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
      1934For the Fiscal Year
      Ended December 31, 2009o
            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, California   92101


(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 o
            Accelerated filer
      o
            Non-accelerated
      filer o
            Smaller 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 15, 2010 was approximately $869,591 based on the closing
price of $0.04 as reported on the NASD’s OTC Electronic Bulletin Board
system.





As of
March 15, 2010, there were 45,959,775 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




PagePART IItem 1.
              Business
              1Item 1A.
              Risk
    Factors
              5Item 1B.
              Unresolved Staff
      Comments
              8Item 2.
              Properties
              8Item 3.
              Legal
      Proceedings
              9Item 4.
              Submission of
      Matters to a Vote of Security Holders
              9PART IIItem 5.
              Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of
      Equity Securities
              10Item 6.
              Selected Financial
      Data
              10Item 7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              11Item 7A.
              Quantitative and
      Qualitative Disclosures About Market Risk
              15Item 8.
              Financial Statements
      and Supplementary Data
              17Item 9.
              Changes in and
      Disagreements With Accountants on Accounting and Financial
      Disclosure
              17Item 9A.
              Controls and
      Procedures
              17Item
9A(T).
              Controls and
      Procedures
              17Item 9B.
              Other
      Information
              18PART
IIIItem 10.
              Directors, Executive
      Officers and Corporate Governance
              18Item 11.
              Executive
      Compensation
              21Item 12.
              Security Ownership
      of Certain Beneficial Owners and Management and Related Stockholder
      Matters
              22Item 13.
              Certain
      Relationships and Related Transactions, and Director
Independence
              23Item 14.
              Principal Accounting
      Fees and Services
              23PART IVItem 15.
              Exhibits, Financial
      Statement Schedules
              24Signatures
              
              25Financial 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
field offices in Oklahoma City, Oklahoma and Bogota, Colombia.





Our
operations in Colombia accounted for approximately 97% and 92% of our total
revenues in 2009 and 2008, 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.  Under the Agreement, we were considered the operators of the
concession and were obligated to pay all costs associated with drilling and
testing of the first well on the Rosablanca concession.  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 Corporation (“LEC”) whereby LEC agreed to provide
all of the capital required to drill the first well, up to $3,500,000 and become
operator of Rosablanca in return for a 50% assignment of our 50% operating
interest in the Rosablanca concession.  The LEC Agreement also
provided that LEC was entitled to receive an amount equal to two times its
investment in the first well before Osage receives any cash flow from the first
well.  The transaction was recorded in accordance with paragraph 47(c)
SFAS 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies,
” as codified by FASB ASC section 932-360-55.  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 were to be allocated 40% to Gold,
25% to LEC, 25% to us and 10% to Empesa.    We recognized no
gain or loss on the assignment of our interest.  On March 23, 2009, we
announced we completed testing on the first well without finding producible
hydrocarbons in any of the zones evaluated.  In September 2009, we
entered into a termination agreement (the “Termination Agreement”) with Gold,
EMPESA and Lewis, whereby we and LEC withdrew from the Rosablanca
concession.  Therefore, we wrote off our entire investment in the
Rosablanca concession as of December 31, 2009.




1




In August
2007, we (i) paid $1,200,000 to Gold representing funds Gold previously issued
to a trust account established by the ANH to drill 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 the first well by
December 26, 2008, which we did.  Under the terms of the concession
agreement with the ANH, we had the right to explore for up to six phases, with
each phase lasting twelve months.  We performed the first phase which
was to drill the first well.  Each phase required us to fund a new
trust account and issue a new 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 was $197,500, and an issuance of a letter of credit
of $110,000, of which our share was $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.  As we withdrew from the concession
in 2009, we wrote off all of the remaining balance in the trust account as of
December 31, 2009.





Cimarrona





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 (“Cimarrona LLC”), an Oklahoma limited liability
company.  Cimarrona LLC owns 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 April 1, 2008.





The
purchase price consisted of 2,750,000 shares of our common stock and a warrant
to purchase 1,125,000 shares of common stock exercisable at $1.25 per share,
expiring April 8, 2013.  In addition, we issued 50,000 shares of
common stock to Energy Capital Solutions, LP for its 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 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 Ecopetrol could become a
50% partner in 2010 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”), 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.  In April 2009, Pacific reimbursed us $797,483, as well as
reduced the amount we owed to them under our joint operating agreement by
$799,007 relating to certain disputes we had with Pacific regarding a blending
facility that they built in conjunction with the pipeline.  These
amounts were originally included as capitalized costs of the
pipeline.  No gain or loss was recognized from this
transaction.





Osage,
Oklahoma





In 2005
we purchased 100% of the working interest and became the operator in certain
producing oil and natural gas leases located in Osage County, Oklahoma, 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”).  The purchase price was $103,177.





Hansford,
Texas





In
January 2007, we deposited $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 did not receive a further
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
invested and accordingly, as of December 31, 2008, we wrote off the deposit to
zero.




2




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 $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 and we received our
$140,000 deposit back in March 2008.  We have no further obligations
for this property.





We
anticipate we need to raise a minimum of $1,000,000 to provide for our cash
requirements for the next twelve months.  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 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 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.





Distribution
Methods





We
currently generate oil sales from our production operations in Colombia and in
the state of Oklahoma and pipeline revenues from our Cimarrona property in
Colombia.  All of the oil that we produce in Oklahoma is sold to
Sunoco, Inc. (“Sunoco”).  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, the operator of the Cimarrona
property.  For 2009, Pacific, Hocol and Sunoco accounted for
approximately 57%, 40% and 3%, respectively, of total revenues.  For
2008, Hocol, Pacific and Sunoco accounted for approximately 57%, 35% and 8%,
respectively, of 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% to 30% or more of the
market value of the gas depending on the availability of competition and other
factors.




3


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.  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 Colombia, pursuant to the
Association Contract with Ecopetrol, we pay royalties of 20.0% of oil produced
to Ecopetrol.





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.





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, 2009, 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.  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.




4


Facilities





We lease
approximately 1,386 square feet of modern office space in San Diego, California
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,
Oklahoma 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 (the “SEC”).





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.





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,
2009 we had an accumulated deficit of approximately $8.47 million.  We
had comprehensive losses of approximately $2.19 million and $4.25 million in
2009 and 2008, 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 is no assurance we will be able to obtain such financing
on attractive terms, if at all.




5


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.





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.




6


The
reserves we report in our SEC filings are estimates and may 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.





At our
Osage property in Oklahoma, we sold oil at $32.35 to $73.66 per barrel in 2009
compared to $30.85 to $142.75 per barrel in 2008.  In our Cimarrona
property in Colombia, we sold oil at $28.06 to $74.40 per barrel in 2009
compared to $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.





7




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.





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 in Colombia as of December 31, 2009 and December 31, 2008, and Reddy
Petroleum Company and Fletcher Lewis Engineers, Inc. for the Osage property in
Oklahoma as of December 31, 2009 and December 31, 2008, respectively, and are as
follows:





Crude
      Oil (BBLs)
              
              
              Natural
      Gas (MCF)Colombia
              
              
              United
      States
              
              
              Total
              
              
              Colombia
              
              
              United
      States
              
              
              TotalDecember
      31, 2009
              
              
              473,572
              
              
              
              123,628
              
              
              
              597,200
              
              
              
              855,776
              
              
              
              200,485
              
              
              
              1,056,261December
      31, 2008
              
              
              327,778
              
              
              
              44,633
              
              
              
              372,411
              
              
              
              590,696
              
              
              
              -
              
              
              
              590,696




Using
year-end 2009 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 approximately $4.4 million for the
Cimarrona property in Colombia and $5.6 million for the Osage property in
Oklahoma, respectively, at December 31, 2009.




8


The
Company’s net oil and gas production after royalty and other working interests
for 2009 and 2008 were as follows:




Crude
      Oil (BBLs)
              
              
              Natural
      Gas (MCF)Colombia
              
              
              United
      States
              
              
              Total
              
              
              Colombia
              
              
              United
      States
              
              
              TotalDecember
      31, 2009
              
              
              28,142
              
              
              
              2,263
              
              
              
              30,405
              
              
              
              -
              
              
              
              -
              
              
              
              -December
      31, 2008
              
              
              23,491
              
              
              
              3,376
              
              
              
              26,867
              
              
              
              -
              
              
              
              -
              
              
              
              -


The
following summarizes the developed leasehold acreage held by the Company as of
December 31, 2009 and 2008.  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, 2009
              
              
              136,265
              
              
              
              480
              
              
              
              136,745
              
              
              
              12,809
              
              
              
              480
              
              
              
              13,289December
      31, 2008
              
              
              136,265
              
              
              
              480
              
              
              
              136,745
              
              
              
              12,809
              
              
              
              480
              
              
              
              13,289


The
following summarizes the Company’s productive oil wells as of December 31, 2009
and 2008.  Productive wells are producing wells and wells capable of
production.  Gross wells 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, 2009
              
              
              7.0
              
              
              
              10.0
              
              
              
              17.0
              
              
              
              0.7
              
              
              
              10.0
              
              
              
              10.7December
      31, 2008
              
              
              7.0
              
              
              
              10.0
              
              
              
              17.0
              
              
              
              0.7
              
              
              
              10.0
              
              
              
              10.7




Drilling
Activity


In the
last three years, we have only drilled Rosablanca #1 in Colombia, which was
started in December 2008 and, pursuant to the Termination Agreement in 2009, we
withdrew completely from the Rosablanca concession and wrote-off all capitalized
costs relating to this concession.





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.




9





PART II





Item 5. Market for Registrant’s
Common 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 2009 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, 2009
              
              High
              
              
              LowFirst
      Quarter
              
              $
              0.21
              
              
              $
              0.04Second
      Quarter
              
              $
              0.07
              
              
              $
              0.02Third
      Quarter
              
              $
              0.05
              
              
              $
              0.02Fourth
      Quarter
              
              $
              0.05
              
              
              $
              0.02Year
      ended December 31, 2008First
      Quarter
              
              $
              1.25
              
              
              $
              0.72Second
      Quarter
              
              $
              0.74
              
              
              $
              0.26Third
      Quarter
              
              $
              0.81
              
              
              $
              0.35Fourth
      Quarter
              
              $
              0.41
              
              
              $
              0.12
  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.  No securities have yet been issued under this plan in 2008 or
2009.





Holders


As of
March 10, 2010, 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
Applicable.




10




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.





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 September, 2007.  Under the Agreement, we were
considered the operators of the concession and were 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, whereby LEC agreed to provide $3,500,000 to drill the
first well and become operator of Rosablanca in return for a 50% assignment of
our 50% operating interest in the Rosablanca.  This Agreement also
provided that LEC was entitled to receive an amount equal to two times its
investment in the first well before Osage receives any cash flow from the first
well.  The transaction was recorded in accordance with paragraph 47(c)
SFAS 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies,
”  as codified in FASB ASC section 932-360-55.  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 were to be allocated 40% to Gold,
25% to LEC, 25% to us and 10% to Empesa.    We recognized no
gain or loss on the assignment of our interest.  On March 23, 2009, we
announced we completed testing on the first well without finding producible
hydrocarbons in any of the zones evaluated.  In September 2009, we
entered into the Termination Agreement with Gold, EMPESA and LEC, whereby we and
LEC withdrew from the Rosablanca concession.   Therefore, we
wrote off our entire investment in the Rosablanca concession as of December 31,
2009.





In August
2007, we (i) paid $1,200,000 to Gold representing the funds Gold 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 did.  Under the terms
of the concession agreement with the ANH, we had the right to explore for up to
six phases, with each phase lasting twelve months.  We already
performed the first phase which was to drill the first well.  Each
phase required 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 was $197,500, and an issuance of
a letter of credit in the amount of $110,000, of which our share was $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.  As
we withdrew from the concession in 2009, we wrote off all of the remaining
balance in the trust account as of December 31, 2009. 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.




11




The
Cimarrona property, but not the pipeline, is subject to the Association Contract
whereby we pay 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, 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.





In April
2009, Pacific reimbursed us $797,483 as well as reduced the amount owed to them
under our joint operating agreement by $799,007 relating to certain disputes we
had with Pacific regarding a blending facility that they built in conjunction
with the pipeline.  These amounts were originally included as
capitalized costs of the pipeline.  No gain or loss was recognized
from this transaction.





We
anticipate we will need to raise at least $1,000,000 over the next twelve
months.  At present, the revenues generated from the Cimarrona and
Oklahoma properties are only sufficient to cover field operating expenses and a
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.





Results
of Operations





Year
ended December 31, 2009 compared to year ended December 31, 2008





2009
              
              
              2008
              
              
              ChangeAmount
              
              
              Percentage
              
              
              Amount
              
              
              Percentage
              
              
              Amount
              
              
              PercentageOil
      Sales
              
              $
              1,207,143
              
              
              
              42.9%
              
              
              $
              2,006,094
              
              
              
              64.6%
              
              
              $
              (798,951
              )
              
              
              -39.8%Pipeline
      Sales
              
              
              1,607,255
              
              
              
              57.1%
              
              
              
              1,099,982
              
              
              
              35.4%
              
              
              
              507,273
              
              
              
              46.1%Total
      Revenues
              
              $
              2,814,398
              
              
              
              100.0%
              
              
              $
              3,106,076
              
              
              
              100.0%
              
              
              $
              (291,678
              )
              
              
              -9.4%





Oil
Sales





Oil sales
were $1,207,143 in 2009, a decrease of $798,951, or 39.8% compared to $2,006,094
in 2008.  The decrease in oil sales is mostly due to a decrease in the
average gross price per barrel sold of $53.42 in 2009 compared to $90.71 in
2008.  In 2009, we sold 24,263 barrels (“BBLs”) compared to 24,376
BBBls in 2008.  Oil sales in Colombia accounted for approximately 92%
and 88% of total oil sales in 2009 and 2008, respectively.




12


Pipeline
Sales





Pipeline
sales were $1,607,255, an increase of $507,273, or 46.1% compared to $1,099,982
in 2008.  In 2009, our Cimarrona pipeline transported approximately
9.24 million barrels (of which our share was approximately 868,000 barrels)
compared to 5.96 million barrels (of which our share was approximately 560,000
barrels) in 2008.  2009 included a full year operation for Cimarrona,
which we acquired on April 1, 2008.





Total
Revenues





Total
revenues were $2,814,398 in 2009, a decrease of $291,678, or 9.4% compared to
$3,106,076  in 2008.  Approximately 97% and 92% of our 2009
and 2008 revenues, respectively, were derived from our Cimarrona property in
Colombia which we acquired on April 1, 2008.  Pipeline sales accounted
for approximately 57.1% and 35.4% of total revenues in 2009 and 2008,
respectively.





Production




2009
                
                
                2008
                
                
                Increase/(Decrease)Net
      Barrels
                
                
                %
      of Total
                
                
                Net
      Barrels
                
                
                %
      of Total
                
                
                Barrels
                
                
                %Colombia
                
                
                5,190
                
                
                
                88.8%
                
                
                
                6,815
                
                
                
                87.9%
                
                
                
                (1,625
                )
                
                
                -23.8%United
      States
                
                
                652
                
                
                
                11.2%
                
                
                
                940
                
                
                
                12.1%
                
                
                
                (288
                )
                
                
                -30.6%Total
                
                
                5,842
                
                
                
                100.0%
                
                
                
                7,755
                
                
                
                100.0%
                
                
                
                (1,913
                )
                
                
                -24.7%


2009
              
              
              2008
              
              
              Increase/(Decrease)Net
      Barrels
              
              
              %
      of Total
              
              
              Net
      Barrels
              
              
              %
      of Total
              
              
              Barrels
              
              
              %Colombia
              
              
              22,513
              
              
              
              92.4%
              
              
              
              18,793
              
              
              
              87.3%
              
              
              
              3,720
              
              
              
              19.8%United
      States
              
              
              1,839
              
              
              
              7.6%
              
              
              
              2,743
              
              
              
              12.7%
              
              
              
              (904
              )
              
              
              -32.9%Total
              
              
              24,352
              
              
              
              100.0%
              
              
              
              21,536
              
              
              
              100.0%
              
              
              
              2,816
              
              
              
              13.1%




Production,
net of royalties, was 24,532 BBLs, an increase of 2,816 BBLs, or 13.1% in 2009
compared to 21,536 in 2008.  Our Colombian property was in operation
for all of 2009 compared to 2008, when it was included from April 1,
2008.   Colombia production accounted for 92.4% and 87.3% of
total production in 2009 and 2008, respectively.





Operating
Costs and Expenses





2009
              
              
              2008Percent
      of
              
              
              
              
              
              Percent
      of
              
              
              ChangeAmount
              
              
              Revenues
              
              
              Amount
              
              
              Revenues
              
              
              Amount
              
              
              PercentageOperating
      Costs and ExpensesOperating
      Expenses
              
              $
              963,333
              
              
              
              34.2%
              
              
              $
              823,327
              
              
              
              26.5%
              
              
              $
              140,006
              
              
              
              17.0%Asset
      Impairment Charges
              
              
              1,900,248
              
              
              
              67.5%
              
              
              
              -
              
              
              
              0.0%
              
              
              
              1,900,248
              
              
              
              N/AStock
      Based Compensation Expense
              
              
              55,493
              
              
              
              2.0%
              
              
              
              3,410,708
              
              
              
              109.8%
              
              
              
              (3,355,215
              )
              
              
              -98.4%Depreciation
      , Depletion and Accretion
              
              
              374,121
              
              
              
              13.3%
              
              
              
              172,405
              
              
              
              5.6%
              
              
              
              201,716
              
              
              
              117.0%General
      & Administrative Expenses
              
              
              1,862,475
              
              
              
              66.2%
              
              
              
              1,713,560
              
              
              
              55.2%
              
              
              
              148,915
              
              
              
              8.7%Total
      Operating Costs and Expenses
              
              $
              5,155,670
              
              
              
              183.2%
              
              
              $
              6,120,000
              
              
              
              197.0%
              
              
              $
              (964,330
              )
              
              
              -15.8%




Operating
Expenses





Our
operating expenses in 2009 were $963,333, an increase of $140,006, or 17.0%
compared to $823,327 in 2008.  Operating expenses relating to the
Guaduas field and pipeline in Colombia were included for all of 2009 compared to
only nine months in 2008.  Operating expenses as a percentage of total
revenues increased to34.2% in 2009 from 26.5% in 2008 due to the increase in
operating expenses and the decrease in revenues.




13


Asset
Impairment





We
recorded an asset impairment charge of $1,900,248 in 2009 relating to our
withdrawal from the Rosablanca concession in 2009.  No comparable
impairment charge was recorded in 2008.





Stock
Based Compensation Expense





Stock
based compensation expense was $55,493 and $3,410,708 in 2009 and
2008.  2009 stock based compensation expense related primarily to
$48,000 of the value of shares issued to four consultants in
2009.  2008 Stock based compensation expense related  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.   All shares were
valued based on the stock price at the date of issuance.





General
and Administrative Expenses





General
and administrative expenses were $1,862,475 and $1,713,560 in 2009 and 2008,
respectively.  The $148,915 increase, or 8.7%, is primarily
attributable to increased compensation expense in 2009.  General and
administrative expenses as a percentage of total revenues increased to 66.2%
decreasing 2009 from 55.2% in 2008, due to an increase in operating expenses and
a decrease in revenues.





Depreciation,
depletion and accretion





Depreciation,
depletion and accretion were $374,121 in 2009 compared to $172,405 in 2008 in
2008, primarily due to the pipeline depreciation and the depletion in the
Guaduas field, which we acquired in April 1, 2008.





Loss
from Operations





Loss from
operations was $2,341,272 and $3,013,924 in 2009 and 2008,
respectively.





Interest
Expense





Interest
expense was $5,323 and $754,617 in 2009 and 2008, respectively.  2009
interest expense related primarily to the ARO accretion, while 2008 interest
expense 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.





Net
Loss





Net loss
was $2,316,493 and $3,742,343 in 2009 and 2008, respectively.


Foreign
Currency Translation





Foreign
currency translation gain was $124,617in 2009 compared to a foreign currency
translation loss of $507,872 in 2008.  The Colombian Peso to Dollar
Exchange Rate averaged 2,048 and 1,969 in 2009 and 2008,
respectively.  The Colombian Peso to Dollar Exchange Rate was 2,053
and 2,247 at December 31, 2009 and December 31, 2008, respectively.





Comprehensive
Loss





Comprehensive
loss was $2,191,876 and $4,250,215 in 2009 and 2008, respectively.




14


Liquidity
and Capital Resources





We had
working capital of $1,095,699 at December 31, 2009 compared to a working capital
deficit of $307,598 at December 31, 2008.  Working capital at December
31, 2009 consisted primarily of $1,174,989 of cash and cash equivalents and
$156,211 of accounts receivable offset by $269,346 of accounts payable and
accrued expenses.  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.





At both
December 31, 2009 and December 31, 2008, we had no debt on our balance
sheet.  Since January 1, 2007, we have raised in excess of $6,000,000
in gross proceeds through various debt and equity financings, as well as
partnership agreements.  We used the majority of the proceeds for
costs related to our Rosablanca concession in Colombia, as well as for working
capital purposes.





Net cash
provided by operating activities was $681,218 in 2009 compared to $66,049 for
2008.  The major components of the net cash provided by operating
activities for 2009 were the $1,900,247 asset impairment on the Rosablanca
concession, the $582,876 increase in accounts payable and accrued expenses and
the $374,121 provision for depreciation and depletion, offset by the net loss of
$2,316,493.  The major components of the net cash provided by
operating activities in 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 decrease in
accounts payable and accrued expenses.





Net cash
used in investing activities was $531,326 and $111,174 for 2009 and 2008,
respectively.  Net cash used in investing activities in 2009 consisted
primarily of $1,900,755 investments in oil and gas properties, offset by
$825,296 reimbursement by LEC for the Rosablanca project and $797,483
reimbursement by Pacific for the pipeline.  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.





Net cash
used by financing activities was $3,320 in 2009 and consisted entirely of
payments on a promissory note used to purchase a truck.  Net cash
provided by financing activities was $851,960 in 2008 and consisted primarily of
$483,414 of beginning cash balance in Cimarrona and $205,123 relating to the
maturity of Colombian bonds.




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 of
Cimarrona.





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 $32.35
to $73.66 per barrel in 2009 compared to $30.85 to $142.75 per barrel in
2008.  In our Cimarrona property in Colombia, we sold oil at $28.06 to
$74.40 per barrel in 2009 compared to $26.84 to $127.19 per barrel in
2008.  The Colombian Peso to Dollar Exchange Rate averaged
approximately 2,048 and 1,969 in 2009 and 2008, respectively.  The
Colombian Peso to Dollar Exchange Rate was 2,053 and 2,247 at December 31, 2009
and December 31, 2008




15





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 $53.42 and $90.71 in 2009 and 2008,
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 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 codified by FASB ASC topic
932.  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, 2009 and December 31,
2008, our oil production operations were conducted in Colombia and 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," as
codified by FASB ASC topic 410, 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.




16




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 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 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.





(b)
Internal Controls Over Financial Reporting.




17


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, 2009, 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, 2009 is
not effective.  Based on this assessment, management has determined
that, as of December 31, 2009, 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 effect 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 independent registered public accounting firm pursuant to
temporary rules of the SEC 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 year ended December 31, 2009 that have materially
affected, or are reasonable likely to materially affect, the Company’s internal
control over financial reporting.





Item 9B. Other
Information





None




PART
III


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, Chairman
            February
      2007
            57Greg
      Franklin
            Chief
      Geologist, Director
            May
      2005
            53





18




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 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, 2009, 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 2009 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.





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 intends to continually evaluate the need for a
Nominating Committee.




19


Code
of Conduct





We have 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
      conflictsof
      interest between personal and professional
  relationships;(2)
            Full,
      fair, accurate, timely and understandable disclosure in reports and
      documents thatare
      filed with, or submitted to, the Commission and in other public
      communications madeby
      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 personsidentified
      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.




20


Item 11. Executive
Compensation





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





SUMMARY
      COMPENSATION TABLEName
      and principal position
            
            Year
            
            Salary
            
            
            Bonus
            
            
            Stock
              Awards
            
            
            Nonequity
      incentive plan compensation
            
            
            Nonqualified
      deferred compensation earnings
            
            
            All
      other
              compensation
      (1)
            
            
            TotalKim
      Bradford
            
            2009
            
            $
            236,308
            
            
            $
            100,000
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            336,308President,
      CEO and CFO
            
            2008
            
            $
            144,000
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            144,000Greg
      Franklin
            
            2009
            
            $
            212,308
            
            
            $
            50,000
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            262,308Chief
      Geologist
            
            2008
            
            $
            120,000
            
            
            $
            50,000
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            170,000





On
November 9, 2007, the Company entered into employment agreements with Kim
Bradford to serve as President and Chief Executive Officer and Greg Franklin to
serve as Chief Geologist.  All of the agreements were 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.    Both
Mr. Bradford and Mr. Franklin’s annual base salaries were increased to $240,000
during 2009 pursuant to a verbal agreement.  The Company is currently
negotiating with Mr. Bradford and Mr. Franklin on a new employment
contract.





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.





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)Kim
      Bradford
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            ---
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Greg
      Franklin
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            ---
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            --





21




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





The
following table shows information as of March 15, 2010 with respect to each
beneficial owner of more than five percent of the Company’s Common
Stock:





Name
      and Address of
                Beneficial
      Owner
              Common
      Stock
                Beneficially
      Owned
              Percent
                of
      ClassKim Bradford
                2445
      5th Avenue, Suite 310
                  San
      Diego, CA  92101
              6,055,000
              13.2%E. Peter Hoffman, Jr.[1]
                6301
      N. Western
                  Suite
      260
                    Oklahoma
      City, OK  73118
              6,040,000
              13.1%Mustang Capital Venture, LLC[2]
                10101
      Reunion Place, Suite 1000
                  San
      Antonio, TX  78216
              5,250,000
              11.4%Sunstone Corporation[3]
                101
      N. Robinson, Suite 800
                  Oklahoma
      City, OK  73102
              3,875,000
              8.2%Greg
      L. Franklin
                2445
      5th Avenue, Suite 310
                  San
      Diego, CA  92131
              3,000,000
              6.5%




The
percentage ownership is based on 45,959,775 shares outstanding at March 15,
2010





[1]
Information is derived from Schedule 13D filed by Mr. Hoffman, Jr.


[2]
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.


[3]
Information is derived from Schedule 13D filed by Mustang Capital Venture,
LLC.





The
following table shows information as of March 15, 2010 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 of
                Beneficial
      Owner
              Common
      Stock
                Beneficially
      Owned
              Percent
                of
      ClassKim Bradford
                2445
      5th Avenue, Suite 310
                  San
      Diego, CA  92101
              6,055,000
              13.2%Greg
      L. Franklin
                2445
      5th Avenue, Suite 310
                  San
      Diego, CA  92131
              3,000,000
              6.5%Officers
      and Directors as aGroup
      (2 people)
              9,055,000
              19.7%




The
percentage ownership is based on 45,959,775 shares outstanding at March 15,
2010.





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




22


Changes
in Control


On
December 28, 2006, a change of control occurred when Kim Bradford, our CEO,
President, CFO and Chairman, along with 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, Mr. Bradford issued a note in the amount of $151,375
for the purchase of 6,055,000 shares. In December 2007, Mr. Bradford paid in
full his note plus accrued interest.





Item 13. Certain Relationships and
Related 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-Q were
$85,000 for both 2009 and 2008.


TAX
FEES





Our
auditors did not bill us for any tax services during 2009 and 2008.





ALL
OTHER FEES





Our
auditors did not bill us for any other services during 2009 and
2008.




23




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)10.21
            Settlement
      Agreement between Lewis Energy Colombia, Inc., Gold Oil Plc Sucursal
      Colombia, EMPESA, SA, and Osage Exploration and Development, Inc. Sucrusal
      Colombia dated September 15, 2009 (12)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


(11)
Incorporated by reference to Osage’s Form 8-k filed March 5, 2009


(12)
Incorporated by reference to Osage’s Form 8-k filed September 17,
2009




24


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 BRADFORDDated:
      March 19, 2010
              
              Kim
      Bradford
                President
      and C.E.O.BY:
              /S/
      KIM BRADFORDDated:
      March 19, 2010
              
              Kim
      Bradford
                Chief
      Financial Officer


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





Signature
            Title
            Date/s/ KIM
      BRADFORD
            President,
      Chief Executive Officer, Chief Financial Officer and
    Chairman
            March
      19,  2010Kim
      Bradford
            (Principal
      Executive and Financial Officer)/s/ GREG
      FRANKLIN
            Chief
      Geologist and Director
            March
      19,  2010Greg
      Franklin




25




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, 2009 and 2008:




PageReport of
      Independent Accountant
            F-1Consolidated Balance
      Sheets as of December 31, 2009 and 2008
            F-2Consolidated
      Statements of Operations for Years Ended December 31, 2009 and
    2008
            F-3Consolidated
      Statements of Stockholders’ Equity (Deficit) from December 31, 2007 to
      December 31, 2009
            F-4Consolidated
      Statements of Cash Flows for Years Ended December 31, 2009 and
    2008
            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, 2009 and
December 31, 2008, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years ended December
31, 2009 and 2008. 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, 2009, and the results of
its operations and its cash flows for the years ended December 31, 2009 and
2008, 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,
2009.  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/ GPKM,
LLP





GPKM,
LLP


Encino,
California


March 15,
2010




F-1





OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS






2009
            
            
            2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            1,174,989
            
            
            $
            988,508Colombian
      Deposits (Note 5)
            
            
            -
            
            
            
            537,665Accounts
      Receivable
            
            
            156,211
            
            
            
            64,658Bank
      CD pledged for Letter of Credit (Note 7)
            
            
            -
            
            
            
            145,632Other
      Current Assets
            
            
            -
            
            
            
            110,986Prepaid
      Expenses
            
            
            37,380
            
            
            
            65,380Total
      Current Assets
            
            
            1,368,580
            
            
            
            1,912,829Property
      and Equipment, at cost (Note 4):Oil
      and gas properties and equipment
            
            
            2,174,793
            
            
            
            4,920,550Capitalized
      asset retirement costs
            
            
            46,146
            
            
            
            13,675Other
      property & equipment
            
            
            48,205
            
            
            
            46,2222,269,144
            
            
            
            4,980,447Less:
      accumulated depletion, depreciationand amortization
            
            
            (557,287
            )
            
            
            (183,166
            )1,711,857
            
            
            
            4,797,281Bank
      CD pledged for Bond
            
            
            30,000
            
            
            
            30,000Total
      Assets
            
            $
            3,110,437
            
            
            $
            6,740,110LIABILITIES AND
      STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            221,398
            
            
            $
            2,128,915Accrued
      Expenses
            
            
            47,948
            
            
            
            87,940Current
      Maturity of Promissory Note (Note 9)
            
            
            3,535
            
            
            
            3,572Total
      Current Liabilities
            
            
            272,881
            
            
            
            2,220,427Promissory
      Note, net of Current Maturity (Note 9)
            
            
            -
            
            
            
            3,283Liability
      for Asset Retirement Obligations (Note 14)
            
            
            55,742
            
            
            
            18,203Commitments
      and Contingencies (Note 12)Stockholders'
      Equity:Common
      stock, $0.0001 par value, 190,000,000 sharesauthorized;
      46,959,775  and 40,959,775 shares issued andoutstanding
      as of
              December
      31, 2009 and December
      31, 2008, respectively.
            
            
            4,696
            
            
            
            4,096Additional-Paid-in-Capital
            
            
            11,804,013
            
            
            
            11,336,613Deferred
      Compensation
            
            
            -
            
            
            
            (7,493
            )Stock
      Purchase Notes Receivable
            
            
            (142,500
            )
            
            
            (142,500
            )Accumulated
      Deficit
            
            
            (8,472,209
            )
            
            
            (6,155,716
            )Accumulated
      Other Comprehensive Loss -Currency
      Translation (Loss)
            
            
            (412,186
            )
            
            
            (536,803
            )2,781,814
            
            
            
            4,498,197Total
      Liabilities and Stockholders' Equity
            
            $
            3,110,437
            
            
            $
            6,740,110




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





F-2




OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF OPERATIONS


2009
            
            
            2008Operating
      RevenuesOil
      Sales
            
            $
            1,207,143
            
            
            $
            2,006,094Pipeline
      Sales
            
            
            1,607,255
            
            
            
            1,099,982Total
      Operating Revenues
            
            
            2,814,398
            
            
            
            3,106,076Operating
      Costs and ExpensesOperating
      Expenses
            
            
            963,333
            
            
            
            823,327Asset
      Impairment
            
            
            1,900,248
            
            
            
            -Depreciation,
      Depletion and Accretion
            
            
            374,121
            
            
            
            172,405Stock
      Based Compensation Expense
            
            
            55,493
            
            
            
            3,410,708General
      and Administrative Expenses
            
            
            1,862,475
            
            
            
            1,713,560Total
      Operating Costs and Expenses
            
            
            5,155,670
            
            
            
            6,120,000Operating
      (Loss)
            
            
            (2,341,272
            )
            
            
            (3,013,924
            )Other
      Income (Expenses):Interest
      Income
            
            
            30,102
            
            
            
            134,108Interest
      Expense
            
            
            (5,323
            )
            
            
            (754,617
            )Other
            
            
            -
            
            
            
            (107,910
            )(Loss)
      before Income Taxes
            
            
            (2,316,493
            )
            
            
            (3,742,343
            )Provision
      for Income Taxes (Note 14)
            
            
            -
            
            
            
            -Net
      (Loss)
            
            
            (2,316,493
            )
            
            
            (3,742,343
            )Other
      Comprehensive Income, net of tax:Foreign
      Currency Translation Adjustment
            
            
            124,617
            
            
            
            (507,872
            )Other
      Comprehensive Income
            
            
            124,617
            
            
            
            (507,872
            )Comprehensive
      (Loss)
            
            $
            (2,191,876
            )
            
            $
            (4,250,215
            )Basic
      and Diluted Loss per Share
            
            $
            (0.05
            )
            
            $
            (0.10
            )Weighted
      average number of common share
                  and common share equivalents used to
                  compute basic and dilluted Loss per Share
            
            
            45,789,775
            
            
            
            39,193,382


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





F-3




OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


Common
      Stock
              
              
              AdditionalPaid-In
              
              
              StockPurchase
                Note
              
              
              Accumulated
              
              
              Deferred
              
              
              AccumulatedOtherComprehensive
              
              
              TotalShares
              
              
              Amount
              
              
              Capital
              
              
              Receivable
              
              
              Deficit
              
              
              Compensation
              
              
              Loss
              
              
              EquityBalance
      at December 31, 2007
              
              
              35,959,775
              
              
              $
              3,596
              
              
              $
              7,478,768
              
              
              $
              (309,875
              )
              
              $
              (2,413,373
              )
              
              $
              (2,750,201
              )
              
              $
              (28,931
              )
              
              $
              1,979,984Payment
      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
              )
              
              $
              4,498,197Issuance
      of Shares for Professional Services
              
              
              750,000
              
              
              
              75
              
              
              
              47,925
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              48,000Issuance
      of Shares to Lewis Energy
              
              
              5,250,000
              
              
              
              525
              
              
              
              419,475
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              420,000Deferred
      Compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,493
              
              
              
              
              
              
              
              7,493Net
      (Loss) for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,316,493
              )
              
              
              
              
              
              
              
              
              
              
              (2,316,493
              )Foreign
      Exchange Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              124,617
              
              
              
              124,617Balance
      at December 31, 2009
              
              
              46,959,775
              
              
              $
              4,696
              
              
              $
              11,804,013
              
              
              $
              (142,500
              )
              
              $
              (8,472,209
              )
              
              $
              -
              
              
              $
              (412,186
              )
              
              $
              2,781,814




The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4




OSAGE
EXPLORATION AND DEVELOPMENT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CASH FLOWS
  2009
              
              
              2008Cash
      flows from Operating Activities:Net
      (Loss)
              
              $
              (2,316,493
              )
              
              $
              (3,742,343
              )Adjustments
      to reconcile net (loss) to net cashprovided/(used) sed by
      operating activites:Asset
      Impairment
              
              
              1,900,247
              
              
              
              -Beneficial
      Conversion of Convertible Debenture
              
              
              -
              
              
              
              652,753Amortization
      of Deferred Compensation
              
              
              7,493
              
              
              
              2,742,708Shares
      issued for services
              
              
              48,000
              
              
              
              668,000Amortization
      of Deferred Financing Cost
              
              
              -
              
              
              
              33,638Accretion
      of Asset Retirment Obligation
              
              
              37,539
              
              
              
              1,656Provision
      for depletion, depreciation,amortization and valuation
      allowance
              
              
              374,121
              
              
              
              172,405Changes
      in operating assets and liabitlies:(Increase)
      in accounts receivable
              
              
              (91,553
              )
              
              
              (53,117
              )(Increase)
      in other current assets
              
              
              109,861
              
              
              
              (50,367
              )(Increase)
      in prepaid expenses
              
              
              29,127
              
              
              
              (748
              )Increase/(decrease)
      in accounts payable and accrued expenses
              
              
              582,876
              
              
              
              (358,536
              )Net
      cash provided by operating activities
              
              
              681,218
              
              
              
              66,049Cash
      flows used in Investing Activities:Increase
      in ARO
              
              
              (32,471
              )
              
              
              -Reimbursement
      by Pacific for Pipeline
              
              
              797,483
              
              
              
              -Assignment
      of Rosablanca
              
              
              232,500
              
              
              
              -Reimbursement
      by LEC for RB#1 and #2
              
              
              825,296
              
              
              
              -Investments
      in Oil & Gas Properties
              
              
              (1,900,755
              )
              
              
              (803,819
              )Loss
      of Deposit on Oil & Gas Property
              
              
              -
              
              
              
              82,000Investment
      in Cd pledged for letter of credit
              
              
              (49,453
              )
              
              
              -Return
      of deposit made on Oil & Gas Property
              
              
              -
              
              
              
              140,000Purchase
      of Non Oil & Gas property
              
              
              (1,983
              )
              
              
              (22,702
              )Interest
      earned on Bank CD pledged for Letter of Credit
              
              
              (1,535
              )
              
              
              1,411Payments
      from/ (into) Colombian Trust Account
              
              
              (400,408
              )
              
              
              491,936Net
      cash (used) by investing activities
              
              
              (531,326
              )
              
              
              (111,174
              )Cash
      flows provided by Financing Activities:Proceeds
      from payment on Stock Purchase Notes Receivable
              
              
              167,375Cash
      balances at Cimarrona at Acquisition
              
              
              
              
              
              
              483,414Maturity
      of Colombian Peace Bonds
              
              
              
              
              
              
              205,123Payments
      on Promissory Notes
              
              
              (3,320
              )
              
              
              (3,952
              )Net
      cash (used)/provided by financing activities
              
              
              (3,320
              )
              
              
              851,960Effect
      of exchange rate on cash and cash equivalents
              
              
              39,909
              
              
              
              (507,872
              )Net
      increase in cash and cash equivalents
              
              
              186,481
              
              
              
              298,963Cash
      and Cash equivalents beginning of year
              
              $
              988,508
              
              
              $
              689,545Cash
      and Cash equivalents at end of year
              
              $
              1,174,989
              
              
              $
              988,508SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      Payment for Interest
              
              
              255
              
              
              
              66,570Cash
      Payment for Taxes
              
              
              15,882
              
              
              
              3,401Non-Cash
      Transactions:Forgiveness
      of accounts payable by Lewis Energy Corporation
              
              
              1,985,043Forgiveness
      of Joint Operating Account Liabilities by PacificRubiales Energy
      Corp.
              
              
              799,907Issuance
      of Shares to Lewis Energy Corporation
              
              
              420,000Forgiveness
      of accounts payable by various vendors relating toRosablanca
              
              
              124,306Shares
      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
              
              
              2,128,392Issuance
      of Shares for Services
              
              
              48,000
              
              
              
              668,000





The
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, 2009 and 2008





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 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 (“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
$8,472,209 at December 31, 2009 and $6,155,716 at December 31,
2008.  Substantial portions of the losses are attributable to stock
based compensation expense, asset impairment charges relating to the Rosablanca
concession and 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 is
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 16:
Supplemental Information About Oil and Gas Producing Activities).





RECLASSIFICATIONS





Certain
prior period amounts were reclassified to conform to current
presentation.





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 2009 and 2008.   At
December 31, 2009 and December 31, 2008, the Company had $571,515 and $275,142
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. (“Pacific”)  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, 2009 and December 31,
2008.  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 are the
operators of this property.





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.  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 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 we completed
testing on the first well without finding producible hydrocarbons in any of the
zones evaluated.  In September 2009, we entered into the Termination
Agreement with Gold, EMPESA and Lewis, whereby we and Lewis withdrew from the
Rosablanca concession.  Therefore, we have written off our entire
investment in the Rosablanca concession as of December 31, 2009.





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.  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 2010 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, 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.




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 codified by FASB ASC topic
932.  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, 2009 and 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, 2009 and December 31, 2008.





In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations", as
codified by FASB ASC topic 410, 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”), as codified by the
FASB ASC topic 360 (“ASC 360”), 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 ASC
360. ASC 360 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. In
2009, the Company wrote-off its entire investment in the Rosablanca concession
of $1,900,248.  Based on further review, the Company believes that, as
of December 31, 2009 and December 31, 2008, 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”, as codified
by FASC ASC topic 718.  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 2009,
we issued a total of 750,000 shares to four consultants.  All of the
shares vested immediately and were recorded as stock based compensation expense
in 2009 and valued at the stock price at the time of issuance with a total value
of $48,000.  In 2008, we issued a total of 1,600,000 shares to three
consultants.  All of the shares vested immediately and were recorded
as stock based compensation expense in 2008.  The shares were valued
at the stock price at the time of issuance with a total value of
$668,000.




F-10




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 $7,493 and $2,747,207 in 2009 and
2008, respectively.





IMPACT OF
RECENT ACCOUNTING PRONOUNCEMENTS





Recent
Pronouncements





In June
2009, the FASB issued Financial Accounting Standard No. 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 162” (FAS 168).
In addition in September 2009, the FASB issued Accounting Standards Update
No. 2009-01, “Topic 205 – Generally Accepted Accounting Principles -
amendments based on Statement of Financial Accounting Standards No. 168 –
The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles” (ASU 2009-1). Both FAS 168 and ASU 2009-1
recognize the FASB Accounting Standards Codification as the source of
authoritative U.S. GAAP to be utilized by nongovernmental entities. FAS 168 and
ASU 2009-1 are effective for interim and annual periods ending after
September 15, 2009. The adoption of this pronouncement did not have a
material impact on the Company’s financial statements.





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, as codified in FASB ASC topic 810 (“ASC 810”). ASC 810
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.  ASC 810 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. ASC 810 is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  The adoption of ASC 810 did not have a material
impact on the Company’s financial statements.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities,” as codified by FASB ASC topic 815 (“ASC
815”).  ASC 815 requires enhanced disclosures about an entity’s
derivative and hedging activities.  The adoption of ASC 815 did not
have a material 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," as codified by
FASB ASC topic 944 (“ASC 944”).  The scope of ASC 944 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, ASC 944 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), ASC 944 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," as codified by FASB ASC topic 815.  The adoption of ASC
944 did not have a material impact on the Company's financial
statements.





In
May 2009, the FASB issued FASB No. 165, “Subsequent Events” (“SFAS
165”), as codified by FASB ASC topic 855(“ASC 855”).  ASC 855
establishes general standards of accounting for disclosing events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date,
that is, whether that date represents the date the financial statements were
issued or were available to be issued. ASC 855 is effective for interim or
annual financial periods ending after September 15, 2009. The adoption of
ASC 855 did not have a material impact on the Company.




F-11




In June
2009, the FASB issued FASB No. 166, “Accounting for Transfers of
Financial Assets - an amendment of FASB Statement No. 140” (“SFAS
166”), as codified by FASB ASC topic 860 (“ASC 860”).  ASC 860
requires additional disclosures about the transfer and derecognition of
financial assets and eliminates the concept of qualifying special-purpose
entities under SFAS 140.  ASC 860 is effective for fiscal years
beginning after November 15, 2009. The adoption of ASC 860 did not have a
material impact on the Company.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)”(“SFAS 167”). SFAS 167 amends certain requirements of
FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest
Entities”, as codified by FASC ASC topic 810 (“ASC 810”) to improve
financial reporting by enterprises involved with variable interest entities and
to provide more relevant and reliable information to users of financial
statements. This Statement is effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. Earlier application is prohibited. The
adoption of ASC 810 did not have a material impact on the Company.





All new
accounting pronouncements issued but not yet effective have been deemed to not
be applicable, hence the adoption of these new standards is not expected to have
a material impact on the consolidated financial statements.





INCOME
TAXES





On
January 1, 2008, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes,” as codified by FASB ASC topic
740 (“ASC 740”).   As a result of the implementation of ASC 740,
the Company made a comprehensive review of its portfolio of tax positions in
accordance with recognition standards established by ASC 740.  As a
result of the implementation of ASC 740, the Company recognized no material
adjustments to liabilities or stockholders equity.





When tax
returns are filed, it is highly certain 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.





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.




We did
not have a provision for income taxes for 2009.  Due to a history of
operating losses, the Company records a full valuation allowance against its net
deferred tax assets and therefore 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", as codified by FASB ASC topic
260, 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.




F-12





2. EQUITY
TRANSACTIONS





Cimarrona
Acquisition


On
April 8, 2008, we entered into the Purchase Agreement with Sunstone
pursuant to which the Company 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
cover 30,665 acres in the Middle Magdalena Valley in Colombia.  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.  In addition, the Company issued
50,000 shares of Common Stock to a financial advisor and $22,500 to an
unaffiliated individual as a finder’s fee.





Lewis Energy Colombia,
Inc.


In March
2009, we entered into the LEC Agreement, whereby LEC agreed to provide
$3,500,000, to drill the first well and become operator of Rosablanca in return
for a 50% assignment of our 50% operating interest in Rosablanca.  In
addition, LEC was entitled to recoup two times its investment in the first well
before Osage receives any cash flow from the first well.  The
transaction was recorded in accordance with paragraph 47(c) SFAS 19, “Financial
Accounting and Reporting by Oil and Gas Producing Companies,” as codified in
FASB ASC section 932-360-55.  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 were to be allocated 40% to Gold, 25% to LEC, 25%
to us and 10% to Empesa.    We recognized no gain or loss on
the assignment of our interest.  In March 2009, we announced we
completed testing on the first well without finding producible hydrocarbons in
any of the zones evaluated.  In September 2009, we entered into the
Termination Agreement with Gold, EMPESA and Lewis, whereby we and Lewis agreed
to withdraw from the Rosablanca concession





3.
GEOGRAPHICAL INFORMATION





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





Colombia
              
              
              United
      States
              
              
              ConsolidatedDecember
      31, 2009Total
      Revenues
              
              $
              2,722,243
              
              
              $
              92,155
              
              
              $
              2,814,398%
      of Total
              
              
              96.7%
              
              
              
              3.3%
              
              
              
              100.0%Long
      Lived Assets
              
              $
              2,053,820
              
              
              $
              215,324
              
              
              $
              2,269,144%
      of Total
              
              
              90.5%
              
              
              
              9.5%
              
              
              
              100.0%December
      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%




F-13




4. OIL
AND GAS PROPERTIES





Oil and
gas properties consisted of the following as of December 31, 2009 and December
31, 2008:




2009
              
              
              2008Properties
      subject to amortization
              
              $
              1,952,295
              
              
              $
              2,239,193Properties
      not subject to amortization
              
              
              -
              
              
              
              2,681,357Capitalized
      asset retirement costs
              
              
              46,146
              
              
              
              13,675Accumulated
      depreciation and depletion
              
              
              (489,513
              )
              
              
              (143,290
              )Oil
      & Gas Properties, Net
              
              $
              1,508,928
              
              
              $
              4,790,935
  Depreciation
and depletion expense for oil and gas properties totaled $343,996 and $138,539
in 2009 and 2008, respectively.





5.
COLOMBIAN DEPOSITS





In August
2007, we (i) paid $1,200,000 to Gold representing funds that 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 requires 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.  In the first quarter of 2009, we
funded both the trust account and the letter of credit.  As we
withdrew from the concession in 2009, we wrote off all of the remaining balance
in the trust account as of December 31, 2009.




6.  DEPOSITS




In
January 2007, we deposited $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 did 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 wrote off the deposit to zero.





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 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-14


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 4 above.  The letter of credit expired in 2009 and we
redeemed the CD at that time.  The balance in the bank CD pledged for
letter of credit was $0 and $145,632 as of December 31, 2009 and December 31,
2008, respectively.





8.
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,
2009 and 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,” as codified by FASB ASC topic 470
(“ASC 470”).  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.





9.
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 had a balance of $3,535 as
of December 31, 2009 and 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, 2009, the interest rate on the Promissory
Note was 4.25%.





10.
COMMITMENTS AND CONTINGENCIES





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





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,
2009, 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.




F-15


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, 2009 under operating leases
are as follows by year:





Year
              
              20102010
              
              $
              46,9502011
              
              
              3,923Totals
              
              $
              50,873





Rental
expense charged to operations totaled $53,093and $45,607 in 2009 and 2008,
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.





11.
DILUTIVE SECURITIES





As of
December 31, 2009, 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
              
              
              
              1.74
      years




As of
December 31, 2008, Osage had the following dilutive securities:





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




12.
INCOME TAXES





The total
provision for income taxes consists of the following in 2009 and 2008 (in
thousands):




Year
      Ended December 31,2009
              
              
              2008Current
      Taxes:Federal
              
              $
              -
              
              
              $
              -State
              
              
              -
              
              
              
              -Foreign
              
              
              -
              
              
              
              570-
              
              
              
              570Deferred
      Taxes:Federal
              
              
              311
              
              
              
              1,374State
              
              
              42
              
              
              
              258Foreign
              
              
              -
              
              
              
              -Valuation
      Allowance
              
              
              (353
              )
              
              
              (2,202
              )Totals
              
              $
              -
              
              
              $
              -


F-17


Following
is a reconciliation of the Federal statutory rate to the effective income tax
rate for 2009 and 2008:




2009
              
              
              2008Computed
      tax provision at statutory Federal rates
              
              
              -34%
              
              
              
              -34%Increase
      (decrease) in taxes resulting from:State
      taxes, net of Federal income tax benefit
              
              
              -6%
              
              
              
              -6%Nondeductible
      and other expenses
              
              
              21%
              
              
              
              10%Valuation
      Allowance
              
              
              19%
              
              
              
              30%0%
              
              
              
              0%





At
December 31, 2009, the Company had net operating loss carry forwards of
approximately $8.5 million which expire at various dates through
2029.





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, 2009
and December 31, 2008 (in thousands):





2009
              
              
              2008Deferred
      tax liability:Net
      operating loss carry forward
              
              $
              1,687
              
              
              $
              1,380Other
              
              
              1,146
              
              
              
              1,099Valuation
      allowance
              
              
              (2,833
              )
              
              
              (2,479
              )Net
      deferred tax liability
              
              
              -
              
              
              $
              -




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.





13. MAJOR
CUSTOMERS





During
2009 and 2008, the Company had three customers that accounted for all of its
sales.  In 2009, Pacific, Hocol and Sunoco accounted for 57%, 40% and
3%, respectively.  In 2008, Hocol, Pacific and Sunoco, each accounted
for 57%, 35% and 8% of total revenues, respectively.





14. 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-18




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, 2009 and 2008, 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:





2009
              
              
              2008Beginning
      Balance
              
              $
              18,203
              
              
              $
              16,547Incurred
      during the periodAdditions
      for new wells
              
              
              32,471Accretion
      expense
              
              
              5,068
              
              
              
              1,656Ending
      Balance
              
              $
              55,742
              
              
              $
              18,203




15.
SUBSEQUENT EVENTS





Subsequent
to year end, of the $142,500 of notes receivable at December 31, 2009, the
Company extended the maturity date on $95,000 of the notes to December 31,
2011.  On January 30, 2010, the Company received and cancelled
1,000,000 shares of Common Stock that were issued to an investor pursuant to
$47,500 of notes which were secured by 1,900,000 shares.  The Company
is attempting to collect the additional 900,000 shares, which it will cancel
upon receipt.





16.
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)





Petrotech
Engineering, Ltd, and Reddy Petroleum Company prepared reserve estimates for the
year-end reports for 2009 for the Cimarrona Property and Osage Property,
respectively.  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
codified by FASB ASC topic 932, 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 and Colombia.




F-19




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, 2009 and 2008 are as
follows:





2009
              
              
              2008Colombia
              
              
              USA
              
              
              Combined
              
              
              Colombia
              
              
              USA
              
              
              CombinedProved
      Properties
              
              
              2,091,908
              
              
              $
              145,799
              
              
              
              2,237,707
              
              
              
              2,091,908
              
              
              $
              145,799
              
              
              
              2,237,707Unproved
      properties being amortized
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -Unproved
      properties not being amortized
              
              
              2,682,843
              
              
              
              
              
              
              
              2,682,843
              
              
              
              2,682,843
              
              
              
              
              
              
              
              2,682,843Capitalized
      asset retiremet costs
              
              
              
              
              
              
              13,675
              
              
              
              13,675
              
              
              
              
              
              
              
              13,675
              
              
              
              13,675Accumulated
      depletion, depreciation,
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -amortization
      and valuation allowances
              
              
              (157,549
              )
              
              
              (8,589
              )
              
              
              (166,138
              )
              
              
              (157,549
              )
              
              
              (8,589
              )
              
              
              (166,138
              )$
              4,617,202
              
              
              $
              150,885
              
              
              $
              4,768,087
              
              
              $
              4,617,202
              
              
              $
              150,885
              
              
              $
              4,768,087




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:




2009
      Oil (BBLs)
              
              
              2009
      Gas (MMCF)Colombia
              
              
              USA
              
              
              Combined
              
              
              Colombia
              
              
              USA
              
              
              CombinedProved
      developed andundeveloped reserves:Beginning
      of year
              
              
              145,794
              
              
              
              44,633
              
              
              
              190,427
              
              
              
              6,284
              
              
              
              
              
              
              6,284Revisions
      of previous estimates
              
              
              355,920
              
              
              
              81,258
              
              
              
              437,178
              
              
              
              2,820
              
              
              
              200
              
              
              
              3,020Improved
      recovery
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -Purchases
      of Minerals in place
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -Extensions
      and discoveries
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -Production
              
              
              (28,142
              )
              
              
              (2,263
              )
              
              
              (30,405
              )
              
              
              
              
              
              
              
              
              
              
              -Sales
      of minerals in place
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -End
      of year
              
              
              473,572
              
              
              
              123,628
              
              
              
              597,200
              
              
              
              9,104
              
              
              
              200
              
              
              
              9,304Proved
      developed reserves:Beginning
      of year
              
              
              145,794
              
              
              
              44,633
              
              
              
              190,427
              
              
              
              6,284
              
              
              
              -
              
              
              
              6,284End
      of year
              
              
              160,307
              
              
              
              123,628
              
              
              
              597,200
              
              
              
              9,104
              
              
              
              200
              
              
              
              9,304
  F-20
  2008
      Oil (BBLs)
                
                
                2008
      Gas (MCF)Colombia
                
                
                USA
                
                
                Combined
                
                
                Colombia
                
                
                USA
                
                
                CombinedProved
      developed andundeveloped reserves:Beginning
      of year
                
                
                
                
                
                157,066
                
                
                
                157,066
                
                
                
                
                
                
                200
                
                
                
                200Revisions
      of previous estimates
                
                
                
                
                
                (109,057
                )
                
                
                (109,057
                )
                
                
                
                
                
                (200
                )
                
                
                (200
                )Improved
      recovery
                
                
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                
                
                
                -Purchases
      of Minerals in place
                
                
                351,269
                
                
                
                
                
                
                
                351,269
                
                
                
                6,284
                
                
                
                
                
                
                
                6,284Extensions
      and discoveries
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                -Production
                
                
                (23,491
                )
                
                
                (3,376
                )
                
                
                (26,867
                )
                
                
                
                
                
                
                
                
                
                
                -Sales
      of minerals in place
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                -End
      of year
                
                
                327,778
                
                
                
                44,633
                
                
                
                372,411
                
                
                
                6,284
                
                
                
                -
                
                
                
                6,284Proved
      developed reserves:Beginning
      of year
                
                
                -
                
                
                
                157,066
                
                
                
                157,066
                
                
                
                -
                
                
                
                200
                
                
                
                200End
      of year
                
                
                145,794
                
                
                
                44,633
                
                
                
                372,411
                
                
                
                6,284
                
                
                
                -
                
                
                
                6,284


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.





The
Colombian reserves are attributable entirely to the Guaduas field, which we hold
through our Cimarrona subsidiary, which owns 9.4% of the Guaduas
field.  There are no reserves attributable to partnership or minority
interests at December 31, 2009 or December 31, 2008.





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





2009
              
              
              2008USA
              
              
              Colombia
              
              
              Combined
              
              
              USA
              
              
              Colombia
              
              
              CombinedProved
      developed and undeveloped reserves
              
              $
              5,572,144
              
              
              $
              7,679,000
              
              
              $
              13,251,144
              
              
              $
              717,906
              
              
              $
              8,295,000
              
              
              $
              9,012,906(Present
      Value before income taxes)





Depletion,
depreciation and accretion per equivalent unit of production was and $3.38 and
$0.53 for 2009 and 2008 in the United States, respectively.  In
Colombia, the depletion, depreciation and accretion per equivalent unit was and
$0.97 and $0.55 in 2009 and 2008, respectively.





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".




F-21




Costs
incurred, both capitalized and expensed, for oil and gas property acquisition,
exploration and development for the years ended December 31, 2009 and 2008 are
as follows:





December
      31, 2009
              
              USA
              
              
              Colombia
              
              
              CombinedProperty
      acquisition costs
              
              
              -
              
              
              
              -
              
              
              
              -Exploration
      costs
              
              
              
              
              
              
              2,118,662
              
              
              
              2,118,662Development
      costs
              
              
              7,645
              
              
              
              363,852
              
              
              
              371,497Asset
      retirement costs
              
              
              -
              
              
              
              -
              
              
              
              -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
              
              
              -
              
              
              
              -
              
              
              
              -





The
results of operations for oil and gas producing activities for 2009 and 2008
were as follows:




2009
              
              
              2008USA
              
              
              Colombia
              
              
              Combined
              
              
              USA
              
              
              Colombia
              
              
              CombinedSales
              
              
              92,155
              
              
              
              1,114,988
              
              
              
              1,207,143
              
              
              
              245,451
              
              
              
              1,760,643
              
              
              
              2,006,094Production
      Costs
              
              
              118,653
              
              
              
              749,800
              
              
              
              868,453
              
              
              
              112,965
              
              
              
              710,632
              
              
              
              823,597Exploration
      Costs
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Depletion,
      depreciation, amortizationand valuation allowance
              
              
              7,696
              
              
              
              321,751
              
              
              
              329,447
              
              
              
              1,786
              
              
              
              136,753
              
              
              
              138,539Income
      Tax Provision
              
              
              (13,678
              )
              
              
              17,375
              
              
              
              3,697
              
              
              
              52,280
              
              
              
              365,303
              
              
              
              417,583Results
      of Operations fromProduction activities
              
              
              (20,516
              )
              
              
              26,062
              
              
              
              5,546
              
              
              
              78,420
              
              
              
              547,955
              
              
              
              626,375




The
following information at December 31, 2009 and for 2009 and 2008, 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.




F-22


The
following table presents the standardized measure of discounted estimated net
cash flows relating to proved oil and gas reserves for 2009 and
2008:





2009
            
            
            2008USA
            
            
            Colombia
            
            
            Combined
            
            
            USA
            
            
            Colombia
            
            
            CombinedFuture
      cash inflows
            
            
            8,784,999
            
            
            
            10,925,000
            
            
            
            19,709,999
            
            
            
            1,854,501
            
            
            
            20,251,810
            
            
            
            22,106,311Furture
      production costs
            
            
            (1,209,737
            )
            
            
            (4,037,000
            )
            
            
            (5,246,737
            )
            
            
            (645,502
            )
            
            
            (7,930,310
            )
            
            
            (8,575,812
            )Future
      development costs
            
            
            (175,000
            )
            
            
            (92,000
            )
            
            
            (267,000
            )
            
            
            (250,000
            )
            
            
            (1,305,110
            )
            
            
            (1,555,110
            )Future
      abanonment costs
            
            
            (92,000
            )
            
            
            (53,000
            )
            
            
            (145,000
            )
            
            
            (92,000
            )
            
            
            (53,000
            )
            
            
            (145,000
            )Future
      income tax expenses
            
            
            (2,923,305
            )
            
            
            (2,697,200
            )
            
            
            (5,620,505
            )
            
            
            (346,800
            )
            
            
            (4,385,356
            )
            
            
            (4,732,156
            )Future
      net cash flow
            
            
            4,384,957
            
            
            
            4,045,800
            
            
            
            8,430,757
            
            
            
            520,199
            
            
            
            6,578,034
            
            
            
            7,098,23310%
      annual discount for estimatedtiming of cash flows
            
            
            (1,058,414
            )
            
            
            (1,137,300
            )
            
            
            (2,195,715
            )
            
            
            (130,778
            )
            
            
            (1,856,386
            )
            
            
            (1,987,165
            )Standardized
      measure of discountedfuture net cash flow
            
            
            3,326,543
            
            
            
            2,908,500
            
            
            
            6,235,043
            
            
            
            389,421
            
            
            
            4,721,648
            
            
            
            5,111,069


The
principal changes in the standardized measure of discounted future net cash
flows during 2009 were as follows:




2009USA
              
              
              Colombia
              
              
              CombinedExtensions
              
              
              
              
              
              
              
              
              -Revisions
      of previous estimatesPrice
      changes
              
              
              1,269,809
              
              
              
              2,976,214
              
              
              
              4,246,023Quantity
      Changes
              
              
              3,282,242
              
              
              
              (624,784
              )
              
              
              2,657,458Changes
      in production rates, timing and other
              
              
              867,723
              
              
              
              (6,470,918
              )
              
              
              (5,603,195
              )Development
      costs incurred
              
              
              (7,645
              )
              
              
              (229,738
              )
              
              
              (237,383
              )Changes
      in estaimted future development costs
              
              
              75,000
              
              
              
              1,213,110
              
              
              
              1,288,110Purchase
      of Minterals in placeSales
      of oil and gas, net of production costs
              
              
              26,498
              
              
              
              (365,188
              )
              
              
              (338,690
              )Accretion
      of discount
              
              
              
              
              
              
              
              
              
              
              -Net
      change in income taxes
              
              
              (2,576,505
              )
              
              
              1,688,156
              
              
              
              (888,349
              )Net
      increase/ (decrese)
              
              
              2,937,122
              
              
              
              (1,813,148
              )
              
              
              1,123,974
  F-23