Net
      AcreageColombia
              
              
              United
      States
              
              
              Combined
              
              
              Colombia
              
              
              United
      States
              
              
              CombinedDecember
      31, 2008
              
              
              136,265
              
              
              
              480
              
              
              
              136,745
              
              
              
              55,683
              
              
              
              480
              
              
              
              56,163December
      31, 2007
              
              
              -
              
              
              
              480
              
              
              
              480
              
              
              
              -
              
              
              
              480
              
              
              
              480




9




The
following summarizes the Company’s productive oil wells as of December 31, 2007
and 2008.  Productive wells are producing wells and wells capable of
production.  Gross well are the total number of wells in which the
Company has an interest.  Net wells are the sum of the Company’s
fractional interests owned in the gross wells.




Productive
      Wells
              
              
              Productive
      WellsGross
      Wells
              
              
              Net
      WellsColombia
              
              
              United
      States
              
              
              Combined
              
              
              Colombia
              
              
              United
      States
              
              
              CombinedDecember
      31, 2008
              
              
              7.0
              
              
              
              10.0
              
              
              
              17.0
              
              
              
              0.7
              
              
              
              10.0
              
              
              
              10.7December
      31, 2007
              
              
              -
              
              
              
              10.0
              
              
              
              10.0
              
              
              
              -
              
              
              
              10.0
              
              
              
              10.0





Productive
wells are the wells that are producing oil and/or natural gas.  A
non-productive well is a well which has a well bore and has not been shut-in
(cemented in and capped).  This well bore may or may not be some time
in the future be a candidate for a work-over.  Dry wells are wells
which have been drilled and there are no oil and gas shows on the
logs.  No oil or gas will ever be produced from a dry
well.





Exploratory
wells are wells which are drilled in a non-proved field.  Geological
studies may indicate the existence of oil or gas but there has not been any
proof by previous drilling in the field.  Developmental wells are
wells drilled or reworked in a field where there are previous discoveries of oil
and natural gas.  These wells have a much higher probability of being
successful than exploratory wells.





Drilling
Activity


In the
last three years, we have only drilled Rosablanca #1 in Colombia, which was
started in December 2008.





Delivery
Commitments


We are
not obligated to provide a fixed and determinable quantity of oil or natural gas
in the near future under existing contracts or agreements.  Further,
during the last three years we had no significant delivery
commitments.




Item
3. Legal
Proceedings




Neither
our Company nor any of its property is a party to, or the subject of, any
material pending legal proceedings other than ordinary, routine litigation
incidental to our business.





Item
4. Submission of
Matters to a Vote of Security Holders





No
matters were submitted to a vote of our securities holders during the fiscal
year ended December 31, 2008.





PART II





Item 5. Market forRegistrant’sCommon Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities




Our
common stock began trading on April 5, 2005 on the Pink Sheets on an unsolicited
basis only and effective February 27, 2008, our common stock began trading on
the OTC Bulletin Board.  Our stock symbol changed from “OSGE.PK” to
“OEDV.PK” on July 17, 2007 and again to OEDV.OB on February 27,
2008.  The high and low closing prices, as reported by the Pink Sheets
and the OTC Bulletin Board, are as follows for 2007 and 2008.  The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.




Year
      ended December 31, 2007
              
              High
              
              
              LowFirst
      Quarter
              
              $
              3.25
              
              
              $
              1.00Second
      Quarter
              
              $
              3.25
              
              
              $
              0.75Third
      Quarter
              
              $
              2.55
              
              
              $
              0.40Fourth
      Quarter
              
              $
              1.55
              
              
              $
              0.50Year
      ended December 31, 2008First
      Quarter
              
              $
              1.25
              
              
              $
              0.72Second
      Quarter
              
              $
              0.74
              
              
              $
              0.26Third
      Quarter
              
              $
              0.81
              
              
              $
              0.35Fourth
      Quarter
              
              $
              0.41
              
              
              $
              0.12
  10





Dividends


We have
declared no cash dividends on our common stock since inception.  There
are no restrictions that limit our ability to pay dividends on our common stock
or that are likely to do so in the future other than the restrictions set forth
in Section 170(b) of the Delaware General Corporation Law that provides that a
company may declare and pay dividends upon the shares of its capital stock
either (1) out of its surplus, as defined in and computed in accordance with
Sections 154 and 244 of the Delaware General Corporation Law, or (2) in case
there shall be no such surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.  We
have not declared, paid cash dividends, or made distributions in the past. We do
not  anticipate  that  we  will  pay  cash
 dividends  or  make distributions  in the  foreseeable
 future.  We currently intend to retain and reinvest future earnings
to finance operations.





Securities
Authorized for Issuance Under Equity Compensation Plans


In June
2007, we implemented the 2007 Osage Exploration and Development, Inc.
Equity-Based Compensation Plan (the “Plan”) which allows the reservation of
5,000,000 shares under the Plan.  Under this Plan, securities issued
may include options, stock appreciation rights (“SARs”) and restricted
stock.  During the year ended December 31, 2007, awards totaling
2,600,000 restricted stock were issued to two of our officers upon entering into
employment agreements with them in November 2007.  These shares were
issued outside of the Plan.





Holders




As of
March 23, 2009, there were approximately 280 holders of record of our common
stock, which figure does not take into account those stockholders whose
certificates are held in the name of broker-dealers or other nominee
accounts.





Issuer
Purchase of Equity Securities





None.




Item
6.Selected Financial
Data







Not
Applicables




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







This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 that include, among others, statements of: expectations, anticipations,
beliefs, estimations, projections, and other similar matters that are not
historical facts, including such matters as: future capital requirements,
development and exploration expenditures (including the amount and nature
thereof), drilling of wells, reserve estimates (including estimates of future
net revenues associated with such reserves and the present value of such future
net revenues), future production of oil and gas, repayment of debt, business
strategies, and expansion and growth of business operations. These statements
are based on certain assumptions and analyses made by our management in light of
past experience and perception of: historical trends, current conditions,
expected future developments, and other factors that our management believes are
appropriate under the circumstances. We caution the reader that these
forward-looking statements are subject to risks and uncertainties, including
those associated with the financial environment, the regulatory environment, and
trend projections, that could cause actual events or results to differ
materially from those expressed or implied by the statements. Such risks and
uncertainties include those risks and uncertainties identified
below.




11





Significant
factors that could prevent us from achieving our stated goals include: declines
in the market prices for oil and gas, adverse changes in the regulatory
environment affecting us, the inherent risks involved in the evaluation of
properties targeted for acquisition, our dependence on key personnel, the
availability of capital resources at terms acceptable to us, the uncertainty of
estimates of proved reserves and future net cash flows, the risk and related
cost of replacing produced reserves, the high risk in exploratory drilling and
competition. You should consider the cautionary statements contained or referred
to in this report in connection with any subsequent written or oral
forward-looking statements that may be issued. We undertake no obligation to
release publicly any revisions to any forward-looking statement to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.




In June
2007, we entered into the Agreement with Gold and Empesa, whereby we farmed-in
to the approximately 165 square mile Rosablanca concession in Colombia awarded
by the ANH to Gold in June, 2007.  Our decision to pursue the
Rosablanca project was based on the seismic data generated by the ANH that
revealed multiple target opportunities.  Under the Agreement, we are
considered the operators of the concession and are obligated to pay all costs
associated with drilling and testing of the first well on the Rosablanca
project.  Revenues generated from the first well were to be allocated
50% to us, 40% to Gold and 10% to Empesa.  In March 2009, we entered
into the LEC Agreement with LEC whereby LEC has agreed to provide all of the
capital required to drill the first well, up to a maximum of
$3,500,000.  As part of the $3,500,000 maximum investment amount by
LEC, LEC has also agreed to reimburse us for certain amounts we have already
spent on the first well.  Under the LEC Agreement, we assigned Lewis
one-half of our 50% interest in the Rosablanca concession and have made LEC the
operator.  Under the LEC Agreement, LEC shall recoup two times its
investment in the first well (which shall not exceed $7,000,000) before we
receives any cash flow derived from the first well.  Furthermore, as
part of the LEC Agreement, we issued 5,250,000 shares of our common stock to an
affiliate of LEC.  As a result of the LEC transaction, revenues and
investments on all future wells in Rosablanca will be allocated 40% to Gold, 25%
to LEC, 25% to us and 10% to Empesa.    If any party doesn’t
contribute its share of the costs, its revenue interest will automatically be
transferred to the party that provides the capital.




In August
2007, we (i) paid $1,200,000 to Gold representing the funds that Gold had
previously issued to a trust account established by the ANH to use for drilling
the first well for the Rosablanaca concession and (ii) issued a letter of credit
in the amount of $144,000 for the benefit of Gold’s bank in Colombia
representing the guarantee required by the ANH.  We were obligated to
commence drilling on the first well by December 26, 2008, which we have
done.  As of December 31, 2008, we had a balance of $537,665 in the
trust account.  Under the terms of the concession agreement with the
ANH, we have the right to explore for up to six phases, with each phase lasting
12 months.  We have already performed the first phase which was to
drill the first well.  Each phase will require us to fund a new trust
account, and issue a letter of credit as well as perform certain
tasks.  Phase 2 required an establishment of a trust account for
$790,000, of which our share is $197,500, and an issuance of a letter of credit
in the amount of $110,000, of which our share is $27,500 and obligated us to
perform certain seismic work.  In the first quarter of 2009, we funded
both the trust account and the letter of credit.  Phases 3,4,5 and 6,
assuming that we are still in exploration, each require the funding of a trust
account in the amount of $1,200,000, of which our share will be $300,000, an
issuance of a letter of credit in the amount of $144,0000, of which our share
will be $36,000 and the drilling of an additional well in each
phase.  The exploitation phase of the concession with the ANH shall
remain in effect for up to 24 years as long as we meet our timely obligations to
drill each well that we present to the ANH. The royalty rate under this ANH
contract is 8% for up to 5,000 barrels per day, increasing to 25% if production
exceeds 600,000 barrels per day.  On March 23, 2009, we announced that
we have completed testing on the first well without finding producible
hydrocarbons in any of the zones evaluated.




12




In
February 2008, we entered into a letter of intent and issued a $100,000 deposit
to acquire a minority position in certain producing oil and gas assets in
Colombia.  On April 8, 2008, we entered into (the Purchase
Agreement with Sunstone pursuant to which we acquired from Sunstone 100% of the
membership interests in Cimarrona LLC, the owner of a 9.4% interest in certain
oil and gas assets in the Guaduas field, located in the Dindal and Rio Seco
Blocks that consist of twenty-one wells, of which seven are currently producing,
that covers 30,665 acres in the Middle Magdalena Valley in Colombia as well as a
pipeline with a current capacity in excess of 30,000 barrels of oil per
day.  The Purchase Agreement was effective as of April 1,
2008.





The
purchase price consisted of 2,750,000 shares of the Company’s common stock and a
warrant to purchase 1,125,000 shares of the Company’s common stock exercisable
at $1.25 per share and expiring April 8, 2013.  The $100,000 deposit
was returned to the Company in conjunction with closing of the
transaction.  In addition, we issued 50,000 shares of common stock to
Energy Capital Solutions, LP for their role as financial advisor and $22,500 to
Larry Ray, an individual, as a finder’s fee.





The
Cimarrona property, but not the pipeline, is subject to an Ecopetrol Association
Contract (the “Association Contract”) whereby we pay Ecopetrol S.A.
(“Ecopetrol”) royalties of 20% of the oil produced.  The royalty
amount is paid in oil.  In addition to the royalty, according to the
Association Contract, Ecopetrol may, for no consideration, become a 50% partner,
once an audit of revenues and expenses indicate that the partners in the
Association Contract have a received a 200% reimbursement of all historical
costs to develop and operate the Guaduas field.  We believe that
Ecopetrol could become a 50% partner in 2009 which would effectively reduce the
cash flows generated by the property by 50%.  In addition, in 2022,
the Association Contract with Ecopetrol terminates, at which time we will have
no economic interest remaining in this property.  The property and the
pipeline are both operated by Pacific Rubiales Energy Corp. (“Pacific
Rubiales”), which owns 90.6% of the Guaduas field.  Pipeline revenues
generated from Cimarrona primarily relate to transportation costs charged to
third party oil producers, including Pacific Rubiales.





We
anticipate that we will need to raise a minimum of $1,000,000 to provide for the
cash requirements for the next twelve months including costs to complete phase 2
and fund the trust account and letter of credit for phase 3 of
Rosablanca.  If we are unable to raise the entire sum and cannot
fulfill our obligations under the Rosablanca concession, we may lose the
concession and our ability to participate in other Colombian
projects.  At present, the revenues generated from Cimarrona and
Oklahoma properties are only sufficient to cover field operating expenses and a
small portion of our overhead.





We have
undertaken steps as part of a plan to improve operations with the goal of
sustaining our operations for the next twelve months and beyond. These steps
include (a) raising additional capital and/or obtaining financing; (b)
increasing our current production in the Osage and Cimarrona properties and (c)
controlling overhead and expenses.





There can
be no assurance we will successfully accomplish these steps and it is uncertain
we will achieve a profitable level of operations and/or obtain additional
financing. There can be no assurance that any additional financings will be
available to us on satisfactory terms and conditions, if at all. In the event we
are unable to continue as a going concern, we may elect or be required to seek
protection from our creditors by filing a voluntary petition in bankruptcy or
may be subject to an involuntary petition in bankruptcy. To date, management has
not considered this alternative, nor does management view it as a likely
occurrence.




13





Results
of Operations





Year
ended December 31, 2008 compared to year ended December 31, 2007





2008
              
              
              2007
              
              
              ChangeAmount
              
              
              Percentage
              
              
              Amount
              
              
              Percentage
              
              
              Amount
              
              
              PercentageOil
      & Gas Sales
              
              $
              2,006,094
              
              
              
              64.6
              %
              
              $
              288,255
              
              
              
              100.0
              %
              
              $
              1,717,839
              
              
              
              595.9
              %Pipeline
      Sales
              
              
              1,099,982
              
              
              
              35.4
              %
              
              
              -
              
              
              
              0.0
              %
              
              
              1,099,982
              
              
              
              N/ATotal
      Revenues
              
              
              3,106,076
              
              
              
              100.0
              %
              
              
              288,255
              
              
              
              100.0
              %
              
              
              2,817,821
              
              
              
              977.5
              %Operating
      ExpensesOperating
      Expenses
              
              
              823,327
              
              
              
              26.5
              %
              
              
              95,893
              
              
              
              33.3
              %
              
              
              727,434
              
              
              
              758.6
              %Stock
      Based Compensation Expense
              
              
              3,410,708
              
              
              
              109.8
              %
              
              
              239,799
              
              
              
              83.2
              %
              
              
              3,170,909
              
              
              
              1322.3
              %Depreciation
      , Depletion and Accretion
              
              
              172,405
              
              
              
              5.6
              %
              
              
              7,966
              
              
              
              2.8
              %
              
              
              164,439
              
              
              
              2064.3
              %General
      & Administrative Expenses
              
              
              1,713,560
              
              
              
              55.2
              %
              
              
              748,860
              
              
              
              259.8
              %
              
              
              964,700
              
              
              
              128.8
              %Total
      Operating Costs and Expenses
              
              
              6,120,000
              
              
              
              197.0
              %
              
              
              1,092,518
              
              
              
              379.0
              %
              
              
              5,027,482
              
              
              
              460.2
              %Operating
      Loss
              
              
              (3,013,924
              )
              
              
              -97.0
              %
              
              
              (804,263
              )
              
              
              -279.0
              %
              
              
              (2,209,661
              )
              
              
              274.7
              %Other
      Expenses
              
              
              (728,419
              )
              
              
              -23.5
              %
              
              
              (960,944
              )
              
              
              -333.4
              %
              
              
              232,525
              
              
              
              -24.2
              %Loss
      before Income Taxes
              
              
              (3,742,343
              )
              
              
              -120.5
              %
              
              
              (1,765,207
              )
              
              
              -612.4
              %
              
              
              (1,977,136
              )
              
              
              112.0
              %Provision
      for Income Taxes
              
              
              -
              
              
              
              0.0
              %
              
              
              -
              
              
              
              0.0
              %
              
              
              -
              
              
              
              N/ANet
      Loss
              
              $
              (3,742,343
              )
              
              
              -120.5
              %
              
              $
              (1,765,207
              )
              
              
              -612.4
              %
              
              $
              (1,977,136
              )
              
              
              112.0
              %Comprehensive
      Loss
              
              $
              (4,250,215
              )
              
              
              -136.8
              %
              
              $
              (1,794,138
              )
              
              
              -622.4
              %
              
              $
              (2,456,077
              )
              
              
              136.9
              %




Oil
and Gas Sales





Revenues
from oil sales were $2,006,094, an increase of $1,717,839, or 595.9%, in 2008
compared to $288,255 in 2007.  Approximately 88% of the oil revenues
in 2008 were derived from the Cimarrona property which we acquired on April 1,
2008.  In 2008, we sold 24,376 barrels (“BBLs”) at an average gross
price of $90.71 compared to 5,649 BBBls at an average gross price of $67.66 in
2007.





Pipeline
Sales





Pipeline
sales from our Cimarrona property accounted for 35.4% and 0% of total revenues
in 2008 and 2007, respectively.  In 2008, we recognized pipeline sales
of $1,099,982 from the transportation of approximately 5.96 million barrels (of
which our share was approximately 560,000 barrels).  No pipeline sales
were recognized in 2007 as Cimarrona was acquired on April 1, 2008.





Total
Revenues





Total
revenues were $3,106,076, an increase of $2,817,821, or 977.5%, in 2008 compared
to $288,255 in the 2007.  Approximately 92% of our 2008 revenues were
derived from our Cimarrona property which we acquired on April 1,
2008.  Oil and gas sales comprised 64.6% of total revenues in 2008
compared to 100% in 2007, due to the inclusion of the Cimarrona pipeline sales
in 2008.




14





Operating
Expenses





Our
operating expenses were $823,327 in 2008 with approximately
$530,174  attributable to our Cimarrona property, compared to
operating expenses of $95,893 in 2007, which were entirely attributable to our
Osage property.  Operating expenses as a percentage of total revenues
decreased to 26.5% in 2008 from 33.3% in 2007.





Stock
Based Compensation Expense





Stock
based compensation expense was $3,410,708 and $239,799 in 2008 and
2007.  2008 Stock based compensation expense relates  to
$2,742,708 for the amortization of the value of shares issued in November 2007
to two employees which vested on January 2009 and $668,000 of the value of the
shares issued to three consultants in 2008.   2007 Stock based
compensation expense relates to the 2007 amortization of the value of shares
issued in November 2007.  All shares were valued based on the stock
price at the date of issuance.





General
and Administrative Expenses





General
and administrative expenses were $1,713,560 and $748,460 in 2008 and 2007,
respectively.  The $964,700 increase, or 128.8%, is primarily
attributable to increased expenses in Colombia relating to the Rosablanca
Property and the Cimarrona property which was acquired April 1, 2008 as well as
increased compensation expense.  General and administrative expenses
as a percentage of total revenues decreased to 55.2% in 2008 from 259.8% in
2007, primarily due to the increase in revenues.





Depreciation,
depletion and accretion





Depreciation,
depletion and accretion were $172,405 in 2008 compared to $7,966 in 2007,
primarily due to depreciation and depletion relating to the Cimarrona property
which we acquired in April 1, 2008.





Loss
from Operations





Loss from
operations was $3,013,924 and $804,263 in 2008 and 2007,
respectively.





Interest
Expense





Interest
expense was $754,617 and $1,050,628 in 2008 and 2007,
respectively.  Interest expense in 2008 consisted primarily of the
amortization of the beneficial conversion feature of the $1,100,000 Unsecured
Convertible Promissory Note, which converted into shares of common stock in
September 2008.  2007 interest expense consisted primarily of the
amortization of the beneficial conversion feature of the $1,100,000 Unsecured
Convertible Promissory Note as well as the amortization of shares issued with
the $250,000 Secured Convertible Debenture.





Net
Loss





Net loss
was $3,742,343 and $1,765,207 in 2008 and 2007, respectively.





Foreign
Currency Translation





Foreign
currency translation loss was $507,872 and $28,931 in 2008 and 2007,
respectively.  The Colombian Peso to Dollar Exchange Rate averaged
1,969 and 2,050 in 2008 and 2007, respectively.  The Colombian Peso to
Dollar Exchange Rate was 2,247 and 2,020 at December 31, 2008 and December 31,
2007.





Comprehensive
Loss





Comprehensive
loss was $4,250,215 and $1,794,138 in 2008 and 2007, respectively.





Liquidity
and Capital Resources





We had a
working capital deficit of $307,599 at December 31, 2008, compared to a working
capital of $1,611,744 at December 31, 2007.  Working capital at
December 31, 2008 consisted primarily of $2,128,915 of accounts payable, mostly
related to drilling of Rosablanca #1 which commenced at the end of 2008, offset
by $988,508 of cash, $537,665 in a trust account in Colombia and $145,632 in a
bank certificate of deposit pledged for letters of credit.




15





At
December 31, 2008, we had no debt on our balance sheet.  We have
raised in excess of $2,500,000 in gross proceeds through various debt and equity
financings since January 1, 2007 and have used the majority of the net proceeds
for costs related to our Rosablanca project in Colombia, as well as for working
capital purposes and professional fees.





Net cash
provided by operating activities totaled $66,049 for 2008 compared to net cash
used by operating activities of $545,453 for 2007.  The major
components of the net cash provided by operating activities for 2008 were the
$2,742,708 amortization of deferred compensation, the $668,000 of the value of
shares issued for services to consultants and the $652,753 beneficial conversion
feature of the Convertible Debenture, offset by the net loss of $3,742, 343 and
a $358,536 increase in accounts payable and accrued expenses.  The
major components of the net cash used in operating activities for 2007 were the
net loss of $1,765,207, offset by $659,511 amortization of beneficial conversion
feature issued with various debt financings, $250,000 for the amortization of
the value of the shares issued in February 2007 with the Secured Convertible
Debenture and $239,799 of stock based compensation expense.





Net cash
used in investing activities totaled $111,174 and $1,490,628 for 2008 and 2007,
respectively.  Net cash used in investing activities in 2008 consisted
primarily of $803,819 investments in Colombian oil properties offset by $491,936
of payments from the Colombian trust account for the Rosablanca well, while net
cash used in investing activities in 2007, consisted primarily of $1,029,601 in
deposits in the trust account for our Rosablanca concession as well as $150,464
for investments in Colombian oil properties.





Net cash
provided by financing activities totaled $851,960 in 2008 and consisted
primarily of $483,414 of beginning cash balance and $205,123 of the maturity of
Colombian bonds that we acquired with Cimarrona in April 2008.  Net
cash provided by financing activities totaled $2,754,557 in 2007 and consisted
primarily of $1,100,000 from the issuance of Unsecured Convertible Promissory
Note due September 30, 2008, $860,250 from the issuance of 925,000 units,
consisting of 925,000 shares and 1,387,500 warrants, and $427,500 from the
issuance of common stock and the proceeds of the $250,000 Secured Convertible
Debenture, which converted in July 31, 2007.





Net
operating revenues from our oil production are very sensitive to changes in the
price of oil making it very difficult for management to predict whether or not
we will be profitable in the future.





We
conduct no product research and development.  Any expected purchase of
significant equipment is directly related to drilling operations and the
completion of successful wells.  .





We
operate our Osage Property through independent contractors that operate
producing wells for several small oil companies.  Pacific Rubiales,
which owns 90.6% of the Guaduas field, is the operator, while LEC, which owns
25% of the Rosablanca concession, is the operator of Rosablanca.





We are
responsible for any contamination of land we own or lease. However, we carry
pollution liability insurance policies, which may limit some potential
contamination liabilities as well as claims for reimbursement from third
parties.





Item
7A. Quantitative and Qualitative Disclosures about Market Risk





We have
no material exposure to interest rate changes.  We are subject to
changes in the price of oil and exchange rates of the Colombian Peso, which are
out of our control.  In our Oklahoma property, we sold oil at prices
ranging from $30.85 to $142.75 per barrel in 2008 compared to a range of $53.25
to $93.75 per barrel in 2007.  In our Cimarrona property in Colombia,
we sold oil at prices ranging from $26.84 to $127.19 per barrel in
2008.  The Colombian Peso to Dollar Exchange Rate averaged
approximately 1,969 and 2,050 in 2008 and 2007, respectively.  The
Colombian Peso to Dollar Exchange Rate was 2,247 and 2,020 at December 31, 2008
and December 31, 2007.




16





Effect
of Changes in Prices


Changes
in prices during the past few years have been a significant factor in the oil
and gas industry. The price received for the oil produced by us fluctuated
significantly during the last year. Changes in the price that we receive for our
oil and gas is set by market forces beyond our control as well as governmental
intervention.  Average price received by us for a barrel of oil
equivalent (“BOE”) were $90.71 and $67.66 in 2008 and 2007,
respectively.  The volatility and uncertainty in oil and gas prices
have made it more difficult for a company like us to increase our oil and gas
asset base and become a significant participant in the oil and gas
industry.  We currently sell all of our oil and gas production to
Sunoco in the United States and to Hocol in Colombia.  However, in the
event these customers discontinued oil and gas purchases, we believe we can
replace these customers with other customers who would purchase the oil and gas
at terms standard in the industry.





Critical
Accounting Policies and Estimates


Management's
Discussion and Analysis of Financial Condition and Results of Operations
discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis,
management evaluates our estimates and judgments, including those related to
revenue recognition, recovery of oil and gas reserves, financing operations, and
contingencies and litigation.





Oil
and Gas Properties


We follow
the "successful efforts" method of accounting for our oil and gas exploration
and development activities, as set forth in the Statement of Financial
Accounting Standards (SFAS) No. 19, as amended, issued by the Financial
Accounting Standards Board.  Under this method, we initially
capitalize expenditures for oil and gas property acquisitions until they are
either determined to be successful (capable of commercial production) or
unsuccessful.  The carrying value of all undeveloped oil and gas
properties is evaluated periodically and reduced if such carrying value appears
to have been impaired.  Leasehold costs relating to successful oil and
gas properties remain capitalized while leasehold costs which have been proven
unsuccessful are charged to operations in the period the leasehold costs are
proven unsuccessful.  Costs of carrying and retaining unproved
properties are expensed as incurred.





The costs
of drilling and equipping development wells are capitalized, whether the wells
are successful or unsuccessful.  The costs of drilling and equipping
exploratory wells are capitalized until they are determined to be either
successful or unsuccessful.  If the wells are successful, the costs of
the wells remain capitalized.  If, however, the wells are
unsuccessful, the capitalized costs of drilling the wells, net of any salvage
value, are charged to operations in the period the wells are determined to be
unsuccessful.





The
provision for depreciation and depletion of oil and gas properties is computed
on the unit-of-production method. Under this method, we compute the provision by
multiplying the total unamortized costs of oil and gas properties including
future development, site restoration, and dismantlement abandonment costs, but
excluding costs of unproved properties by an overall rate determined by dividing
the physical units of oil and gas produced during the period by the total
estimated units of proved oil and gas reserves. This calculation is done on a
country-by-country basis.  As of December 31, 2008, our oil production
operations were conducted in Colombia and in the United States of
America.  At December 31, 2007, all of our oil production operations
were conducted in the United States of America. The cost of unevaluated
properties not being amortized, to the extent there is such a cost, is assessed
quarterly to determine whether the value has been impaired below the capitalized
cost. The cost of any impaired property is transferred to the balance of oil and
gas properties being depleted. The costs associated with unevaluated properties
relate to projects which were undergoing exploration or development activities
or in which we intend to commence such activities in the future. We will begin
to amortize these costs when proved reserves are established or impairment is
determined.





In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations," we
report a liability for any legal retirement obligations on our oil and gas
properties. The asset retirement obligations represent the estimated present
value of the amounts expected to be incurred to plug, abandon, and remediate the
producing properties at the end of their productive lives, in accordance with
state laws, as well as the estimated costs associated with the reclamation of
the property surrounding. The Company determines the asset retirement
obligations by calculating the present value of estimated cash flows related to
the liability. The asset retirement obligations are recorded as a liability at
the estimated present value as of the asset's inception, with an offsetting
increase to producing properties. Periodic accretion of the discount related to
the estimated liability is recorded as an expense in the statement of
operations.




17





The
estimated liability is determined using significant assumptions, including
current estimates of plugging and abandonment costs, annual inflation of these
costs, the productive lives of wells, and a risk-adjusted interest rate. Changes
in any of these assumptions can result in significant revisions to the estimated
asset retirement obligations. Revisions to the asset retirement obligations are
recorded with an offsetting change to producing properties, resulting in
prospective changes to depletion and depreciation expense and accretion of the
discount. Because of the subjectivity of assumptions and the relatively long
lives of most of the wells, the costs to ultimately retire the Company's wells
may vary significantly from prior estimates.





Revenue
Recognition


We
recognize revenue upon transfer of ownership of the product to the customer
which occurs when (i) the product is physically received by the customer, (ii)
an invoice is generated which evidences an arrangement between the customer and
us, (iii) a fixed sales price has been included in such invoice and (iv)
collection from such customer is probable.





Off-Balance
Sheet Arrangements


Our
Company has not entered into any transaction, agreement or other contractual
arrangement with an entity unconsolidated with us under which we
have





·
            an
      obligation under a guarantee
contract,


·
            a
      retained or contingent interest in assets transferred to the
      unconsolidated entity or similar arrangement that serves as credit,
      liquidity or market risk support to such entity for such
      assets,


·
            any
      obligation, including a contingent obligation, under a contract that would
      be accounted for as a derivative instrument,
or


·
            any
      obligation, including a contingent obligation, arising out of a variable
      interest in an unconsolidated entity that is held by us and material to us
      where such entity provides financing, liquidity, market risk or credit
      risk support to, or engages in leasing, hedging or research  and
      development services with us.





Item
8. Financial
Statements and Supplementary Data





See
Consolidated Financial Statements beginning on page F-1





Item
9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure





None





Item 9A.Controls and
Procedures








Item
9A(T). Controls and
Procedures





(a)
Disclosure Controls and Procedures.





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”).  Based upon their evaluation, the principal executive
officer and principal financial offer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were not effective for the purpose of ensuring that the information required to
be disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial offers, as
appropriate to allow timely decisions regarding required
disclosure.




18





(b)
Internal Controls Over Financial Reporting.





Management’s
Report on Internal Control Over Financial Reporting





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.  The internal
control process has been designed under our supervision to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company’s financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the United States of
America.





Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2008, utilizing a top-down, risk
based approach described in SEC Release No. 34-55929 as suitable for smaller
public companies.  Based on this assessment, management determined that the
Company’s internal control over financial reporting as of December 31, 2008 is
not effective.  Based on this assessment, management determined that,
as of December 31, 2008, there were material weaknesses in our internal control
over financial reporting. The material weaknesses identified during management's
assessment was the lack of independent oversight by an audit committee of
independent members of the Board of Directors. As defined by the Public Company
Accounting Oversight Board Auditing Standard No. 5, a material weakness is a
deficiency or a combination of deficiencies, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected.  Given the difficulty of
finding qualified individuals who are willing to serve as independent directors,
there has been no change in the audit committee.





Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and (3) unauthorized acquisitions, use, or disposition of the
Company’s assets that could have a material affect on the Company’s financial
statements are prevented or timely detected.





All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparations and presentations.  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.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent 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.





(c)
Changes to Internal Control Over Financial Reporting.





Except as
indicated herein, there were no changes in the Company’s internal control over
financial reporting during the three months ended December 31, 2008 that have
materially affected, or are reasonable likely to materially affect, the
Company’s internal control over financial reporting.





ITEM 9B. Other
Information





None




19





Item 10.Directors, Executive
Officers and Corporate Governance.





The
following table sets forth the names, ages, and offices held by our directors
and executive officers:


Name
            Position
            Director
      Since
            AgeKim
      Bradford
            President,
      Chief Executive Officer, Chief Financial Officer, Director
            February
      2007
            56Greg
      Franklin
            Chief
      Geologist, Director
            May
      2005
            52




A list of
current officers and directors appears above.  The directors of the
Company are elected annually by the stockholders.  The officers serve
at the pleasure of the board of directors.  The directors do not
receive fees or other remuneration for their services, but are reimbursed for
their out-of-pocket expenses to attend board meetings.  All officers
have employment contracts with compensation arrangements if they resign, retire
or are terminated or such events occur as a result of a change in control of the
Company.





The
principal occupation and business experience during at least the last five years
for each of the present directors and executive officers of the Company are as
follows:





Kim
Bradford:Mr. Bradford was
elected President and Chief Executive Officer of the Company in January 2007 and
elected to our board as Chairman effective February 2007.  Mr.
Bradford also served as our Chief Financial Officer and Secretary from January
2007 through November 9, 2007.  In September 2008, Mr. Bradford once
again became our Chief Financial Officer.  In August 2005, Mr.
Bradford co-founded Catalyst Consulting Partners LLC, a California based
consulting firm that advises publicly traded companies and their management
teams on executive search, shareholder communications, general media consulting,
investor relations, website design, and other corporate matters.  In
2001, Mr. Bradford co-founded Decision Capital Management, LLC, the successor
firm to Decision Capital Management LP, a Registered Investment Advisor firm
which he founded in 1999.  Prior to founding Decision Capital, Mr.
Bradford has been involved in the brokerage business for over 25 years, both as
an employee of major Wall Street firms, such as Merrill Lynch and Morgan
Stanley, and as a principal in a NASD broker dealer firm specializing
exclusively in natural resource based investments, such as oil and gas and
precious metals mining.





Greg L.
Franklin:  Mr. Franklin has
been our Chief Geologist since November 9, 2007 and a director of the Company
since May 2005.  Mr. Franklin previously served as a consultant to the
Company in the role of a petroleum geologist since February 2005.  Mr.
Franklin has 25 years experience in the search, discovery, management and
production of Oil and Gas.  From March 1999 to February 2005 Mr.
Franklin was a staff geologist for Barbour Energy.  Mr. Franklin’s
previous experience includes positions as Vice President for Gulf Coast
Exploration and Development Company and geologist with
Conoco.   Mr. Franklin Graduated with a Bachelor of Science in
Geology from Oklahoma State University 1980.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires our executive officers and directors, and persons who beneficially own
more than ten percent of the Company’s common stock, to file initial reports of
ownership and reports of changes in ownership with the SEC. Executive officers,
directors and greater than ten percent beneficial owners are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that
during the year ended December 31, 2008, the officers and directors filed all of
their respective Section 16(a) reports on a timely basis.





Audit
Committee





We do not
have an Audit Committee, as our board of directors during 2008 performed the
same functions of an Audit Committee, such as: recommending a firm of
independent certified public accountants to audit the annual financial
statements; reviewing the independent auditors independence, the financial
statements and their audit report; and reviewing management's administration of
the system of internal accounting controls. We do not currently have a written
audit committee charter or similar document.




20





Nominating
Committee




We do not
have a Nominating Committee or Nominating Committee Charter. Our Board of
Directors performed some of the functions associated with a Nominating
Committee. We have elected not to have a Nominating Committee at this time,
however, our Board of Directors intend to continually evaluate the need for a
Nominating Committee.





Code
of Conduct





We have
adopted a written code of conduct that governs all of our officers, directors,
employees and contractors. The code of conduct relates to written standards that
are reasonably designed to deter wrongdoing and to promote:





(1)
            Honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts
              of
      interest between personal and professional
  relationships;(2)
            Full,
      fair, accurate, timely and understandable disclosure in reports and
      documents that
              are
      filed with, or submitted to, the Commission and in other public
      communications made
              by
      an issuer;(3)
            Compliance
      with applicable governmental laws, rules and
  regulations;(4)
            The
      prompt internal reporting of violations of the code to an appropriate
      person or persons
              identified
      in the code; and(5)
            Accountability
      for adherence to the code.





Involvement
in Certain Legal Proceedings





No
director, person nominated to become a director, executive officer, promoter or
control persons of our company has been involved during the last five years in
any of the following events that are material to an evaluation of his ability or
integrity:





·
            Bankruptcy
      petitions filed by or against any business of which such person was a
      general partner or executive officer either at the time of the bankruptcy
      or within two years prior to that
time.





·
            Conviction
      in a criminal proceeding or being subject to a pending criminal proceeding
      (excluding traffic violations and other minor
  offenses).





·
            Being
      subject to any order, judgment or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring or suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities,
      or





·
            Being
      found by a court of competition jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodities Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended or
      vacated.





Compensation
Committee





We
currently do not have a compensation committee of the Board of Directors. Until
a formal committee is established, if at all, our entire board of directors will
review all forms of compensation provided to our executive officers, directors,
consultants and employees including stock compensation and loans.




21





Item 11.Executive
Compensation





During
the last three fiscal years, the following executive officers of our company
have received total annual salary and bonus exceeding $100,000:




SU7MMARY
      COMPENSATION TABLEName
      and principal position
              Year
              
              Salary
              
              
              Bonus
              
              
              Stock
      Awards
              
              
              Nonequity
      incentive plan compensation
              
              
              Nonqualified
      deferred compensation earnings
              
              
              All
      other
                compensation
      (1)
              
              
              TotalKim
      Bradford
              2008
              
              $
              144,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              144,000President,
      CEO and CFO
              2007
              
              $
              16,615
              
              
              $
              150,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              166,615Greg
      Franklin
              2008
              
              $
              120,000
              
              
              $
              50,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              170,000Chief
      Geologist
              2007
              
              $
              13,846
              
              
              $
              0
              
              
              $
              2,300,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              54,000
              
              
              $
              2,367,846Ran
      Furman
              2008
              
              $
              102,000
              
              
              $
              50,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              152,000CFO
      (2)
              2007
              
              $
              11,769
              
              
              $
              0
              
              
              $
              690,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              62,500
              
              
              $
              764,269Charles
      F. Volk, Jr
              2008
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0President
      & CEO
              2007
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              02006
              
              $
              126,142
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              126,142




(1)
            Represents
      amounts earned by Mr. Franklin and Mr. Furman as consultants to the
      Company prior to becoming
employees.


(2)
            Mr.
      Furman resigned as CFO effective September 8,
  2009.





On
November 9, 2007, the Company entered into employment agreements with Kim
Bradford to serve as President and Chief Executive Office, Greg Franklin to
serve as Chief Geologist and Ran Furman to serve as Chief Financial Officer of
the Company.  All of the agreements are for two years ending November
30, 2009 (“Employment Period”) and all allow the officers to be eligible for an
annual bonus as determined by the Board of Directors. In the event that any
officer’s employment is terminated for a Change of Control, then he shall be
eligible to receive, in one lump payment, the greater of (i) annual base salary
in effect immediately prior to the Change of Control and (ii) the remaining base
salary in effect immediately prior to the Change of control owed to the officer
until the end of the Employment Period.





Mr.
Bradford’s employment agreement included an annual base salary of $144,000 and a
signing bonus of $150,000.  Mr. Franklin’s employment included an
annual base salary of $120,000 and a signing bonus of 2,000,000 shares of the
Company’s Stock, which vested as to 100% on January 1, 2009.  Mr.
Furman’s employment agreement included an annual base salary of $102,000 and a
signing bonus of 600,000 shares of the Company’s Stock, which vested as to 100%
of January 1, 2009.    Mr. Furman resigned as CFO and
director of the Company effective September 8, 2008.





We do not
have any other contractual arrangements with our executive officers, promoters
or directors, nor do we have any compensatory arrangements with our executive
officers, promoters or directors other than as described below.





Charles
Volk, Jr. resigned as President and Chief Executive Officer of the Company on
January 23, 2007.  Mr. Volk, Jr. is considered a promoter of the
Company and has received a total of 4,301,501 shares from the
Company.  Of these shares, Mr. Volk, Jr. received 3,942,501 shares of
stock in conjunction with the acquisition of Osage Energy Company,
LLC.




22





Outstanding
Equity Awards at Fiscal Year-End




Option
      Awards
            
            Stock
      AwardsName
              (a)
            Number
      of Securities Underlying Unexercised Options (#) Exercisable
              (b)
            
            Number
      of Securities Underlying Unexercised Options (#)
Unexercisable
              (c)
            
            
            Equity
      Incentive Plan Awards Number of Securities Underlying Unexercised Unearned
      Options (#)
              (d)
            
            Option
      Exercise Price
              ($)
              (e)
            Option
      Expiration Date
              (f)
            
            Number
      of Shares or Units of Stock That Have Not Vested (#)
              (g)
            
            
            Market
      Value of Shares or Units of Stock That Have Not Vested ($)
              (h)
            
            Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested (#)
              (i)
            
            Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested ($)
              (j)Greg
      Franklin
            
            
            
            --
            
            
            
            --
            
            
            
            
            
            2,000,000
            
            
            $
            280,000
            
            
            
            
            --




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


The
following table shows information as of March 15, 2009 with respect to each
beneficial owner of more than five percent of the Company’s Common
Stock:




Name
      and Address of
                              
                              Common
      Stock
                              
                              
                              PercentBeneficial Owner
                              
                              Beneficially Owned
                              
                              
                              of ClassKim
      Bradford[1]
                              
                              
                              6,055,000
                              
                              
                              
                              13.1
                              %2445
      5th Avenue, Suite 310San
      Diego, CA 92101E.
      Peter Hoffman, Jr. [2]
                              
                              
                              6,040,000
                              
                              
                              
                              13.0
                              %6301
      N. WesternSuite
      260Oklahoma
      City, OK 73118Mustang
      Capital Venture, LLC [4]
                              
                              
                              5,250,000
                              
                              
                              
                              11.3
                              %10101
      Reunion Place, Suite 1000San
      Antonio, TX 78216Sunstone
      Corporation [3]
                              
                              
                              3,875,000
                              
                              
                              
                              8.1
                              %101
      N. Robinson, Suite 800Oklahoma
      City, OK 73102Charles
      F. Volk, Jr.[5]
                              
                              
                              2,733,896
                              
                              
                              
                              5.9
                              %29
      Lupine Ave. #CSan
      Francisco, CA 94118Greg
      L. Franklin
                              
                              
                              3,000,000
                              
                              
                              
                              6.5
                              %2445
      5th Avenue, Suite 310San
      Diego,
CA 92131







The
percentage ownership is based on 46,359,775 shares outstanding at March 23,
2009





[1] Kim
Bradford was elected CEO and President of the Company on January 23, 2007 and
then elected to be Chairman of the Board of Directors effective February 7,
2007.  Mr. Bradford has also been serving as Chief Financial Officer
since September 8, 2008.


[2]
Information is derived from Schedule 13D filed by Mr. Hoffman, Jr.


[3]
Information is derived from Schedule 13D filed by Sunstone
Corporation.   Includes 1,250,000 warrants to purchase shares of
common stock exercisable within 60 days.


[4]
Information is derived from Schedule 13D filed by Mustang Capital Venture,
LLC.


[5]
Information is derived from NOBO list dated 03/12/2009 and shareholder list
dated 03/23/2009 provided by Company's transfer agent.




23





The
following table shows information as of March 23, 2009 with respect to each of
the beneficial owners of the Company’s Common Stock by its executive officers,
directors and nominee individually and as a group:




Name and Address
              Position
              Common
      Stock
                Beneficially Owned
              Percent
                of Shares
              Term of OfficeKim
      Bradford [1]
                2445
      5th
      Avenue, Suite 310
                San
      Diego, CA  92131
              President,
      CEO, CFO and Chairman of the Board of Directors
              6,055,000
              13.1%
              November
      2009Greg
      L. Franklin [2]
                2445
      5th
      Avenue, Suite 310
                San
      Diego, CA  92131
              Chief
      Geologist and Director
              3,000,000
              6.5%
              November
      2009Officers
      and directors as
                a
      group (2 persons)
              
              9,055,000
              19.6%




The
percentage ownership is based on 46,359,775 shares outstanding at March 23,
2009.





[1] Kim
Bradford was elected CEO and President of the Company on January 23, 2007 and
then elected to be Chairman of the Board of Directors effective February 7,
2007.  Mr. Bradford has also been serving as Chief Financial Officer
since September 4, 2008.


[2] Greg
Franklin was elected to the board effective May 5, 2005 and became our Chief
Geologist on November 9, 2007





There are
no family relationships among the directors and executive officers.





Changes
in Control


On
December 28, 2006, a change of control occurred when Kim Bradford, our CEO,
President, CFO and Chairman, along with Paul DiFrancesco, a former partner of
Mr. Bradford in Catalyst Consulting Partners, LLC and Decision Capital
Management, LLC, along with Ran Furman, our former CFO and director and other
investors entered into a transaction with the Company whereby for a $470,875
promissory note, the Company issued a total of 18,835,000 shares of Common
Stock, or approximately 64% of the total shares outstanding.  The
shares were valued based on the approximate asset value per share prior to the
transaction. Of the $470,875 promissory notes issued by the investor to the
Company, Mr. Bradford, Mr. DiFrancesco and Mr. Furman issued a note in the
amount of $151,375, $78,500 and $9,375, respectively, for the purchase of
6,055,000, 3,140,000 and 375,000 shares respectively. In December 2007, Mr.
Bradford and Mr. Furman paid in full their notes plus accrued
interest.  In June 2008, Mr. DiFranceso paid in full his note plus
accrued interest.  In conjunction with this change of control in 2006,
two of our three directors, Charles Volk and Charles Lamberson, resigned, and
Kim Bradford and Ran Furman were elected as directors.





Item 13. Certain Relationships and
Related Transactions





Prior to
entering into an employment agreement with Mr. Franklin in November 2007, Osage
Exploration and Development, Inc. as well as Osage Energy Company LLC have
utilized the services of Greg Franklin for various geological and administrative
services.  On January 1, 2007, the Company entered into a 12 month
geological consulting agreement with Mr. Franklin for various geological and
operational advisory services at a cost of $6,000 per month, which as of August
1, 2007, was increased to $8,000 per month, which the Company believes is
equivalent to those it may receive from an unaffiliated third
party.  Effective November 9, 2007, Mr. Franklin became our Chief
Geologist pursuant to an employment agreement as more fully described above in
item 10.





On
February 1, 2007, the Company entered into a month-to-month lease on its
corporate headquarters with Catalyst Consulting Partners, LLC, a company owned
in part by Kim Bradford, our President, CEO, CFO and Chairman, at a cost of $500
per month, which the Company believes to be at market rate.  Mr.
DiFrancesco, a principal shareholder, was a partner in Catalyst Consulting
Partners, LLC.  Effective February, 2008, we terminated this
lease.




24




Outside
of the above transactions, there have been no transactions during the last two
years, or proposed transactions, to which we were or are to be a party in which
any of the following persons had or is to have a direct or indirect material
interest:





·
            any
      officer or director;


·
            any
      nominee for election as a director;


·
            any
      beneficial owner of more than five percent of our voting
      securities;


·
            any
      member of the immediate family of any of the above
  persons.





Director
Independence





Our Board
of Directors is made up of Kim Bradford, our President, Chief Executive Officer
and Chief Financial Officer and Greg Franklin, our Chief
Geologist.  Our common stock trades on the Over-the-Counter Bulletin
Board.  Because we are traded on the Over-the-Counter Bulletin Board,
we are not currently subject to corporate governance standards of listed
companies, which require, among other things, that the majority of the board of
directors be independent.





Since we
are not currently subject to corporate governance standards relating to the
independence of our directors, we choose to define an "independent" director in
accordance with applicable independence standards required of issuers listed on
the NASDAQ Capital Market.  NASDAQ Marketplace Rule 4200(a)(15)
defines an "Independent director" as a person other than an executive officer or
employee of the company or any other individual having a relationship which, in
the opinion of the issuer's board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
director.  At this time, the Board has determined that none of its
employee directors are independent under the above definition.





Item 14. Principal Accounting Fees
and Services





Selection
of our Independent Registered Public Accounting Firm is made by the Board of
Directors. GPKM LLP has been selected as our Independent Registered Public
Accounting Firm for the current fiscal year. All audit and non-audit services
provided by GPKM LLP are pre-approved by the Board of Directors which gives due
consideration to the potential impact of non-audit services on auditor
independence.





In
accordance with Independent Standard Board Standards No. 1 (Independence
Discussion with Audit Committees), we received a letter and verbal communication
from GPKM LLP that it knows of no state of facts which would impair its status
as our independent public accountants. The Board of Directors has considered
whether the non-audit services provided by GPKM LLP are compatible with
maintaining its independence and has determined that the nature and substance of
the limited non-audit services have not impaired GPKM LLP s status as our
Independent Registered Public Accounting Firm.





AUDIT
FEES





The
aggregate fees billed and anticipated by our auditor for professional services
rendered for the audit of our annual financial statements and for the reviews of
the financial statements included in our Quarterly Reports on Form 10-QSB during
2008 and 2007 were approximately $85,000 and $67,500, respectively.





TAX
FEES





Our
auditors did not bill us for any tax services during 2008 and 2007.




ALL
OTHER FEES





Our
auditors did not bill us for any other services during 2008 and
2007.




25




Part
IV





Item
15. Exhibit, Financial Statements
Schedules





Exhibit No.
                Description2.1
                Plan
      of Reorganization and Agreement of Merger, dated June 18, 2007
      (1)3.1
                Articles
      of Incorporation of Osage Exploration and Development, Inc.
      (1)3.2
                Bylaws
      of Osage Exploration and Development, Inc. (1)10.1
                Agreement
      for Acquisition of Oil and Gas Leaseholds between Conquest Exploration
      Company, LLC, David Farmer, Charles Volk, Jr. and Osage Energy Company,
      LLC dated November 10, 2004. (1)10.2
                Assignment
      and Bill of Sale between Conquest Exploration Company, LLC and Osage
      Energy Company, LLC dated January 24, 2005. (1)10.3
                $250,000
      Note and Security Agreement with Vision Opportunity Master Fund, Ltd.
      dated February 13, 2007. (1)10.4
                $1,100,000
      Unsecured Convertible Promissory Note with Marie Baier Foundation dated
      July 16, 2007. (2)10.5
                Form
      of Warrant issued to Marie Baier Foundation in connection with the
      $1,100,000 Unsecured Convertible Promissory Note. (2)10.6
                Rosa
      Blanca Carried Interest Agreement dated June 21,
      2007.  (3)10.7
                2007
      Equity Based Compensation Plan (4)10.8
                Purchase
      and Sale Agreement for the purchase of the Hansford
      Property  (4)10.8.1
                Extension
      Agreement with Pearl Resources, Corp. for the Hansford Property
      (5)10.8.2
                Letter
      from Charles Volk regarding Ownership of the Hansford Property
      (6)10.9
                Consulting
      Agreement dated January 1, 2007 with Greg Franklin (4)10.10
                Consulting
      Agreement dated February 1, 2007 with Ran Furman (4)10.11
                Form
      of Stock Subscription Receivable dated December 28, 2006
    (4)10.11.1
                Form
      of Amendment #1 to Stock Subscription Receivable dated August 1, 2007
      (4)10.12
                Oil
      and Gas Mining Lease with the Osage Nation dated July 21, 1999
      (4)10.13
                Office
      lease agreement with Catalyst Consulting Partners, LLC
  (4)10.14
                Employment
      Agreement with Kim Bradford, President and CEO (7)10.15
                Employment
      Agreement with Greg Franklin, Chief Geologist (7)10.15.1
                Restricted
      Stock Agreement with Greg Franklin, Chief Geologist (7)10.16
                Employment
      Agreement with Ran Furman, Chief Financial Officer (7)10.16.1
                Restricted
      Stock Agreement with Ran Furman, Chief Financial Officer
    (7)10.17
                Office
      Lease, dated February 1, 2008, by and between Osage Exploration &
      Development, Inc. and Fifth & Laurel Associates, LLC.
    (8)10.18
                Membership
      Purchase Interest between Osage Exploration and Development, Inc. and
      Sunstone Corporation dated April 8, 2008 (9)10.18.1
                Warrant
      to purchase 1,125,000 shares of common stock of Osage Exploration and
      Development, Inc. issued to Sunstone Corporation dated April 8, 2003
      (9)10.19
                Independent
      Contractor Agreement between Osage Exploration and Development, Inc. and
      E. Peter Hoffman, Jr. dated July 2, 2008 (10)10.20
                Agreement
      between Lewis Energy Colombia, Inc., Gold Oil Plc Sucursal Colombia and
      Osage Exploration and Development, Inc. and Osage Exploration and
      Development, Inc., Sucrusal Colombia dated March 3, 2009
    (11)21.1
                List
      of Subsidiaries (4)31.1
                Certification
      of Chief Executive pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated
      under the Securities and Exchange Act of 1934, as
  amended.31.2
                Certification
      of Chief Financial pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated
      under the Securities and Exchange Act of 1934, as
  amended.32.1
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)32.2
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer)


(1) Incorporated
by reference to Osage’s Form 10-SB filed July 6, 2007
 (2) Incorporated
by reference to Osage’s Form 8-k filed July 17, 2007
 (3) Incorporated
by reference to Osage’s Form 8-k filed August 13, 2007
 (4)  Incorporated
by reference to Osage’s Form 10-SB Amendment No. 1 filed August 27,
2007
 (5)  Incorporated
by reference to Osage’s Form 10-SB Amendment No. 2 filed October 15,
2007
 (6)  Incorporated
by reference to Osage’s Form 10-SB Amendment No. 3 filed November 19,
2007
 (7)  Incorporated
by reference to Osage’s Form 10-SB Amendment No. 5 filed December 28,
2007
 (8)  Incorporated
by reference to Osage’s Form 8-k filed March 4, 2008
 (9)  Incorporated
by reference to Osage’s Form 8-k filed April 10, 2008
 (10)
Incorporated by reference to Osage’s Form 8-k filed July 7, 2008
 (10)
Incorporated by reference to Osage’s Form 8-k filed March 5, 2009
  26





SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.








OSAGE
EXPLORATION & DEVELOPMENT, INC.





BY:
    /S/ KIM BRADFORD


Kim
Bradford


President
and C.E.O.





Dated:
March 24, 2009








BY:
    /S/ KIM BRADFORD


Kim
Bradford


Chief
Financial Officer





Dated:  March
24, 2009








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.





Signature
            Title
            Date/s/ KIM
      BRADFORD
              Kim
      Bradford
            President,
      Chief Executive Officer, Chief Financial Officer and Chairman
              (Principal
      Executive and Financial Officer)
            March
      24,  2009/s/ GREG
      FRANKLIN
              Greg
      Franklin
            Chief
      Geologist and Director
            March
      24,  2009




27




OSAGE
EXPLORATION AND DEVELOPMENT, INC.


INDEX
TO FINANCIAL STATEMENTS





Set forth
below are the following consolidated financial statements for our company for
the years ended December 31, 2008 and 2007:


Page


Report
      of Independent Accountant
              F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-2Consolidated
      Statements of Operations and Other Comprehensive Loss for Years Ended
      December 31, 2008 and 2007
              F-3Consolidated
      Statements of Stockholders’ Equity for Years Ended December 31, 2008 and
      2007
              F-4Consolidated
      Statements of Cash Flows for Years Ended December 31, 2008 and
      2007
              F-5Notes
      to Consolidated Financial Statements
              F-6










REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders


Osage
Exploration and Development, Inc. and Subsidiaries


San
Diego, CA





We have
audited the accompanying consolidated balance sheets of Osage Exploration and
Development, Inc. and Subsidiaries (Company), as of December 31, 2008 and
December 31, 2007, and the related consolidated statements of operations and
other comprehensive loss, stockholders' equity, and cash flows for each of the
two years ended December 31, 2008 and 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated 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 audits 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 internal
control over financial reporting. Our audits 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. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
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 Osage Exploration and
Development, Inc. and Subsidiaries as of December 31, 2008, and the results of
their operations and their cash flows for the years ended December 31, 2008 and
2007, in conformity with accounting principles generally accepted in the United
States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit as of December 31,
2008.  These conditions raise substantial doubt about the Company's
ability to continue as a going concern.  Management's plans in regard
to these matters are also described in Note 1 to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





/s/ Goldman Parks Kurland
Mohidin, LLP





Goldman
Parks Kurland Mohidin, LLP


Encino,
California


March 14,
2009




F-1




OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


As of
December 31, 2008 and December 31, 2007
  2008
                  
                  
                  2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                  
                  $
                  988,508
                  
                  
                  $
                  689,545Colombian
      Deposits (Note 5)
                  
                  
                  537,665
                  
                  
                  
                  1,029,601Accounts
      Receivable
                  
                  
                  64,658
                  
                  
                  
                  11,541Bank
      CD pledged for Letter of Credit (Note 7)
                  
                  
                  145,632
                  
                  
                  
                  147,043Other
      Current Assets
                  
                  
                  110,986
                  
                  
                  
                  -Prepaid
      Expenses
                  
                  
                  65,380
                  
                  
                  
                  64,632Deposits
      (Note 6)
                  
                  
                  -
                  
                  
                  
                  140,000Deferred
      Financing Costs
                  
                  
                  -
                  
                  
                  
                  33,638Total
      Current Assets
                  
                  
                  1,912,829
                  
                  
                  
                  2,116,000Property
      and Equipment, at cost (Note 4):Oil
      and gas properties and equipment
                  
                  
                  4,920,550
                  
                  
                  
                  253,641Capitalized
      asset retirement costs
                  
                  
                  13,675
                  
                  
                  
                  13,675Other
      property & equipment
                  
                  
                  46,222
                  
                  
                  
                  23,5204,980,447
                  
                  
                  
                  290,836Less:
      accumulated depletion, depreciationand
      amortization
                  
                  
                  (183,166
                  )
                  
                  
                  (10,761
                  )4,797,281
                  
                  
                  
                  280,075Deposits
      (Note 6)
                  
                  
                  -
                  
                  
                  
                  82,000Bank
      CD pledged for Bond
                  
                  
                  30,000
                  
                  
                  
                  30,000Total
      Assets
                  
                  $
                  6,740,110
                  
                  
                  $
                  2,508,075LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      Liabilities:Accounts
      payable
                  
                  $
                  2,128,915
                  
                  
                  $
                  53,491Accrued
      Expenses
                  
                  
                  87,941Current
      Maturity of Promissory Note (Note 11)
                  
                  
                  3,572
                  
                  
                  
                  3,518Unsecured
      Convertible Promissory Note, net of $0 and $652,753of
      unamortized discount as of December 31, 2008 andDecember
      31, 2007, respectively (Note 10)
                  
                  
                  -
                  
                  
                  
                  447,247Total
      Current Liabilities
                  
                  
                  2,220,428
                  
                  
                  
                  504,256Promissory
      Note, net of Current Maturity (Note 11)
                  
                  
                  3,283
                  
                  
                  
                  7,289Liability
      for Asset Retirement Obligations (Note 17)
                  
                  
                  18,203
                  
                  
                  
                  16,547Commitments
      and Contingencies (Note 12)Stockholders'
      Equity:Common
      stock, $0.0001 par value, 190,000,000 sharesauthorized;
      40,959,775  and 35,959,775 shares issued and
                  
                  
                  4,095
                  
                  
                  
                  3,595outstanding
      as of December 31, 2008 andDecember
      31, 2007, respectively.Additional-Paid-in-Capital
                  
                  
                  11,336,613
                  
                  
                  
                  7,478,768Deferred
      Compensation
                  
                  
                  (7,493
                  )
                  
                  
                  (2,750,201
                  )Stock
      Purchase Notes Receivable
                  
                  
                  (142,500
                  )
                  
                  
                  (309,875
                  )Accumulated
      Deficit
                  
                  
                  (6,155,716
                  )
                  
                  
                  (2,413,373
                  )Accumulated
      Other Comprehensive Loss -Currency
      Translation (Loss)/Gain
                  
                  
                  (536,803
                  )
                  
                  
                  (28,931
                  )4,498,196
                  
                  
                  
                  1,979,983Total
      Liabilities and Stockholders' Equity
                  
                  $
                  6,740,110
                  
                  
                  $
                  2,508,075The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-2




OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS


For the
Years Ended December 31, 2008 and December 31, 2007
  2008
                
                
                2007Operating
      RevenuesOil
      & Gas Sales
                
                $
                2,006,094
                
                
                $
                288,255Pipeline
      Revenues
                
                
                1,099,982
                
                
                
                -Total
      Operating Revenues
                
                
                3,106,076
                
                
                
                288,255Operating
      Costs and ExpensesOperating
      Expenses
                
                
                823,327
                
                
                
                95,893Depreciation,
      Depletion and Accretion
                
                
                172,405
                
                
                
                7,966Stock
      Based Compensation Expense
                
                
                3,410,708
                
                
                
                239,799General
      and Administrative Expenses
                
                
                1,713,560
                
                
                
                748,860Total
      Operating Costs and Expenses
                
                
                6,120,000
                
                
                
                1,092,518Operating
      (Loss)
                
                
                (3,013,924
                )
                
                
                (804,263
                )Other
      Income (Expenses):Interest
      Income
                
                
                134,108
                
                
                
                89,684Interest
      Expense
                
                
                (754,617
                )
                
                
                (1,050,628
                )Other
                
                
                (107,910
                )(Loss)
      before Income Taxes
                
                
                (3,742,343
                )
                
                
                (1,765,207
                )Provision
      for Income Taxes (Note 14)
                
                
                -
                
                
                
                -Net
      (Loss)
                
                
                (3,742,343
                )
                
                
                (1,765,207
                )Other
      Comprehensive Loss, net of tax:Foreign
      Currency Translation Adjustment
                
                
                (507,872
                )
                
                
                (28,931
                )Other
      Comprehensive Loss
                
                
                (507,872
                )
                
                
                (28,931
                )Comprehensive
      (Loss)
                
                $
                (4,250,215
                )
                
                $
                (1,794,138
                )Basic
      and Diluted Loss per Share
                
                $
                (0.10
                )
                
                $
                (0.06
                )Weighted
      average number of common shareand
      common share equivalents used tocompute
      basic and dilluted Loss per Share
                
                
                39,193,382
                
                
                
                32,002,893The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-3


OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


For the
Years Ended December 31, 2008 and December 31, 2007
  Common
      Stock
                
                
                
                
                
                AdditionalPaid-In
                
                
                StockPurchase
                  Note
                
                
                Accumulated
                
                
                Deferred
                
                
                AccumulatedOtherComprehensive
                
                
                TotalShares
                
                
                Amount
                
                
                Capital
                
                
                Receivable
                
                
                Deficit
                
                
                Compensation
                
                
                Loss
                
                
                EquityBalance
      at December 31, 2006
                
                
                29,484,858
                
                
                $
                2,948
                
                
                $
                1,226,691
                
                
                $
                (470,875
                )
                
                $
                (648,166
                )
                
                
                
                
                $
                -
                
                
                $
                110,598Shares
      issued for Convertible Debenture
                
                
                362,417
                
                
                
                36
                
                
                
                382,664
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                382,700Sahres
      issued with Secured Convertible Debt
                
                
                300,000
                
                
                
                30
                
                
                
                249,970
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                250,000Payment
      on Stock Purchase Notes Receivable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                161,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                161,000Issue
      of Shares
                
                
                1,187,500
                
                
                
                119
                
                
                
                427,381
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                427,500Issue
      of Shares in Unit Offering
                
                
                925,000
                
                
                
                93
                
                
                
                860,158
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                860,250Beneficial
      Conversion of Unsecured Convertible Promissory Note
                
                
                
                
                
                
                
                
                
                
                1,067,274
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,067,274Issue
      of Shares for Note and accrued interest conversion
                
                
                1,100,000
                
                
                
                110
                
                
                
                274,890
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                275,000Foreign
      Exchange Translation Adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (28,931
                )
                
                
                (28,931
                )Issue
      of Shares - Compensation Expense
                
                
                2,600,000
                
                
                
                260
                
                
                
                2,989,740
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,990,000Deferred
      Compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,750,201
                )
                
                
                
                
                
                
                (2,750,201
                )Net
      (Loss) for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,765,207
                )
                
                
                
                
                
                
                
                
                
                
                (1,765,207
                )Balance
      at December 31, 2007
                
                
                35,959,775
                
                
                $
                3,596
                
                
                $
                7,478,768
                
                
                $
                (309,875
                )
                
                $
                (2,413,373
                )
                
                $
                (2,750,201
                )
                
                $
                (28,931
                )
                
                $
                1,979,983Payment
      on Stock Purchase Notes Receivable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                167,375
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                167,375Issuance
      of Shares for Professional Services
                
                
                1,600,000
                
                
                
                160
                
                
                
                667,840
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                668,000Cancellation
      of Shares Issued for Professional Services
                
                
                (500,000
                )
                
                
                (50
                )
                
                
                50
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Deferred
      Compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,742,708
                
                
                
                
                
                
                
                2,742,708Foreign
      Exchange Translation Adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (507,872
                )
                
                
                (507,872
                )Purchase
      of Cimarrona
                
                
                2,800,000
                
                
                
                280
                
                
                
                2,090,065
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,090,345Issuance
      of Shares for Note conversion
                
                
                1,100,000
                
                
                
                110
                
                
                
                1,099,890
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,100,000Net
      (Loss) for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,742,343
                )
                
                
                
                
                
                
                
                
                
                
                (3,742,343
                )Balance
      at December 31, 2008
                
                
                40,959,775
                
                
                $
                4,096
                
                
                $
                11,336,613
                
                
                $
                (142,500
                )
                
                $
                (6,155,716
                )
                
                $
                (7,493
                )
                
                $
                (536,803
                )
                
                $
                4,498,196The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-4




OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For the
Years Ended December 31, 2008 and December 31, 2007
  2008
                
                
                2007Cash
      flows from Operating Activities:Net
      (Loss)
                
                $
                (3,742,343
                )
                
                $
                (1,765,207
                )Adjustments
      to reconcile net (loss) to net cashprovided/(used)
      sed by operating activites:Beneficial
      Conversion of Convertible Debenture
                
                
                652,753
                
                
                
                659,511Amortization
      of shares issued with Secured Convertible Debenture
                
                
                
                
                
                
                250,000Amortization
      of Warrants issued with Convertible Debenture
                
                
                
                
                
                
                111,481Amortization
      of Deferred Compensation
                
                
                2,742,708
                
                
                
                239,799Increase/(Decrease)
      in accrued interest
                
                
                
                
                
                
                (20,307
                )Shares
      issued for services
                
                
                668,000Accretion
      of Asset Retirment Obligation
                
                
                1,656
                
                
                
                1,504Amortization
      of Deferred Financing Costs
                
                
                33,638
                
                
                
                (33,638
                )Issuance
      of shares for Accrued Interest
                
                
                
                
                
                
                58,700Provision
      for depletion, depreciationamortization
      and valuation allowance
                
                
                172,405
                
                
                
                7,966Changes
      in operating assets and liabitlies:(Increase)
      in accounts receivable
                
                
                (53,117
                )
                
                
                2,858(Increase)
      in other current assets
                
                
                (50,367
                )(Increase)
      in prepaid expenses
                
                
                (748
                )
                
                
                (64,632
                )Increase/(Decrease)
      in bank overdraft
                
                
                
                
                
                
                (4,138
                )Increase/(decrease)
      in accounts payable and accrued expenses
                
                
                (358,536
                )
                
                
                10,650Net
      cash provided/(used) by operating activities
                
                $
                66,049
                
                
                $
                (545,453
                )Cash
      flows used in Investing Activities:Bank
      CD pledged for Letter of Credit
                
                
                
                
                
                
                (144,000
                )Investments
      in Oil & Gas Properties
                
                
                (803,819
                )
                
                
                (150,464
                )Loss
      of Deposit on Oil & Gas Property
                
                
                82,000Deposit
      made on Oil & Gas Property
                
                
                
                
                
                
                (140,000
                )Return
      of deposit made on Oil & Gas Property
                
                
                140,000Purchase
      of Non Oil & Gas property
                
                
                (22,702
                )
                
                
                (23,520
                )Interest
      earned on Bank CD pledged for Letter of Credit
                
                
                1,411
                
                
                
                (3,043
                )Payments
      from/ (into) Colombian Trust Account
                
                
                491,936
                
                
                
                (1,029,601
                )Net
      cash provided (used) by investing activities
                
                
                (111,174
                )
                
                
                (1,490,628
                )Cash
      flows provided by Financing Activities:Proceeds
      from issuance of Stock and Warrant Units
                
                
                
                
                
                
                860,250Proceeds
      from issuance of Common Stock
                
                
                
                
                
                
                427,500Proceeds
      from issuance of Unsecured Convertible Promissory Note
                
                
                
                
                
                
                1,100,000Payment
      of Debt Offering Costs
                
                
                
                
                
                
                (55,000
                )Proceeds
      from payment on Stock Purchase Notes Receivable
                
                
                167,375
                
                
                
                161,000Cash
      balances at Cimarrona at Acquisition
                
                
                483,414Maturity
      of Colombian Peace Bonds
                
                
                205,123Proceeds
      from issuance of Secured Convertible Debenture
                
                
                
                
                
                
                250,000Proceeds
      from issuance of Promissory Note
                
                
                
                
                
                
                13,046Payments
      on Promissory Notes
                
                
                (3,952
                )
                
                
                (2,239
                )Net
      cash provided by financing activities
                
                
                851,960
                
                
                
                2,754,557Effect
      of exchange rate on cash and cash equivalents
                
                
                (507,872
                )
                
                
                (28,931
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                298,963
                
                
                
                689,545Cash
      and Cash equivalents beginning of year
                
                $
                689,545
                
                
                $
                -Cash
      and Cash equivalents at end of year
                
                $
                988,508
                
                
                $
                689,545SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      Payment for Interest
                
                
                
                
                
                
                43,684Cash
      Payment for Taxes
                
                
                
                
                
                
                -Non-Cash
      Transactions:Shares
      issued with Secured Convertible Debenture
                
                
                
                
                
                
                250,000Shares
      issued upon conversion of Secured Convertible Debentureand
      accrued interest
                
                
                
                
                
                
                275,000Purchase
      of Truck for Promissory Note
                
                
                
                
                
                
                13,046Shares
      and Warrants issued in connection withacquisition
      of Cimarrona
                
                
                2,090,345Shares
      issued upon conversion of Unsecured ConvertiblePromissory
      Note
                
                
                1,100,000Oil
      & Gas Investments obligations included in accounts
    payable
                
                
                2,128,392The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-5





OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


For the
Years ended December 31, 2008 and 2007





1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





NATURE OF
OPERATIONS AND BUSINESS COMBINATION





Osage
Exploration and Development, Inc. ("Osage" or "the Company") is an independent
energy company engaged primarily in the acquisition, development, production and
the sale of oil, gas and natural gas liquids. The Company's production
activities are located in the country of Colombia and in the state of
Oklahoma.   The principal executive offices of the Company are
located at 2445 Fifth Avenue, Suite 310, San Diego,
CA  92101.  Osage was organized September 9, 2004 as Osage
Energy Company, LLC, (“Osage LLC”) an Oklahoma limited liability
company.  On April 24, 2006 we merged with a non-reporting, Nevada
corporation trading on the pink sheets, Kachina Gold Corporation, which was the
entity that survived the merger, through the issuance of 10,000,000 shares of
our Common Stock.  The merger has been accounted for as a
recapitalization of Osage LLC rather than a business
combination.  Accordingly, no pro forma disclosure is
made.  The historical financial statements are those of Osage
LLC.





The
Nevada shell corporation had been incorporated under the laws of Canada on
February 24, 2003 as First Mediterranean Gold Resources, Inc.  The
domicile of the Company was changed to the State of Nevada on May 11,
2004.  On May 24, 2004, the name of the Company was changed to
Advantage Opportunity Corp.  On March 4, 2005, the Company changed its
name to Kachina Gold Corporation (“KGC”).  On April 24, 2006 Kachina
Gold Corporation merged with Osage Energy Company, LLC, and on May 15, 2006
changed its name to Osage Energy Corporation.  On July 2, 2007, the
Company changed its name to Osage Exploration and Development, Inc. and changed
its domicile to the State of Delaware.  On February 27, 2008, the
Company’s common stock began trading on the Over-the-Counter Bulletin Board
under the symbol “OEDV.OB.”





The
Company has incurred significant losses and had negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$6,155,716 at December 31, 2008 and $2,413,373 at December 31,
2007.  Substantial portions of the losses are attributable to legal
and professional fees as well as interest expense.  The Company's
operating plans require additional funds that may take the form of debt or
equity financings. There can be no assurance that any additional funds will be
available. The Company's ability to continue as a going concern is in
substantial doubt and is dependent upon achieving a profitable level of
operations and obtaining additional financing.





Management
of our Company has undertaken steps as part of a plan to improve operations with
the goal of sustaining our operations for the next twelve months and beyond.
These steps include (a) raising additional capital and/or obtaining financing ;
(b) increasing our current production; and (c) controlling overhead and
expenses.





There can
be no assurance the Company can successfully accomplish these steps and it is
uncertain the Company will achieve a profitable level of operations and obtain
additional financing. There can be no assurance that any additional financings
will be available to the Company on satisfactory terms and conditions, if at
all. In the event we are unable to continue as a going concern, we may elect or
be required to seek protection from our creditors by filing a voluntary petition
in bankruptcy or may be subject to an involuntary petition in bankruptcy. To
date, management has not considered this alternative, nor does management view
it as a likely occurrence.





These
consolidated financial statements do not give effect to any adjustments which
would be necessary should the Company be unable to continue as a going concern
and therefore be required to realize its assets and discharge its liabilities in
other than the normal course of business and at amounts different from those
reflected in the accompanying consolidated financial statements.




F-6





BASIS OF
CONSOLIDATION





The
consolidated financial statements include the accounts of Osage and its wholly
owned subsidiaries, Osage Energy Company, LLC and Cimarrona,
LLC.  Accordingly, all references herein to Osage or the Company
include the consolidated results. All significant inter-company accounts and
transactions were eliminated in consolidation.





RISK
FACTORS RELATED TO CONCENTRATION OF SALES AND PRODUCTS





The
Company's future financial condition and results of operations will depend upon
prices received for its oil and natural gas and the costs of finding, acquiring,
developing and producing reserves. Prices for oil and natural gas are subject to
fluctuations in response to changes in supply, market uncertainty and a variety
of other factors beyond the Company's control. These factors include worldwide
political instability (especially in the Middle East), the foreign supply of oil
and natural gas, the price of foreign imports, the level of consumer product
demand and the price and availability of alternative fuels.





USE OF
ESTIMATES





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.  Management used significant estimates in determining the
carrying value of its oil and gas producing assets and the associated
depreciation and depletion expense related to sales' volumes. The significant
estimates included the use of proved oil and gas reserve volumes and the related
present value of estimated future net revenues there-from (See Note 21:
Supplemental Information About Oil and Gas Producing Activities).





CASH AND
CASH EQUIVALENTS





Cash and
cash equivalents consist of short-term, highly liquid investments readily
convertible into cash with an original maturity of three months or
less.





FAIR
VALUE OF FINANCIAL INSTRUMENTS





The
Company measures its financial assets and liabilities in accordance with US
GAAP.  For certain of the Company's financial instruments, including
accounts receivable (trade and related party), notes receivable and accounts
payable (trade and related party), and accrued expenses, the carrying amounts
approximate fair value due to their short maturities. The amounts owed for notes
payable also approximate fair value because interest rates and terms offered to
the Company are at current market rates.





CONCENTRATION
OF CREDIT RISK





Financial
instruments that potentially subject the Company to concentrations of credit
risk are: cash and accounts receivable arising from its normal business
activities. The Company places its cash in what it believes are credit-worthy
financial institutions. However, the Company’s cash balances have exceeded the
FDIC insured levels at various times during 2007 and 2008.   At
December 31, 2008 and December 31, 2007, the Company had $275,142 and $580,539
in cash in excess of federally insured limits, respectively.  The
Company maintains cash accounts only at large, high quality financial
institutions and believes the credit risk associated with cash held in back
exceeding the FDIC insured levels is remote.





In the
U.S., the Company currently sells all of its oil production to one customer,
Sunoco, Inc.  In Colombia, the Company currently sells all of its oil
production to one customer, Hocol, S.A. and has only one customer for its
pipeline, Pacific Rubiales Energy Corp.  However, the Company believes
it can sell all its production to many different purchasers, most of whom pay
similar prices that vary with the international spot market
prices.  The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is limited. The
Company had no allowance as of December 31, 2008 and December 31,
2007.  The analysis was based on its evaluation of specific customers'
balances and the collectability thereof.




F-7





OIL AND
GAS PROPERTIES





Osage is
an exploration and production oil and natural gas company with proved reserves
and existing production in Oklahoma and in the country of
Colombia.  In 2005 we purchased 100% of the working interest in
certain producing oil and natural gas leases located in Osage County, Oklahoma,
referred to herein as the Osage Property, which property consists of twenty
three wells, ten of which are producing, on 480 acres.  We operate
this property and in 2006, begun a secondary recovery program to increase
current production.




In June
2007, we entered into an agreement (the “Agreement”) with Gold Oil, Plc (“Gold”)
and Empesa Petrolera de Servicios y Asesorias, S.A. (“Empesa), whereby we
farmed-in to the approximately 165 square mile Rosablanca concession in Colombia
awarded by the Agencia Nacional de Hidrocarburos (“ANH”) to Gold in June,
2007.  We based our decision to pursue the Rosablanca project based on
the seismic data generated by the ANH that revealed multiple target
opportunities.  Under the Agreement, we are considered the operators
of the concession and will pay all costs associated with drilling and testing of
the first well on the Rosablanca project.  Revenues generated from the
first well were to be allocated 50% to us, 40% to Gold and 10% to
Empesa.  In March 2009, we entered into an agreement (the “LEC
Agreement”) with Lewis Energy (“LEC”) whereby LEC shall provide all of the
capital required to drill the first well, up to a maximum of
$3,500,000.  As part of the $3,500,000 maximum investment amount by
LEC, LEC has also agreed to reimburse us for certain amounts we have already
spent on the first well.  Under the LEC Agreement, we assigned Lewis
50% of our 50% interest in the Rosablanca concession and have made LEC the
operator.  In addition, LEC shall recoup two times its investment in
the first well (which shall not exceed $7,000,000) before Osage receives any
cash flow derived from the first well.  Furthermore, as part of the
LEC Agreement, we issued 5,250,000 shares of our common stock to an affiliate of
LEC.  As a result of the LEC transaction, revenues and investments on
all future wells in Rosablanca will be allocated 40% to Gold, 25% to LEC, 25% to
us and 10% to Empesa.    If any party doesn’t contribute its
share of the costs, its revenue interest will automatically be transferred to
the party that provides the capital.




In
February 2008, we entered into a letter of intent and issued a $100,000 deposit
to acquire a minority position in certain producing oil and gas assets in
Colombia.  On April 8, 2008, we entered into a membership
interest purchase agreement (the “Purchase Agreement”) with Sunstone Corporation
(“Sunstone”) pursuant to which we acquired from Sunstone 100% of the membership
interests in Cimarrona Limited Liability company, an Oklahoma limited liability
company (“Cimarrona LLC”).  Cimarrona LLC is the owner of a 9.4%
interest in certain oil and gas assets in the Guaduas field, located in the
Dindal and Rio Seco Blocks that consist of twenty one wells, of which seven are
currently producing, that covers 30,665 acres in the Middle Magdalena Valley in
Colombia as well as a pipeline with a current capacity of approximately 30,000
barrels of oil per day.  The Purchase Agreement was effective as of
April 1, 2008.





The
purchase price consisted of 2,750,000 shares of the Company’s common stock and a
warrant to purchase 1,125,000 shares of the Company’s common stock exercisable
at $1.25 per share and expiring April 8, 2013.  The $100,000 deposit
was returned to the Company in conjunction with closing of the
transaction.  In addition, we issued 50,000 shares of common stock to
Energy Capital Solutions, LP for their role as financial advisor and $22,500 to
an individual, as a finder’s fee.





The
Cimarrona property, but not the pipeline, is subject to an Ecopetrol Association
Contract (the “Association Contract”) whereby we pay Ecopetrol S.A.
(“Ecopetrol”) royalties of 20% of the oil produced.  The royalty
amount is paid in oil.  In addition to the royalty, according to the
Association Contract, Ecopetrol may, for no consideration, become a 50% partner,
once an audit of revenues and expenses indicate that the partners in the
Association Contract have a received a 200% reimbursement of all historical
costs to develop and operate the Guaduas field.  We believe that
Ecopetrol could become a 50% partner in 2009 which would effectively reduce our
cash flows by 50%.  In addition, in 2022, the Association Contract
with Ecopetrol terminates, at which time we will have no economic interest
remaining in this property.  The property and the pipeline are both
operated by Pacific Rubiales Energy Corp. (“Pacific Rubiales”), which owns 90.6%
of the Guaduas field.  Pipeline revenues generated from Cimarrona
primarily relate to transportation costs charged to third party oil producers,
including Pacific Rubiales.




F-8





The
Company follows the "successful efforts" method of accounting its oil and gas
exploration and development activities, as set forth in the Statement of
Financial Accounting Standards (“SFAS”) No. 19, as amended, issued by the
Financial Accounting Standards Board.  Under this method, the Company
initially capitalizes expenditures for oil and gas property acquisitions until
they are either determined to be successful (capable of commercial production)
or unsuccessful.  The carrying value of all undeveloped oil and gas
properties is evaluated periodically and reduced if such carrying value appears
to have been impaired.  Leasehold costs relating to successful oil and
gas properties remain capitalized while leasehold costs which have been proved
unsuccessful are charged to operations in the period the leasehold costs are
proved unsuccessful.  Costs of carrying and retaining unproved
properties are expensed as incurred.





The costs
of drilling and equipping development wells are capitalized, whether the wells
are successful or unsuccessful.  The costs of drilling and equipping
exploratory wells are capitalized until they are determined to be either
successful or unsuccessful.  If the wells are successful, the costs of
the wells remain capitalized.  If, however, the wells are
unsuccessful, the capitalized costs of drilling the wells, net of any salvage
value, are charged to operations in the period the wells are determined to be
unsuccessful.





The
provision for depreciation and depletion of oil and gas properties is computed
by the unit-of-production method. Under this method, the Company computes the
provision by multiplying the total unamortized costs of oil and gas properties
including future development, site restoration, and dismantlement abandonment
costs, but excluding costs of unproved properties by an overall rate determined
by dividing the physical units of oil and gas produced during the period by the
total estimated units of proved oil and gas reserves. This calculation is done
on a country-by-country basis. As of December 31, 2008, the Company's oil
production operations are conducted in the United States of America and in the
country of Colombia. The cost of unevaluated properties not being amortized, to
the extent there is such a cost, is assessed quarterly to determine whether the
value has been impaired below the capitalized cost. The costs associated with
unevaluated properties relate to projects which were undergoing exploration or
development activities or in which the Company intends to commence such
activities in the future. The Company will begin to amortize these costs when
proved reserves are established or impairment is
determined.  Management believes no such impairment exists at December
31, 2008 and December 31, 2007.





In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations", the
Company reports a liability for any legal retirement obligations on its oil and
gas properties.  The asset retirement obligations represent the
estimated present value of the amounts expected to be incurred to plug, abandon,
and remediate the producing properties at the end of their productive lives, in
accordance with state laws, as well as the estimated costs associated with the
reclamation of the property surrounding. The Company determines the asset
retirement obligations by calculating the present value of estimated cash flows
related to the liability. The asset retirement obligations are recorded as a
liability at the estimated present value as of the asset's inception, with an
offsetting increase to producing properties. Periodic accretion of the discount
related to the estimated liability is recorded as an expense in the statement of
operations.





The
estimated liability is determined using significant assumptions, including
current estimates of plugging and abandonment costs, annual inflation of these
costs, the productive lives of wells, and a risk-adjusted interest rate. Changes
in any of these assumptions can result in significant revisions to the estimated
asset retirement obligations. Revisions to the asset retirement obligations are
recorded with an offsetting change to producing properties, resulting in
prospective changes to depletion and depreciation expense and accretion of the
discount. Because of the subjectivity of assumptions and the relatively long
lives of most of the wells, the costs to ultimately retire the Company's wells
may vary significantly from prior estimates.




F-9





OTHER
PROPERTY AND EQUIPMENT





Non-oil
and gas producing properties and equipment are stated at cost; major renewals
and improvements are charged to the property and equipment accounts; while
replacements, maintenance and repairs, which do not improve or extend the lives
of the respective assets, are expensed currently. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable amounts. Gains
or losses from retirements or sales are credited or charged to
operations.





Depreciation
for non-oil and gas properties is recorded on the straight-line method at rates
based on estimated useful lives ranging from three to fifteen years of the
assets.





IMPAIRMENT
OF LONG-LIVED ASSETS





Effective
January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and
reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations
for a Disposal of a Segment of a Business.” The Company periodically evaluates
the carrying value of long-lived assets to be held and used in accordance with
SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of December 31,
2008 and December 31, 2007, there were no significant impairments of its
long-lived assets.





REVENUE
RECOGNITION





The
Company recognizes revenue upon transfer of ownership of the product to the
customer which occurs when (i) the product is physically received by the
customer, (ii) an invoice is generated which evidences an arrangement between
the customer and the Company, (iii) a fixed sales price has been included in
such invoice, and (iv) collection from such customer is probable.





STOCK
BASED COMPENSATION





The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.”  The
Company recognizes in the statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to employees and
non-employees.   For stock-based awards the value is based on the
market value for the stock on the date of grant and if the stock has
restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.  For shares issued for services or property, the
value is based on the market value for the stock on the date of
grant.





In 2008,
we issued a total of 1,600,000 shares to three consultants.  The
shares were valued at the stock price at the time of issuance with a total value
of $668,000.  All of the shares vested immediately and were recorded
as stock based compensation expense in 2008. In 2008, we cancelled 500,000
of these shares that were originally valued at $140,000.





In 2007,
we issued 2,600,000 shares of restricted stock to two employees.  The
shares were valued at $1.15 per share, the stock price at the time of issuance,
for a total value of $2,900,000.  As the shares vested on January 1,
2009, we recorded compensation expense of $2,747,207 and $239,799 in 2008 and
2007, respectively.  At December 31, 2008, we had unrecognized
deferred compensation of $7,949, which will all be expensed  in the
first quarter of 2009.  At December 31, 2007, we had unrecognized
deferred compensation of $2,750,201.




F-10





INCOME
TAXES





The
Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2008.  As a result of implementing FIN 48, the
Company performed a comprehensive review of its portfolio of income tax
positions in accordance with recognition standards established by FIN
48.  As a result of implementing FIN 48, the Company recognized no
material adjustments to liabilities or stockholders equity.





When tax
returns are filed, it is highly likely that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.  Tax positions taken are
not offset or aggregated with other positions.  Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.  The
Company is not currently subject to any income tax examinations.





Interest
associated with unrecognized tax benefits are classified as interest expense and
penalties are classified in selling, general and administrative expenses in the
statements of income.




Our
provision for income taxes on a consolidated basis was $0 in 2008 and 2007,
respectively.  Due to a history of operating losses, the Company
records a full valuation allowance against its net deferred tax assets and
therefore has recorded no tax provision related to its US operations for the
current period.




EARNINGS
PER SHARE





The
Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic and
diluted earnings (loss) per share. Basic earnings (loss) per share is computed
by dividing net income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding during the
year.  Due to the net loss reported by the Company, the effect of
including shares attributable to the exercise of warrants would have been
antidilutive.  Common stock equivalents are excluded from the
calculation when a loss is incurred as their effect would be
anti-dilutive.





NEW
ACCOUNTING PRONOUNCEMENTS





Recent
Pronouncements





In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements", which is an amendment of
Accounting Research Bulletin ("ARB") No. 51. SFAS 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 changes the way the consolidated income statement
is presented, thus requiring consolidated net income to be reported at amounts
that include the amounts attributable to both parent and the noncontrolling
interest. SFAS 160 is effective for the fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Based on current
conditions, the Company does not expect the adoption of SFAS 160 to have a
significant impact on its results of operations or financial
position.




F-11





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133." SFAS 161 changes
the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. Based on current
conditions, the Company does not expect the adoption of SFAS 161 to have a
significant impact on its results of operations or financial
position.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). SFAS 162 will not have an impact on the Company's
financial statements.





In May
2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60." The scope of
SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables), SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 163 will not have an impact on the
Company's financial statements.





2.  ACQUISITION:





In 2005
we purchased 100% of the working interest in certain producing oil and natural
gas leases located in Osage County, Oklahoma, referred to herein as the Osage
Property, which property consists of ten wells on 480 acres for a total
consideration of $103,177.  We operate this property and in 2006,
begun a secondary recovery program to increase current production.





3.
GEOGRAPHICAL INFORMATION





The
following table sets forth revenues for the periods reported and assets by
geographic location:





Colombia
              
              
              United
      States
              
              
              ConsolidatedDecember
      31, 2008Total
      Revenues
              
              $
              2,860,625
              
              
              $
              245,451
              
              
              $
              3,106,076%
      of Total
              
              
              92.1
              %
              
              
              7.9
              %
              
              
              100.0
              %Long
      Lived Assets
              
              $
              4,774,751
              
              
              $
              205,696
              
              
              $
              4,980,447%
      of Total
              
              
              95.9
              %
              
              
              4.1
              %
              
              
              100.0
              %December
      31, 2007Total
      Revenues
              
              $
              -
              
              
              $
              288,255
              
              
              $
              288,255%
      of Total
              
              
              0.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Long
      Lived Assets
              
              
              150,464
              
              
              
              140,372
              
              
              
              290,836%
      of Total
              
              
              51.7
              %
              
              
              48.3
              %
              
              
              100.0
              %
  F-12





4. OIL
AND GAS PROPERTIES





Oil and
gas properties consisted of the following as of December 31, 2008 and December
31, 2007:





2008
              
              
              2007Properties
      subject to amortization
              
              $
              2,239,193
              
              
              $
              103,177Properties
      not subject to amortization
              
              
              2,681,357
              
              
              
              150,464Capitalized
      asset retirement costs
              
              
              13,675
              
              
              
              13,675Accumulated
      depreciation and depletion
              
              
              (143,290
              )
              
              
              (4,751
              )Oil
      & Gas Properties, Net
              
              $
              4,790,935
              
              
              $
              262,565





Depreciation
and depletion expense for oil & gas properties totaled $138,539 and $3,324
in 2008 and 2007, respectively.





5.
COLOMBIAN DEPOSITS




In August
2007, we (i) paid $1,200,000 to Gold representing the funds Gold had previously
issued to a trust established by the ANH to use for drilling the first well for
the Rosablanaca concession and (ii) issued a letter of credit of $144,000 for
the benefit of Gold’s bank in Colombia representing the guarantee required by
the ANH.  We were obligated to commence drilling on the first well by
December 26, 2008, which we have done.  As of December 31, 2008, we
had a balance of $537,665 in the trust account.  Under the terms of
the concession agreement with the ANH, we are required to perform six phases,
with each phase lasting 12 months.  We have already performed the
first phase which was to drill the first well.  Each phase will
require us to fund a new trust account and issue a letter of credit as well as
perform certain tasks.  Phase 2 required an establishment of a trust
account for $790,000, of which our share is $197,500, and an issuance of a
letter of credit in the amount of $110,000, of which our share is $25,000 and
obligated us to perform certain seismic work.  Phases 3,4,5 and 6 each
require the funding of a trust account in the amount of $1,200,000, of which our
share will be $300,000 and an issuance of a letter of credit in the amount of
$144,0000, of which our share will be $35,000 and the drilling of an additional
well in each phase.  The concession with the ANH shall remain in
effect as long as we meet our timely obligations to drill each well that we
present to the ANH.




6.  DEPOSITS





In
January 2007, we placed a deposit totaling $82,000 on approximately 85% of the
working interest of a natural gas property consisting of 640 acres with proved
undeveloped reserves located in Hansford County, Texas, owned by Pearl Resources
Corp.  The agreement was amended in March 2007 stipulating that unless
the Company acquires a contiguous lease by June 1, 2007 for $48,000, a second
contiguous lease by August 1, 2007 for $80,000 and place $445,180 in escrow for
drilling and completing the first well with actual commencement of drilling
prior to September 15, 2007, the seller has the right to refund 90% of all
payments received and void the agreement.  In September 2007, the
seller provided us with an extension until June 30, 2008 to fulfill all of our
obligations under the agreement.  We have not received an extension
from the seller and believe the seller will void the agreement.  We do
not believe we will receive any of the $82,000 we have invested and accordingly,
as of December 31, 2008, we have written down the value of the deposit to
zero.





In
November 2007, we entered into an agreement to purchase out of bankruptcy a
working interest in an oil & gas leasehold and producing wellbore in
Louisiana for a purchase price of $1,400,000.  Upon the signing of the
agreement, we placed a deposit totaling 10% of the total purchase price, or
$140,000.  The bankruptcy court decided it is not pursuing the sale at
this moment and we received our deposit of $140,000 back on March 1,
2008.  We have no further obligations for this property.




F-13





7. BANK
CD PLEDGED FOR LETTER OF CREDIT





In August
2007, we placed $144,000 in a certificate of deposit with a bank as collateral
for the $144,000 letter of credit required by the ANH as more fully described in
footnote 5 above.  In June 2008, we received an extension from
the ANH until December 26, 2008 to drill our first well.  Accordingly,
in December 2008, the CD was extended until March 25, 2009.  We were
obligated to drill the first well in the Rosablanca concession by December 26,
2008 in order to not lose our interest in the concession and this
CD.  As we completed our obligation on the first well by December 26,
2008, we anticipate that the letter of credit will expire on March 25, 2009 and
we will redeem the CD at that time.  The balance in the Bank CD
pledged for the letter of credit as of December 31, 2008 is
$145,632.





8.
CONVERTIBLE DEBENTURES





From
February 2006 through October 2006, we issued convertible debentures (the
“Convertible Debentures”) with three-year detachable warrants to accredited
investors for gross proceeds of $349,000.  The Convertible Debentures
mature one year from issuance, carried a 10% interest rate and were convertible
at $1.20 per share for $263,000 of the Convertible Debentures, $0.75 as to
$50,000 of the Convertible Debentures and $0.80 as to $36,000 of the Convertible
Debentures.  All of the Convertible Debentures, including accrued
interest on $337,000 of the Convertible Debentures, converted in January and
February 2007 into 362,417 shares of our Common Stock.   In May
2007, we paid $1,200 of interest on $12,000 of the Convertible
Debentures.





Pursuant
to EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" and EITF 00-27,
“Application of Issue No. 98-5 in Certain Convertible Instruments,” based on
relative fair values of the warrant and the debt, the proceeds from the debt
were allocated to the warrant and the debt on a relative fair value
basis.  We recorded $209,014 upon the issuance of the Convertible
Debentures attributable to the beneficial conversion feature as additional paid
in capital.  The discount was being amortized using the effective
interest rate method over the term of the indebtedness.  The warrants
are exercisable for a period of three years with an exercise price of $2.40
expiring February to October 2009, for $299,000 of the Convertible Debentures,
and $1.50 as to $50,000 of the Convertible Debenture.  Using the Black
Scholes pricing model, with volatility of 80.0%, risk-free rate of 4.61% to
5.15% and a 0% dividend yield, the warrants were determined to have a fair value
of $138,604 and were recorded as additional paid in capital.  The
balance of the unamortized discount at the date of conversion was
expensed.





9.
SECURED CONVERTIBLE DEBENTURE





On
February 16, 2007, we issued a $250,000 secured convertible debenture (the
“Secured Convertible Debenture”) and 300,000 shares of common stock to an
institutional investor for gross proceeds of
$250,000.    The Secured Convertible Debenture matured July
31, 2007, had a 10% interest rate with a minimum interest amount of $25,000 due
at maturity, and was convertible, in whole or in part, into shares of common
stock at a conversion price $0.25 per share. The 300,000 shares issued in
conjunction with the Secured Convertible Debenture were valued at $250,000 based
on the price of the stock issued at the most recent private placement offering
and were recorded as additional paid in capital.  The discount of
$250,000 was amortized using the effective interest rate method over the term of
the indebtedness.  Pursuant to EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios", we recorded an interest expense of $0 upon the issuance of
the Secured Convertible Debentures attributable to the beneficial conversion
feature as the value of the shares exceeded the face value of the Secured
Convertible Debenture.  On July 31, 2007, the Secured Convertible
Debenture along with accrued interest converted into 1,100,000 shares of common
stock.  The effective interest rate, which includes the value of the
shares as well as the minimum interest amount of $25,000, was
241.5%.




F-14





10.
UNSECURED CONVERTIBLE PROMISSORY NOTE





In July
2007, we issued a $1,100,000 unsecured convertible promissory note (“Unsecured
Convertible Promissory Note”) to one institutional investor for gross proceeds
of $1,100,000.  The Unsecured Convertible Promissory Note matured
September 30, 2008, had an 8% interest rate, payable in cash quarterly, and was
convertible, in whole or in part, into units, with each unit (“Unit”) priced at
$1.00 and consisting of one share of common stock and one warrant, exercisable
at $1.25 per share maturing three years from issuance.  We had the
option to prepay the Unsecured Convertible Promissory Note at any time prior to
maturity with no penalty.   We had the option, but only at
maturity, to repay the Unsecured Convertible Promissory Note in
Units.  At September 30, 2008, we elected to repay in full the
Unsecured Convertible Promissory note by issuing 1,100,000 Units.  As
such, the balance of the Unsecured Convertible Promissory Note at December 31,
2008 is zero.  Pursuant to EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF 00-27, “Application of Issue No. 98-5 in Certain
Convertible Instruments,” we recorded $1,067,274 upon the issuance of the
Unsecured Convertible Promissory Note attributable to the beneficial conversion
feature as additional paid in capital.  The discount was amortized
using the effective interest rate method over the term of the
indebtedness.





11.
PROMISSORY NOTE





On April
27, 2007, we purchased a truck to be used by our pumper in our Oklahoma
properties by issuing a promissory note (the “Promissory Note”) to a bank
secured by the truck.  The Promissory Note matures October 27, 2010,
has a variable interest rate of Prime plus 1.0%, and has monthly principal and
interest payments totaling $366.  As of December 31, 2008, the
interest rate on the Promissory Note was 5.0%.





The
following table summarizes the balance of the note at December 31,
2008:





Promissory
      Note Outstanding at December 31, 2008
            
            $
            6,855Less
      Current Portion
            
            
            3,572$
            3,283





12.
COMMITMENTS AND CONTINGENCIES





Under the
terms of the Rosablanca concession agreement with the ANH, we are required to
perform six phases, with each phase lasting 12 months.  We performed
the first phase which was to drill the first well.  Each phase will
require us to fund a new trust account and issue a letter of credit as well as
perform certain tasks.  Phase 2 requires an establishment of a trust
account for $790,000, of which our share is $197,500, an issuance of a letter of
credit in the amount of $110,000, of which our share is $25,000 and obligated us
to perform certain seismic work.  Phases 3,4,5 and 6 each require the
funding of a trust account in the amount of $1,200,000, of which our share will
be $300,000, an issuance of a letter of credit in the amount of $144,0000, of
which our share will be $35,000 and the drilling of an additional well in each
phase.  The concession with the ANH shall remain in effect for up to
24 years as long as we meet our timely obligations to drill each well that we
present to the ANH.





ENVIRONMENT





Osage, as
owner and operator of oil and gas properties, is subject to various federal,
state, and local laws and regulations relating to discharge of materials into,
and protection of, the environment. These laws and regulations may, among other
things, impose liability on the owner of real property and the lessee under oil
and gas leases for the cost of pollution clean-up resulting from operations,
subject the owner/lessee to liability for pollution damages and impose
restrictions on the injection of liquids into subsurface strata.





Although
Company environmental policies and practices are designed to ensure compliance
with these laws and regulations, future developments and increasing stringent
regulations could require the Company to make additional unforeseen
environmental expenditures.




F-15





The
Company maintains insurance coverage that it believes is customary in the
industry, although it is not fully insured against all environmental
risks.





The
Company is not aware of any environmental claims existing as of December 31,
2008, that would have a material impact on its consolidated financial position
or results of operations. There can be no assurance, however, that current
regulatory requirements will not change, or past non-compliance with
environmental laws will not be discovered on the Company's
property.





LAND
RENTALS AND OPERATING LEASES





In
February 2008, the Company entered into a 36 month lease for its corporate
offices in San Diego.  The lease is initially for $3,682 per month for
the first year, increasing to $3,800 and $3,923 in the second and third year
respectively.  The lease is guaranteed by Mr. Bradford, our President
and CEO. No compensation was given to Mr. Bradford for his guarantee. In
addition, the Company is responsible for all operating expenses and
utilities.  Outside of the San Diego lease, the Company’s Oklahoma
office and all equipment leased are under month-to-month operating
leases.





Future
minimum rental payments required as of December 31, 2008 under operating leases
are as follows by year:





Year
            
            Amount2009
            
            $
            45,4842010
            
            $
            46,9502011
            
            $
            3,923Totals
            
            $
            96,357





Rental
expense charged to operations totaled $45,607 and $12,225 in 2008 and 2007,
respectively.





LEGAL
PROCEEDINGS





The
Company is not a party to any litigation that has arisen in the normal course of
its business and that of its subsidiaries.





13.
EQUITY TRANSACTIONS





2007 Unit
Offering


In June
2007 and July 2007, for gross proceeds of $925,000, we issued 925,000 shares of
common stock and 1,387,500 warrants, exercisable at $1.50 per share expiring on
June 30, 2010 to one accredited investor and two institutional
investors.





Common Stock
Offering


In April
and May 2007, we issued 1,187,500 shares of our common stock at a price per
share of $0.40 to six accredited investors and entities for a total
consideration of $475,000.





In all
instances of the above sales, the sales were made under the exemption from
registration provided by Regulation D, Rule 506.





STOCK
OPTIONS





In June
2007, Osage implemented the 2007 Osage Exploration and Development, Inc. Equity
Based Compensation plan (“2007 Plan”).  As of December 31, 2008 and
December 31, 2007, no shares or options have been issued under the 2007
Plan.   In 2007, we issued 2,600,000 shares to two of our
officers in conjunction with their employment agreement outside of the 2007
Plan.




F-16





OTHER
DILUTIVE SECURITIES





As of
December 31, 2008, Osage has outstanding dilutive securities consisted entirely
of warrants issued in various financings.  A summary of such
securities follows:




Underlying
      shares
              
              
              
              
              
              Average
      Remainingof
      Common Stock
              
              
              Exercise
      Price
              
              
              Contractual
      Life3,612,500
              
              
              $
              1.25
              
              
              
              2.74
              
              years73,333
              
              
              $
              1.50
              
              
              
              0.20
              
              years274,084
              
              
              $
              2.40
              
              
              
              0.43
              
              years22,000
              
              
              $
              3.00
              
              
              
              0.45
              
              yearsTotals
              
              
              3,981,917
              
              
              $
              1.34
              
              
              
              2.52
              
              years
 As of
December 31, 2007, Osage had the following dilutive securities:


Underlying
      shares
              
              
              
              
              
              Average
      Remainingof
      Common Stock
              
              
              Exercise
      Price
              
              
              Contractual
      Life1,387,500
              
              
              $
              1.25
              
              
              
              3.05
              
              years73,333
              
              
              $
              1.50
              
              
              
              1.21
              
              years274,084
              
              
              $
              2.40
              
              
              
              1.43
              
              years22,000
              
              
              $
              3.00
              
              
              
              1.46
              
              yearsTotals
              
              
              
              1,756,917
              
              
              $
              1.46
              
              
              
              2.27
              
              yearsUnsecured
      Convertible Promissory Note:(1)
              
              
              1,100,000
              
              
              $
              1.25
              
              
              3
      years from conversion(1)
              
              
              1,100,000
              
              
              $
              1.00
              
              
              3
      years from conversion2,200,000




(1)
            The
      Unsecured Convertible Promissory Note matured September 30, 2008 and
      converted on September 30, 2008 into 1,100,000 units, with each unit
      (“Unit”) consisting of one share of common stock and one warrant,
      exercisable at $1.25 per share maturing three years from
      issuance.




F-17




14.
INCOME TAXES





The total
provision for income taxes consists of the following in 2008 and 2007 (in
thousands):


2008
                
                
                2007Current
      Taxes:Federal
                
                $
                -
                
                
                $
                -StateForeign
                
                
                570570
                
                
                
                -Deferred
      Taxes:Federal
                
                
                1,374
                
                
                
                -State
                
                
                258
                
                
                
                -Foreign
                
                
                -
                
                
                
                -Valuation
      Allowance
                
                
                (1,632
                )
                
                
                -570Totals
                
                $
                -
                
                
                $
                -




Following
is a reconciliation of the Federal statutory rate to the effective income tax
rate for 2008 and 2007:





2008
              
              
              2007Computed
      tax provision at statutory Federal rates
              
              
              34.0
              %
              
              
              34.0
              %Increase
      (decrease) in taxes resulting from:State
      taxes, net of Federal income tax benefit
              
              
              5.0
              %
              
              
              6.0
              %Other
      expenses
              
              
              -10.0
              %Valuation
      Allowance
              
              
              -44.0
              %
              
              
              -40.0
              %-15.0
              %
              
              
              0.0
              %






At
December 31, 2008, the Company had net operating loss carry forwards of
approximately $$6.8 million which expire at various dates through
2026.





Deferred
tax assets and liabilities reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of
Osage’s deferred tax assets and liabilities are as follows at December 31, 2008
and December 31, 2007 (in thousands):





2008
              
              
              2007Deferred
      tax liability:Net
      operating loss carry forward
              
              $
              1,380
              
              
              $
              -Other
              
              
              1,099
              
              
              
              -Valuation
      allowance
              
              
              (2,479
              )
              
              
              -Net
      deferred tax liability
              
              $
              -
              
              
              $
              -






F-18





The
non-current portions of the deferred tax asset and the deferred tax liability
accounts offset each other in the Company's consolidated balance
sheet.





15.
RELATED PARTY TRANSACTIONS





In
January 2007, the Company entered into a twelve-month consulting agreement with
Mr. Franklin for geological services at a cost of $6,000 per month, which as of
August 1, 2007, was increased to $8,000 per month, which the Company believes is
equivalent to those it may receive from an unaffiliated third
party.  Effective November 9, 2007, Mr. Franklin became our Chief
Geologist pursuant to an employment agreement.





On
February 1, 2007, the Company entered into a month-to-month lease on its
corporate headquarters with a company then owned in part by Kim Bradford, our
President, Chief Executive Officer, Chief Financial Officer and Chairman, at
$500 per month, which the Company believes to be at market rate.  The
lease was terminated in February 2008.





On
December 28, 2006, Mr. Bradford, Mr. DiFrancesco, a former partner of Mr.
Bradford in Catalyst Consulting Partners and Decision Capital Management, LP and
Mr. Furman, one former CFO and director purchased 6,055,000, 3,140,000 and
375,000 shares of our Common Stock, respectively by issuing notes to us in the
amounts of $151,375, $78,500  and $9,375, respectively.  As
a result of this transaction, a total of $239,250 of the $470,875 note, is due
from related parties.   In December 2007, Mr. Bradford and Mr.
Furman paid in full their notes plus accrued interest.  In June 2008,
Mr. DiFrancesco paid in full his note plus accrued interest.





16. MAJOR
CUSTOMERS





During
2008, the Company had three customers that accounted for all of its
sales.  Hocol, Pacicic and Sunoco, each accounted for 57%,35% and 8%
of total revenues.  For 2007, one customer, Sunoco, Inc., accounted
for 100.0% of our oil and gas sales.





17. ASSET
RETIREMENT OBLIGATIONS





The
Company recognizes a liability at discounted fair value for the future
retirement of tangible long-lived assets and associated assets retirement cost
associated with the petroleum and natural gas properties. The fair value of the
liability is capitalized as part of the cost of the related asset and amortized
to expense over its useful life. The liability accretes until the date of
expected settlement of the retirement obligations. The related accretion expense
is recognized in the statement of operations. The provision will be revised for
the effect of any changes to timing related to cash flow or undiscounted
abandonment costs. Actual expenditures incurred for the purpose of site
reclamation are charged to the asset retirement obligations to the extent that
the liability exists on the balance sheet. Differences between the actual costs
incurred and the fair value of the liability recorded are recognized in income
in the period the actual costs are incurred.




F-19





There are
no legally restricted assets for the settlement of asset retirement
obligations.  No income tax is applicable to the asset retirement
obligation as of December 31, 2008 and 2007, because the Company records a
valuation allowance on deductible temporary differences due to the uncertainty
of its realization.  A reconciliation of the Company's asset
retirement obligations from the periods presented is as follows:





2008
                
                
                2007Beginning
      Balance
                
                $
                16,547
                
                
                $
                15,043Incurred
      during the periodAdditions
      for new wellsAccretion
      expense
                
                
                1,656
                
                
                
                1,504Ending
      Balance
                
                $
                18,203
                
                
                $
                16,547





18.
CHANGE IN CONTROL OF REGISTRANT





On
December 28, 2006, a change of control occurred when Kim Bradford, our CEO and
President, along with Ran Furman, our former CFO and a director, and Paul
DiFrancesco, a partner of Kim Bradford in Catalyst Consulting Partners and
Decision Capital Management, LP and other investors entered into a transaction
with the Company whereby for a $470,875 promissory note, the Company issued a
total of 18,835,000 shares of Common Stock, or approximately 64% of the
Company’s outstanding common stock as of December 31, 2006.  The
promissory notes carry an 8% interest rate, with interest and principal due at
maturity, December 2009 and are secured by a pledge of shares
issued.  In December 2007, Mr. Bradford and Mr. Furman paid in full
their notes plus accrued interest.  In June 2008, Mr. DiFrancesco paid
in full his note plus accrued interest.  In conjunction with the
change of control, on January 23, 2007, Mr. Volk, Jr. resigned as President and
CEO of the Company and Mr. Bradford was elected as President and CEO of the
Company for a one year term.





19.
CHANGE IN DIRECTORS OF REGISTRANT





Effective
February 7, 2007, Mr. Lamberson resigned as director of the Company and Mr. Volk
and Mr. Franklin elected Mr. Bradford to fill the director vacancy
created.  Mr. Volk then resigned as a director of the Company and Mr.
Bradford and Mr. Franklin elected Mr. Furman to fill the director vacancy
created.  Mr. Franklin and Mr. Furman then elected to Mr. Bradford to
the chairman of the board of the company.  Effective September 8,
2008, Mr. Furman resigned as director of the Company.





20.
SUBSEQUENT EVENTS





In
January 2009, we issued a total of 150,000 shares to two
consultants.  The shares were valued at the stock price at the time of
issuance with a total value of $30,000.  All of the shares vested
immediately and will be recorded as stock based compensation expense in the
first quarter of 2009.




In March
2009, we entered into an agreement (the “LEC Agreement”) with Lewis Energy
(“LEC”) whereby LEC shall provide all of the capital required to drill the first
well, up to a maximum of $3,500,000.  As part of the $3,500,000
maximum investment amount by LEC, LEC has also agreed to reimburse us for
certain amounts we have already spent on the first well.  Under the
LEC Agreement, we assigned Lewis 50% of our 50% interest in the Rosablanca
concession and have made LEC the operator.  In addition, LEC shall
recoup two times its investment in the first well (which shall not exceed
$7,000,000) before Osage receives any cash flow derived from the first
well.  Furthermore, as part of the LEC Agreement, we issued 5,250,000
shares of our common stock to an affiliate of LEC.  As a result of the
LEC transaction, revenues and investments on all future wells in Rosablanca will
be allocated 40% to Gold, 25% to LEC, 25% to us and 10% to
Empesa.    If any party doesn’t contribute its share of the
costs, its revenue interest will automatically be transferred to the party that
provides the capital.  On March 23, 2009, we announced that we have
completed testing on the first well without finding producible hydrocarbons in
any of the zones evaluated.




F-20




21.
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)





Petrotech
Engineering, Ltd, and Fletcher Lewis Engineering, Inc. prepared reserve
estimates for the year-end reports for 2008 for the Cimarrona Property and Osage
Property, respectively.  Raja Reddy Petroleum prepared the 2007
report. Management cautions that there are many inherent uncertainties in
estimating proved reserve quantities and related revenues and expenses, and in
projecting future production rates and the timing and amount of development
expenditures. Accordingly, these estimates will change, as future information
becomes available.





Proved
oil and gas reserves are the estimated quantities of crude oil, condensate,
natural gas and natural gas liquids 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
and costs as of the date the estimate is made.  Prices include
consideration of changes in existing prices provided only by contractual
agreements, but not on escalations based upon future conditions





Proved
developed reserves are those reserves expected to be recovered through existing
wells with existing equipment and operating methods.





SFAS No.
19, "Financial Accounting and Reporting by Oil and Gas Producing Companies", as
amended, requires disclosure of certain financial data for oil and gas
operations and reserve estimates of oil and gas.  This information,
presented here, is intended to enable the reader to better evaluate the
operations of the Company.  All of the Company's oil and gas reserves
are located in the United States.





The
aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depletion, depreciation, and amortization
and valuation allowances as of December 31, 2008 and 2007 are as
follows:





2008
              
              
              2007Colombia
              
              
              USA
              
              
              Combined
              
              
              Colombia
              
              
              USA
              
              
              CombinedProved
      Properties
              
              
              2,091,908
              
              
              $
              145,799
              
              
              
              2,237,707
              
              
              
              
              
              $
              103,177
              
              
              $
              103,177Unproved
      properties being amortized
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              -Unproved
      properties not being amortized
              
              
              2,682,843
              
              
              
              
              
              
              
              2,682,843
              
              
              
              150,464
              
              
              
              
              
              
              
              150,464Capitalized
      asset retiremet costs
              
              
              
              
              
              
              13,675
              
              
              
              13,675
              
              
              
              
              
              
              
              13,675
              
              
              
              13,675Accumulated
      depletion, depreciation,
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -amortization
      and valuation allowances
              
              
              (157,549
              )
              
              
              (8,589
              )
              
              
              (166,138
              )
              
              
              
              
              
              
              (5,435
              )
              
              
              (5,435
              )$
              4,617,202
              
              
              $
              150,885
              
              
              $
              4,768,087
              
              
              $
              150,464
              
              
              $
              111,417
              
              
              $
              261,881




F-21




Estimated
quantities of proved developed and undeveloped reserves of crude oil and natural
gas, as well as changes in proved developed and undeveloped reserves during the
past two years are indicated below:




2008
      Oil (BBLs)
              
              
              2008
      Gas (MCF)Colombia
              
              
              USA
              
              
              Combined
              
              
              Colombia
              
              
              USA
              
              
              CombinedProved
      developed andundeveloped
      reserves:Beginning
      of year
              
              
              -
              
              
              
              157,066
              
              
              
              157,066
              
              
              
              -
              
              
              
              200,922
              
              
              
              200,922Revisions
      of previous estimates
              
              
              
              
              
              
              (109,057
              )
              
              
              (109,057
              )
              
              
              
              
              
              
              (200,922
              )
              
              
              (200,922
              )Improved
      recovery
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -Purchases
      of Minerals in place
              
              
              351,269
              
              
              
              
              
              
              
              351,269
              
              
              
              
              
              
              
              
              
              
              
              -Extensions
      and discoveries
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -Production
              
              
              (23,491
              )
              
              
              (3,376
              )
              
              
              (26,867
              )
              
              
              
              
              
              
              
              
              
              
              -Sales
      of minerals in place
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -End
      of year
              
              
              327,778
              
              
              
              44,633
              
              
              
              372,411
              
              
              
              -
              
              
              
              -
              
              
              
              -Proved
      developed reserves:Beginning
      of year
              
              
              -
              
              
              
              157,066
              
              
              
              157,066
              
              
              
              -
              
              
              
              200,922
              
              
              
              200,922End
      of year
              
              
              327,778
              
              
              
              44,633
              
              
              
              372,411
              
              
              
              -
              
              
              
              -
              
              
              
              -




2007
      Oil (BBLs)
              
              
              2007
      Gas (MCF)Colombia
              
              
              USA
              
              
              Combined
              
              
              Colombia
              
              
              USA
              
              
              CombinedProved
      developed andundeveloped
      reserves:Beginning
      of year
              
              
              
              
              
              159,717
              
              
              
              159,717
              
              
              
              
              
              
              200,439
              
              
              
              200,439Revisions
      of previous estimates
              
              
              
              
              
              2,999
              
              
              
              2,999
              
              
              
              
              
              
              483
              
              
              
              483Improved
      recovery
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              -Purchases
      of Minerals in place
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              -Extensions
      and discoveries
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              -Production
              
              
              
              
              
              (5,650
              )
              
              
              (5,650
              )
              
              
              
              
              
              
              
              
              
              -Sales
      of minerals in place
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              -End
      of year
              
              
              -
              
              
              
              157,066
              
              
              
              157,066
              
              
              
              -
              
              
              
              200,922
              
              
              
              200,922Proved
      developed reserves:Beginning
      of year
              
              
              -
              
              
              
              159,717
              
              
              
              159,717
              
              
              
              -
              
              
              
              200,439
              
              
              
              200,439End
      of year
              
              
              -
              
              
              
              157,066
              
              
              
              157,066
              
              
              
              -
              
              
              
              200,922
              
              
              
              200,922




The
foregoing estimates have been prepared by the Company from data prepared by
independent petroleum engineers in respect to certain producing
properties.  Revisions in previous estimates as set forth above
resulted from analysis of new information, as well as from additional production
experience or from a change in economic factors.  The reserve
estimates are believed to be reasonable and consistent with presently known
physical data concerning size and character of the reservoirs and are subject to
change as additional knowledge concerning the reservoirs becomes
available.





There
Colombian reserves are attributable entirely to the Guaduas field, which we hold
through our Cimarrona subsidiary, which owns 9.4% of the Guaduas field as of
December 31, 2008.  There are no reserves attributable to partnership
or minority interests at December 31, 2007.




F-22





The
present value of estimated future net revenues of proved developed reserves,
discounted at 10%, were as follows:




2008
              
              
              2007USA
              
              
              Colombia
              
              
              Combined
              
              
              USA
              
              
              Colombia
              
              
              CombinedProved
      developed and undeveloped reserves
              
              $
              717,906
              
              
              $
              8,295,070
              
              
              $
              9,012,976
              
              
              $
              7,788,051
              
              
              $
              -
              
              
              $
              7,788,051




(Present
Value before income taxes)




Depletion,
depreciation and accretion per equivalent unit of production was $0.53 and $0.47
for 2008 and 2007 in the United States.  In Colombia, the depletion,
depreciation and accretion per equivalent unit was $0.55 for 2008 and zero for
2007.





SFAS No.
69, "Disclosures About Oil and Gas Producing Activities", requires certain
disclosures of the costs and results of exploration and production activities
and established a standardized measure of oil and gas reserves and the
year-to-year changes therein.





In
addition to the foregoing disclosures, SFAS No. 69 established a "Standardized
Measure of Discounted Future Net Cash Flows and Changes Therein Relating to
Proved Oil and Gas Reserves".





Costs
incurred, both capitalized and expensed, for oil and gas property acquisition,
exploration and development 2008 and 2007 are as follows:





December
      31, 2008
              
              USA
              
              
              Colombia
              
              
              CombinedProperty
      acquisition costs
              
              
              
              
              
              2,090,345
              
              
              
              2,090,345Exploration
      costs
              
              
              
              
              
              873,648
              
              
              
              873,648Development
      costs
              
              
              42,622
              
              
              
              299,699
              
              
              
              342,321Asset
      retirement costs
              
              
              -
              
              
              
              -
              
              
              
              -December
      31, 2007
              
              USA
              
              
              Colombia
              
              
              CombinedProperty
      acquisition costs
              
              
              
              
              
              
              
              
              
              
              -Exploration
      costs
              
              
              
              
              
              
              150,464
              
              
              
              150,464Development
      costs
              
              
              
              
              
              
              
              
              
              
              -Asset
      retirement costs
              
              
              -
              
              
              
              -
              
              
              
              -





The
results of operations for oil and gas producing activities for 2008 and 2007
were as follows:





2008
              
              
              2007USA
              
              
              Colombia
              
              
              Combined
              
              
              USA
              
              
              Colombia
              
              
              CombinedSales
              
              
              245,451
              
              
              
              1,760,643
              
              
              
              2,006,094
              
              
              
              288,255
              
              
              
              -
              
              
              
              288,255Production
      Costs
              
              
              112,965
              
              
              
              710,632
              
              
              
              823,597
              
              
              
              95,893
              
              
              
              -
              
              
              
              95,893Exploration
      Costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              -Depletion,
      depreciation, amortizationand
      valuation allowance
              
              
              1,786
              
              
              
              136,753
              
              
              
              138,539
              
              
              
              3,324
              
              
              
              -
              
              
              
              3,324Income
      Tax Provision
              
              
              52,280
              
              
              
              365,303
              
              
              
              417,583
              
              
              
              75,615
              
              
              
              -
              
              
              
              75,615Results
      of Operations fromProduction
      activities
              
              
              78,420
              
              
              
              547,955
              
              
              
              626,375
              
              
              
              113,423
              
              
              
              -
              
              
              
              113,423




F-23




The
following information at December 31, 2008 and for 2008 and 2007, sets forth
standardized measures of the discounted future net cash flows attributable to
the Company's proved oil and gas reserves.





Future
cash inflows were computed by applying year-end prices of oil and gas (with
consideration of price changes only to the extent provided by contractual
arrangements) and using the estimated future expenditures to be incurred in
developing and producing the proved reserves, assuming continuation of existing
economic conditions.





Future
income tax expenses were computed by applying statutory income tax rates to the
difference between pretax net cash flows relating to the Company's proved oil
and gas reserves and the tax basis of proved oil and gas properties and
available operating loss and excess statutory depletion carryovers reduced by
investment tax credits. Discounting the annual net cash flows at 10% illustrates
the impact of timing on these future cash flows.





The
following table presents the standardized measure of discounted estimated net
cash flows relating to proved oil and gas reserves for 2008 and
2007:




2008
              
              
              2007USA
              
              
              Colombia
              
              
              Combined
              
              
              USA
              
              
              Colombia
              
              
              CombinedFuture
      cash inflows
              
              
              1,854,501
              
              
              
              20,251,810
              
              
              
              22,106,311
              
              
              
              13,185,804
              
              
              
              -
              
              
              
              13,185,804Furture
      production costs
              
              
              (645,502
              )
              
              
              (7,930,310
              )
              
              
              (8,575,812
              )
              
              
              (2,354,360
              )
              
              
              -
              
              
              
              (2,354,360
              )Future
      development costs
              
              
              (250,000
              )
              
              
              (1,305,110
              )
              
              
              (1,555,110
              )
              
              
              (175,000
              )
              
              
              -
              
              
              
              (175,000
              )Future
      abanonment costs
              
              
              (92,000
              )
              
              
              (53,000
              )
              
              
              (145,000
              )
              
              
              (92,000
              )
              
              
              -
              
              
              
              (92,000
              )Future
      income tax expenses
              
              
              (346,800
              )
              
              
              (4,385,356
              )
              
              
              (4,732,156
              )
              
              
              (4,225,778
              )
              
              
              -
              
              
              
              (4,225,778
              )Future
      net cash flow
              
              
              520,199
              
              
              
              6,578,034
              
              
              
              7,098,233
              
              
              
              6,338,666
              
              
              
              -
              
              
              
              6,338,66610%
      annual discount for estimatedtiming
      of cash flows
              
              
              (130,778
              )
              
              
              (1,856,386
              )
              
              
              (1,987,165
              )
              
              
              (2,514,204
              )
              
              
              -
              
              
              
              (2,514,204
              )Standardized
      measure of discountedfuture
      net cash flow
              
              
              389,421
              
              
              
              4,721,648
              
              
              
              5,111,069
              
              
              
              3,824,462
              
              
              
              -
              
              
              
              3,824,462




F-24




The
principal changes in the standardized measure of discounted future net cash
flows during 2008 were as follows:





2008USA
              
              
              Colombia
              
              
              CombinedExtensions
              
              
              
              
              
              
              
              
              -Revisions
      of previous estimatesPrice
      changes
              
              
              (1,492,974
              )
              
              
              
              
              
              (1,492,974
              )Quantity
      Changes
              
              
              (5,419,491
              )
              
              
              
              
              
              (5,419,491
              )Changes
      in production rates, timing and other
              
              
              (151,446
              )
              
              
              
              
              
              (151,446
              )Development
      costs incurred
              
              
              (42,622
              )
              
              
              (299,699
              )
              
              
              (342,321
              )Changes
      in estaimted future development costs
              
              
              (75,000
              )
              
              
              
              
              
              
              (75,000
              )Purchase
      of Minterals in place
              
              
              
              
              
              
              6,071,358Sales
      of oil and gas, net of production costs
              
              
              (132,486
              )
              
              
              (1,050,011
              )
              
              
              (1,182,497
              )Accretion
      of discount
              
              
              
              
              
              
              
              
              
              
              -Net
      change in income taxes
              
              
              3,878,978
              
              
              
              
              
              
              
              3,878,978Net
      increase/ (decrese)
              
              
              (3,435,041
              )
              
              
              4,721,648
              
              
              
              (4,784,751
              )




F-25