UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file no. 0-30502

JOHN D. OIL AND GAS COMPANY

(Exact name of Registrant as specified in its charter)

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

8500 STATION STREET, SUITE 345, MENTOR, OHIO 44060
(Address of principal executive office)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

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

The number of shares outstanding of the registrant’s common stock as of November 5, 2010 was 9,067,090 shares.

Except as otherwise indicated, the information contained in this Report is as of September 30, 2010.

JOHN D. OIL AND GAS COMPANY
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

	Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 4. Controls and Procedures		27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		27
Item 6. Exhibits		28
Signatures		28
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

John D. Oil and Gas Company and Subsidiary
Consolidated Balance Sheets

	September 30, 2010			December 31, 2009
	(Unaudited)			(Audited)
ASSETS
Current Assets:
Cash	$	—		$	22,072
Accounts Receivable		35,574			57,748
Accounts Receivable from Related Parties		550,803			464,584
Other Current Assets		149,762			17,723
Total Current Assets		736,139			562,127
Property and Equipment, Net		7,980,156			8,985,937
Investment in Unconsolidated Affiliate		755,414			705,965
Other Assets		—			5,495
TOTAL ASSETS	$	9,471,709		$	10,259,524
LIABILITIES AND EQUITY
Current Liabilities:
Bank Overdraft	$	114,999		$	—
Line of Credit		9,480,187			9,497,024
Current Maturities of Long Term Debt		136,940			1,145,174
Accounts Payable		287,610			370,675
Accounts Payable to Related Parties		182,695			47,144
Accrued Expenses		135,461			201,959
Total Current Liabilities		10,337,892			11,261,976
Long Term Debt, Net of Current Maturities		961,501			—
Asset Retirement Obligation		713,232			680,056
Commitments and Contingencies		—			—
Equity:
Serial Preferred Stock — $.001 par value: 2,000,000 shares authorized, 1,350 shares issued and outstanding		1			1
Common Stock — $.001 par value: 50,000,000 shares authorized; 9,067,090 shares issued and outstanding		9,067			9,067
Paid-in Capital		30,276,650			30,273,239
Accumulated Deficit		(32,117,365	)		(31,151,171	)
Total John D. Oil and Gas Company Shareholder’s Equity		(1,831,647	)		(868,864	)
Non-Controlling Interest		(709,269	)		(813,644	)
Total Equity		(2,540,916	)		(1,682,508	)
TOTAL LIABILITIES AND EQUITY	$	9,471,709		$	10,259,524

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

3

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenues
Oil and Natural Gas Sales	$	485,008		$	757,798		$	1,640,218		$	2,975,892
Self-Storage Operation Revenues		86,917			81,787			251,787			247,737
Interest and Other		—			2			179,008			8
Total Revenues		571,925			839,587			2,071,013			3,223,637
Operating Expenses
Interest		178,984			92,631			314,021			390,176
Accretion		11,040			9,552			27,081			28,653
Oil and Natural Gas Production Costs		116,291			154,732			406,845			467,834
Self-Storage Property Operating Expense		40,082			30,850			111,144			87,217
Legal and Professional Fees		56,543			117,684			309,953			237,217
Property Taxes and Insurance		18,339			32,304			50,431			106,110
General and Administrative		162,083			149,000			459,567			600,773
Loss from Unconsolidated Affiliate		2,620			3,406			33,051			14,599
Depreciation, Depletion and Amortization		283,442			532,346			1,139,961			2,001,577
Total Operating Expenses		869,424			1,122,505			2,852,054			3,934,156
Net Loss		(297,499	)		(282,918	)		(781,041	)		(710,519	)
Net Income (Loss) attributable to Non-controlling Interest		(4,022	)		(11,462	)		104,375			(59,941	)
Net Loss attributable to John D. Oil and Gas Company	$	(293,477	)		(271,456	)	$	(885,416	)	$	(650,578	)
Other Comprehensive Income All attributable to John D. Oil and Gas Company:
Change in Fair Value of Cash Flow Hedge		—			43,809			—			133,880
Comprehensive Loss	$	(293,477	)	$	(227,647	)	$	(885,416	)	$	(516,698	)
Weighted Average Shares Outstanding — Basic and Diluted		9,067,090			9,067,090			9,067,090			9,067,090
Income per Common Share — Basic and Diluted	$	(0.04	)	$	(0.03	)	$	(0.11	)	$	(0.08	)

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

4

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Equity
For The Nine Months Ended September 30, 2010 and 2009

										Accumulated
										Other			Non-
	Preferred		Common		Paid-in		Accumulated			Comprehensive			Controlling
	Stock		Stock		Capital		Deficit			Income (Loss)			Interest			Total
Balance at December 31, 2008 (audited)	$	1	$	9,067	$	30,268,691	$	(28,428,470	)	$	(133,880	)	$	(732,100	)	$	983,309
Restricted Common Stock Award						3,411											3,411
Dividends Declared and Paid								(80,778	)								(80,778	)
Net Loss								(650,578	)					(59,941	)		(710,519	)
Change in Fair Value of Cash Flow Hedge											133,880						133,880
Balance at September 30, 2009 (unaudited)	$	1	$	9,067	$	30,272,102	$	(29,159,826	)	$	—		$	(792,041	)	$	329,303
Balance at December 31, 2009 (audited)	$	1	$	9,067	$	30,273,239	$	(31,151,171	)	$	—		$	(813,644	)	$	(1,682,508	)
Restricted Common Stock Award						3,411											3,411
Dividends Declared and Paid								(80,778	)								(80,778	)
Net Income (Loss)								(885,416	)					104,375			(781,041	)
Balance at September 30, 2010 (unaudited)	$	1	$	9,067	$	30,276,650	$	(32,117,365	)	$	—		$	(709,269	)	$	(2,540,916	)

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

5

John D. Oil and Gas Company and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2010			2009
Cash Flows from Operating Activities:
Net Loss	$	(781,041	)	$	(710,519	)
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities
Accretion		27,081			28,653
Loss from Unconsolidated Affiliate		33,051			14,599
Depreciation, Depletion and Amortization		1,139,961			2,001,577
Restricted Common Stock Award		3,411			3,411
Changes in Operating Assets and Liabilities:
Accounts Receivable		(64,045	)		973,530
Other Current Assets		(132,039	)		44,000
Other Assets		5,495			54,818
Accounts Payable		63,426			(1,547,053	)
Accrued Expenses		(66,498	)		(109,922	)
Net Cash Provided By Operating Activities		228,802			753,094
Cash Flows from Investing Activities:
Purchases of Property and Equipment		(117,592	)		—
Expenditures for Unconsolidated Affiliate		(93,440	)		(235,035	)
Expenditures for Oil and Natural Gas Wells		(10,493	)		(396,923	)
Net Cash Used In Investing Activities		(221,525	)		(631,958	)
Cash Flows from Financing Activities:
Dividends Paid to Preferred Stockholders		(80,778	)		(80,778	)
Bank Overdraft		114,999			—
Proceeds from Related Party Note Payable		—			600,000
Proceeds from Long Term Debt		63,956			—
Payments on Line of Credit		(16,837	)		—
Principal Payments on Related Party Debt		—			(600,000	)
Principal Payments on Long Term Debt		(110,689	)		(97,133	)
Net Cash Used In Financing Activities		(29,349	)		(177,911	)
Net Decrease in Cash		(22,072	)		(56,775	)
Cash, Beginning of Period		22,072			78,301
Cash, End of Period	$	—		$	21,526
Supplemental Disclosure of Cash flow Information:
Interest Paid on Borrowings	$	279,194		$	369,175

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

6

John D. Oil and Gas Company and Subsidiary
Notes to Unaudited Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

General

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

The Company is in the business of acquiring, exploring, developing, and producing oil and natural gas in Northeast Ohio. The Company currently has fifty-eight producing wells. The Company cannot guarantee success under its business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable.

The Company also still retains one self storage facility located in Painesville, Ohio. The self-storage facility is operated through a partnership agreement between Liberty Self-Stor Ltd. (“Ltd”) and the Company. Liberty Self Stor, Ltd’s interest in LSS I Limited Partnership (LSS I) is reflected as a non-controlling interest in these consolidated financial statements. Due to the losses incurred by the self-storage facilities, current and previously owned, the initial investment was previously written off. The Company may, if business and time warrant, sell the Painesville facility in the future.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and with instructions to Form 10-Q and, accordingly, do not include all information and footnotes required under accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, these interim consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of September 30, 2010 and the results of its operations and cash flows for the three and nine months ended September 30, 2010 and 2009. Interim results of operations are not necessarily indicative of the results to be expected for the year ended December 31, 2010. Certain prior year amounts have been reclassified to conform to the September 30, 2010 presentation. These reclassifications had no effect on net loss or shareholders’ equity as previously reported.

Accounting estimates were revised as necessary during the quarter based on new information and changes in facts and circumstances. These unaudited consolidated financial statements should be read in conjunction with the comprehensive discussion of the Company’s management estimates and significant accounting policies in the Company’s Form 10-K for the year ended December 31, 2009.

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. See Note 2 to these consolidated financial statements.

Principles of Consolidation

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

7

Use of Estimates

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

The Company’s financial statements are based on a number of significant estimates, including collectability of receivables, selection of useful lives for property and equipment and timing and costs associated with its retirement obligations. Estimated oil and natural gas reserve quantities are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties.

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

Accounts Receivable

The Company has certain trade receivables consisting of oil and natural gas sale obligations due under normal trade terms. The Company currently sells its production to a related party through an oil and natural gas agreement, extending credit on an unsecured basis to them. In evaluating its allowance for possible losses, the Company performs a review of outstanding receivables. The trade receivables outstanding are typically three months of natural gas production due to the timing and accounting treatment by the main distribution pipeline company in Northeast Ohio and related party accounting treatments.

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

At September 30, 2010 and December 31, 2009, the Company’s credit evaluation indicated that it has no need for an allowance for possible losses.

Property and Equipment

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

8

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

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

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

Asset Impairment

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

Asset Retirement Obligation

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

The following table presents the Company’s asset retirement obligation activity.

	For the Nine Months Ended
	September 30,
	2010		2009
Asset retirement obligations, beginning of the period	$	680,056	$	674,517
Liabilities incurred during the period		6,095		—
Liabilities settled during the period		—		(26,000	)
Accretion expense		27,081		28,653
Asset retirement obligations, end of the period		713,232		677,170
Less current liabilities		—		—
Asset retirement obligations, net of current maturities	$	713,232	$	677,170

9

At September 30, 2010 and December 31, 2009, the Company’s current portion of the asset retirement obligations was $0.

Revenue Recognition

The Company recognizes revenue from its oil and natural gas interests in producing wells as oil and natural gas is sold to a purchaser at a fixed or determinable price, when delivery has occurred, title and risk of loss have transferred to the purchaser and the collectability of revenue is reasonably assured. The Company has a management agreement with a related party to transport the Company’s natural gas production through the related party’s pipeline and include this natural gas with the related party’s natural gas in order to fulfill production volume contracts they currently have in place. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at September 30, 2010 and December 31, 2009.

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

The Company also leases certain commercial space in its Painesville property under long-term lease agreements through December 31, 2019. Total lease revenue related to these leases was $54,962 and $48,214 for the three months and $156,706 and $147,483 for the nine months ended September 30, 2010 and 2009, respectively. Revenue under these long-term lease agreements is recognized on a straight-line basis over the respective lease terms.

Future minimum lease revenue from operations under non-cancelable leases excluding options to renew for each of the five succeeding annual periods ending September 30 and thereafter are as follows:

2011	$	219,360
2012		212,170
2013		201,684
2014		187,887
2015		171,378
Thereafter		174,470
	$	1,166,949

Stock-Based Compensation

Of the 300,000 stock options that may be granted, none were outstanding as of September 30, 2010 and 2009, respectively. The former President and Chief Operating Officer of the Company was granted 35,000 restricted shares that amortize ratably over a five year vesting period until August of 2011. The compensation expense recorded for the restricted shares was $1,137 for the three months and $3,411 for the nine months ended September 30, 2010 and 2009.

Income Taxes

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

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

10

The Company has net operating loss carry forwards (NOLS) and a valuation allowance to offset any tax effects. The Company has no unrecognized tax benefits and therefore, there is no anticipated effect on the Company’s effective tax rate. Any tax penalties or interest expense will be recognized in income tax expense. No interest and penalties were accrued as of September 30, 2010 or December 31, 2009, or paid during the periods then ended. The Company does not anticipate a significant change over the next twelve months to any tax liability.

The Company is open to federal and state tax audits until the applicable statute of limitations expire. There are currently no federal or state income tax examinations underway for the Company. The tax years after 2007 remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months. The Company does, however, have prior year net operating losses which remain open for examination.

Reclassifications

Certain reclassifications of prior year comparative amounts have been made to conform to current period presentation.

Recently Issued Accounting Pronouncements

In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU amends disclosure requirements with respect to the credit quality of financing receivables and the related allowance for credit losses. Entities will be required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. Disclosures to be made as of the end of a reporting period will be effective for the Company’s reporting period ending December 31, 2010; and the disclosures about activity that occurs during a reporting period will be effective for the Company’s reporting period ending March 31, 2011. Since this ASU will only amend disclosure requirements, not accounting practice, the Company does not anticipate that adoption of this ASU will have any impact on the Company’s financial position, results of operations or cash flows.

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

Note 2. Going Concern

The Company’s independent registered accounting firm indicated, in the Company’s Form 10-K for the year ended December 31, 2009, in their audit report in an explanatory paragraph that, due to the Company’s recurring losses and outstanding debt of $10.6 million that was currently due and then in default, there was substantial doubt at December 31, 2009 about the Company’s ability to continue as a going concern. The Company’s unaudited consolidated financial statements as of September 30, 2010 have been prepared on the assumption that the Company will continue as a going concern. The Company has incurred substantial losses, which have strained its financial resources, and the Company’s liabilities exceed its assets at September 30, 2010. The Company’s $9.5 million line of credit with RBS Citizens, N.A. d/b/a Charter One (“Charter One,”) was due August 1, 2009 and was in default. On August 24, 2009, Charter One received a judgment in its favor against the Company and Mr. Osborne related to this debt. On June 18, 2010, the Company, and other parties, and Charter One entered into a forbearance agreement, (“the Forbearance Agreement”) pursuant to which Charter One will forbear from enforcing its rights and remedies under the Company’s line of credit, as well as the other parties’ loan agreements, until July 1, 2011, subject to no further events of default including the payments due under the Forbearance Agreement. The Company does not have the available cash to repay the line of credit with Charter One. See Note 5 “Line of Credit and Long Term Debt” to these consolidated financial statements for more information.

11

Note 3. Property and Equipment

Property and equipment consists of the following:

	September 30, 2010			December 31, 2009
	(Unaudited)			(Audited)
Oil and Natural Gas Properties:
Proved Properties	$	16,529,639		$	16,516,743
Unproved Properties		173,230			169,536
Well Material Inventory		50,349			50,349
Accumulated Depletion		(10,283,394	)		(9,250,963	)
Total Oil and Natural Gas Properties		6,469,824			7,485,665
Other Property and Equipment:
Land		307,780			307,780
Building and Improvements		2,402,983			2,357,822
Furniture and Equipment		246,070			173,640
Accumulated Depreciation		(1,446,501	)		(1,338,970	)
Total Other Property and Equipment		1,510,332			1,500,272
Property and Equipment, Net	$	7,980,156		$	8,985,937

Note 4. Investment in Unconsolidated Affiliate

The Company is an owner and managing member of an unconsolidated affiliate, Kykuit Resources LLC, (“Kykuit”) which is accounted for using the equity method of accounting. The Company had a 21.30% and a 20.83% ownership in Kykuit at September 30, 2010 and December 31, 2009, respectively. On June 18, 2010, the Company pledged its partnership interest in Kykuit to Charter One in connection with the Forbearance Agreement. During the third quarter of 2010, the Company borrowed funds totaling $39,789 from Kykuit. For the nine months ended, the Company made cash investments totaling $93,440 to Kykuit, including $10,940 previously recorded in accounts payable. The investment by the Company in this venture is $755,414 which includes cash totaling $1,496,330 and a cumulative net book loss of $740,916 at September 30, 2010. The following table displays the unaudited balance sheets of Kykuit at September 30, 2010 and December 31, 2009 and the unaudited statements of operations for the three and nine months ended September 30, 2010 and 2009, respectively.

12

Kykuit Resources LLC
Balance Sheet

	September 30, 2010			December 31, 2009
Current Assets	$	34,137		$	115,893
Unproved Leaseholds and Development Costs		7,133,070			6,957,065
Furniture and Fixtures, Net of Depreciation		23,216			31,747
Other Assets		18,485			24,087
	$	7,208,908		$	7,128,792
Current Liabilities	$	819,012		$	832,728
Paid in Capital		7,036,675			6,786,675
Accumulated Deficit		(646,779	)		(490,611	)
	$	7,208,908		$	7,128,792

Kykuit Resources LLC
Statement of Operations

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Total Revenues	$	—		$	—		$	—		$	—
Total Expenses		12,301			16,892			156,168			76,203
Net Loss	$	(12,301	)	$	(16,892	)	$	(156,168	)	$	(76,203	)

Note 5. Line of Credit and Long-Term Debt

The Company’s line of credit with Charter One was fully drawn for $9.5 million at September 30, 2010 at a rate of 4.75%. Charter One contends that the interest rate at September 30, 2010 is LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is an interest rate cap of 3.00%. Also, Charter One has applied a default rate to the loan from January 4, 2010 thru June 18, 2010. As the Company does not agree with the rates being charged, it has not recorded interest expense of approximately $171,000 at September 30, 2010. The parties are in discussions regarding the applicable interest rates. In addition, the Company has made payments of approximately $147,000 to Charter One that have not been reflected as a reduction of principal or payment of interest and therefore are included in other assets at September 30, 2010.

The Company’s $9.5 million line of credit matured on August 1, 2009. On August 20, 2009, Charter One received a judgment in its favor against the Company and Richard M. Osborne, the Company’s Chairman and CEO, related to the $9.5 million line of credit.

On June 18, 2010, the Company, Richard M. Osborne (the Company’s Chairman of the Board and Chief Executive Officer and a guarantor of the Company’s line of credit), the Richard M. Osborne Trust (the “Trust”), Great Plains Exploration, LLC (“Great Plains”), and Oz Gas, Ltd. (companies owned by Mr. Osborne) entered into a Forbearance Agreement with Charter One regarding the Company’s $9.5 million line of credit under the Loan and Security Agreement, as amended, dated March 28, 2008, by and among the Company, Richard M. Osborne and Charter One and regarding the $25.0 million loan agreement between Great Plains, Oz Gas and Mr. Osborne and Charter One, dated August 2, 2007 (together, the “Loan Agreements”). The Company, Mr. Osborne, the Trust, Great Plains and Oz Gas are collectively referred to in the Forbearance Agreement and herein as the “Loan Parties.”

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Pursuant to the Forbearance Agreement and during the forbearance period, Charter One agreed to, among other things, forbear from exercising its rights and remedies arising out of the judgments and the Loan Agreements and to stay any action on its motion for the appointment of a receiver.

Under the Forbearance Agreement, Charter One’s agreement to forbear is conditioned upon and subject to the following conditions:

• Payment by the Loan Parties of a forbearance fee of $40,000 per month during the forbearance period;

• No material adverse change in the condition of the Loan Parties;

• An assignment and grant of a security interest by the Company and Great Plains of each of their ownership interests in the Alpha and Panzica wells (the “Wells Assignment”);

• A pledge by the Loan Parties of their ownership interests in Kykuit Resources LLC (the “Kykuit Pledge”); and

• A pledge by Mr. Osborne of not less than 800,000 shares of common stock of Gas Natural Inc. with such stock having a market value of not less than $9.6 million pursuant to a pledge agreement.

Commencing July 1, 2010 and each month thereafter until all amounts under the judgments and loan agreements have been paid in full, the Loan Parties shall pay Charter One $400,000, including the $40,000 forbearance fee. One third of the $400,000 has been allocated to be paid monthly by the Company. Such payments shall be applied first to Charter One’s fees and expenses, second to accrued but unpaid interest due under the judgments, and third to principal amount due under the judgments. The judgments will bear interest at LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is an interest rate cap of 3.00%. The parties are in discussions regarding the applicable interest rates, including a default rate for part of the period. If the Loan Parties repay $10 million and if after application of such repayment the outstanding balance of the judgments does not exceed 65% of the current producing reserve value (as that term is defined in the Loan Agreements) of the Company, Great Plains and Oz Gas, then the pledge of Mr. Osborne’s Kykuit interests and his Gas Natural Inc. shares shall be released. In addition, the Company must deposit all proceeds of its operations into accounts maintained by Charter One. While these conditions are met, Charter One will not take any action to set off funds in any such account.

The forbearance period is effective until July 1, 2011, subject to the earlier termination upon the occurrence of any events of default by any of the Loan Parties, including non-payment of any amounts due by any of the Loan Parties under the Forbearance Agreement.

Because the Company does not have the available cash to repay the line of credit, if the required payments are not made by the Company or any of other Loan Parties, or other events of default occur, under the Forbearance Agreement or if prior to the end of the forbearance period the Company is unsuccessful in refinancing the line of credit with Charter One or if the Company is unsuccessful in obtaining substitute financing, there is substantial doubt about the Company’s ability to continue as a going concern.

Discussions with Charter One are ongoing and there is no certainty that these discussions will result in satisfactory terms of a revised loan agreement or a revised loan agreement at all. If Charter One demands repayment of the outstanding amounts payable at the end of the forbearance period, the Company does not have the available cash to repay the line of credit and will need financing from other sources to repay Charter One.

14

The Painesville facility is encumbered by a mortgage with First Merit Bank, N.A. by agreement dated June 9, 2009. The loan was deemed to be in default by First Merit Bank, N.A. in August 2009 when Charter One sought judgments against the Company regarding its line of credit.

On May 11, 2010, Liberty Self Stor, LTD and First Merit Bank, N.A signed a loan modification agreement which waived the prior defaults. The terms of the mortgage include a five year term, maturing on June 1, 2014, with a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. Monthly payments include principal of $10,370 plus interest. The current rate on September 30, 2010 was 2.76%. The principal amount of the loan as of September 30, 2010 and December 31, 2009 was $1,041,474 and $1,145,174, respectively.

The repayment terms for the Painesville loan include the following principal payments over the next four years ending September 30:

2011	$	124,440
2012		124,440
2013		124,440
2014		668,154
	$	1,041,474

In February 2010, the Company entered into a loan for the purchase of a vehicle which matures in February 2015. The interest rate is fixed at 2.90%. The outstanding principal amount of the loan as of September 30, 2010 was $56,967. The future minimum lease payments over the next five years ending September 30 are as follows:

2011	$	12,500
2012		12,399
2013		12,998
2014		13,380
2015		5,690
		56,967
Less current portion		(12,500	)
	$	44,467

Interest expense on these debt instruments was $178,984 and $89,343 for the three months and $314,021 and $368,740 for the nine months ended September 30, 2010 and 2009, respectively.

Note 6. Notes Payable to Related Party

On February 13, 2009, Great Plains Exploration, LLC (“Great Plains”) loaned the Company $600,000 to fund the Company’s ongoing capital requirements. Great Plains is owned by Mr. Osborne. On July 25, 2009, the debt and all interest outstanding was repaid.

Interest expense on the related party note was $0 and $3,288 for the three months and $0 and $21,436 for the nine months ended September 30, 2010 and 2009, respectively.

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Note 7. Interest and Other Revenue

Interest and other revenue for the nine months ended September 30, 2010 includes a refund for real estate property tax of $177,918 for tax years 2006 through 2009 on the Painesville self storage facility from the first half of 2010.

Note 8. Earnings Per Share

Basic income (loss) per share of common stock is determined by dividing net income (loss) less declared preferred stock dividends by the weighted average number of shares of common stock outstanding during the period.

The restricted stock awards, Class A Limited Partnership conversion and warrants for the three and nine months ended September 30, 2010 and 2009 were anti-dilutive and had no effect on diluted earnings per share. The Company’s Class A Limited Partnership exchange factor is .1377148 per share.

The Company paid no cash distributions to its common stockholders for the three or nine months ended September 30, 2010 and 2009. However, the Company declared and paid $27,222 in preferred stock dividends for the three months ended September 30, 2010 and 2009, respectively. The Company declared and paid $80,778 in preferred stock dividends for the nine months ended September 30, 2010 and 2009, respectively.

Note 9. Income Taxes

At December 31, 2009, the Company had net operating loss carry forwards (NOLS) for future years of approximately $15.9 million. These NOLS will expire at various dates through 2029. Utilization of the NOLS could be limited if there is a substantial change in ownership of the Company and is contingent on future earnings. In addition, the Company paid $41,187 for alternative minimum tax (AMT) in 2006, creating a tax credit that carries forward indefinitely.

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

Note 10. Other Related Party Transactions

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

The Company leases its executive offices from OsAir, Inc., a company owned by Mr. Osborne. The current lease has a three year term maturing on April 1, 2012 for $2,000 per month. Rent expense totaled $6,000 for the three months ended September 30, 2010 and 2009 and $18,000 and $16,050 for the nine months ended September 30, 2010 and 2009, respectively, and is included in general and administrative expenses.

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Effective January 1, 2006, the Company entered into a contract with Great Plains for well operations and sale of natural gas and oil production, net of pipeline costs. The term of the agreement was one year from the effective date. It was extended as of January 1, 2007 and shall be extended for consecutive one year periods unless terminated earlier.

The Company is a fifty percent partner and the operating manager of Lucky Brothers LLC, a company whose other partners are almost all related to Mr. Osborne. The partnership owns one well at September 30, 2010. The purpose of Lucky Brothers LLC is to engage in a joint venture for drilling wells. The Company has invested $174,392 in well tangibles and intangibles at September 30, 2010 and December 31, 2009.

The Company purchases well supplies from Big Oats Oilfield Supply Company, a company owned by Mr. Osborne.

At September 30, 2010, the Company had a $12,000 invoice outstanding to Oz Gas Ltd., a company owned by Mr. Osborne, for payments made on the Company’s behalf to Charter One. See Note 5 “Line of Credit and Long Term Debt” to these consolidated financial statements for more information.

The Company paid Orwell Trumbull Pipeline, LLC, a company owned by Mr. Osborne, for telemeter charges.

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

	September 30,		December 31,
	2010		2009
Accounts Receivable Oil and Gas Sales:
Great Plains Exploration, LLC	$	531,684	$	423,566
Liberty Self Stor II		2,054		727
Lucky Brothers		10,000		38,983
Various Related Companies		7,065		1,308
	$	550,803	$	464,584
Accounts Payable:
Great Plains Exploration, LLC	$	107,545	$	47,144
Big Oats Oilfield Supply Company		17,430		—
OzGas Ltd.		12,000		—
Kykuit Resources LLC		39,789		—
Osair, Inc.		5,912		—
Orwell Natural Gas		19		—
	$	182,695	$	47,144

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	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Great Plains Exploration, LLC:
Capitalized Costs for Well Property and Equipment	$	—	$	93,765	$	—	$	170,410
Revenues
Revenue From the Sale of Oil and Natural Gas Production, net of pipeline transportation costs	$	445,882	$	740,828	$	1,393,258	$	2,892,705
Operating expenses
Well Management, Water Hauling and Service Rig	$	107,756	$	136,798	$	307,006	$	391,560
Big Oats Oilfield Supply Company:
Purchases	$	2,089	$	—	$	21,236	$	—
Orwell Trumbull Pipeline, LLC
Operating expenses	$	—	$	—	$	1,375	$	—

The Company is an owner and managing member of an unconsolidated affiliate, Kykuit which is accounted for using the equity method of accounting. The Company had a 21.30% and a 20.83% ownership in Kykuit at September 30, 2010 and December 31, 2009, respectively. On June 18, 2010, the Company pledged its interest in Kykuit to Charter One in connection with the Forbearance Agreement. During the third quarter of 2010, the Company borrowed funds totaling $39,789 from Kykuit. For the nine months ended, the Company made cash investments totaling $93,440 to Kykuit, including $10,940 previously recorded in accounts payable. The investment by the Company in this venture is $755,414 which includes cash totaling $1,496,330 and a cumulative net book loss of $740,916 at September 30, 2010. Additional information is disclosed in Note 4 to these financial statements.

Mr. Osborne, the Company’s Chairman and Chief Executive Officer, and Gas Natural Inc., a publicly-held public utility company of which Mr. Osborne is the Chairman, Chief Executive Officer and a significant stockholder, owns interests in Kykuit. Mr. Osborne’s personal interests in Kykuit were pledged to Charter One in connection with the Forbearance Agreement.

Additionally, the Company has non-operator joint venture operating agreements with J. R. Smail, Inc., a corporation owned by James R. Smail, a director of the Company until August 26, 2009. The Company received $16,970 and $53,076 for revenue from the sale of oil and natural gas production, net of pipeline transportation costs, and incurred $5,434 and $13,917 in well management, water hauling and service rig fees for the three and nine months ended September 30, 2009.

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

Note 11. Financial Information Relating to Industry Segments

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

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The Company’s operations are classified into two principal industry segments. The following tables present the three and nine months ended September 30, 2010 and 2009.

	Oil and Gas			Self-Storage
Three Months ended September 30, 2010	Production			Facilities			Total
Revenues from external customers	$	485,008		$	86,917		$	571,925
Interest and other revenue		—			—			—
Total Revenue		485,008			86,917			571,925
Interest Expense		171,351			7,633			178,984
Accretion Expense		11,040			—			11,040
Property Operating Costs		116,291			40,082			156,373
Other Operating expenses		222,627			14,338			236,965
Loss from Unconsolidated Affiliate		2,620			—			2,620
Depreciation, depletion and amortization		252,843			30,599			283,442
Total Operating Expenses		776,772			92,652			869,424
Net Loss	$	(291,764	)	$	(5,735	)	$	(297,499	)
Property and Equipment additions	$	13,215		$	—		$	13,215

	Oil and Gas			Self-Storage
Nine Months ended September 30, 2010	Production			Facilities		Total
Revenues from external customers	$	1,640,218		$	251,787	$	1,892,005
Interest and other revenue		1,090			177,918		179,008
Total Revenue		1,641,308			429,705		2,071,013
Interest expense		285,486			28,535		314,021
Accretion expense		27,081			—		27,081
Property Operating Costs		406,845			111,144		517,989
Other Operating expenses		769,868			50,083		819,951
Loss from Unconsolidated Affiliate		33,051			—		33,051
Depreciation, depletion and amortization		1,048,913			91,048		1,139,961
Total Operating Expenses		2,571,244			280,810		2,852,054
Net Income (Loss)	$	(929,936	)	$	148,895	$	(781,041	)
Property and Equipment additions	$	81,538		$	46,547	$	128,085
Total Assets	$	8,077,911		$	1,393,798	$	9,471,709

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	Oil and Gas			Self-Storage
Three Months ended September 30, 2009	Production			Facilities			Total
Revenues from external customers	$	757,798		$	81,787		$	839,585
Interest and other revenue		2			—			2
Total Revenue		757,800			81,787			839,587
Interest Expense		82,799			9,832			92,631
Accretion Expense		9,552			—			9,552
Property Operating Costs		154,732			30,850			185,582
Other Operating expenses		271,545			27,443			298,988
Loss from Unconsolidated Affiliate		3,406			—			3,406
Depreciation, depletion and amortization		502,333			30,013			532,346
Total Operating Expenses		1,024,367			98,138			1,122,505
Net Loss	$	(266,567	)	$	(16,351	)	$	(282,918	)
Property and Equipment additions	$	232,169		$	—		$	232,169

	Oil and Gas			Self-Storage
Nine Months ended September 30, 2009	Production			Facilities			Total
Revenues from external customers	$	2,975,892		$	247,737		$	3,223,629
Interest and other revenue		8			—			8
Total Revenue		2,975,900			247,737			3,223,637
Interest expense		362,670			27,506			390,176
Accretion expense		28,653			—			28,653
Property Operating Costs		467,834			87,217			555,051
Other Operating expenses		815,618			128,482			944,100
Loss from Unconsolidated Affiliate		14,599			—			14,599
Depreciation, depletion and amortization		1,911,539			90,038			2,001,577
Total Operating Expenses		3,600,913			333,243			3,934,156
Net Loss	$	(625,013	)	$	(85,506	)	$	(710,519	)
Property and Equipment additions	$	396,923		$	—		$	396,923
Total Assets	$	10,826,077		$	1,477,198		$	12,303,275

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

The Company entered into the business of extracting and producing oil and natural gas products during 2006. The Company currently has two segments: one that is drilling and operating oil and natural gas wells in Northeast Ohio and one composed of the remaining self-storage facility located in Painesville, Ohio. The Company cannot guarantee success under its business plan as drilling wells for oil and natural gas is a high-risk enterprise and there is no guarantee the Company will become profitable. The decline in the current market price of natural gas severely affects the viability of any future drilling because our lower cash flow makes it economically difficult to incur the high costs of drilling a well.

As previously disclosed in the Company’s Form 8-K filed on June 25, 2010 with the Securities and Exchange Commission, on June 18, 2010, the Company, along with Mr. Osborne, the Trust, Great Plains and Oz Gas Ltd. (companies owned by Mr. Osborne), entered into a Forbearance Agreement with Charter One pursuant to which Charter One agreed to forbear from enforcing its rights and remedies under the Company’s fully-drawn $9.5 million line of credit as well as the other parties’ loan agreements until July 1, 2011, subject to no further events of default including the payments due under the Forbearance Agreement. Pursuant to the Forbearance Agreement and during the forbearance period, the parties must pay Charter One $400,000 per month, including a $40,000 per month forbearance fee, until all amounts under the loan agreements have been paid in full. One third of the $400,000 has been allocated to be paid monthly by the Company. See Note 5 “Line of Credit and Long-Term Debt” to the Company’s consolidated financial statements for more information.

Discussions with Charter One are ongoing and there is no certainty that these discussions will result in satisfactory terms of a revised loan agreement or a revised loan agreement at all. If Charter One demands repayment of the outstanding amounts payable at the end of the forbearance period, the Company does not have the available cash to repay the line of credit and will need financing from other sources to repay Charter One.

On May 11, 2010, Liberty Self Stor, LTD and First Merit Bank N.A. signed a loan modification agreement which waived the prior defaults. The terms of the mortgage include a five year term, maturing on June 1, 2014, with a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. Monthly payments include principal of $10,370 plus interest.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. These interim financial statements contain certain amounts that were based upon the Company’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. A “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

A comprehensive discussion of the Company’s critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1, in the Company’s Form 10-K for the year ended December 31, 2009. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2009.

Liquidity and Capital Resources

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

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

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The Company’s $9.5 million line of credit with Charter One matured on August 1, 2009. On August 20, 2009, Charter One received a judgment in its favor against the Company, Mr. Osborne and the Richard M. Osborne Trust, jointly and severally for $9.5 million plus interest and late charges. On June 18, 2010, the Company, along with Richard M. Osborne, the Trust, Great Plains and Oz Gas Ltd. (companies owned by Mr. Osborne), entered into a Forbearance Agreement with Charter One pursuant to which Charter One will forbear from enforcing its rights and remedies under the Company’s line of credit as well as the other parties’ loan agreements until July 1, 2011, subject to no further events of default including the payments due under the Forbearance Agreement. The Company, Mr. Osborne, the Trust, Great Plains and Oz Gas are collectively referred to in the Forbearance Agreement and herein as the “Loan Parties.”

Under the Forbearance Agreement, Charter One’s agreement to forbear is conditioned upon and subject to the following conditions:

• Payment by the Loan Parties of a forbearance fee of $40,000 per month during the forbearance period;

• No material adverse change in the condition of the Loan Parties;

• An assignment and grant of a security interest by the Company and Great Plains of each of their ownership interests in the Alpha and Panzica wells (the “Wells Assignment”);

• A pledge by the Loan Parties of their ownership interests in Kykuit Resources LLC (the “Kykuit Pledge”); and

• A pledge by Mr. Osborne of not less than 800,000 shares of common stock of Gas Natural Inc. with such stock having a market value of not less than $9.6 million pursuant to a pledge agreement.

Commencing July 1, 2010 and each month thereafter until all amounts under the judgments and loan agreements have been paid in full, the Loan Parties shall pay Charter One $400,000, including the $40,000 forbearance fee. One third of the $400,000 has been allocated to be paid monthly by the Company. Such payments shall be applied first to Charter One’s fees and expenses, second to accrued but unpaid interest due under the judgments, and third to principal amount due under the judgments. The judgments will bear interest at LIBOR plus 1.75% with a LIBOR floor of 3.00%. The Company believes that there is an interest rate cap of 3.00%. The parties are in discussions regarding the applicable interest rates, including a default rate for part of the period. If the Loan Parties repay $10 million and if after application of such repayment the outstanding balance of the judgments does not exceed 65% of the current producing reserve value (as that term is defined in the Loan Agreements) of the Company, Great Plains and Oz Gas, then the pledge of Mr. Osborne’s Kykuit interests and his Gas Natural Inc. shares shall be released. In addition, the Company must deposit all proceeds of its operations into accounts maintained by Charter One. While these conditions are met, Charter One will not take any action to set off funds in any such account.

The forbearance period is effective until July 1, 2011, subject to the earlier termination upon the occurrence of any events of default by any of the Loan Parties, including non-payment of any amounts due by any of the Loan Parties under the Forbearance Agreement.

Because the Company does not have the available cash to repay the line of credit, if the required payments are not made by the Company or any of the other Loan Parties, or other events of default occur, under the Forbearance Agreement or if prior to the end of the forbearance period the Company is unsuccessful in refinancing its line of credit with Charter One or if the Company is unsuccessful in obtaining substitute financing, there is substantial doubt about the Company’s ability to continue as a going concern.

Discussions with Charter One are ongoing and there is no certainty that these discussions will result in satisfactory terms of a revised loan agreement or a revised loan agreement at all. If Charter One demands repayment of the outstanding amounts payable at the end of the forbearance period, the Company does not have the available cash to repay the line of credit and will need financing from other sources to repay Charter One.

22

The Painesville facility is encumbered by a mortgage with First Merit Bank, N.A. by agreement dated June 9, 2009. The loan was deemed to be in default by First Merit Bank, N.A in August 2009 when Charter One sought judgments against the Company regarding its line of credit.

On May 11, 2010, Liberty Self Stor, LTD and First Merit Bank, N.A signed a loan modification agreement which waived the prior defaults. The terms of the mortgage include a five year term, maturing on June 1, 2014, with a ten year amortization period at a variable rate of the 30 day LIBOR plus 250 basis points. Monthly payments include principal of $10,370 plus interest. The current rate on September 30, 2010 was 2.76%. The principal amount of the loan as of September 30, 2010 and December 31, 2009 was $1,051,844 and $1,145,174, respectively.

The Company’s current assets increased $174,012 to $736,139 at September 30, 2010 from $562,127 at December 31, 2009, largely due to an increase in accounts receivable from related parties and recording amounts paid to Charter One as prepaid interest. Due to the current discussions with Charter One regarding the interest rates from January 1, 2010 to June 18, 2010, the Company has chosen to not decrease the principal balance down or increase its interest expense until an agreement has been reached between the Company and Charter One on the applicable interest rates.

The Company’s current liabilities decreased $924,084, to $10,337,892 at September 30, 2010, from $11,261,976 at December 31, 2009, primarily due to moving the Painesville property loan from current liabilities to long term debt after entering into an agreement with First Merit Bank N.A.

The Company had a positive cash flow from operating activities of $228,802 for the nine months ended September 30, 2010 compared to a positive cash flow of $753,094 for the same period in 2009. The positive cash flow is a result of fewer accounts payable paid in 2010 than in 2009, net of less cash collected on accounts receivable in 2010 as compared to 2009.

The Company had a negative cash flow from investing activities of $221,525 for the nine months ended September 30, 2010 compared to a negative cash flow of $631,958 for the same period in 2009. The nine months ended September 30, 2010 improved from the same period in the prior year largely due to reduced cash investments in Kykuit and in oil and natural gas wells, net of additional property and equipment purchases in 2010 as compared to 2009.

The Company had a negative cash flow from financing activities of $29,349 for the nine months ended September 30, 2010 compared to a negative cash flow of $177,911 for the same period in 2009. The negative cash flow for the nine months ended September 30, 2010 was lower than the same period in 2009 primarily due to a bank overdraft balance for 2010 of $114,999.

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

Material Changes in Results of Operations

Revenues from Operations

Total revenues from operations and interest income decreased $267,662, or 31.9%, to $571,925 for the three months ended September 30, 2010, compared to $839,587 for the same period in 2009. Total revenues from operations and interest income decreased $1,152,624, or 35.8%, to $2,071,013 for the nine months ended September 30, 2010, compared to $3,223,637 for the same period in 2009. The decrease is due to lower natural gas production and lower contract pricing in 2010, offset by the real estate property tax refund received and the reduction in accrued real estate taxes related to the Painesville self-storage facility.

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Expenses from Operations

Total operating expenses decreased $253,081, or 22.5%, to $869,424 for the three months ended September 30, 2010 from $1,122,505 for the same period in 2009. Total operating expenses decreased $1,082,102, or 27.5%, to $2,852,054 for the nine months ended September 30, 2010 from $3,934,156 for the same period in 2009. These decreases were primarily due to the decrease in depreciation, depletion and amortization.

Interest expense increased $86,353, or 93.2%, to $178,984 for the three months ended September 30, 2010 compared to $92,631 for the same period in 2009. Interest expense decreased $76,155, or 19.5%, to $314,021 for the nine months ended September 30, 2010 compared to $390,176 for the same period in 2009. Interest expense was higher for the three months ended September 30, 2010 due to a higher Charter One loan interest rate and $61,880 of loan fee expense relating to the June 2010 forbearance agreement. Interest expense was lower for the nine months ended September 30, 2010 largely due to the maturity of the swap agreement in August 2009.

Accretion expense increased $1,488, or 15.6%, to $11,040 for the three months ended September 30, 2010 compared to $9,552 for the same period in 2009. Accretion expense decreased $1,572, or 5.5%, to $27,081 for the nine months ended September 30, 2010 compared to $28,653 for the same period in 2009.

Oil and natural gas production costs decreased $38,441, or 24.8%, to $116,291 for the three months ended September 30, 2010 compared to $154,732 for the same period in 2009. Oil and natural gas production costs decreased $60,989, or 13.0%, to $406,845 for the nine months ended September 30, 2010 compared to $467,834 for the same period in 2009. The decrease for the three and nine months ended September 30, 2010 is largely due to lower water hauling and water treatment expenses, service rig usage and well repairs offset partially by county production taxes and telemeter charges compared to the same period in 2009.

Self-storage property operating expenses increased $9,232, or 29.9%, to $40,082 for the three months ended September 30, 2010 compared to $30,850 for the same period in 2009. Self-storage property operating expenses increased $23,927, or 27.4%, to $111,144 for the nine months ended September 30, 2010 compared to $87,217 for the same period in 2009. The increase for the three months ended September 30, 2010 compared to the same period in 2009 is due to larger repairs, computer and utility expenses. The increase for the nine months ended September 30, 2010 compared to the same period in 2009 is due to larger repairs, utility payments and snowplowing expenses.

Legal and professional fees decreased $61,141, or 52.0% to $56,543 for the three months ended September 30, 2010 compared to $117,684 for the same period in 2009. Legal and professional fees increased $72,736, or 30.7% to $309,953 for the nine months ended September 30, 2010 compared to $237,217 for the same period in 2009. During the three months ended September 30, 2009 a $50,000 fee was paid to Charter One for its attorney fees. The increase for the nine months ended September 30, 2010 compared to the same period in 2009 is directly related to the forbearance settlement on June 18, 2010 with Charter One whereby the Company had to pay its attorney expenses and Charter One’s as part of the Forbearance Agreement.

Property taxes and insurance expenses decreased $13,965, or 43.2%, to $18,339 for the three months ended September 30, 2010 compared to $32,304 for the same period in 2009. Property taxes and insurance expenses decreased $55,679, or 52.5%, to $50,431 for the nine months ended September 30, 2010 compared to $106,110 for the same period in 2009. This decrease is largely due to a reduction in the property values, and consequently the property taxes, on two parcels at the Painesville self-storage facility.

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General and administrative expenses increased $13,083 or 8.8%, to $162,083 for the three months ended September 30, 2010 compared to $149,000 for the same period in 2009. General and administrative expenses decreased $141,206, or 23.5%, to $459,567 for the nine months ended September 30, 2010 compared to $600,773 for the same period in 2009. The increase in general and administrative expenses for the three months is largely due to higher medical insurance premium expense. The decrease in general and administrative expenses for the nine months is largely due to a decrease in employees and benefits, director and officer insurance and director meeting expense, plus fewer expenditures in general, minimally offset by higher medical insurance premium expense.

Loss from unconsolidated affiliate expense decreased $786 to $2,620 for the three months ended September 30, 2010 compared to $3,406 for the same period in 2009. Loss from unconsolidated affiliate expense increased $18,452 to $33,051 for the nine months ended September 30, 2010 compared to $14,599 for the same period in 2009. Kykuit expenses for the nine months increased in 2010 due to recording current well costs as expense instead of as a capitalized cost.

Depreciation, depletion and amortization expenses decreased $248,904, or 46.8%, to $283,442 for the three months ended September 30, 2010 compared to $532,346 for the same period in 2009. Depreciation, depletion and amortization expenses decreased $861,616, or 43.0%, to $1,139,961 for the nine months ended September 30, 2010 compared to $2,001,577 for the same period in 2009. The current depletion expense is lower than the same period in 2009 largely due to the reduction in the Company’s depletable base from prior year expense and lower reserve pricing.

Net Loss

The Company had a net loss from operations of $297,499 for the three months ended September 30, 2010 compared to a net loss of $282,918 for same period in 2009. The Company had a net loss from operations of $781,041 for the nine months ended September 30, 2010 compared to a net loss of $710,519 for same period in 2009. The large reduction in natural gas production revenue was due to decreased production volumes and lower contract pricing for the three and nine months ended September 30, 2010, as compared to 2009. This revenue decrease was partially offset by the Company’s receipt of a refund of real estate taxes in 2010 and lower operating expenses as compared to 2009.

Net Income (Loss) attributable to Non-Controlling Interest

The Company had a net loss attributable to its non-controlling interest in LSS I of $4,022 for the three months ended September 30, 2010 and a net loss of $11,462 for the same period in 2009. The Company had net income attributable to its non-controlling interest in LSS I of $104,375 for the nine months ended September 30, 2010 and a net loss of $59,941 for the same period in 2009. Although LSS I has usually recorded a loss in prior periods, during the nine months ended September 30, 2010, it had income due to the decrease in the property values on the Painesville property in which a refund payment was received.

Net Loss attributable to John D. Oil and Gas Company

The Company had a net loss attributable to John D. interests of $293,477 for the three months ended September 30, 2010 compared to a net loss of $271,456 for the same period in 2009. The Company had a net loss attributable to John D. interests of $885,416 for the nine months ended September 30, 2010 compared to a net loss of $650,578 for the same period in 2009. The loss for the three and nine months ended September 30, 2010 is largely due to the large reduction in natural gas volumes and lower contract pricing in 2010, partially offset by lower operating expense.

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Interest Rate Risk

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

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

Off-Balance Sheet Arrangements

The Company had one off-balance sheet arrangement at September 30, 2010, with respect to its investment in Kykuit. While the Company is not liable for the contribution obligations of other members of Kykuit, the Company is investing additional funds since Kykuit currently does not have production revenue but has incurred expenses. For the nine months ended September 30, 2010 and 2009, the Company invested $93,440 and $393,260, respectively, in Kykuit as part of their cash calls and to make up the difference for members not investing.

Forward-Looking Statements

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

• our ability to continue as a going concern;

• liquidity and our ability to meet our debt obligations;

• business strategy;

• financial strategy;

• drilling locations;

• natural gas and oil reserves;

• realized natural gas and oil prices;

• production volumes;

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

• future operating results; and

• plans, objectives, expectations and intentions.

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2010, the Company’s management under the supervision of and with participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and chief financial officer each concluded that the Company’s disclosure controls and procedures were not effective in light of the identification of a material weakness in the Company’s internal controls over financial reporting as discussed and reported in the Company’s Form 10-K filed March 29, 2010.

Notwithstanding the material weakness described in the Form 10-K filed March 29, 2010, to the best of their knowledge, the Company’s management believes that the Company’s financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The previous year’s reduction in staff continues to hamper the Company’s ability to maintain adequate segregation of duties.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

As previously reported, on August 20, 2009, the Company received a declaration of default with respect to its $9.5 million line of credit with Charter One. On August 24, 2009, Charter One received a judgment in its favor against the Company, Mr. Osborne, and the Richard M. Osborne Trust (of which Mr. Osborne is the sole trustee), jointly and severally, for the amount of $9.5 million plus interest and late charges as well as attorneys’ fees, costs and other amounts payable under the loan agreement.

On June 18, 2010, the Company, along with Richard M. Osborne (the Company’s chairman of the board and chief executive officer), the Richard M. Osborne Trust, Great Plains Exploration, LLC and Oz Gas Ltd. (companies owned by Mr. Osborne), entered into a Forbearance Agreement with RBS Citizens, N.A. dba Charter One pursuant to which Charter One agreed to forbear from enforcing its rights and remedies under the Company’s fully-drawn $9.5 million line of credit as well as the other parties’ loan agreements until July 1, 2011, subject to no further events of default including the payments due under the Forbearance Agreement. Pursuant to the Forbearance Agreement and during the forbearance period, the parties must pay Charter One $400,000 per month, including a $40,000 per month forbearance fee, until all amounts under the loan agreements have been paid in full.

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Item 6. Exhibits

Exhibit No.			Description
	31.1	*	Section 302 Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) pursuant to the Sarbanes-Oxley Act of 2002
	31.2	*	Section 302 Certification of Chief Financial Officer (principal financial officer) pursuant to the Sarbanes-Oxley Act of 2002
	32.1	*	Certification of Chairman of the Board and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

SIGNATURES

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

JOHN D. OIL AND GAS COMPANY
/s/ Richard M. Osborne Richard M. Osborne	Dated: November 12, 2010
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ C. Jean Mihitsch C. Jean Mihitsch	Dated: November 12, 2010
Chief Financial Officer
(Principal Financial and Accounting Officer)

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