UNITED
STATES


Securities
and Exchange Commission


Washington,
D.C.  20549




FORM
10-K




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


For
      the fiscal year ended December 31,
2008




or




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


For
      the transition period from  to .




Commission
File No. 0-054306




American
Energy Production, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
              
              74-2945581(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)  6073
      Hwy 281 South, Mineral Wells, TX
                
                76067(Address
      of principal executive offices)
                
                (Zip
      Code)





Registrant’s
telephone number, including area code (940)
445-0698




Securities registered pursuant to
Section 12(b) of the Act:




Title
      of each class
                    
                    Name
      of each exchange on which registeredNone
                    
                    None





Securities
      registered pursuant to section 12(g) of the Act:Common
      Stock, $0.0001 par value(Title
      of Class)





Indicate
by check mark if 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. YesoNo x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yesx   Noo





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 x


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes o Nox





As of the
last business day of the Company’s most recently completed second fiscal
quarter, the aggregate market value of voting and non-voting common equity held
by non-affiliates* was $_________.





As of
April 15, 2009, the registrant had 20,363,389 common shares
outstanding.





* Without
asserting that any of the issuer’s directors or executive officers, or the
entities that own shares of common stock are affiliates, the shares of which
they are beneficial owners have been deemed to be owned by affiliates solely for
this calculation.


-1-


TABLE OF CONTENTSPagePART
      IITEM 1.
                BUSINESS
                4ITEM 1A.
                RISK FACTORS
                13ITEM 2.
                PROPERTIES
                22ITEM 3.
                LEGAL PROCEEDINGS
                22PART
      IIITEM 5.
                MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
                23ITEM 6.
                SELECTED FINACIAL DATA
                24ITEM 7.
                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
                25ITEM 8.
                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                31ITEM 9.
                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE.
                32ITEM 9A.
                CONTROLS AND PROCEDURES
                32ITEM 9B.
                OTHER INFORMATION
                33PART
      IIIITEM 10.
                DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
                34ITEM 11.
                EXECUTIVE COMPENSATION
                36ITEM 12.
                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
                38ITEM 13.
                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                39ITEM 14.
                PRINCIPAL ACCOUNTANT FEES AND SERVICES
                40PART
      IVITEM 15.
                EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                41SIGNATURES
                
                42





-2-


FORWARD-LOOKING
STATEMENTS





This report contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, and Section 27A of the Securities Act of 1933. Any statements contained in
this report that are not statements of historical fact may be forward-looking
statements. When we use the words “intends,” “estimates,” “predicts,”
“potential,” “continues,” “anticipates,” “plans,” “expects,”
“believes,” “should,” “could,” “may,” “will” or the negative of these
terms or other comparable terminology, we are identifying forward-looking
statements. Forward-looking statements involve risks and uncertainties, which
may cause our actual results, performance or achievements to be materially
different from those expressed or implied by forward-looking statements.
 These factors include our research and development activities, distributor
channels, compliance with regulatory impositions; and our capital needs.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.




Except
as may be required by applicable law, we do not undertake or intend to update or
revise our forward-looking statements, and we assume no obligation to update any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not assume that
our silence over time means that actual events are bearing out as expressed or
implied in such forward-looking statements. You should carefully review and
consider the various disclosures we make in this report and our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks, uncertainties and other factors that may affect
our business.




For
further information about these and other risks, uncertainties and factors,
please review the disclosure included in this report under “Part I, Item 1A,
Risk Factors.”






-3-


PART
I




ITEM
      1.
            DESCRIPTION OF BUSINESS




American
Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our”
“its”) is a publicly traded oil and gas company that is engaged primarily in the
acquiring, developing, producing, exploring and selling of oil and natural gas.
The Company traditionally has acquired oil and gas companies that have the
potential for increased oil and natural gas production utilizing new
technologies, well workovers and fracture stimulation systems. Additionally, the
Company has expanded its scope of business to include the drilling of new wells
with its own equipment through its wholly-owned subsidiary
companies.   The Company website is www.americanenergyproduction.com.




The
Company’s wholly-owned subsidiaries are primarily involved in three areas of oil
and gas operations.




1.
Leasing programs.




2.
Production acquisitions




3.
Drilling and producing with proven and emerging technologies.




The
Company believes that for the foreseeable future, the world will be highly
dependent on oil and natural gas. Currently, alternative fuels are far more
expensive than fossil fuels and because of the politically unstable conditions
of many of the energy producing regions of the world.  As a result,
the Company believes that oil and natural gas will remain a key yet volatile
component of the world energy future and furthermore, with the ever increasing
world demand for energy, the domestic production of oil and gas will play an
even greater role in America’s future then it already has to date.




History
of Company Development




The
Company was f/k/a Communicate Now.com, Inc. and was incorporated on January 31,
2000 under the laws of the State of Delaware. On July 15, 2002, the Company
changed its corporate name to American Energy Production, Inc.





On
February 20, 2003, upon the acquisition of certain oil and gas assets, the
Company entered into a new development stage. Activities during the development
stage include acquisition of assets, obtaining geological reports, developing an
implementation plan to extract oil and gas, completing initial sales of oil and
seeking capital.




On
January 12, 2004, the Company filed a Form N-54A with the Securities and
Exchange Commission (“SEC”) to be regulated as a BDC under the Investment
Company Act of 1940, as amended (“Act”).




In May
2006, the SEC Staff issued a comment letter to the Company (the “Comment
Letter”) raising a number of questions relating to the Company’s BDC operations.
In response to the Comment Letter, the Company undertook a review of its
compliance with the 1940 Act and subsequently determined that it was not in
compliance with several important provisions of the 1940 Act. Accordingly, and
after careful consideration of the 1940 Act requirements applicable to BDCs, the
Board determined that continuation as a BDC was not in the best interests of the
Company and its shareholders




On March
13, 2007, at a Special Meeting of Shareholders, the Shareholders approved and
authorized the Board to withdraw the Company’s election to be treated as a BDC
under the 1940 Act and the election of three directors to the
Board.  On April 3, 2007, the Company filed a Form N-54C to withdraw
its election to be regulated as a BDC and as of that date, is no longer a BDC
under the 1940 Act.  The Company is no longer a BDC with
unconsolidated majority-owned portfolio companies but rather be an oil and gas
operating company with consolidated subsidiaries. The results of operations for
April 1, 2007 through April 3, 2007 were not material and therefore, the Company
will utilize April 1, 2007 as the inception date for the new development
stage


-4-





At a
meeting held on May 16, 2007, the Board of Directors reviewed the Company’s
current business and financial performance, the recent trading range of its
Common Stock and inability to obtain additional capital from the investment
community with 494,170,082 shares of Common Stock issued and outstanding and
500,000,000 shares of Common Stock authorized. As a result, the Board determined
that a reverse stock split was desirable and in the best interest of the
Company.  On July 5, 2007, the Company filed a Definitive 14A Proxy
Statement with the SEC giving notice of a special shareholders meeting to be
held on August 17, 2007 for the purpose of approving a one-for-twenty five
reverse stock split.  On September 14, 2007, the Company announced
that all of the required steps had been completed for the one-for-twenty five
reverse stock split of its common stock. In connection with the reverse stock
split, the Company was assigned a new stock symbol. The Company's shares were
previously quoted on the OTC Bulletin Board under the stock symbol AMEP and are
now reported on the OTC Bulletin Board under the new stock symbol AENP. The new
stock symbol and the reverse stock split were effective at the beginning of
trading on September 14, 2007.




On
September 30, 2008, the Company announced the issuance of an SEC Order
Instituting Cease-and-Desist and
Exemption Suspension Proceedings, Making Findings, Imposing a Cease-and-Desist
Order, and Permanently Suspending the Regulation E Exemption Pursuant to Section
9(f) of the Investment Company Act of 1940 and Rule 610(c) of Regulation
E (Order) against the Company.  The Order finds that the
Company had, among other things, issued senior securities without the required
asset coverage, issued rights to purchase securities without expiration to
non-security holders, issued prohibited non-voting stock, issued securities for
services, failed to make and keep required records; and failed to establish a
majority of disinterested directors on its board.  As a result, the
Company violated Sections 18(a), 18(d), 18(i), 23(a), 31(a)(1), and 56(a)
respectively, of the Investment Company Act and Investment Company Act Rule
31a-1.  In addition, the Company failed to obtain a fidelity bond as
required under Section 17(g) of the Investment Company Act and Rule 17g-1
thereunder, and failed to implement a compliance program as required under
Investment Company Act Rule 38a-1.  Finally, the Company failed to
comply with Rule 609 of Regulation E because it did not file offering status
reports on Form 2-E in connection with a securities offering under Regulation E
commenced in January 2004.




Based on
the above, the Order permanently suspends the Regulation E exemption and orders
the Company to cease and desist from committing or causing any violations and
any future violations of Sections 17(g), 18(a), 18(d), 18(i), 23(a), 31(a)(1)
and 56(a) of the Investment Company Act and Rules 17g-1, 31a-1, and Rule 38a-1
thereunder.  The Company consented to the issuance of the Order
without admitting or denying any of the findings.




In
determining the Order, the SEC considered remedial acts promptly undertaken by
the Company and cooperation afforded the SEC staff and as a result, the Company
did not incur any fines or other penalties, and no action was taken against any
individuals.




Our
Strategy




Management
believes that:




·
            Natural
      gas is an environmentally friendly fuel that will be increasingly valued
      in the United States;




·
            There
      are a number of natural gas and/or oil and development projects that we
      are pursuing which will require significant capitalization to complete,
      explore and develop;




·
            We
      have the ability to assemble the technical and commercial and resources
      needed to pursue these potential projects;
and




·
            Our
      successful development of one or more large potential natural gas or oil
      projects will create substantial shareholder
  value.




-5-


The
principal elements of our strategy to maximize shareholder value
are:




Generate growth through
drilling.  We expect to generate long-term reserve and
production growth predominantly through our drilling activities.  We
anticipate the substantial majority of our future capital expenditures will be
directed toward the drilling of wells, although we expect to continue to acquire
additional leasehold interests.  Initially, we anticipate reserve
growth will be our primary focus with a more balanced reserve and production
growth profile as we continue to execute our growth strategy.




Manage costs by maximizing
operational control.  We seek to exert control over our
exploration, exploitation and development activities.  As the operator
of our projects, we have greater control over the amount and timing of the
expenditures associated with those activities.  As we manage our
growth, we are focused on reducing lease operating expenses, general and
administrative costs, and finding and development costs on a per mcfe
basis.  As of December 31, 2008, we operated 100% of our wells,
although we may not be able to be operator of all our future
projects.




Pursue complementary leasehold
interest and property acquisitions.  We intend to attempt to
supplement our drilling strategy with complementary leasehold interest and
property acquisitions.




Current
Natural Gas and Oil Projects




We are in
the process of building our portfolio of exploration and exploitation projects
targeting both oil and natural gas.  We believe that there is
potential for commercial development in areas where historical drilling attempts
resulted in indications of oil and gas but ultimate development was not pursued,
and we intend to continue to focus our activities in areas having this
profile.  We believe that the application of advanced drilling,
completion and stimulation technologies combined with a strong commodity pricing
environment could make development of our project areas economically
viable.




Through
Production Resources, Inc. (“PRI”), our wholly owned subsidiary, we own leases
covering approximately 1,600 gross acres of land in Medina County, Texas. The
leases have 173 gross and net wells drilled to shallow saturated sand called the
Olmos.  There is an additional zone similar to the Olmos called the
Escondido that has been commercially productive in this area but it has not been
tested on these leases. Additional wells can be drilled on these leases to the
Olmos formation under the current spacing rules. This is a heavy oil field has
had produced for a number of years. Initially the field had enough pressure to
flow but over time pumping and advanced recovery methods were necessary.
Previously, the field had been ignored for a number of years due to the high
operating costs, low oil prices and low daily production.





Additionally,
through Bend Arch Petroleum, Inc. (“Bend Arch”), our wholly owned subsidiary, we
own leases covering approximately 6,100 gross acres of land primarily in the
counties of Palo Pinto, Eastland and Comanche, Texas.  The leases have
34 gross wells (31 net wells) drilled to the shallower Bend Conglomerate and the
deeper Strawn formation.   Most of these wells need to be
re-worked and re-stimulated to achieve maximum productive
potential.




Natural
Gas and Oil Reserves




The
following table presents information as of December 31, 2008 with respect to our
estimated proved reserves:




Net
      Proved Reserve Summary and PV-10 Forecast from December 31,
      2008Reserve
                    Categories
                
                Oil
                    (MBBL)
                
                
                Gas
                    (BCF)
                
                
                Cash
      Flow
                    ($)
                
                
                PV-10
                    ($)(e)PDP
      (b)
                
                
                .303
                
                
                
                5.927
                
                
                $
                36,542,066
                
                
                $
                6,884,536PDBP
      (c)
                
                
                .230
                
                
                
                7.500
                
                
                
                45,733,971
                
                
                
                12,201,860PUD
      (d)
                
                
                7.195
                
                
                
                27.095
                
                
                
                396,669,564
                
                
                
                127,959,348Total Proved(a)
                
                
                7.728
                
                
                
                40.522
                
                
                $
                479,330,566
                
                
                $
                147,045,744





-6-


(a)
            Proved
      reserves are those quantities of gas that, by analysis of geological and
      engineering data, can be estimated with reasonable certainty to be
      commercially recoverable from known reservoirs and under current economic
      conditions, operating methods and government
  regulations.




(b)
            PDP
      is Proved Producing Reserves and represents reserves that can be expected
      to be recovered through existing wells with existing equipment and
      operating methods.


(c)
              PDBP
      is Proved Behind Pipe Reserves and represents reserves that are expected
      to be recovered from existing wells where a relatively major expenditure
      is required for recompletion.
 (d)
                PUD
      is Proved Undeveloped Reserves and represents undeveloped reserves that
      are expected to be recovered from new wells on un-drilled acreage, or from
      existing wells where a relatively major expenditure is required for
      recompletion.
 (e)
                    PV-10
      represents the present value, discounted at 10% per annum, of estimated
      future net revenue before income tax of our estimated proved
      reserves.  The estimated future net revenues were determined by
      using reserve quantities of proved reserves and the periods in which they
      are expected to be developed and produced based on economic conditions
      prevailing at December 31, 2008.  PV-10 is a non-GAAP financial
      measure because it excludes income tax effects.  Management
      believes that the presentation of the non-GAAP financial measure of PV-10
      provides useful information to investors because it is widely used by
      professional analysts and sophisticated investors in evaluating oil and
      natural gas companies.  PV-10 is not a measure of financial or
      operating performance under GAAP.  PV-10 should not be
      considered as an alternative to the standardized measure as defined under
      GAAP.  We have included a reconciliation of PV-10 to the most
      directly comparable GAAP measure — standardized measure of discounted
      future net cash flow — in the following
  table:


December 31,
                    2008Standardized
      measure of discounted future net cashflows
      (d)
                  
                  $
                  95,579,734Add:
      Present value of future income tax discounted at 10%
                  
                  
                  51,466,010PV-10
                  
                  $
                  147,045,744


(d)
            The
      standardized measure represents the present value of estimated future cash
      inflows from proved oil and natural gas reserves, less future development,
      abandonment, production and income tax expenses, discounted at 10% per
      annum to reflect timing of future cash flows and using the same pricing
      assumptions as were used to calculate PV-10.  Standardized
      measure differs from PV-10 because standardized measure includes the
      effect of future income taxes.




Acreage




The
following table sets forth as of December 31, 2008 the gross and net acres of
both developed and undeveloped oil and gas leases that we
hold.  “Gross” acres are the total number of acres in which we own a
working interest.  “Net” acres refer to gross acres multiplied by our
fractional working interest.  Acreage numbers do not include our
options to acquire additional leaseholds which have not been
exercised.


-7-




December 31, 2008Developed(a)
                        
                        Undeveloped(b)
                        
                        TotalPlay/Trend
                        Gross
                        
                        Net
                        
                        Gross
                        
                        Net
                        
                        Gross
                        
                        NetTexas
                        7,701
                        
                        7,393
                        
                        -
                        
                        -
                        
                        7,701
                        
                        7,393





(a)
            Developed
      refers to acres that are allocated or assignable to producing wells or
      wells capable of production.  Developed acreage includes acreage
      having wells shut-in awaiting the addition of
    infrastructure.




(b)
            Undeveloped
      refers to lease acreage on which wells have not been developed or
      completed to a point that would permit the production of commercial
      quantities of oil or natural gas regardless of whether such acreage
      contains proved reserves.




Production
and Price Information




The
following tables summarize sales volumes, sales prices, and production cost
information for the periods indicated:


Year
      Ended December 31,2008ProductionOil
      (bbls)
              
              
              11,501Natural
      gas (mcf)
              
              
              88,711Natural
      gas equivalent (mcfe)
              
              
              14,785Total
      equivalent (bbls)
              
              
              26,286Oil and natural gas
      salesOil
      sales
              
              $
              1,072,005Natural
      gas sales
              
              
              768,538Total
      (A)
              
              $
              1,840,543Average sales priceOil
      ($ per bbl)
              
              $
              93.21Natural
      gas ($ per mcf)
              
              
              8.66Natural
      gas equivalent ($ per mcfe)
              
              
              51.98Average production
      costTotal
      equivalent ($ bbls)
              
              $
              86.18





(A)
Excludes $1,516 of oil and gas royalty income included in Total Revenue for
consolidated financial statements.





The
following table sets forth information at December 31, 2008, relating to the
productive wells in which we owned a working interest as of that
date.  Productive wells consist of producing wells and wells capable
of production, including natural gas wells awaiting pipeline connections to
commence deliveries and oil wells awaiting connection to production
facilities.  Gross wells are the total number of productive wells in
which we have an interest, and net wells are the sum of our fractional working
interests owned in gross wells.


-8-




December 31, 2008Play/Trend
                
                Gross
                  Wells
                
                
                Net
                  WellsTexas
                
                
                207
                
                
                
                204





Drilling
Activities




The
following table sets forth information with respect to wells drilled and
completed during the periods indicated.  The information should not be
considered indicative of future performance, nor should it be assumed that there
is necessarily any correlation between the number of productive wells drilled,
quantities of reserves found or economic value.  Productive wells are
those that produce commercial quantities of hydrocarbons, regardless of whether
they produce a reasonable rate of return.




Gross
      Wells
                
                
                Net
      WellsPeriod
                Type
      of Well
                
                Productive(b)
                
                
                Dry(c)
                
                
                Total
                
                
                Productive(b)
                
                
                Dry(c)
                
                
                TotalYear
      ended December 31, 2008
                Exploratory(a)
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0TexasDevelopment(a)
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Texas




(a)
            An
      exploratory well is a well drilled either in search of a new, as yet
      undiscovered, oil or natural gas reservoir or to greatly extend the known
      limits of a previously discovered reservoir.  A development well
      is a well drilled within the presently proved productive area of an oil or
      natural gas reservoir, as indicated by reasonable interpretation of
      available data, with the objective of being completed in that
      reservoir.




(b)
            A
      productive well is an exploratory or development well found to be capable
      of producing either oil or natural gas in sufficient quantities to justify
      completion as an oil or natural gas
well.




(c)
            A
      dry well is an exploratory or development well that is not a producing
      well or a well that has either been plugged or has been converted to
      another use.




Markets
and Customers




The
success of our operations is dependent upon prevailing prices for natural gas
and oil.  The markets for natural gas and oil have historically been
volatile and may continue to be volatile in the future.  Natural gas
and oil prices are beyond our control.  However, rising demand for
natural gas to fuel power generation and meet increasing environmental
requirements has led some industry observers to indicate that long term demand
for natural gas is increasing.




We may
use different strategies for gas sales depending on the location of the field
and the local markets.  In some locations, we may use proprietary CO2
reduction units to process our own gas and sell it to nearby local
markets.  In other cases, we may connect to nearby high pressure
transmission pipelines.  We are not currently aware of any restraints
with respect to pipeline availability.  However, because of the nature
of natural gas development, there may be periods of time when pipeline capacity
is inadequate to meet our transportation needs.  It is often the case
that as new development comes on-line, pipelines are near or at capacity before
new pipelines are built.




We have
no firm delivery contract for the delivery of our natural gas
sales.


-9-




To the
extent that we bring new wells on-line and our production volume increases, of
which there is no assurance, we will sell the new production in the spot markets
or under new monthly base contracts.  We expect that we will usually
sell in this fashion, partly through firm gas delivery contracts and partly in
the spot markets.




Prices
for oil and natural gas fluctuate fairly widely based on supply and
demand.  Supply and demand are influenced by weather, foreign policy
and industry practices.  For example, demand for natural gas has
increased in recent years due to a trend in the power plant industry to move
away from using oil and coal as a fuel source to using natural gas, because
natural gas is a cleaner fuel.  Nonetheless, in light of historical
fluctuations in prices, there can be no assurance at what price we will be able
to sell our oil and natural gas.  It is possible that prices will be
low at the time periods in which the wells are most productive, thereby reducing
overall returns.




Competition




The
natural gas and oil industry is intensely competitive and speculative in all of
its phases.  We encounter competition from other natural gas and oil
companies in all areas of our operations.  In seeking suitable natural
gas and oil properties for acquisition, we compete with other companies
operating in our areas of interest, including medium and large natural gas and
oil companies and other independent operators, which have greater financial
resources and have been engaged in the exploration and production business for a
much longer time than we have.  Many of our competitors also have
substantially larger operating staffs than we do.  Many of these
competitors not only explore for and produce natural gas and oil but also market
natural gas and oil and other products on a regional, national or worldwide
basis.  These competitors may be able to pay more for productive
natural gas and oil properties and exploratory prospects, and define, evaluate,
bid for and purchase a greater number of properties and prospects than we are
able to.  In addition, these competitors may have a greater ability to
continue exploration activities during periods of low market
prices.  Our ability to acquire additional properties and to discover
reserves in the future will depend on our ability to evaluate and select
suitable properties and to finance and consummate transactions in a highly
competitive environment.




The
prices of our natural gas and oil production will be controlled by market
forces.  However, competition in the natural gas and oil exploration
industry also exists in the form of competition to acquire leases and obtain
favorable transportation prices.  We are extremely small, with limited
financial resources and may have difficulty acquiring additional acreage and/or
projects and may have difficulty arranging for the transportation of our
production.  We also face competition in obtaining natural gas and oil
drilling rigs and in sourcing the manpower to run them and provide related
services.




Government
Regulation of the Oil and Gas Industry




General.




Our
business is affected by numerous laws and regulations, including energy,
environmental, conservation, tax and other laws and regulations relating to the
energy industry. Failure to comply with these laws and regulations may result in
the assessment of administrative, civil and criminal penalties, the imposition
of injunctive relief or both. Moreover, changes in any of these laws and
regulations could have a material adverse effect on our business. In view of the
many uncertainties with respect to current and future laws and regulations,
including their applicability to us, we cannot predict the overall effect of
such laws and regulations on our future operations.




We
believe that operations where we own interests comply in all material respects
with applicable laws and regulations and that the existence and enforcement of
these laws and regulations have no more restrictive an effect on our operations
than on other similar companies in the energy industry.




The
following discussion contains summaries of certain laws and regulations and is
qualified in its entirety by the foregoing and by reference to the full text of
the laws and regulations described.




Federal Regulation of the Sale and
Transportation of Oil and Gas.




Various
aspects of our oil and gas operations are or will be regulated by agencies of
the federal government. The Federal Energy Regulatory Commission, or FERC,
regulates the transportation and sale for resale of natural gas in interstate
commerce pursuant to the Natural Gas Act of 1938, or NGA, and the Natural Gas
Policy Act of 1978, or NGPA. In the past, the federal government has regulated
the prices at which oil and gas could be sold. While ”first sales” by producers
of natural gas, and all sales of crude oil, condensate and natural gas liquids
can currently be made at uncontrolled market prices, Congress could reenact
price controls in the future. Deregulation of wellhead sales in the natural gas
industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted
the Natural Gas Wellhead Decontrol Act.


-10-




The
Decontrol Act removed all NGA and NGPA price and non-price controls affecting
wellhead sales of natural gas effective January 1, 1993, and resulted in a
series of Orders being issued by FERC requiring interstate pipelines to provide
transportation services separately, or ”unbundled,” from the pipelines’ sales of
gas and to provide open access transportation on a nondiscriminatory basis that
is equal for all natural gas shippers.




We
do not believe that we will be affected by these or any other FERC rules or
orders materially differently than other natural gas producers and marketers
with which we compete.




The
FERC also has issued numerous orders confirming the sale and abandonment of
natural gas gathering facilities previously owned by interstate pipelines and
acknowledging that if the FERC does not have jurisdiction over services provided
on those facilities, then those facilities and services may be subject to
regulation by state authorities in accordance with state law. A number of states
have either enacted new laws or are considering the adequacy of existing laws
affecting gathering rates and/or services. Other state regulation of gathering
facilities generally includes various safety, environmental, and in some
circumstances, nondiscriminatory take requirements, but does not generally
entail rate regulation. Thus, natural gas gathering may receive greater
regulatory scrutiny of state agencies in the future. Our anticipated gathering
operations could be adversely affected should they be subject in the future to
increased state regulation of rates or services, although we do not believe that
we would be affected by such regulation any differently than other natural gas
producers or gatherers. In addition, the FERC’s approval of transfers of
previously-regulated gathering systems to independent or pipeline affiliated
gathering companies that are not subject to FERC regulation may affect
competition for gathering or natural gas marketing services in areas served by
those systems and thus may affect both the costs and the nature of gathering
services that will be available to interested producers or shippers in the
future.




We
conduct certain operations on federal oil and gas leases, which are administered
by the Minerals Management Service, or MMS. Federal leases contain relatively
standard terms and require compliance with detailed MMS regulations and orders,
which are subject to change. Among other restrictions, the MMS has regulations
restricting the flaring or venting of natural gas, and has proposed to amend
those regulations to prohibit the flaring of liquid hydrocarbons and oil without
prior authorization. Under certain circumstances, the MMS may require any of our
operations on federal leases to be suspended or terminated. Any such suspension
or termination could materially and adversely affect our financial condition,
cash flows and operations. The MMS issued a final rule that amended its
regulations governing the valuation of crude oil produced from federal leases.
This rule, which became effective June 1, 2000, provides that the MMS will
collect royalties based on the market value of oil produced from federal leases,
and was further modified by amendments to the June 2000 MMS rules,
effective July 1, 2004. Also, the MMS promulgated new Federal Gas Valuation
rules, effective June 1, 2005 (70FR 11869, March 10, 2005) concerning
calculation of transportation costs, including the allowed rate of return in the
calculation of actual transportation costs in non-arm’s length arrangements and
addresses various other related matters. We cannot predict whether this new gas
rule will become effective, nor can we predict whether the MMS will take further
action on oil and gas valuation matters. However, we do not believe that any
such rules will affect us any differently than other producers and marketers of
crude oil with which we will compete.




Additional
proposals and proceedings that might affect the oil and gas industry are pending
before Congress, the FERC, the MMS, state commissions and the courts. We cannot
predict when or whether any such proposals may become effective. In the past,
the natural gas industry has been heavily regulated. There is no assurance that
the regulatory approach currently pursued by various agencies will continue
indefinitely. Notwithstanding the foregoing, we do not anticipate that
compliance with existing federal, state and local laws, rules and regulations
will have a material or significantly adverse effect upon our capital
expenditures, earnings or competitive position. No material portion of our
business is subject to re-negotiation of profits or termination of contracts or
subcontracts at the election of the federal government.




State
Regulation.




Our
operations also are subject to regulation at the state and, in some cases,
county, municipal and local governmental levels. This regulation includes
requiring permits for the drilling of wells, maintaining bonding requirements in
order to drill or operate wells and regulating the location of wells, the method
of drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled, the plugging and abandonment of wells and the disposal
of fluids used and produced in connection with operations. Our operations also
are or will be subject to various conservation laws and regulations. These
include (1) the size of drilling and spacing units or proration units,
(2) the density of wells that may be drilled, and (3) the unitization
or pooling of oil and gas properties. In addition, state conservation laws,
which frequently establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. State regulation of gathering facilities
generally includes various safety, environmental and, in some circumstances,
nondiscriminatory take requirements, but (except as noted above) does not
generally entail rate regulation. These regulatory burdens may affect
profitability, but we are unable to predict the future cost or impact of
complying with such regulations.




-11-


Environmental
Matters.




Operations
on properties in which we have an interest are subject to extensive federal,
state and local environmental laws that regulate the discharge or disposal of
materials or substances into the environment and otherwise are intended to
protect the environment. Numerous governmental agencies issue rules and
regulations to implement and enforce such laws, which are often difficult and
costly to comply with and which carry substantial administrative, civil and
criminal penalties and in some cases injunctive relief for failure to comply.
Some laws, rules and regulations relating to the protection of the environment
may, in certain circumstances, impose ”strict liability” for environmental
contamination. These laws render a person or company liable for environmental
and natural resource damages, cleanup costs and, in the case of oil spills in
certain states, consequential damages without regard to negligence or fault.
Other laws, rules and regulations may require the rate of oil and gas production
to be below the economically optimal rate or may even prohibit exploration or
production activities in environmentally sensitive areas. In addition, state
laws often require some form of remedial action, such as closure of inactive
pits and plugging of abandoned wells, to prevent pollution from former or
suspended operations. Legislation has been proposed in the past and continues to
be evaluated in Congress from time to time that would reclassify certain oil and
gas exploration and production wastes as ”hazardous wastes.” This
reclassification would make these wastes subject to much more stringent storage,
treatment, disposal and clean-up requirements, which could have a significant
adverse impact on operating costs. Initiatives to further regulate the disposal
of oil and gas wastes are also proposed in certain states from time to time and
may include initiatives at the county, municipal and local government levels.
These various initiatives could have a similar adverse impact on operating
costs. The regulatory burden of environmental laws and regulations increases our
cost and risk of doing business and consequently affects our
profitability.




The
federal Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA, also known as the ”Superfund” law, imposes liability, without regard to
fault, on certain classes of persons with respect to the release of a ”hazardous
substance” into the environment. These persons include the current or prior
owner or operator of the disposal site or sites where the release occurred and
companies that transported, disposed or arranged for the transport or disposal
of the hazardous substances found at the site. Persons who are or were
responsible for releases of hazardous substances under CERCLA may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for the federal or state government to
pursue such claims. It is also not uncommon for neighboring landowners and other
third parties to file claims for personal injury or property or natural resource
damages allegedly caused by the hazardous substances released into the
environment. Under CERCLA, certain oil and gas materials and products are, by
definition, excluded from the term ”hazardous substances.” At least two federal
courts have held that certain wastes associated with the production of crude oil
may be classified as hazardous substances under CERCLA. Similarly, under the
federal Resource, Conservation and Recovery Act, or RCRA, which governs the
generation, treatment, storage and disposal of ”solid wastes” and ”hazardous
wastes,” certain oil and gas materials and wastes are exempt from the definition
of ”hazardous wastes.” This exemption continues to be subject to judicial
interpretation and increasingly stringent state interpretation. During the
normal course of operations on properties in which we have an interest, exempt
and non-exempt wastes, including hazardous wastes, that are subject to RCRA and
comparable state statutes and implementing regulations are generated or have
been generated in the past. The federal Environmental Protection Agency and
various state agencies continue to promulgate regulations that limit the
disposal and permitting options for certain hazardous and non-hazardous
wastes.




Our
operations will involve the use of gas fired compressors to transport collected
gas. These compressors are subject to federal and state regulations for the
control of air emissions. Title V status for a facility results in
significant increased testing, monitoring and administrative and compliance
costs. To date, other compressor facilities have not triggered Title V
requirements due to the design of the facility and the use of state-of-the-art
engines and pollution control equipment that serve to reduce air emissions.
However, in the future, additional facilities could become subject to
Title V requirements as compressor facilities are expanded or if regulatory
interpretations of Title V applicability change. Stack testing and
emissions monitoring costs will grow as these facilities are expanded and if
they trigger Title V. The U.S. Environmental Protection Agency and some
other state environmental agencies have increased their focus on control of
minor gas emission leaks from pipelines, compressors, tanks, and related oil and
gas production and storage equipment in response to ozone non-attainment
requirements increasing the costs and complexity of our operations. We believe
that the operator of the properties in which we have an interest is in
substantial compliance with applicable laws, rules and regulations relating to
the control of air emissions at all facilities on those properties.




Although
we maintain insurance against some, but not all, of the risks described above,
including insuring the costs of clean-up operations, public liability and
physical damage, there is no assurance that our insurance will be adequate to
cover all such costs, that the insurance will continue to be available in the
future or that the insurance will be available at premium levels that justify
our purchase. The occurrence of a significant event not fully insured or
indemnified against could have a material adverse effect on our financial
condition and operations.




Compliance
with environmental requirements, including financial assurance requirements and
the costs associated with the cleanup of any spill, could have a material
adverse effect on our capital expenditures, earnings or competitive position. We
do believe, however, that our operators are in substantial compliance with
current applicable environmental laws and regulations. Nevertheless, changes in
environmental laws have the potential to adversely affect operations. At this
time, we have no plans to make any material capital expenditures for
environmental control facilities.


-12-




Our
Employees




As of
December 31, 2008, we have 10 full time employee and no part-time
employees.  We are not a party to any collective bargaining
agreements.  We believe that our relations with our employees are
good.




ITEM
      1A.
            RISKFACTORS




You
should carefully consider each of the following risk factors and all of the
other information provided in this Annual Report.  The risks described
below are those we currently believe may materially affect us.  An
investment in our Common Stock involves a high degree of risk, and should be
considered only by persons who can afford the loss of their entire
investment.




Any
investment in our common stock involves a high degree of risk.  In
addition to the other information contained in this report, including risks and
uncertainties described elsewhere, you should carefully consider the following
risk factors and all of the information contained in this Annual Report in
evaluating us or deciding whether to purchase our common stock.  The
risks and uncertainties described below or elsewhere in this Annual Report are
not the only ones we face.  Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business and operations.  The following list of risk factors should
not be considered as all inclusive.  If any of the following risks
were to occur, our business, financial condition, operating results and cash
flows could be materially affected, all of which might cause the trading price
of our common stock to decline, and you could lose all or part of any investment
you may make in our common stock.





Our
actual results may differ materially from those anticipated in our
forward-looking statements.  We operate in a market environment that
is difficult to predict and that involves significant risks and uncertainties,
many of which will be beyond our control.  Refer also to “SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS” at the beginning of this Annual
Report.





Risks
related to our industry, business and strategy.




Going
Concern Risk




We have
previously had and could have future losses, deficits and deficiencies in
liquidity, which could impair our ability to continue as a going concern. Our
independent registered public accounting firm has indicated that certain factors
raise substantial doubt about our ability to continue as a going concern and
these factors are discussed in Note 2 to our audited financial statements. Since
its inception, the Company has suffered recurring losses from operations and has
been dependent on existing stockholders and new investors to provide the cash
resources to sustain its operations.





As
reflected in the accompanying financial statements, the Company had a net loss
of $2,148,551 for the year ended December 31, 2008.  Additionally, the
Company has a negative working capital balance of $6,693,177, a stockholders’
deficit of $3,055,149 at December 31, 2008 and is subject to certain
contingencies as discussed in Notes 1 and 7 to the accompanying consolidated
financial statements, which could have a material impact on the Company’s
financial condition and operations. The ability of the Company to continue as a
going concern is dependent on the Company’s ability to raise capital and
generate sufficient revenues and cash flow from its business plan as an oil and
gas operating company.  The financial statements included in this
report do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.





Management
believes that as a result of the one-for-twenty five reverse stock split
recently approved by the shareholders of the Company, the Company will have
several options available to obtain financing from third parties in order to
carry out the business plan of the Company.





We have
substantial current obligations and at December 31, 2008, we had $6,782,260 of
current liabilities as compared to only $89,0838 of current assets. Accordingly,
the Company does not have sufficient cash resources or current assets to pay
these obligations.


-13-




Our
substantial debt obligations pose risks to our business and stockholders
by:




·
            making
      it more difficult for us to satisfy our
  obligations;




·
            requiring
      us to dedicate a substantial portion of our cash flow to principal and
      interest payments on our debt obligations, thereby reducing the
      availability of our cash flow to fund working capital, capital
      expenditures and other corporate
requirements;




·
            impeding
      us from obtaining additional financing in the future for working capital,
      capital expenditures and general corporate purposes;
  and




·
            making
      us more vulnerable to a downturn in our business and limit our flexibility
      to plan for, or react to, changes in our
  business.




The time
required for us to become profitable is highly uncertain, and we cannot assure
you that we will achieve or sustain profitability or generate sufficient cash
flow from operations to meet our planned capital expenditures, working capital
and debt service requirements. If required, our ability to obtain additional
financing from other sources also depends on many factors beyond our control,
including the state of the capital markets and the prospects for our business.
The necessary additional financing may not be available to us or may be
available only on terms that would result in further dilution to the current
owners of our common stock.  If we fail to make any required payment
under the agreements and related documents governing our indebtedness or fail to
comply with the financial and operating covenants contained in them, we would be
in default.




We
have significant financial and operational covenant.




Our
wholly owned subsidiary, Bend Arch, has a $2,000,000 amended promissory note
(“Note”) accruing interest at 8% with Proco Operating Co., Inc. (“Proco”), a
company controlled by the brother of the Company’s Chief Executive Officer with
a maturity date of December 31, 2009.  The purpose of the Note is to
secure payment for oil and gas leases and wells located in Comanche and Eastland
counties in the State of Texas sold to Bend Arch by Proco on June 15, 2004. The
Note replaced a $2,000,000 convertible debenture dated January 5,
2004.




The terms
of the Note include (i) the payment of interest at a rate of eight percent (8%)
per annum (ii) principal and interest due and payable on December 31, 2009 (iii)
no prepayment penalty (iv) payment made in excess of sixty (60) days after the
due date of December 31, 2009 is a default of the Note and Bend Arch will
forfeit all ownership of the related leases and wells and relinquish operations
on the lease and wells to Proco, and (v) upon a default of the Note, Bend Arch
will vacate the leases with no rights of ownership and execute the necessary
documents to transfer the leases and wells to Proco or its assigns. Bend Arch
also has a covenant that as long as the Note is outstanding and unpaid, no
transfer, assignment or sale of the underlying leases and wells securing the
payment of the Note will be allowed without the written approval of
Proco.




If we are
determined to be in default of the covenants provided for in the Note, the
impact on our business could be materially detrimental.





Our
operations require large amounts of capital and we may be unable to obtain
needed capital or financing on satisfactory terms, which could lead to a loss of
properties and a decline in our natural gas and oil reserves.




Our
current plans require us to make large capital expenditures for the exploration
and development of our existing acreage and we also anticipate that we will need
substantial additional capital to pursue other potential
projects.  Historically, we have funded our capital expenditures
through the issuance of equity.


-14-




There are
no commitments from any source to provide any equity or debt
financing.  Even if we are able to obtain equity or debt financing, of
which there is no assurance, issuing equity securities to satisfy our financing
requirements could cause substantial dilution to our existing
stockholders.  Debt financing, if obtained, could lead
to:




·
            a
      substantial portion of our operating cash flow being dedicated to the
      payment of principal and interest,


·
            our
      being more vulnerable to competitive pressures and economic downturns,
      and


·
            restrictions
      on our operations.




If we are
not able to obtain capital through an equity or debt financing or otherwise, our
ability to execute our business plans could be greatly
limited.  Moreover, we will need to increase our sources of revenue,
funding or both to sustain operations for the long run.  There is no
assurance that this will occur.




We
may not discover commercially productive oil and gas reserves, which will impact
our ability to meet our business goals.




Our
ability to locate reserves is dependent upon a number of factors, including our
participation in multiple exploration projects and our technological capability
to locate oil and gas in commercial quantities.  We cannot predict
that we will have the opportunity to participate in projects that economically
produce commercial quantities of oil and gas in amounts necessary to create a
positive cash flow for the Company or that the projects in which we elect to
participate will be successful.  There can be no assurance that our
planned projects will result in significant reserves or that we will have future
success in drilling productive wells at economical reserve replacement
costs.




Oil
and gas prices are volatile and an extended decline in prices can significantly
affect our financial results, impede our growth and hurt our business
prospects




Our
future profitability and rate of growth and the anticipated carrying value of
our oil and gas properties could be affected by the then prevailing market
prices for oil and gas.  We expect the markets for oil and gas to
continue to be volatile.  If we are successful in continuing to
establish production, any substantial or extended decline in the price of oil or
gas could:




·
            have
      a material adverse effect on our results of
  operations,


·
            limit
      our ability to attract capital,


·
            make
      the formations we are targeting significantly less economically
      attractive,


·
            reduce
      our cash flow and borrowing capacity,
and


·
            reduce
      the value and the amount of any future
reserves.




Various
factors beyond our control will affect prices of oil and gas,
including:




·
            worldwide
      and domestic supplies of oil and
gas,


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


·
            political
      instability or armed conflict in oil or gas producing
    regions,


·
            the
      price and level of foreign imports,


·
            worldwide
      economic conditions,


·
            marketability
      of production,


·
            the
      level of consumer demand,


·
            the
      price, availability and acceptance of alternative
  fuels,


·
            the
      availability of processing and pipeline
  capacity,


·
            weather
      conditions, and


·
            actions
      of federal, state, local and foreign
  authorities.




-15-


These
external factors and the volatile nature of the energy markets make it difficult
to estimate future prices of oil and gas.  In addition, sales of oil
and gas are seasonal in nature, leading to substantial differences in cash flow
at various times throughout the year.




Our
exploration and development activities are subject to reservoir and operational
risks which may lead to increased costs and decreased production.




The
marketability of our oil and gas production, if any, will depend in part upon
the availability, proximity and capacity of gas gathering systems, pipelines and
processing facilities.  Federal and state regulation of oil and gas
production and transportation, general economic conditions, changes in supply
and changes in demand all could adversely affect our ability to produce and
market our oil and natural gas.  If market factors were to change
dramatically, the financial impact could be substantial because we would incur
expenses without receiving revenues from the sale of production.  The
availability of markets is beyond our control.




Even when
oil and gas is found in what is believed to be commercial quantities, reservoir
risks, which may be heightened in new discoveries, may lead to increased costs
and decreased production.  These risks include the inability to
sustain deliverability at commercially productive levels as a result of
decreased reservoir pressures, large amounts of water, or other factors that
might be encountered.  As a result of these types of risks, most
lenders will not loan funds secured by reserves from newly discovered
reservoirs, which would have a negative impact on our future
liquidity.  Operational risks include hazards such as fires,
explosions, craterings, blowouts (such as the blowout experienced at our initial
exploratory well), uncontrollable flows of oil, gas or well fluids, pollution,
releases of toxic gas and encountering formations with abnormal
pressures.  In addition, we may be liable for environmental damage
caused by previous owners of property we own or lease.  As a result,
we may face substantial liabilities to third parties or governmental entities,
which could reduce or eliminate funds available for exploration, development or
acquisitions or cause us to incur substantial losses.  The occurrence
of any one of these significant events, if it is not fully insured against,
could have a material adverse effect on our financial condition and results of
operations.




We
face risks related to title to the leases we enter into that may result in
additional costs and affect our operating results.




It is
customary in the oil and gas industry to acquire a leasehold interest in a
property based upon a preliminary title investigation.  If the title
to the leases acquired is defective, we could lose the money already spent on
acquisition and development, or incur substantial costs to cure the title
defect, including any necessary litigation.  If a title defect cannot
be cured, we will not have the right to participate in the development of or
production from the leased properties.  In addition, it is possible
that the terms of our oil and gas leases may be interpreted differently
depending on the state in which the property is located.  For
instance, royalty calculations can be substantially different from state to
state, depending on each state’s interpretation of lease language concerning the
costs of production.  We cannot guarantee that there will be no
litigation concerning the proper interpretation of the terms of our
leases.  Adverse decisions in any litigation of this kind could result
in material costs or the loss of one or more leases.




To
the extent that we undertake exploratory drilling, it is a high risk activity
with many uncertainties that could adversely affect our business, financial
condition or results of operations.




Exploratory
drilling involves numerous risks, including the risk that we will not find any
commercially productive oil or gas reservoirs.  The cost of drilling,
completing and operating wells is often uncertain, and a number of factors can
delay or prevent drilling operations, including:




·
            unexpected
      drilling conditions,


·
            pressure
      or irregularities in formations,


·
            equipment
      failures or accidents,


·
            adverse
      weather conditions,


·
            compliance
      with governmental requirements,


·
            shortages
      or delays in the availability of drilling rigs and the delivery of
      equipment, and


·
            shortages
      of trained oilfield service
personnel.




-16-


Our
future drilling activities may not be successful, nor can we be sure that our
overall drilling success rate or our drilling success rate for activities within
a particular area will not decline.  Unsuccessful drilling activities
could have a material adverse effect on our results of operations and financial
condition.  Also, we may not be able to obtain any options or lease
rights in potential drilling locations that we identify.  Although we
have identified a number of potential exploration projects, we cannot be sure
that we will ever drill them or that we will produce oil or gas from them or any
other potential exploration projects.




Accounting
rules may require write-downs, which may result in a charge to
earnings.




We follow
the successful efforts method of accounting, capitalizing costs of successful
exploratory wells and expensing costs of unsuccessful exploratory
wells.  All developmental costs are capitalized.  We are
predominately engaged in exploration and production activities.




Depreciation
and depletion of producing properties is computed on the units-of-production
method based on estimated proved oil and natural gas
reserves.  Depreciation of non-oil and gas properties is over their
estimated useful life of three years, using the straight line
method.  Repairs and maintenance are expensed, while renewals and
betterments are generally capitalized.  Expenditures less than $1,000,
including contract labor, are expensed to operations in the year
incurred.




At least
quarterly, or more frequently if conditions indicate that long-term assets may
be impaired, the carrying value of property is compared to management’s future
estimated pre-tax cash flow from the properties.  In accordance with
Statement of Financial Accounting Standards No. 144, Accounting for Impairment
or Disposal Of Long-Lived Assets, if impairment is necessary, the asset carrying
value is written down to fair value.  Cash flow pricing estimates are
based on existing proved reserve and production information and pricing
assumptions that management believes are reasonable.  Impairment of
individually significant unproved properties is assessed and amortized on an
aggregate basis.  We had no significant unproved properties at
December 31, 2008 and no impairment was necessary at December 31,
2008.




The
oil and gas exploration and production industry is highly competitive and many
of our competitors have more resources than we do.




We
compete in oil and gas exploration with a number of other
companies.  Many of these competitors have financial and technological
resources vastly exceeding those available to us.  We cannot be sure
that we will be successful in acquiring and developing profitable properties in
the face of this competition.  In addition, from time to time, there
may be competition for, and shortage of, exploration, drilling and production
equipment.  These shortages could lead to an increase in costs and
delays in operations that could have a material adverse effect on our business
and our ability to develop our properties.  Problems of this nature
also could prevent us from producing any oil and gas we discover at the rate we
desire to do so.




The
oil and gas industry is heavily regulated and costs associated with such
regulation could reduce our profitability.




Federal,
state and local authorities extensively regulate the oil and gas
industry.  Legislation and regulations affecting the industry are
under constant review for amendment or expansion, raising the possibility of
changes that may affect, among other things, the pricing or marketing of oil and
gas production.  State and local authorities regulate various aspects
of oil and gas drilling and production activities, including the drilling of
wells (through permit and bonding requirements), the spacing of wells, the
unitization or pooling of oil and gas properties, environmental matters, safety
standards, the sharing of markets, production limitations, plugging and
abandonment, and restoration.  The overall regulatory burden on the
industry increases the cost of doing business, which, in turn, decreases
profitability.




Our
oil and gas operations must comply with complex environmental regulations and
such compliance is costly.




Our oil
and gas operations are subject to complex and constantly changing environmental
laws and regulations adopted by federal, state and local governmental
authorities.  New laws or regulations, or changes to current
requirements, could have a material adverse effect on our
business.  We will continue to be subject to uncertainty associated
with new regulatory interpretations and inconsistent interpretations between
state and federal agencies.  We could face significant liabilities to
the government and third parties for discharges of oil, natural gas, produced
water or other pollutants into the air, soil or water, and we could have to
spend substantial amounts on investigations, litigation and
remediation.  We cannot be sure that existing environmental laws or
regulations, as currently interpreted or enforced, or as they may be
interpreted, enforced or altered in the future, will not have a material adverse
effect on our results of operations and financial condition.


-17-




Technological
changes could put us at a competitive disadvantage.




The oil
and gas industry is characterized by rapid and significant technological
advancements and introductions of new products and services using new
technologies.  As new technologies develop, we may be placed at a
competitive disadvantage, and competitive pressures may force us to implement
those new technologies at a substantial cost.  If other oil and gas
exploration and development companies implement new technologies before we do,
those companies may be able to provide enhanced capabilities and superior
quality compared with what we are able to provide.  We may not be able
to respond to these competitive pressures and implement new technologies on a
timely basis or at an acceptable cost.  If we are unable to utilize
the most advanced commercially available technologies, our business could be
materially and adversely affected.




Oil
and gas sales are seasonal leading to varying cash flow during the
year.




Sales of
oil and natural gas are seasonal in nature, leading to substantial differences
in cash flow at various times throughout the year.  The marketability
of our oil and gas production, if any, will depend in part upon the
availability, proximity and capacity of gas gathering systems, pipelines and
processing facilities.  Federal and state regulation of oil and gas
production and transportation, general economic conditions, changes in supply
and changes in demand all could negatively affect our ability to produce and
market oil and natural gas.  If market factors were to change
dramatically, the financial impact could be substantial because we would incur
expenses without receiving revenues from sales of production.  The
availability of markets and the volatility of product prices are beyond our
control and represent a significant risk to us.




Our
oil and gas business depends on transportation facilities owned by
others.




The
marketability of our potential oil and gas production depends in part on the
availability, proximity and capacity of pipeline systems owned or operated by
third parties.  Federal and state regulation of oil and gas production
and transportation, tax and energy policies, changes in supply and demand and
general economic conditions could adversely affect our ability to produce,
gather and transport oil and natural gas.




Oil
and gas reserve estimates may not be accurate.




There are
numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond our
control.  Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in any
exact way, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgment.  As a result, estimates made by different engineers often
vary from one another.  In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revisions of such
estimates, and such revisions, if significant, would change the schedule of any
further production and development drilling.  Accordingly, reserve
estimates are generally different, and often materially so, from the quantities
of oil and natural gas that are ultimately recovered.  Furthermore,
estimates of quantities of proved reserves and their PV-10 value may be affected
by changes in crude oil and gas prices because the Company’s quantity estimates
are based on prevailing prices at the time of their determination.




Attempts
to grow our business could have an adverse effect




Because
of our small size, we desire to grow rapidly in order to achieve certain
economies of scale.  Although there is no assurance that this rapid
growth will occur, to the extent that it does occur, it will place a significant
strain on our financial, technical, operational and administrative
resources.  As we increase our services and enlarge the number of
projects we are evaluating or in which we are participating, there will be
additional demands on our financial, technical and administrative
resources.  The failure to continue to upgrade our technical,
administrative, operating and financial control systems or the occurrence of
unexpected expansion difficulties, including the recruitment and retention of
geoscientists and engineers, could have a material adverse effect on our
business, financial condition and results of operations.




The
failure to complete future property acquisitions successfully could reduce
earnings and slow growth.




We may
not be able to identify properties for acquisition or may not be able to make
acquisitions on terms that we consider economically acceptable.  There
is intense competition for acquisition opportunities in the oil and gas
industry.  Competition for acquisitions may increase the cost of, or
cause us to refrain from, completing acquisitions.  Our strategy of
completing acquisitions is dependent upon, among other things, our ability to
obtain debt and equity financing and, in some cases, regulatory
approvals.  Our ability to pursue its growth strategy may be hindered
if we are not able to obtain financing or regulatory approvals.


-18-




Shortages
of supplies, equipment and personnel may adversely affect our
operations.




Our
ability to conduct operations in a timely and cost effective manner depends on
the availability of supplies, equipment and personnel.  The oil and
gas industry is cyclical and experiences periodic shortages of drilling rigs,
supplies and experienced personnel.  Shortages can delay operations
and materially increase operating and capital costs.




Our
ability to market the oil and gas that we produce will be essential to our
business.




Several
factors beyond our control may adversely affect our ability to market the oil
and gas that we discover.  These factors include the proximity,
capacity and availability of oil and gas pipelines and processing equipment,
market fluctuations of prices, taxes, royalties, land tenure, allowable
production and environmental protection.  The extent of these factors
cannot be accurately predicted, but any one or a combination of these factors
may result in our inability to sell our oil and gas at prices that would result
in an adequate return on our invested capital.  We currently
distribute the oil that we produce through a single pipeline.  If this
pipeline were to become unavailable, we would incur additional costs to secure a
substitute facility in order to deliver the gas that we produce.  In
addition, although we currently have access to firm transportation for the
majority of our current gas production, there is no assurance that we will be
able to procure additional transportation on terms satisfactory to us, or at
all, to the extent we increase and expand the area or areas of our
production.




We
will have limited control over the activities on properties we do not
operate.




We
currently have one operator over the oil and gas activities on our properties,
but in the future other companies may operate some or many of the properties in
which we have an interest.  We will have limited ability to influence
or control the operation or future development of these non-operated
properties.  Our dependence on the operator and other working interest
owners for these projects and our limited ability to influence or control the
operation and future development of these properties could materially adversely
affect the realization of our targeted returns on capital in these drilling or
acquisition activities.




Hedging
our production may result in losses.




We
currently have no hedging agreements in place.  However, we may in the
future enter into arrangements to reduce our exposure to fluctuations in the
market prices of oil and natural gas.  We may enter into oil and gas
hedging contracts in order to increase credit availability.  Hedging
will expose us to risk of financial loss in some circumstances, including
if:




·
            production
      is less than expected,


·
            the
      other party to the contract defaults on its obligations,
  or


·
            there
      is a change in the expected differential between the underlying price in
      the hedging agreement and actual prices
  received.




In
addition, hedging may limit the benefit we would otherwise receive from
increases in the prices of oil and gas.  Further, if we do not engage
in hedging, we may be more adversely affected by changes in oil and gas prices
than our competitors who engage in hedging.




We
have limited senior management resources, and we need to attract and retain
highly skilled personnel; we may be unable to effectively manage growth with our
limited resources.





Our
senior management currently consists of Charles Bitters, Chief Executive
Officer, Chief Financial Officer and sole Director, Joe Christopher, President
of Oil America Group, Inc., our wholly-owned subsidiary and Renny Walker,
President of Production Resources, Inc,., our wholly-owned
subsidiary.  Our limited senior management requires them to handle an
increasingly large and more diverse amount of responsibility. Expansion of our
business would place a significant additional strain on our limited managerial,
operational, and financial resources. In such event, we will be required to
expand our operational and financial systems and to expand, train, and manage
our work force in order to manage the expansion of our operations. Our failure
to fully integrate our new employees into our operations could have a material
adverse effect on our business, prospects, financial condition, and results of
operations. Our ability to attract and retain highly skilled personnel is
critical to our operations and expansion. We face competition for these types of
personnel from other oil and gas companies and more established organizations,
many of which have significantly larger operations and greater financial,
marketing, human, and other resources than we have. We may not be successful in
attracting and retaining qualified personnel on a timely basis, on competitive
terms, or at all. If we are not successful in attracting and retaining these
personnel, our business, prospects, financial condition, and results of
operations will be materially adversely affected. Our future success will be
dependent on our ability to attract and retain key personnel





-19-


We do not have a full time Chief Financial Officer or
Controller





We currently do not have a full time Chief Financial
Officer or Controller.  Rather, we utilize external consultants for
recording our accounting information andfor preparing our required SEC reporting requirements
including this Form 10-K.    Charles Bitters, our Chief
Executive Officer is not a trained accountant and relies on the external
consultants to prepare the required information and
disclosures.In addition, compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 has and will continue to place additional strain on
our limited managerial, operational, and financial resources which we believe
will be very significant and could have a material adverse effect on our
business, prospects, financial condition and results of operations. Our future
success will be dependent on our ability to attract and retain key
personnel





We
may incur substantial costs in order to comply with the requirements of the
Sarbanes-Oxley act of 2002.




The
Sarbanes-Oxley Act of 2002 has introduced many new requirements applicable to us
regarding corporate governance and financial reporting. Among many other
requirements is the requirement under Section 404(a) of the Sarbanes-Oxley Act
for management to report on our internal controls over financial reporting and
the requirement under Section 404(b) of the Sarbanes-Oxley Act for our
registered independent public accountant to attest to this report.





We were
required to comply with Section 404(a) effective for this year ended December
31, 2008.  Our management, including our principal executive officer
and principal financial officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2008 and
concluded that the disclosure controls and procedures were not effective,
because certain deficiencies involving internal controls constituted a material
weakness. The material weakness identified did not result in the restatement of
any previously reported financial statements or any other related financial
disclosure, nor does management believe that it had any effect on the accuracy
of the Company’s financial statements for the current reporting
period.





To the
best of our ability, we may devote substantial time and incur substantial costs
during fiscal 2009 to improve our controls and procedures with the goal of
compliance. We cannot, however, be certain that we will remediate the material
weaknesses discovered, if any, in complying with Section 404.




Risks
related to our common stock.




We
have a limited market for our common stock, and our stock price is
volatile





Our
common stock is not listed on a national securities exchange or quoted on the
Nasdaq Global Market or Nasdaq Small Capital Market.  Instead, our
common stock is currently quoted on the OTC Bulletin Board under the symbol
“AENP.OB.”  Trading on the OTC Bulletin Board is sporadic and highly
volatile.  The market price for our common stock has fluctuated in the
past and may continue to fluctuate in the future.  The market price of
our common stock is subject to, and will continue to be subject to, a variety of
factors, including without limitation:





·
            the
      business environment;


·
            the
      operating results of companies in the industries we
  serve;


·
            future
      announcements concerning our business or that of our competitors or
      customers;


·
            the
      introduction of new products or changes in product pricing policies by us
      or our competitors;


·
            litigation
      matters;


·
            changes
      in analysts’ earnings statements or performance
  estimates;


·
            developments
      in the financial markets;


·
            quarterly
      operating results;


·
            perceived
      dilution from stock issuances for acquisitions and other transactions;
      and


·
            market
      conditions of securities traded on the OTC Bulletin
  Board.





-20-


Furthermore,
stock prices for many companies fluctuate for reasons that may be unrelated to
their operating results.  Those fluctuations and general economic,
political and market conditions, such as recessions, international currency
fluctuations or terrorist or military actions, as well as public perception of
equity values of publicly traded companies, may adversely affect the market
price of our common stock.





There
is no assurance of an established public trading market for our common
stock





Although
our common stock trades on the OTC Bulletin Board, a regular trading market for
our common stock may not be sustained in the future. The NASD (National
Association of Stock Dealers) has enacted recent changes that limit quotations
on the OTC Bulletin Board to securities of issuers that are current in their
reports filed with the SEC.  The OTC Bulletin Board is an
inter-dealer, over-the-counter market that provides significantly less liquidity
than the NASD’s automated quotation system (the “Nasdaq Stock
Market”).  Quotes for stocks included on the OTC Bulletin Board are
not listed in the financial sections of newspapers as are those for the NASDAQ
Stock Market.  Therefore, prices for securities traded solely on the
OTC Bulletin Board may be difficult to obtain and holders of our common stock
may be unable to resell their securities at or near their original offering
price, or at any price.





Our
common stock is considered a “penny stock” and may be difficult to
sell





Our
common stock is considered to be a “penny stock” since it meets one or more of
the definitions in Rule 3(a)(51-1) promulgated under the Exchange
Act.  These include but are not limited to the following: (i) the
stock trades at a price less than $5 per share; (ii) we are NOT traded on a
“recognized” national securities exchange; (iii) we are NOT quoted on the Nasdaq
Stock Market; (iv) we are NOT have a market value of listed securities of $50
million; or (v) it does NOT have a minimum bid price of $4 per
share.  The principal result or effect of being designated a “penny
stock” is that securities broker-dealers cannot recommend the stock but must
trade in it on an unsolicited basis.  Section 15(g) of the Exchange
Act, and Rule 15g-2 promulgated thereunder by the SEC, require broker-dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor’s account.  Our common stock will not be
considered a “penny stock” if our net tangible assets exceed $2,000,000 or our
average revenue is at least $6,000,000 for the previous three
years.




Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny
stock.”  Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor.  This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
clause (ii) above; and (iv) receive a signed and dated copy of such statement
from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment
objectives.  Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.





If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected





We have
identified certain material weaknesses in our internal controls over financial
reporting per the assessment required pursuant to rules adopted by the SEC
pursuant to the Sarbanes-Oxley Act of 2002.  This may have an adverse
impact on investor confidence and the price of our common
stock.  Failure to establish and maintain appropriate internal
controls over financial reporting, or any failure of those controls once
established, could have a material adverse effect on our business, financial
condition or results of operations or raise concerns for
investors.  Any actual or perceived weaknesses or conditions in our
internal controls over financial reporting that need to be addressed may have a
material adverse effect on the price of our common stock.





Loss
of Control by Present Management and Shareholders




The
Company may consider an acquisition in which the Company would issue as
consideration for the business opportunity to be acquired an amount of the
Company's authorized but unissued Common Stock that could, upon issuance,
constitute as much as 51% of the voting power and equity of the Company. The
result of such an acquisition would be that the acquired company's stockholders
and management would control the Company, and the Company's management could be
replaced by persons unknown at this time.  Such a merger could leave
investors in the securities of the Company with a greatly reduced percentage of
ownership of the Company.  Management could sell its control block of
stock at a premium price to the acquired company's stockholders, although
management has no plans to do so.


-21-




Dilutive
Effects of Issuing Additional Common Stock




In order
to pursue our business plans, we will need to raise additional
capital.  If we are able to obtain additional funding through the sale
of common stock, the financing would dilute the equity ownership of existing
stockholders.




The
necessary financing could be obtained through one or more transactions that
could effectively dilute the ownership interests of our then-current
stockholders.  Further, there can be no assurances that we will be
able to secure such additional financing.  The board of directors of
the Company has authority to issue such unissued shares without the consent or
vote of the shareholders of the Company.  We are authorized to issue
up to 500,000,000 shares of our common stock and 5,000,000 shares of preferred
stock, $0.001 par value per share.





Our
Board of Directors can issue preferred stock with terms that are preferential to
our common stock.




Our Board
of Directors may issue up to 5,000,000 shares of preferred stock without action
by our stockholders.  Rights or preferences could include, among other
things:




·
            the
      establishment of dividends which must be paid prior to declaring or paying
      dividends or other distributions to our common
    stockholders;


·
            greater
      or preferential liquidation rights which could negatively affect the
      rights of common stockholders; and


·
            the
      right to convert the preferred stock at a rate or price which would have a
      dilutive effect on the outstanding shares of common
  stock.




See
“Description of Securities—Preferred Stock”.




In
addition, any preferred stock that is issued may have rights, including as to
dividends, liquidation preferences and voting, that are superior to those of
holders of Common Stock.




We
have not and do not anticipate paying dividends on our Common
Stock.




We have
not paid any cash dividends to date with respect to our common
stock.  We do not anticipate paying dividends on our common stock in
the foreseeable future since we will use all of our earnings, if any, to finance
expansion of our operations.  However, we are authorized to issue
preferred stock and may in the future pay dividends on our preferred stock that
may be issued.




ITEM
      2.
            PROPERTIES




We do not
own any real estate or other physical properties materially important to our
operation.  Our administrative and principal executive offices are
located at 6073 Hwy 281 South, Mineral Wells, TX 76067.  We currently
do not have a lease and we are not paying rent for our office space. It is being
provided to the Company by our Chief Executive Officer and sole director free of
charge.  Usage of this office space and the related value is de
minimis.  Therefore, no expense has been recorded in the accompanying
financial statements.  We expect we will have to lease more
substantial corporate office space in the near future and that the cost of the
space may be material to our operations.  We believe that our office
facilities are suitable and adequate for our business as it is contemplated to
be conducted.




ITEM
      3.
            LEGAL
      PROCEEDINGS




From time
to time, we may become subject to proceedings, lawsuits and other claims in the
ordinary course of business including proceedings related to environmental and
other matters.  Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance.




During
the period covered by this Annual Report, and as of the present date, we were
not and are not a party to any material legal proceedings, nor were or are we
aware of any threatened litigation of a material nature against us.




-22-




PART II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Market
Information





As of
April 15, 2009, the Company had 20,360,389 shares of common stock issued and
outstanding.  The Company’s common stock, par value $0.0001 per share
(the "Common Stock"), is traded on the Over the Counter Bulletin Board ("OTCBB")
under the symbol "AENP".





The
following table sets forth certain information as to the high and low bid
quotations quoted on the OTCBB for our 2008 and 2007 fiscal years. Information
with respect to over-the-counter bid quotations represents prices between
dealers, does not include retail mark-ups, markdowns or commissions, and may not
necessarily represent actual transactions.





High
                
                
                LowFiscal
      Year Ending 2008First
      Quarter
                
                $
                0.47
                
                
                $
                0.27Second
      Quarter
                
                $
                0.44
                
                
                $
                0.23Third
      Quarter
                
                $
                0.25
                
                
                $
                0.15Fourth
      Quarter
                
                $
                0.21
                
                
                $
                0.01Fiscal
      Year Ending 2007First
      Quarter
                
                $
                2.25
                
                
                $
                1.50Second
      Quarter
                
                $
                1.75
                
                
                $
                0.75Third
      Quarter
                
                $
                1.00
                
                
                $
                0.25Fourth
      Quarter
                
                $
                0.49
                
                
                $
                0.22





On April
15, 2009, the closing bid price for a share our common stock, as reported by the
OTCBB was $0.038.





Holders





As of
April 15, 2009, there were approximately 415 stockholders of record of our
common stock, which does not include shareholders whose shares are held in
street or nominee names, and no shares of our preferred stock were issued or
outstanding.





Dividends





No cash
dividends have been declared or paid on our common stock since our
inception.  No restrictions limit our ability to pay dividends on our
common stock.  We do not expect to pay any dividends in the near
future.





-23-


Securities
Authorized For Issuance Under Equity Compensation Plans





In
September 2008, the Company’s Board of Directors approved the issuance of up to
10,000,000 shares of common stock under the 2008 Non-Qualified Stock Option Plan
(the “Plan”).  The Plan is to assist the Company in securing and
retaining Key Participants of outstanding ability by making it possible to offer
them an increased incentive to join or continue in the service of the Company
and to increase their efforts for its welfare through participation in the
ownership and growth of the Company.  On September 25, 2008, the
Company filed a Form S-8 with the SEC for the registration of the underlying
shares of stock from the plan.  As of April 15, 2009, no grants under
the Plan had been issued by the Company.





Recent
Sales of Unregistered Securities




None




ITEM
      6.
            SELECTED
      FINANCIAL DATA




Years
      EndedDecember
      31,2008
                
                
                2007Revenues
                
                $
                1,842,059
                
                
                $
                1,581,661Total
      Operating Expenses
                
                
                3,617,895
                
                
                
                3,743,656Operating
      Loss
                
                
                (1,775,836
                )
                
                
                (2,161,995
                )Total
      Other Income (Expense)
                
                
                (372,716
                )
                
                
                (121,982
                )Net
      Loss
                
                $
                (2,148,551
                )
                
                $
                (2,283,978
                )Net
      Cash Provided by Operating Activities
                
                $
                117,874
                
                
                $
                122,368Per
      Share and Share DataWeighted
      average Shares Outstanding
                
                
                20,361,880
                
                
                
                19,770,055Shares
      Outstanding at Year-End
                
                
                20,360,389
                
                
                
                19,767,055Net
      Loss Per Share - Basic and Diluted
                
                $
                (0.11
                )
                
                $
                (0.12
                )Book
      Value Per Share
                
                $
                (0.15
                )
                
                $
                (0.05
                )Market
      Price:High
                
                $
                0.47
                
                
                $
                2.25Low
                
                $
                0.01
                
                
                $
                0.22Year-End
      Close
                
                $
                0.03
                
                
                $
                0.45AssetsCurrent
      Assets
                
                $
                89,083
                
                
                $
                134,740Property
      and equipment, net
                
                $
                4,011,903
                
                
                $
                4,365,765Other
      Assets
                
                $
                135,280
                
                
                $
                272,771Total
      Assets
                
                $
                4,236,266
                
                
                $
                4,773,277LiabilitiesTotal
      Current Liabilities
                
                $
                6,782,260
                
                
                $
                5,155,387Asset
      Retirement Obligations
                
                $
                509,155
                
                
                $
                524,488Total
      Liabilities
                
                $
                7,291,415
                
                
                $
                5,679,875Stockholders'
      Deficit
                
                $
                (3,055,149
                )
                
                $
                (906,599
                )Total
      Liabilities and Stockholders' Deficit
                
                $
                4,236,266
                
                
                $
                4,773,277Number
      of Employees
                
                
                10
                
                
                
                11Oil
      and Gas WellsGross
                
                
                207
                
                
                
                220Net
                
                
                204
                
                
                
                215AcreageGross
                
                
                7,701
                
                
                
                7,811Net
                
                
                7,393
                
                
                
                7,394ReservesProved
      Oil (MBBL)
                
                
                7.728
                
                
                
                6.934Proved
      Natural Gas (BCF)
                
                
                40.522
                
                
                
                1.58ProductionOil
      (bbls)
                
                
                11,501
                
                
                
                14,144Natural
      Gas (mcf)
                
                
                88,711
                
                
                
                81,928Total
      Equivalent (bbls)
                
                
                26,286
                
                
                
                27,799Average
      Sales PriceOil
      (bbls)
                
                $
                93.21
                
                
                $
                68.74Natural
      Gas (mcf)
                
                $
                8.66
                
                
                $
                7.42Natural
      Gas Equivalent (mcfe)
                
                $
                51.98
                
                
                $
                44.52
  -24-


ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS




The
following discussion and analysis of our financial condition and results of
operations is qualified by reference to, and should be read in conjunction with,
our audited consolidated financial statements included in this Annual Report
(the “Financial
Statements”), and the accompanying notes thereto, and the other financial
information appearing elsewhere in this Annual Report. The analysis set forth
below is provided pursuant to applicable SEC regulations and is not intended to
serve as a basis for projections of future events.  Our actual results
may differ materially from those anticipated in our forward-looking
statements.  Please also refer to “SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS” beginning on page 4 of this Annual Report and “RISK
FACTORS” beginning on page 8 of this Annual Report.




OVERVIEW




For a
description of the historical development of our business, please refer to “Item
1.  Description of Business – History of Company Development”
beginning on page 6 of this Annual Report.





RECENT
DEVELOPMENTS




On March
6, 2009 but effective December 31, 2008, Bent Arch executed a Fourth
Modification and Extension Agreement (the “Fourth Extension”) in relation to the
Note that was to become due and payable on December 31, 2008.  The
Third Extension modified the terms of the Note as follows;




·
            The
      maturity date of the Note was extended to December 31,
    2009.




Critical
Accounting Estimates and Policies




The
methods, estimates and judgment we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements.  The Securities and Exchange Commission has defined the
most critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and require us to make our
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain.  Based upon this
definition, our most critical estimates include going concern, BDC conversion,
oil and gas properties, property and equipment, the evaluation of whether our
assets are impaired, asset retirement obligations, revenue recognition, the
valuation allowance for deferred tax assets, and the estimate of reserves of oil
and gas that are used to develop projected income whereby an appropriate
discount rate has been used.  We also have other key accounting
estimates and policies, but we believe that these other policies either do not
generally require us to make estimates and judgments that are as difficult or as
subjective, or it is less likely that they would have a material impact on our
reported results of operations for a given period.  For additional
information, see Note 3 "Nature of Operations and Summary of Significant
Accounting Policies" in the notes to our audited financial statements contained
in this Annual Report.  Although we believe that our estimates and
assumptions are reasonable, they are based upon information presently
available.  Actual results may differ significantly from these
estimates.




GOING
CONCERN




The
independent registered public accounting firms’ reports to our financial
statements at December 31, 2008 and 2007 and for the years ended December 31,
2008 and 2007, include an explanatory paragraph in addition to their audit
opinion stating that our recurring losses from operations, net cash used in
operations, stockholders’ deficit and working capital deficiency raise
substantial doubt about our ability to continue as a going
concern.  Our financial statements do not include any adjustments to
reflect the possible effects on recoverability and classification of assets or
the amounts and classification of liabilities that may result from our inability
to continue as a going concern.




-25-


BDC
CONVERSION




As a
result of the Company’s conversion from a BDC company to an oil and gas
operating company, the change in accounting is considered a change in accounting
principle. As a result, in accordance with Statement of Financial Accounting
Standard 154, "Accounting for Changes and Error Corrections," which requires
that a change in accounting principle be retrospectively applied to all prior
periods presented, the Company’s financial statements are presented on an
operating and consolidated basis for all current and prior periods presented on
a retrospective basis without regard to the BDC method of
accounting.  The Company does not believe that withdrawing its
election to be regulated as a BDC will have any impact on its federal income tax
status, because the Company never elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code. Instead, the
Company has always been subject to corporate level federal income tax on its
income (without regard to any distributions it makes to its shareholders) as a
“regular” corporation under Subchapter C of the Internal Revenue
Code.




OIL AND GAS
PROPERTIES




The
Company uses the successful efforts method of accounting for its oil and gas
properties.   Costs incurred by the Company related to the
acquisition of oil and gas properties and the cost of drilling successful wells
are capitalized.   Costs to maintain wells and related equipment
and lease and well operating costs are charged to expense as
incurred.   Gains and losses arising from sales of properties are
included in income.   Unproved properties are assessed
periodically for possible impairment.





PROPERTY AND
EQUIPMENT




The
Company’s oil and gas rig is depreciated over its estimated useful life of ten
years, using the straight line method.  Vehicles and field equipment
are depreciated over their estimated useful life of three years and five years,
respectively, using the straight line method.  Maintenance, repairs
and minor replacements are charged to operations in the year
incurred.




EVALUATION OF ASSET
IMPAIRMENT




We
account for the impairment of long-lived assets including proved properties in
accordance with Financial Accounting Standards, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be
recoverable.  Recoverability of the asset is measured by comparison of
its carrying amount to the undiscounted cash flow that the asset or asset group
is expected to generate.  If such assets or asset groups are
considered to be impaired, the loss recognized is the amount by which the
carrying amount of the property if any, exceeds its fair market
value.  Based on our impairment analysis of property and equipment, no
impairment charge has been recorded for the years ended December 31, 2008 or
2007.




ASSET RETIREMENT
OBLIGATIONS




The
Company accounts for asset retirement obligations in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement
Obligations. 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.


-26-




REVENUE
RECOGNITION




Revenues
from sales of crude oil and natural gas products are recorded when deliveries
have occurred and legal ownership of the commodity transfers to the
customer.  Revenues from the production of oil and natural gas
properties in which the Company shares an undivided interest with other
producers are recognized based on the actual volumes sold by the Company during
the period.




VALUATION ALLOWANCE FOR
DEFERRED TAX ASSETS




In
assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized.  The valuation allowance at December 31, 2008
was $1,548,597.  Net operating loss carry-forwards aggregate
approximately $4,424,563 and expire in the years through 2029.




As
discussed previously, on April 3, 2007, the Company filed a Form N-54C to
withdraw its election to be regulated as a BDC and as of that date, is no longer
a BDC under the 1940 Act.  The Company is no longer a BDC with
unconsolidated majority-owned portfolio companies but rather an oil and gas
operating company with consolidated subsidiaries. The results of operations for
April 1, 2007 through April 3, 2007 were not material and therefore, the Company
has utilized April 1, 2007 as the inception date for the new
business as an oil and gas operating company. As a result of this change,
and IRS Section 382 rules, the net operating loss carry-forwards from previous
years to April 1, 2007 will not be allowable and are not
included.




Results
of Operations





The
following discussion of the results of operations should be read in conjunction
with our consolidated financial statements and notes thereto for the periods
presented included in this Form 10-K.




Years
      EndedDecember
      31,2008
                                                                                                                    
                                                                                                                    
                                                                                                                    2007Revenues:Oil
      sales, net
                                                                                                                    
                                                                                                                    $
                                                                                                                    1,842,059
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    1,581,661Operating
      ExpensesCompensation
                                                                                                                    
                                                                                                                    
                                                                                                                    255,384
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    213,419Consulting
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3,260Depreciation,
      depletion and accretion
                                                                                                                    
                                                                                                                    
                                                                                                                    562,334
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    540,677Rent
                                                                                                                    
                                                                                                                    
                                                                                                                    89,161
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    36,527General
      and administrative
                                                                                                                    
                                                                                                                    
                                                                                                                    225,836
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    389,746Production
                                                                                                                    
                                                                                                                    
                                                                                                                    2,265,456
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,300,198Professional
                                                                                                                    
                                                                                                                    
                                                                                                                    126,748
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    173,393Taxes
                                                                                                                    
                                                                                                                    
                                                                                                                    91,896
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    86,436Website
                                                                                                                    
                                                                                                                    
                                                                                                                    1,080
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -Total
      Operating Expenses
                                                                                                                    
                                                                                                                    
                                                                                                                    3,617,895
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3,743,656Operating
      Loss
                                                                                                                    
                                                                                                                    
                                                                                                                    (1,775,836
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    2,161,995
                                                                                                                    )Other
      Income (Expense)Other
      income (expense)
                                                                                                                    
                                                                                                                    
                                                                                                                    (195,942
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    19,097Gain
      on sale of properties
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    29,309Interest
      expense
                                                                                                                    
                                                                                                                    
                                                                                                                    (170,769
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (164,383
                                                                                                                    )Payroll
      tax expense and penalties
                                                                                                                    
                                                                                                                    
                                                                                                                    (6,004
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (6,004
                                                                                                                    )Total
      Other
      Income (Expense)
                                                                                                                    
                                                                                                                    
                                                                                                                    (372,716
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (121,982
                                                                                                                    )Net
      Loss
                                                                                                                    
                                                                                                                    $
                                                                                                                    (2,148,551
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    (2,283,978
                                                                                                                    )




-27-


Year Ended December 31, 2008
compared to December 31, 2007




Revenues:




Revenues
increased $260,399 or 16%, to $1,842,059 for 2008 from $1,581,661 for
2007.  The increase was due to increased market pricing from the sale
of the Company’s oil and gas production..





Operating
Expenses:





Operating
expenses decreased $125,761, or 3%, to $3,617,895 for 2008 from $3,743,656 for
2007.  The decrease was primarily the result of a $163,910 decrease in
general and administrative expense, a $34,742 decrease in production expense and
a $46,645 decrease in professional expense, offset by a $52,633 increase in rent
expense, a $41,966 increase in compensation expense and a $21,658 increase in
depreciation, depletion and accretion expense.  The decrease in
production expense was primarily from the Company not being able to focus on its
oil and gas operations because of insufficient operating cash.  The
change in general and administrative and professional expense was from an effort
made by the Company to reduce expenses.





Other Income
(Expense):





Other
income (expense) increased $250,733 of expense, or approximately 100% to
$372,716 of expense for 2008 from $121,982 of expense for 2007.  The
change was primarily composed of a $215,039 increase in other expense, of which
$195,000 was related to an adjustment of accrued compensation not properly
recorded in the prior periods.  Additionally, the change was comprised
of $29,309 gain on sale of properties in 2007 with no corresponding amount in
2008.





Liquidity
and Capital Resources:




Cash and
cash equivalents were $88,937 at December 31, 2008 as compared to $133,220 at
December 31, 2007, and working capital deficit was $6,693,177 at December 31,
2008 as compared to a working capital deficit of $5,020,647 at December 31,
2007.  The increase in the working capital deficit was primarily from
a $1,531,027 increase in due to related parties and $161,864 increase in accrued
interest payable.





Historical
Trends:




Operating
Activities





Cash
provided by operating activities was $117,874 for the year ended December 31,
2007 compared to cash provided of $122,638 for the year ended December 31,
2007.





Investing
Activities





Cash used
in investing activities was $253,504 for the year ended December 31, 2008
compared to cash used of $144,178 for the year ended December 31,
2007.  The increase in cash used resulted primarily from an increase
in the investment in property and equipment.





Financing
Activities





Cash
provided by financing activities was $91,348 for the year ended December 31,
2008 compared to $48,127 of cash provided for the year ended December 31,
2007.  The change was primarily from a reduction in the repayment of
notes payable from 2007 to 2008 by $29,221.


-28-





Our
principal uses of cash to date have been for operating activities and we have
funded our operations previously primarily by incurring indebtedness in the form
of convertible debentures and issuing common stock.  Our existing debt
obligations pose a significant liquidity risk to our business and stockholders
by requiring us to dedicate a substantial portion of our cash flow to principal
and interest payments on our debt obligations, thereby reducing the availability
of our cash flow to fund working capital, capital expenditures and other
corporate requirements.  Additionally, these debt obligations may
impede us from obtaining additional financing in the future for working capital,
capital expenditures and other corporate requirements and may make us more
vulnerable to a downturn in our business and limit our flexibility to plan for,
or react to, changes in our business.





Debt:





Our
debt at December 31, 2008 and 2007 consisted of the following:




Lease
Payable




December
      31,2008
              
              
              2007$21,238
      computer equipment lease, bearing interest at 10% per
annum
              
              $
              16,131
              
              
              $
              16,131




On April
16, 2001, the Company leased computer equipment under a 36-month lease that was
accounted for as a capital lease in the amount of $21,238.  The lease
was secured by the computer equipment and perfected by a financing statement;
however, the Company liquidated the equipment in 2006 (with the lessor approval)
and paid the resulting $4,000 of proceeds to the lessor.  As a result
of the computer liquidation other payments, the remaining unpaid balance of
principal has been $16,131 since March 31, 2006.  The payable is
personally guaranteed by a former officer/director and the Chief Executive
Officer of the Company.  As of December 31, 2008, the Company has
recorded a total of $25,029 in accrued interest for this payable in the
accompanying Balance Sheet.




In
November 2003, a settlement was negotiated with the lessor discussed above to
forgive the outstanding principal and accrued interest on the lease payable once
the transfer of 4,000 shares (100,000 shares prior to the one-for-twenty five
reverse stock split) of the Company’s common stock personally held by the
Company’s Chief Executive office occurs.  The Chief Executive Officer
of the Company transferred these shares on September 15,
2003.  However, as of December 31, 2008, the transaction has not been
finalized as the lessor has not agreed to the settlement. The Company expects to
fully resolve this matter in the future at which time the value of the shares
exchanged and any related gain or loss will be determined and
recognized.




As of
December 31, 2008, the Company has recorded $122,671 of accrued interest for
previously issued convertible debentures.  Several convertible
debenture holders previously elected to convert all or a portion of the
convertible debentures into common stock.  However, the conversion did
not include accrued interest that was specified in the convertible debenture
documentation.  Although the Company believes that no further common
stock will be issued for these conversions, the accrued interest balance for
these converted debentures is included in the accrued interest balance as of
December 31, 2008.




Notes
Payable




December
      31,2008
                
                
                2007$2,000,000
      Promissory Note, dated February 20, 2003, bearinginterest
      at 8% per annum and due on December 31, 2008
                
                $
                2,000,000
                
                
                $
                2,000,000$25,000
      Line of Credit, dated October 28, 2005, bearingsimple
      variable interest at 6% per annum and due onFebruary
      28, 2008.
                
                
                24,062
                
                
                
                23,714$103,000
      Note, dated March, 2008, not formalized and not bearing
      interest
                
                
                91,000
                
                
                
                -$
                2,115,062
                
                
                $
                2,023,714




-29-


On June
15, 2004, Bend Arch Petroleum, Inc. (“Bend Arch”), a wholly-owned subsidiary of
the Company executed a $2,000,000 promissory note accruing interest at 8% with
Proco Operating Co., Inc., a company controlled by the brother of the Company’s
Chief Executive Officer with a maturity date of July 25, 2007.  The
purpose of the Note is to secure payment for oil and gas leases and wells
located in Comanche and Eastland counties in the State of Texas sold to Bend
Arch by Proco on June 15, 2004. The Note replaced a $2,000,000 convertible
debenture dated January 5, 2004.




The terms
of the Note included (i) the payment of interest at a rate of eight percent (8%)
per annum (ii) principal and interest due and payable on July 25, 2007 (iii) no
prepayment penalty (iv) payment made in excess of sixty (60) days after the due
date of July 25, 2007 is a default of the Note and Bend Arch will forfeit all
ownership of the related leases and wells and relinquish operations on the lease
and wells to Proco, and (v) upon a default of the Note, Bend Arch will vacate
the leases with no rights of ownership and execute the necessary documents to
transfer the leases and wells to Proco or its assigns.




Effective
July 25, 2007, Bent Arch executed a Modification and Extension Agreement (the
“First Extension”) in relation to the Note that became due and payable on the
same date.




The First
Extension modified the terms of the Note as follows:




·
            The
      maturity date of the Note was extended to September 25,
    2007.




·
            Bend
      Arch covenants that as long as the Note is outstanding and unpaid, no
      transfer, assignment or sale of the underlying leases and wells securing
      the payment of the Note will be allowed without the written approval of
      Proco.




Effective
September 25, 2007, Bent Arch executed a Second Modification and Extension
Agreement (the “Second Extension”) in relation to the Note that became due and
payable on the same date. The Second Extension modifies the terms of the Note as
follows:




·
            The
      maturity date of the Note was extended to March 31,
  2008.




As of
December 31, 2008, the Company has accrued $798,685 of accrued interest on the
Promissory Note and is included as a component of accrued interest payable in
the accompanying financial statements.




On March
6, 2009 but effective December 31, 2008, Bent Arch executed a Fourth
Modification and Extension Agreement (the “Fourth Extension”) in relation to the
Note that was to become due and payable on December 31, 2008.  The
Fourth Extension modified the terms of the Note as follows;




·
            The
      maturity date of the Note was extended to December 31,
    2009.




On
October 28, 2005, Bend Arch entered into a $25,000 line of credit facility with
a financial institution for working capital purposes. The line of credit is
secured by a certificate of deposit held by the financial institution and bears
simple interest per annum at a variable rate which is six percent (6%) as of
December 31, 2008. As of December 31, 2008, the outstanding balance is $24,062
and is included in the Note Payable balance in the accompanying consolidated
financial statements.




In March
2008, the Company purchased oilfield property and equipment for a price of
$150,000.  The terms included a cash payment of $47,000 and a note
payable for the balance of $103,000.  During the nine months ended
September 30, 2008, the Company paid down $12,000 of principal and the balance
is $91,000 as of December 31, 2008 and classified as a component of Note Payable
in the accompanying consolidated financial statements.  As of December
31, 2008, no formal agreement of the terms of the note payable had been
finalized and the Company has a verbal agreement to pay the principal back at a
rate of $10,000 monthly.  It is anticipated that a formal agreement
will be negotiated and finalized in the future.




-30-


Equity
Financing





For the
year ended December 31, 2007 and 2006, the Company received $89,000 and
$2,335,245 of proceeds, net of offering costs, from the issuance of common
stock, respectively.





Contractual
Obligations and Commercial Commitments




The
following table highlights, as of December 31, 2008, our contractual obligations
and commitments by type and period:




Contractual Obligations
                
                Total
                
                
                Less than 1 yearDebt:Lease
      Payable
                
                $
                16,131
                
                
                $
                16,131Notes
      Payable
                
                
                2,115,062
                
                
                
                2,115,062Accrued
      Interest Payable
                
                
                946,385
                
                
                
                946,385Total
      Debt
                
                $
                3,077,578
                
                
                $
                3,077,578







Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.





2009
OUTLOOK





Our
ability to have a successful oil and gas company is heavily dependent on
securing additional capital to supplement the anticipated timeframe required for
the oil and gas revenues and cash flows to be sufficient to cover our operating
expenses.  As a result, we are searching for an alternative means of
securing additional capital, which may include the sale of additional shares of
our common stock or the issuance of additional debt
securities.  Additionally, we require additional funds for working
capital and for growth opportunities.  However, there is no assurance
that additional equity or debt financing will be available on terms acceptable
to our management or that the additional financing will be available when we
require the funds.




If we are
unable to obtain additional capital or successfully implement our business
strategy, this will have a significant impact on our ability to continue as a
going concern.




ITEM
      8.
            FINANCIAL
      STATEMENTSANDSUPPLEMENTARY
DATA




The
Consolidated Financial Statements and schedules that constitute Item 8 are
attached at the end of this Annual Report on Form 10-K.  An index to
these Financial Statements and schedules is also included on page F-1 of this
Annual Report on Form 10-K.




-31-


ITEM
9.                      CHANGES
IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.




There
have been no disagreements, or transactions or events similar to those which
involved such disagreements or reportable events, with former accountants on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter disagreements in connection with any of its
reports.




ITEM
9A. CONTROLS
AND PROCEDURES




We
maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by
us in reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable assurance of achieving
the desired control objectives, and we necessarily are required to apply our
judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures.





Our
management, including our principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2008 and concluded that
the disclosure controls and procedures were not effective, because certain
deficiencies involving internal controls constituted a material weakness as
discussed below. The material weakness identified did not result in the
restatement of any previously reported financial statements or any other related
financial disclosure, nor does management believe that it had any effect on the
accuracy of the Company’s financial statements for the current reporting
period.





Management’s
Annual Report on Internal Control over Financial Reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act. Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes, in accordance
with generally accepted accounting principles. Because of inherent limitations,
a system of internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate due to
change in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





Our
management, including our principal executive officer and principal accounting
officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on its evaluation, our management concluded
that there is a material weakness in our internal control over financial
reporting. A material weakness is a deficiency, or a combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Company’s annual or
interim financial statements will not be prevented or detected on a timely
basis.





The
material weakness(s) identified are:





1.
            The
      Company does not have a full time Accounting Controller or Chief Financial
      Officer and utilizes part time consultants to perform these critical
      responsibilities.  This lack of full time accounting staff
      results in a lack of segregation of duties and accounting technical
      expertise necessary for an effective system of internal
      control.





-32-


Additionally,
management determined during its internal control assessment the following
weakness(s), while not considered material, are items that should be considered
by the Board of Directors for resolution in the near future:





1.
            The
      management of oil and gas leases including a schedule of oil and gas lease
      agreements and related documents to ensure that the Company has rights to
      Oil and Gas, expiration and renewal dates, contractual payments regarding
      royalties, taxes, improvements, etc.   This ensures correct
      oil and gas capital accounts, revenues and related expenses are calculated
      correctly by Accounting.  Additionally, the CEO (since
      there is no CFO) should review all Oil and gas lease
      agreements.


2.
            The
      Company should take steps to require that oil and gas expenditures are
      properly classified into the proper categories such as acquisition costs
      and intangible and tangible drilling costs.  Without this, the
      Company cannot properly determine the proper recording and disclosure of
      oil and gas expenditures.


3.
            The
      Company should take steps to enhance the security for bank wire
      transfers.  Currently, the Subsidiary President’s and CEO
      provide instruction to the bookkeepers to initiate a wire
      transfer.  As a security enhancement, the Bank should be
      required to obtain approval from the CEO or CFO to make the wire
      transfer.


4.
            The
      Company IT process should be strengthened as there is no disaster recovery
      plan, no server, and the company accounting records are maintained through
      a consultant accountant.  The Company should consider the
      purchase and implementation of a server and proper back-ups off site to
      ensure that accounting information is
  safeguarded.


5.
            The
      Company should take steps to implement a policies and procedures
      manual.





In order
to mitigate all of the above weaknesses(s), to the fullest extent possible, all
financial reports are reviewed by the Chief Executive Officer as well as the
Board of Directors for reasonableness. All unexpected results are investigated.
At any time, if it appears that any control can be implemented to continue to
mitigate such weaknesses, it is immediately implemented. As soon as our finances
allow, we will hire sufficient accounting staff and implement appropriate
procedures as described above.





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





This
report shall not be deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liabilities of that
section, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2008 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.




ITEM
      9B.
            OTHER INFORMATION




Not
applicable.


-33-




PART III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




Directors
and Executive Officers




The
principal occupations of each of our executive officers and directors for at
least the past five years are as follows:




Name
              Age
              Positions Held With The
    Company
              Director SinceCharles
      Bitters
              63
              Chief
      Executive Officer, President  and Director
              2002Joe
      Christopher
              60
              President
      of Oil America Group, Inc. and Director
              2008Renny
      Walker
              56
              President
      of Production Resources, Inc.
              N/A





There are
no family relationships among any of our directors or executive officers. Each
executive officer is elected or appointed by, and serves at the discretion of,
our board of directors.





Charles Bitters has been
Chief Executive Officer and director of the Company since 2002 and President
since 2001.  Mr. Bitters has over 25 years experience in all phases of
the petroleum industry including drilling of oil and gas wells and the
stimulation, production and operation of oil and gas wells.  From 1997
to 2000, he was the Managing Member of Trinity Group, LLC, an oil and gas lease
production company.  Mr. Bitters holds a Bachelor of Science degree
from Tarleton State University.





Joe Christopher has been
President of Oil America Group, Inc., a wholly-owned subsidiary of the Company,
since 2005 and was elected as a director of the Company in 2008.  Mr.
Christopher has a background in banking, securities, construction and
manufacturing and is a graduate of the University of Texas at Arlington, Texas
with a degree in Business Administration.





Renny Walker has been
President of Production Resources, Inc. Oil America Group, Inc., a wholly-owned
subsidiary of the Company, since 2005. Mr. Walker has an extensive background in
the oil and gas industry including significant experience as a landman and in
oil and gas exploration and production.





Effective
May 27, 2008, Joe Christopher was elected to serve as a Director and will serve
as a Director until the next annual meeting of the Shareholders of the
Company.





There are
no agreements with respect to the election of Directors. We have not previously
compensated our Directors for service on our Board of Directors, any committee
thereof, or reimbursed for expenses incurred for attendance at meetings of our
Board of Directors and/or any committee of our Board of Directors. Officers are
appointed annually by our Board of Directors and each Executive Officer serves
at the discretion of our Board of Directors. The Company does not have a
standing nominating committee or audit committee as the Board consists of only
two members, Mr. Bitters and Mr. Christopher, which makes such committee’s
impracticable. Mr. Bitters and Mr. Christopher are the sole directors
participating in the consideration of director nominees.  The Company
knows of no understanding or arrangement between any director, nominee for
director, officer or any other person pursuant to which he was or is to be
selected as a director or nominee for director or an Officer of the
Company.





None of
our officers and/or directors signing this annual report have ever filed any
bankruptcy petition, been convicted of or been the subject of any criminal
proceedings or the subject of any order, judgment or decree involving the
violation of any state or federal securities laws.


-34-





Section
16(a) Beneficial Ownership Reporting Compliances




Pursuant
to Section 16(a) of the 1934 Act, the Company's directors and executive
officers, and any persons holding more than 10% of its common stock, are
required to report their beneficial ownership and any changes therein to the SEC
and the Company. Specific due dates for those reports have been established, and
the Company is required to report herein any failure to file such reports by
those due dates.  Based on the Company's review of Forms 3, 4 and 5
filed by such persons, the Company believes that during the fiscal year ended
December 31, 2008, all Section 16(a) filing requirements applicable to such
persons were met in a timely manner.




Code
of Ethics, Whisteblower and Insider Trading




On
February 1, 2008, the Company adopted a Code of Ethics for its Principal
Executive Officer and Senior Financial Officer (the “Code of
Ethics”).  A copy of the Code of Ethics is filed as Exhibit 14 to this
Form 10-K. The Code of Ethics is also available free of charge by writing to the
Company at 6073 Hwy 281 South, Mineral Wells, TX 76067.  The Code of
Ethics establishes procedures for personal investment and restricts certain
transactions by our personnel.  The Code of Ethics generally does not
permit investment by our employees in securities that may be purchased or held
by us.  Any updates to the Code of Ethics will be disclosed by the
Company on a Form 8-K.




Additionally,
the Company adopted Whistleblower and Insider Trading and Disclosure Policies on
February 1, 2008.  The Whistleblower policy provides that any employee
of the Company may submit a good faith complaint regarding accounting or
auditing matters to the management of the Corporation without fear of dismissal
or retaliation of any kind.  The Company is committed to achieving
compliance with all applicable securities laws and regulations, accounting
standards, accounting controls and audit practices.  The Corporation’s
Board of Directors (until an Audit Committee is formally established) will
oversee treatment of employee concerns in this area.





The
Insider Trading Policy and Disclosure Policy provides guidance and procedures
for employees, consultants, officers and directors related to Rule 10b-5 of the
federal securities laws which prohibits buying or selling of a company’s stock
by any person having knowledge of non-public material information
concerning that company.  In this context, material information is
defined as information that a reasonable investor would want to know in making a
decision to buy or sell that stock.  The federal securities laws also
impose certain duties on companies whose stock is publicly traded to take
appropriate measures, in advance, to prevent insider trading
violations.  Primarily for this reason, the Company has adopted
this  policy to limit and restrict buying and selling of its stock by
persons with access to non-public information in an effort to prevent violations
of the antifraud provisions of the securities laws.





Identification
of Audit Committee; Audit Committee Financial Expert




As
discussed previously, the Company does not have a standing audit committee as
the Board consists of only two members, Mr. Bitters and Mr. Christopher, which
makes such a committee impracticable.




The
Delaware General Corporation Law, our charter and by-laws provide for
indemnification of our directors and officers for liabilities and expenses that
they may incur in such capacities. In general, directors and officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, and
with respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful.




Our
charter and by-laws limit the liability of directors to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a corporation
will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except liability for:


·
              any
      breach of their duty of loyalty to the corporation or its
      stockholders;


·
            acts
      of omissions that are not in good faith or that involve intentional
      misconduct or a knowing violation of
law;


·
            unlawful
      payments of dividends or unlawful stock repurchases or redemptions;
      or


·
            any
      transaction from which the director derived an improper personal
      benefit.




-35-


The
limitations do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies, including
injunctive relief or rescission.




Our
charter and by-laws provide that we will indemnify our directors and officers,
and may indemnify other employees and agents, to the maximum extent permitted by
law. We believe that indemnification under our by-laws covers at least
negligence and gross negligence on the part of indemnified parties. Our by-laws
also permit us to secure insurance on behalf of any officer, director, employee
or agent for any liability arising out of actions taken in his or her capacity
as an officer, director, employee or agent, regardless of whether the by-laws
would permit indemnification.




At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.




Our
charter provides that we must indemnify our directors and officers and that we
must advance expenses, including attorneys’ fees, to our directors and officers
in connection with legal proceedings, subject to very limited exceptions. In
addition, our charter provides that our directors will not be personally liable
for monetary damages to us for breaches of their fiduciary duty as directors,
except to the extent that the Delaware law statute prohibits the elimination or
limitation of liability of directors for breaches of fiduciary
duty.




These
provisions may discourage stockholders from bringing a lawsuit against our
directors for breach of their fiduciary duties. These provisions may also have
the effect of reducing the likelihood of derivative litigation against directors
and officers, even though such an action, if successful, might otherwise benefit
us and our stockholders. Furthermore, you may lose some or all of your
investment in our common stock if we pay the costs of settlement or damage
awards against our directors and officers under these provisions. We believe
these provisions are necessary to attract and retain talented and experienced
directors and officers.




ITEM
11.                      EXECUTIVECOMPENSATION




We provided named executive officers and our other
employees with a salary to compensate them for services rendered during the
fiscal year. Salary amounts for the named executive officers are determined for
each executive based on his or her position and responsibility, and on past
individual performance. Salary levels are typically considered annually as part
of our performance review process. Merit based increases to salaries of the
named executive officers are based on our board of directors’ assessment of the
individual’s performance.





The following table shows for theyearsended December 31, 2008 and 2007,the compensation
awarded or paid by the Company to its Chief Executive Officer andits named executive officers as that term is defined in
Item 402(a)(2) of Regulation S-B.





Summary Compensation Table


Name andPrincipalPosition(1)
                
                Year
                
                
                Salary
                  ($) (4)
                
                
                Bonus
                  ($)
                
                
                Stock
                  Awards
                  ($)
                
                
                Option
                  Awards
                  ($)
                
                
                Non-
                  Equity
                  Incentive
                  Plan
                  Compensation
                  ($)
                
                
                Change in
                  Pension Value
                  and
                  Nonqualified
                  Deferred
                  Compensation
                  Earnings
                
                
                All other
                  Compensation
                  ($)
                
                
                Total
                  ($)Charles Bitters, Chief Executive Officer
                
                
                2008
                  2007
                
                
                
                120,000
                  120,000
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                120,000
                  120,000Joe Christopher, President of Oil America Group,
      Inc.
                
                
                2008
                  2007
                
                
                
                65,000
                  65,000
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                65,000
                  65,000Renny Walker, President of Production Resources,
      Inc.
                
                
                2008
                  2007
                
                
                
                70,384
                  64,970
                
                
                
                -
                  29,047
                (3)
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                -
                  -
                
                
                
                70,384
                  94,017





-36-


1 Mr.
Bitters and Mr. Christopher serve on the Company’s board of directors and do not
receive any compensation for their director roles.


2 Mr.
Bitters and Mr. Christopher serve on the Company’s board of directors and do not
receive any compensation.


3 Mr.
Walker’s bonus includes $27,547 of payments from the sale of a lease in
2007.


4 Salary
is total base salary earned, rather paid or not.  For both 2008 and
2007, Mr. Bitters earned $120,000 of salary and Mr. Christopher earned $65,000
of salary, both of which were accrued and unpaid.





No
director received any type of compensation from the Company for serving in such
capacity during the years ended December 31, 2008 and 2007.





Option Grants in Last Fiscal Year





No options were granted in the year ended December 31,
2008 to any executive officers.





Aggregated Option Exercisesin Last Fiscal Year and Fiscal Year End Option
Values





No options were exercised inthe year ended December 31, 2008 by any executive officers.





Outstanding Equity Awards at Fiscal
Year-End





We do not currently have any outstanding stock
appreciation rightsor stock options
outstanding at December 31, 2008.





Employment
Agreements




Effective
July 1, 2003, the Company entered into a salary and equipment rental agreement
with its Charles Bitters, its Chief Executive Officer.  As of January
1, 2005, the $3,500 per month equipment rental agreement with the Chief
Executive Officer was terminated. As of December 31, 2007, the Company owed the
Chief Executive Officer $306,425 for unpaid amounts under the
agreement.  During the year ended December 31, 2008, the Company
accrued but did not pay $120,000 for compensation, reduced the balance $8,500
for payments made to the Chief Executive Officer, and increased the balance
$93,000 for advances made by the Chief Executive Officer on behalf of the
Company.  As a result, the accrued balance as of December 31, 2008 is
$510,925 and is classified as a component of Due To Related Parties in the
accompanying financial statements.




Effective
January 1, 2005, the Company has an agreement with Joe Christopher, the
President of its wholly owned subsidiary Oil America Group, Inc. in the amount
of $65,000 annually.  Through December 31, 2008, the Company has
accrued $260,000 of accrued compensation related to this agreement and this
amount is recorded as other current liabilities in the accompanying consolidated
financial statements.




In the
future we may implement a retirement savings plan and medical insurance plan
covering our officers and other employees.




We do not
have any other contractual arrangements with our executive officers or
directors, nor do we have any compensatory arrangements with our executive
officers other than as described above.  Except as described above
with respect to Mr. Bitters, we have not agreed to make any payments to our
named executive officers because of resignation, retirement or any other
termination of employment with us or our subsidiaries, or from a change in
control of us, or a change in the executive’s responsibilities following a
change in control.




-37-


Director
Compensation




We do not
have a formal plan for director compensation.No director received any type of
compensation from the Company for serving in such capacity for the year ended
December 31, 2008.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS




The
following table summarizes certain information as of April 15, 2009with respect to the
beneficial ownership of our common stock by (1) our directors and executive
officers, (2) stockholders known by us to own 5% or more of the shares of our
Common Stock, and (3) all of our executive officers and directors as a
group.




Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the
Securities Exchange Act of 1934, as amended, and generally includes voting or
investment power with respect to securities.  Except as indicated by
footnote, and subject to community property laws, where applicable, the person
named below has voting and investment power with respect to all shares of our
common stock shown as beneficially owned by him.


Title
      of Class
                  Name
      and Address of
                    Beneficial Owner(a)
                  Amount
      and
                    Nature
      of
                    Beneficial
                    Ownership
                  Percent
      of
                    ClassCommon
      Stock
                  Charles
      Bitters, CEO and Director
                    353
      South Hackberry Ave
                    New
      Braunfels, TX 78130
                  113,816 (b)
                  *Common
      Stock
                  Joe
      Christopher, President of Oil America Group, Inc.
                    400
      S. Zang Blvd., Suite 812
                    Dallas,
      TX 75208
                  111,000
      (c)
                  *Common
      Stock
                  Renny
      Walker, President of Production Resources, Inc.
                    705
      County Rd. 646
                    Hondo,
      TX 78861
                  131,944
                  *


*
              Less
      than 1%
  (a)
              Under
      Rule 13d-3 under the Securities Exchange Act of 1934, a beneficial
      owner of a security includes any person who, directly or indirectly,
      through any contract, arrangement, understanding, relationship, or
      otherwise has or shares: (i) voting power, which includes the power
      to vote, or to direct the voting of shares; and (ii) investment
      power, which includes the power to dispose or direct the disposition of
      shares. Certain shares may be deemed to be beneficially owned by more than
      one person (if, for example, persons share the power to vote or the power
      to dispose of the shares). In addition, shares are deemed to be
      beneficially owned by a person if the person has the right to acquire the
      shares (for example, upon exercise of an option) within 60 days of the
      date as of which the information is provided. In computing the percentage
      ownership of any person, the number of shares outstanding is deemed to
      include the number of shares beneficially owned by such person (and only
      such person) by reason of these acquisition rights. As a result, the
      percentage of outstanding shares of any person as shown in this table does
      not necessarily reflect the person’s actual ownership or voting power with
      respect to the number of shares of common stock actually outstanding on
      the date of this Offering. As of April 15, 2009, the Company had
      20,360,389 shares of common stock issued and
  outstanding.


(b)
            Includes
      62 shares in the name of a corporation controlled by Mr. Bitter’s
      wife.




(c)
            Includes
      80,000 shares held directly by Mr. Christopher, 25,000 held directly by a
      company controlled by Mr. Christopher and 6,000 shares in the name of Oil
      America Group, Inc., which Mr. Christopher is the President and has sole
      voting power.




-38-


Equity
Compensation Plan Information




The
following table gives information as of December 31, 2008, about our common
stock that may be


issued
upon the exercise of options, warrants and rights under all of our existing
equity compensation


plans:





Plan
      Category
                
                (a)Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                
                
                (b)Weighted-average
      exercise price of outstanding options, warrants and rights
                
                
                ‘
      (c) Number of securities remaining available for future issuance
      under equity compensation plans (excluding securities reflected in column
      (a)Equity
      compensation plans approved by security holders (1)
                
                
                -0-
                
                
                
                -0-
                
                
                
                10,000,000Equity
      compensation plans not approved by security holders
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-Total
                
                
                -0-
                
                
                
                -0-
                
                
                
                10,000,000





(1)
Consists of the following equity compensation plans: 2008 Non-Qualified Stock
Option Plan.




ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.




We
currently do not have a lease and we are not paying rent on our space. It is
being provided to the Company by the Chief Executive Officer free of
charge.





Effective
July 1, 2003, the Company entered into a salary and equipment rental agreement
with its Chief Executive Officer.  As of January 1, 2005, the $3,500
per month equipment rental agreement with the Chief Executive Officer was
terminated. As of December 31, 2007, the Company owed the Chief Executive
Officer $306,425 for unpaid amounts under the agreement.  During the
year ended December 31, 2008, the Company accrued but did not pay $120,000 for
compensation, reduced the balance $8,500 for payments made to the Chief
Executive Officer, and increased the balance $93,000 for advances made by the
Chief Executive Officer on behalf of the Company.  As a result, the
accrued balance as of December 31, 2008 is $510,925 and is classified as a
component of Due To Related Parties in the accompanying financial
statements.




As of
December 31, 2008, the Chief Executive Officer of the Company is owed $894,103
for advances and unpaid equipment rental charges made on behalf of Bend Arch,
the Company’s wholly-owned subsidiary.  As of December 31, 2007, Bend
Arch owed the Chief Executive Officer $704,703 for previous advances and
equipment rental charges at $4,500 per month.  During the year ended
December 31, 2008, the Chief Executive Officer advanced $162,400 of funds to
Bend Arch; the Company recorded $54,000 for equipment rental charges and repaid
$27,000 to the Chief Executive Officer resulting in the $894,103 balance at
December 31, 2008 classified as a component of Due to Related Parties in the
accompanying financial statements.




At
December 31, 2008, the President of Oil America Group, Inc. is owed $260,000 for
unpaid salary per an agreement effective January 1, 2005.  The
agreement is for annual compensation of $65,000 and none of this amount has been
paid since the inception of the agreement.




At
December 31, 2007, the operator of the Company’s oil and gas properties was owed
$696,631 for services as the operator of the Company’s oil and gas production
activities.  During the year ended December 31, 2008, the operator
balance owed was increased for the net activities performed such that as of
December 31, 2008, the net amount due to the operator of the Company’s oil and
gas production activities was $1,630,734 and is classified as a component of Due
to Related Parties in the accompanying financial statements.  The
operator is Proco Operating Co., Inc. (“Proco”) and is a related party as Proco
is controlled by the brother of the Company’s Chief Executive
Officer




-39-




Director Independence




Our common stock trades on the Over The Counter Bulletin
Board.  As such,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.




We are not currently subject to corporate governance
standards defining theindependence of our
directors, and we have chosen to define an “independent”director in accordance with the NASDAQ Global Market's requirements for
independent directors (NASDAQ Marketplace Rule 4200).  Under this
definition, we have determined that sincewe have only one
director and who is also the Chief Executive Officer and Chief Financial Officer
of the Company, we do not currently qualify as has having any independent
directors.  We do not list the “independent”definition we use on our Internet website.




ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND
SERVICES




Audit Fees:  Audit
fees consist of fees billed for professional services rendered for the audit of
our year-end financial statements and services in connection with statutory and
regulatory filings.  For the year ended December 31, 2008, fees
incurred by the Company from Moore were an aggregate of $19,500 for the
quarterly review associated with our Form 10-Q filings and any amendments
thereto.  For the years ended December 31, 2008 and 2007, fees
incurred by the Company from Moore were zero and $20,000 for the annual audit of
the Company's financial statements included as part of our Form 10-K
filing.




Audit-Related
Fees:  Audit-related services consist of fees billed for
assurance and related services that are reasonably related to the performance of
the audit or review of our financial statements and are not reported under
“Audit Fees.”  These services include attest services that are not
required by statute or regulation and consultations concerning financial
accounting and reporting standards.  There were no audit-related fees
during the years ended December 31, 2008 and 2007.




Tax Services
Fees:  Tax fees consist of fees billed for professional
services for tax compliance.  These services include assistance
regarding federal, state, and local tax compliance.  There were no tax
fees during the years ended December 31, 2008 and 2007.




All Other
Fees:  Other fees would include fees for products and services
other than the services reported above.  There were no other fees
during the years ended December 31, 2008 and 2007.




The
Company does not have a standing audit committee, rather the entire Board acts
as the Company’s audit committee.  Management is responsible for our
internal controls and the financial reporting process.  The
independent registered public accounting firm is responsible for performing an
independent audit of our financial statements in accordance with auditing
standards generally accepted in the United States and expressing an opinion on
the conformity of those audited financial statements in accordance with
accounting principles generally accepted in the United States.  The
Board’s responsibility is to monitor and oversee these processes and is also
directly responsible for the appointment, compensation, and oversight of the
Company's independent registered public accounting firm.




The Board
has established a pre-approval policy that describes the permitted audit,
audit-related, tax and other services to be provided by Moore, the Company's
independent registered public accounting firm.  The policy requires
that the Board pre-approve the audit and non-audit services performed by the
independent registered public accounting firm in order to assure that the
provision of such service does not impair the auditor's
independence.




Any
requests for audit, audit-related, tax and other services that have not received
general pre-approval must be submitted to the Board for specific pre-approval,
and cannot commence until such approval has been granted.  Normally,
pre-approval is provided at regularly scheduled meetings of the
Board.  However, the Board may delegate pre-approval authority to one
or more of its members.  The member or members to whom such authority
is delegated shall report any pre-approval decisions to the Board at its next
scheduled meeting.  The Board does not delegate its responsibilities
to pre-approve services performed by the independent registered public
accounting firm to management.




-40-


The Board
has reviewed the audited consolidated financial statements and met and held
discussions with management regarding the audited consolidated financial
statements.  Management has represented to the Board that the
Company's financial statements were prepared in accordance with accounting
principles generally accepted in the United States. The Board has discussed with
Moore, the Company's independent registered public accounting firm, matters
required to be discussed by Statement of Auditing Standards No. 61
(Communication with Audit Committees).  The Board received and
reviewed the written disclosures and the letter from the independent registered
public accounting firm required by Independence Standard No. 1, Independence
Discussions with Audit Committees, as amended by the Independence Standards
Board, and has discussed with the auditors the auditors'
independence.




Based on
the Board’s discussion with management and the independent registered public
accounting firm, the Board's review of the audited financial statements, the
representations of management and the report of the independent registered
public accounting firm to the Board, the Board recommends that the audited
consolidated financial statements be included in the Company's Annual Report on
Form 10-K for the years ended December 31, 2008 and 2007, for filing with the
SEC.




ITEM
15.                      EXHIBITS,
FINANCIAL STATEMENT SCHEDULES




Exhibit
      No
                    
                    Description
      of Exhibit2.1
                    
                    Certificate
      of Amendment to Articles of Incorporation of American Energy Production,
      Inc. filed with the Delaware Secretary of
    State  (1)3.1
                    
                    Form
      S-8 Registration Statement under the Securities Act of 1933 filed January
      31, 2003. (1)3.2
                    
                    Form
      8-A12G for Registration of Certain Classes of Securities Pursuant to
      Section 12 (b) or (g) of the Securities Act of 1934 filed October 10,
      2003. (1)3.3
                    
                    Definitive
      Proxy Statement Pursuant to Section 14(a) of the Securities Act of 1934
      filed November 19, 2003. (1)3.4
                    
                    Form
      N-54 Notification of Election as a Business Development Company dated
      January 12, 2004. (1)3.5
                    
                    Form
      1-E Notification under Regulation E dated January 14, 2004.
      (1)3.6
                    
                    Form
      1-E/A Notification under Regulation E dated June 24, 2005.
    (1)3.7
                    
                    Form
      2-E Notification under Regulation E dated June 27, 2006.
    (1)3.8
                    
                    Form
      2-E Notification under Regulation E dated December 11, 2006.
      (1)3.9
                    
                    Definitive
      Proxy Statement Pursuant to Section 14(a) of the Securities Act of 1934
      filed February 8, 2007. (1)3.10
                    
                    Form
      N-54C Notification of Withdrawal of Business Development Companies dated
      April 23, 2007. (1)3.11
                    
                    Definitive
      Proxy Statement Pursuant to Section 14(a) of the Securities Act of 1934
      filed July 5, 2007. (1)3.12
                    
                    Form
      S-8 Registration Statement under the Securities Act of 1933 filed
      September 25, 2008. (1)14.1
                    
                    Code
      of Ethics (1)20.1
                    
                    Oil
      and Gas property valuation by Blue Ridge Enterprises as of December 31,
      2008 *21.1
                    
                    Subsidiaries of American Energy Production, Inc.
      *31.1
                    
                    Certification of the Chief Executive and Chief Financial
      Officer of American Energy production, Inc. pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
                    
                    Certification of the Chief Executive and Chief Financial
      Officer of American Energy Production, Inc. pursuant to Section 906 of the
      Sarbanes- Act of 2002.*


*            Filed
herewith





(1)
            Incorporated
      by reference.





-41-




SIGNATURES




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




AMERICAN
      ENERGY PRODUCTION, INC.Date:
      April 30, 2009
              By:
              /s/ Charles
      BittersCharles
      BittersChief
      Executive Officer and Chief Financial Officer




In
accordance with the requirements of the Exchange Act, 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/ Charles Bitters
                  Charles
      Bitters
                President,
      Chief Executive Officer and Director (Principal Executive, Financial and
      Accounting Officer)
                April
      30, 2009/s/ Joe Christopher
                  Joe
      Christopher
                Director
                April
      30, 2009





-42-




American
Energy Production, Inc. and Subsidiaries
 
 Page
No.
 
 Report of Independent Registered Public Accounting
      Firm
              F-2Consolidated Balance Sheets at December 31, 2008 and
      2007
              F-3Consolidated Statements of Operations for the years ended
      December 31, 2008 and 2007
              F-4Consolidated
      Statements of Changes in Stockholders’ Deficit for the years endedDecember
      31, 2008 and 2007
              F-5Consolidated Statements of Cash Flows for the years ended
      December 31, 2008 and 2007
              F-6Notes to Consolidated Financial
    Statements
              F-7Supplemental Oil and Gas Data
    (Unaudited)
              F-20
 
 F-1
 
 REPORT
OF INDEPENDENTREGISTEREDPUBLIC ACCOUNTING FIRM
 
 MOORE
& ASSOCIATES, CHARTERED
 ACCOUNTANTS AND
ADVISORS
 PCAOB
REGISTERED
 
 
 REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Board of Directors
 American
Energy Production, Inc.
 
 We have
audited the accompanying consolidated balance sheets of American Energy
Production, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders’ equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.
 
 We
conduct our audits in accordance with 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.  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 financial statements referred to above present fairly, in all
material respects, the financial position of American Energy Production, Inc. as
of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in stockholders’ equity (deficit) and cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company had a net loss of $2,148,551 and $2,283,978
for the years ended December 31, 2008 and 2007, respectively. Additionally, at
December 31, 2008, the Company has minimal cash, a negative working capital
balance of $6,693,177, and a stockholders’ deficit of $3,055,149. These factors
raise substantial doubt about its ability to continue as a going
concern.  Management’s plans concerning these matters are also
described in Note 2.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 /s/
Moore & Associates, Chartered
 Moore
& Associates, Chartered
 Las
Vegas, Nevada
 May 5,
2009
 
 
 6490 West Desert Inn Rd, Las
Vegas, NV 89146 (702) 253-7499 Fax (702) 253-7501
 F-2
 American
Energy Production, Inc. and Subsidiaries
 Consolidated BalanceSheets
 
 ASSETS12/31/2008
                            
                            
                            12/31/2007Current
      AssetsCash
                            
                            $
                            88,937
                            
                            
                            $
                            133,220Accounts
      receivable
                            
                            
                            -
                            
                            
                            
                            1,205Other
      current assets
                            
                            
                            146
                            
                            
                            
                            316Total
      Current Assets
                            
                            
                            89,083
                            
                            
                            
                            134,740Property
      and equipment, net
                            
                            
                            4,011,903
                            
                            
                            
                            4,365,765Other
      AssetsDevelopment
      programs - related party
                            
                            
                            134,092
                            
                            
                            
                            104,392Other
                            
                            
                            1,188
                            
                            
                            
                            168,379Total
      Other Assets
                            
                            
                            135,280
                            
                            
                            
                            272,771Total
      Assets
                            
                            
                            4,236,266
                            
                            
                            
                            4,773,277LIABILITIESCurrent
      LiabilitiesAccounts
      payable
                            
                            $
                            312,903
                            
                            
                            $
                            373,403Other
      current liabilities
                            
                            
                            11,855
                            
                            
                            
                            175,548Due
      to related parties
                            
                            
                            3,295,763
                            
                            
                            
                            1,707,759Notes
      payable
                            
                            
                            2,115,062
                            
                            
                            
                            2,023,714Accrued
      interest payable
                            
                            
                            946,385
                            
                            
                            
                            778,486Accrued
      payroll taxes and penalties
                            
                            
                            84,161
                            
                            
                            
                            80,346Lease
      payable
                            
                            
                            16,131
                            
                            
                            
                            16,131Total
      Current Liabilities
                            
                            
                            6,782,260
                            
                            
                            
                            5,155,387Asset
      Retirement Obligations
                            
                            
                            509,155
                            
                            
                            
                            524,488Total
      Liabilities
                            
                            $
                            7,291,415
                            
                            
                            $
                            5,679,875Commitments
      and Contingencies (Note 8)STOCKHOLDERS' DEFICITConvertible
      preferred stock, Series A, $0.0001 par value,5,000,000
      shares authorized, 3,500,000 shares
                            
                            $
                            350
                            
                            
                            $
                            350Common
      stock, $0.0001 par value,500,000,000
      shares authorized, 20,360,389 and 19,767,055 shares,
      respectively
                            
                            
                            2,037
                            
                            
                            
                            1,977Common
      stock issuable, $0.0001 par value, zero and 596,000 shares
      respectively
                            
                            
                            -
                            
                            
                            
                            60Additional
      paid in capital
                            
                            
                            24,067,655
                            
                            
                            
                            24,067,655Accumulated
      deficit
                            
                            
                            (26,223,191
                            )
                            
                            
                            (24,074,640
                            )(2,153,149
                            )
                            
                            
                            (4,599
                            )Less:  Subscription
      Receivable
                            
                            
                            (902,000
                            )
                            
                            
                            (902,000
                            )Total
      Stockholders' Deficit
                            
                            
                            (3,055,149
                            )
                            
                            
                            (906,599
                            )Total
      Liabilities and Stockholders' Deficit
                            
                            $
                            4,236,266
                            
                            
                            $
                            4,773,277
 See
accompanying notes to consolidated financial statements.
 F-3
 American
Energy Production, Inc. and Subsidiaries
 Consolidated
Statements of Operations
 Years
      EndedDecember
      31,2008
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2007Revenues:Oil
      sales, net
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              1,842,059
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              1,581,661Operating
      ExpensesCompensation
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              255,384
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              213,419Consulting
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,260Depreciation,
      depletion and accretion
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              562,334
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              540,677Rent
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              89,161
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              36,527General
      and administrative
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              225,836
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              389,746Production
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,265,456
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,300,198Professional
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              126,748
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              173,393Taxes
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              91,896
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              86,436Website
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,080
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -Total
      Operating Expenses
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,617,895
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,743,656Operating
      Loss
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (1,775,836
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,161,995
                                                                                                                                                              )Other
      Income (Expense)Other
      income (expense)
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (195,942
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              19,097Gain
      on sale of properties
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              29,309Interest
      expense
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (170,769
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (164,383
                                                                                                                                                              )Payroll
      tax expense and penalties
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (6,004
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (6,004
                                                                                                                                                              )Total
      Other
      Income (Expense)
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (372,716
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (121,982
                                                                                                                                                              )Net
      Loss
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (2,148,551
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (2,283,978
                                                                                                                                                              )Net
      Loss Per Share - Basic and Diluted
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (0.11
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (0.12
                                                                                                                                                              )Weighted
      average Shares Outstanding
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              20,361,880
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              19,770,055
 See
accompanying notes to consolidated financial statements.
 F-4
 American
Energy Production, Inc.
 Consolidated
Statements of ChangesinStockholders’ Equity
(Deficit)
 Years
Ended December 31, 2007 and 2006
    Preferred
      Stock
                  
                  
                  Common
    Stock
                  
                  
                  Common Stock
      IssuableShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Subscription
      Receivable
                  
                  
                  Additional Paid-In
      Capital
                  
                  
                  Accumulated
      Deficit
                  
                  
                  Total Stockholders'
      DeficitBalance
      at December 31, 2006
                  
                  
                  3,500,000
                  
                  
                  $
                  350
                  
                  
                  
                  19,767,055
                  
                  
                  $
                  1,977
                  
                  
                  
                  3,000
                  
                  
                  $
                  -
                  
                  
                  $
                  (902,000
                  )
                  
                  $
                  23,978,715
                  
                  
                  $
                  (21,790,662
                  )
                  
                  $
                  1,288,379Common stock issued for
      subscription receivable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  593,000
                  
                  
                  
                  60
                  
                  
                  
                  -
                  
                  
                  
                  88,940
                  
                  
                  
                  
                  
                  
                  
                  89,000Net loss, year ended
      December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,283,978
                  )
                  
                  
                  (2,283,978
                  )Balance
      at December 31, 2007
                  
                  
                  3,500,000
                  
                  
                  $
                  350
                  
                  
                  
                  19,767,055
                  
                  
                  $
                  1,977
                  
                  
                  
                  596,000
                  
                  
                  $
                  60
                  
                  
                  $
                  (902,000
                  )
                  
                  $
                  24,067,655
                  
                  
                  $
                  (24,074,640
                  )
                  
                  $
                  (906,599
                  )Common stock issued for sale of
      stock - $0.15 per share
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  593,334
                  
                  
                  
                  60
                  
                  
                  
                  (593,000
                  )
                  
                  
                  (60
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0Write off of issuable shares
      from 2003 - 3,000 shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,000
                  )
                  
                  
                  (0
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (0
                  )Net loss, year ended
      December 31, 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,148,551
                  )
                  
                  
                  (2,148,551
                  )Balance
      at December 31, 2008
                  
                  
                  3,500,000
                  
                  
                  $
                  350
                  
                  
                  
                  20,360,389
                  
                  
                  $
                  2,037
                  
                  
                  
                  -
                  
                  
                  $
                  (0
                  )
                  
                  $
                  (902,000
                  )
                  
                  $
                  24,067,655
                  
                  
                  $
                  (26,223,191
                  )
                  
                  $
                  (3,055,149
                  )
  See
accompanying notes to consolidated financial statements
 F-5
 American
Energy Production, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
 Years
      EndedDecember
      31,2008
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              2007Operating
      Activities:Net
      loss
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (2,148,551
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (2,283,978
                                                                                                                                                                                                              )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      expense
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              479,212
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              443,062Depletion
      expense
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              61,218
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              74,337Accretion
      expense
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              21,904
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              23,278Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,205
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              122Other
      current assets
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              170
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              3,880Other
      assets
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              167,191
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              16,321Accounts
      payable
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (60,500
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              46,212Other
      current liabilities
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (163,693
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              10,245Due
      from related party
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              88,229Due
      to related party
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,588,004
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,531,027Accrued
      interest payable
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              167,191
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              161,864Accrued
      payroll taxes payable
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              3,815
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              7,770Net
      Cash Provided By Operating Activities
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              117,874
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              122,368Investing
      Activities:Investment
      in property and equipment
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (223,805
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (118,412
                                                                                                                                                                                                              )Payments
      for development programs - related party
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (29,699
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (25,767
                                                                                                                                                                                                              )Net
      Cash Used In Investing Activities
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (253,504
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (144,178
                                                                                                                                                                                                              )Financing
      Activities:Proceeds
      from note payable
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              103,000
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Proceeds
      from sale of common stock
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              89,000Proceeds
      from repayment of subscription receivable
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Repayment
      of note payable
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (11,652
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (40,873
                                                                                                                                                                                                              )Net
      Cash Provided By (Used In) Financing Activities
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              91,348
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              48,127Net
      Increase in Cash
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (44,282
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              26,317Cash
      at Beginning of Period
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              133,220
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              106,902Cash
      at End of Period
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              88,937
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              133,219Cash
      interest paid
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              -Supplemental
      disclosure of non-cash transactionsCapitalized
      asset retirement obligations
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              3,841Retirement
      of asset retirement obligation from sale of properties
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              20,158Retirement
      of asset retirement obligation from audit of properties
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              37,237
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
  See
accompanying notes to consolidated financial statements
 F-6
 1.  HISTORYANDNATURE OF BUSINESS
 
 American
Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our”
“its”) is a publicly traded oil and gas company that is engaged primarily in the
acquiring, developing, producing, exploring and selling of oil and natural gas.
The Company traditionally has acquired oil and gas companies that have the
potential for increased oil and natural gas production utilizing new
technologies, well workovers and fracture stimulation systems. Additionally, the
Company has expanded its scope of business to include the drilling of new wells
with its own equipment through its wholly-owned subsidiary
companies.
  The
Company’s wholly-owned subsidiaries are primarily involved in three areas of oil
and gas operations.
  1.
Leasing programs.
 2.
Production acquisitions
 3.
Drilling and producing with proven and emerging technologies.
  The
Company believes that for the foreseeable future, the world will be highly
dependent on oil and natural gas. Currently, alternative fuels are far more
expensive than fossil fuels and because of the politically unstable conditions
of many of the energy producing regions of the world.  As a result,
the Company believes that oil and natural gas will remain a key yet volatile
component of the world energy future and furthermore, with the ever increasing
world demand for energy, the domestic production of oil and gas will play an
even greater role in America’s future then it already has to date.
  The
Company was f/k/a Communicate Now.com, Inc. and was incorporated on January 31,
2000 under the laws of the State of Delaware. On July 15, 2002, the Company
changed its corporate name to American Energy Production, Inc.
 
 On
February 20, 2003, upon the acquisition of certain oil and gas assets, the
Company entered into a new development stage. Activities during the development
stage include acquisition of assets, obtaining geological reports, developing an
implementation plan to extract oil and gas, completing initial sales of oil and
seeking capital.
  On
January 12, 2004, the Company filed a Form N-54A with the Securities and
Exchange Commission (“SEC”) to be regulated as a Business Development Company
(“BDC”) under the Investment Company Act of 1940, as amended
(“Act”).
  In May
2006, the SEC Staff issued a comment letter to the Company (the “Comment
Letter”) raising a number of questions relating to the Company’s BDC operations.
In response to the Comment Letter, the Company undertook a review of its
compliance with the 1940 Act and subsequently determined that it was not in
compliance with several important provisions of the 1940 Act. Accordingly, and
after careful consideration of the 1940 Act requirements applicable to BDCs, the
Board determined that continuation as a BDC was not in the best interests of the
Company and its shareholders (See Note 12 – Subsequent Events).
  On March
13, 2007, at a Special Meeting of Shareholders, the Shareholders approved and
authorized the Board to withdraw the Company’s election to be treated as a BDC
under the 1940 Act and the election of three directors to the
Board.  On April 3, 2007, the Company filed a Form N-54C to withdraw
its election to be regulated as a BDC and as of that date, is no longer a BDC
under the 1940 Act.  The Company is no longer a BDC with
unconsolidated majority-owned portfolio companies but rather be an oil and gas
operating company with consolidated subsidiaries. The results of operations for
April 1, 2007 through April 3, 2007 were not material and therefore, the Company
has utilized April 1, 2007 as the inception date for the new
business as an oil and gas operating company (See Note 12 – Subsequent
Events).
 
 At a
meeting held on May 16, 2007, the Board of Directors reviewed the Company’s
current business and financial performance, the recent trading range of its
Common Stock and inability to obtain additional capital from the investment
community with 494,170,082 shares of Common Stock issued and outstanding and
500,000,000 shares of Common Stock authorized. The Board determined that a
reverse stock split was desirable and in the best interest of the
Company.  On July 5, 2007, the Company filed a Definitive 14A Proxy
Statement with the SEC giving notice of a special shareholders meeting to be
held on August 17, 2007 for the purpose of approving a one-for-twenty five
reverse stock split.  On September 14, 2007, the Company announced
that all of the required steps had been completed for the one-for-twenty five
reverse stock split of its common stock. In connection with the reverse stock
split, the Company was assigned a new stock symbol. The Company's shares were
previously quoted on the OTC Bulletin Board under the stock symbol AMEP and are
now reported on the OTC Bulletin Board under the new stock symbol AENP. The new
stock symbol and the reverse stock split were effective at the beginning of
trading on September 14, 2007.
 F-7
  On
September 30, 2008, the Company announced the issuance of an SEC Order
Instituting Cease-and-Desist and
Exemption Suspension Proceedings, Making Findings, Imposing a Cease-and-Desist
Order, and Permanently Suspending the Regulation E Exemption Pursuant to Section
9(f) of the Investment Company Act of 1940 and Rule 610(c) of Regulation
E (Order) against the Company.  The Order finds that the
Company had, among other things, issued senior securities without the required
asset coverage, issued rights to purchase securities without expiration to
non-security holders, issued prohibited non-voting stock, issued securities for
services, failed to make and keep required records; and failed to establish a
majority of disinterested directors on its board.  As a result, the
Company violated Sections 18(a), 18(d), 18(i), 23(a), 31(a)(1), and 56(a)
respectively, of the Investment Company Act and Investment Company Act Rule
31a-1.  In addition, the Company failed to obtain a fidelity bond as
required under Section 17(g) of the Investment Company Act and Rule 17g-1
thereunder, and failed to implement a compliance program as required under
Investment Company Act Rule 38a-1.  Finally, the Company failed to
comply with Rule 609 of Regulation E because it did not file offering status
reports on Form 2-E in connection with a securities offering under Regulation E
commenced in January 2004.
  Based on
the above, the Order permanently suspends the Regulation E exemption and orders
the Company to cease and desist from committing or causing any violations and
any future violations of Sections 17(g), 18(a), 18(d), 18(i), 23(a), 31(a)(1)
and 56(a) of the Investment Company Act and Rules 17g-1, 31a-1, and Rule 38a-1
thereunder.  The Company consented to the issuance of the Order
without admitting or denying any of the findings.
  In
determining the Order, the SEC considered remedial acts promptly undertaken by
the Company and cooperation afforded the SEC staff and as a result, the Company
did not incur any fines or other penalties, and no action was taken against any
individuals.
 
 2.  GOING
CONCERN
  As
reflected in the accompanying consolidated financial statements, the Company had
a net loss of $2,148,551 and $2,283,978 for the years ended December 31, 2008
and 2007, respectively.  Additionally, at December 31, 2008, the
Company has minimal cash, a negative working capital balance of $6,693,177, a
stockholders’ deficit of 3,055,149 and is subject to certain contingencies as
discussed in Note 10, which could have a material impact on the Company’s
financial condition and operations. The ability of the Company to continue as a
going concern is dependent on the Company’s ability to raise capital and
generate sufficient revenues and cash flow from its business plan as an oil and
gas operating company.  The financial statements included in this
report do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
 
 We have
substantial current obligations and at December 31, 2008, we had $6,782,260 of
current liabilities as compared to only $89,083 of current assets. Accordingly,
the Company does not have sufficient cash resources or current assets to pay
these obligations.
 
 Our
substantial debt obligations pose risks to our business and stockholders
by:
  ·
              making
      it more difficult for us to satisfy our
  obligations;
 ·
              requiring
      us to dedicate a substantial portion of our cash flow to principal and
      interest payments on our debt obligations, thereby reducing the
      availability of our cash flow to fund working capital, capital
      expenditures and other corporate
requirements;
 ·
              impeding
      us from obtaining additional financing in the future for working capital,
      capital expenditures and general corporate purposes;
  and
 ·
              making
      us more vulnerable to a downturn in our business and limit our flexibility
      to plan for, or react to, changes in our
  business.
  The time
required for the Company to become profitable is highly uncertain, and
Management cannot assure you that the Company will achieve or sustain
profitability or generate sufficient cash flow from operations to meet planned
capital expenditures, working capital and debt service requirements. If
required, the ability to obtain additional financing from other sources also
depends on many factors beyond the Company’s control, including the state of the
capital markets and the prospects for the Company’s business. The necessary
additional financing may not be available to the Company or may be available
only on terms that would result in further dilution to the current owners of
common stock.
 F-8
 
 3.  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
  Basis of
Presentation
  The
accompanying consolidated financial statements have been prepared in accordance
with United States Generally Accepted Accounting Principles (“U.S. GAAP”) for
annual financial information and with the instructions to Form 10-K of
Regulation S-K.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements include the general accounts of
American Energy and its wholly-owned subsidiaries as of December 31, 2008 and
2007 and all significant intercompany transactions, accounts and balances have
been eliminated.
 
 Accounting
Estimates
 
 When
preparing financial statements in conformity with U.S. GAAP, management must
make estimates based on future events that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities as of the
date of the financial statements, and revenues and expenses during the reporting
period.  Actual results could differ from these
estimates.  Significant estimates in the accompanying financial
statements include going concern, BDC conversion, oil and gas properties,
property and equipment, the evaluation of whether our assets are impaired, asset
retirement obligations, revenue recognition, the valuation allowance for
deferred tax assets, and the estimate of reserves of oil and gas that are used
to develop projected income whereby an appropriate discount rate has been
used.  We also have other key accounting estimates and policies, but
we believe that these other policies either do not generally require us to make
estimates and judgments that are as difficult or as subjective, or it is less
likely that they would have a material impact on our reported results of
operations for a given period.   The actual amounts could differ
materially from such estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include all highly liquid investments with a maturity date of
three months or less when purchased.
 
 Oil and Gas
Properties
  The
Company uses the successful efforts method of accounting for its oil and gas
properties.   Costs incurred by the Company related to the
acquisition of oil and gas properties and the cost of drilling successful wells
are capitalized.   Costs to maintain wells and related equipment
and lease and well operating costs are charged to expense as
incurred.   Gains and losses arising from sales of properties are
included in income.   Unproved properties are assessed
periodically for possible impairment.
  Property and
Equipment
 
 The
Company’s oil and gas rig is depreciated over its estimated useful life of ten
years, using the straight line method.  Vehicles are depreciated over
their estimated useful life of three years, using the straight line
method.  Maintenance, repairs and minor replacements are charged to
operations in the year incurred.
 F-9
  Asset Retirement
Obligations
  The
Company accounts for asset retirement obligations in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement
Obligations. 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.
  Accounting for the
Impairment of Long-Lived Assets
  We
account for the impairment of long-lived assets in accordance SFAS No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets, which requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be
recoverable.   Recoverability of the asset is measured by
comparison of its carrying amount to the undiscounted cash flow that the asset
or asset group is expected to generate.   If such assets or asset
groups are considered to be impaired, the loss recognized is the amount by which
the carrying amount of the property, if any, exceeds its fair market
value.   Based upon the Company’s evaluation, no impairment was
determined for the years ended December 31, 2008 and 2007.
  Revenue
Recognition
  Revenues
from sales of crude oil and natural gas products are recorded when deliveries
have occurred and legal ownership of the commodity transfers to the
customer.  Revenues from the production of oil and natural gas
properties in which the Company shares an undivided interest with other
producers are recognized based on the actual volumes sold by the Company during
the period.
 
 Fair Value of Financial
Instruments
  We define
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
carrying value of trade receivable, other receivables, other assets and accounts
payable approximates fair value because of the short maturity of those
instruments. The estimated fair value of our other obligations is estimated
based on the current rates offered to us for similar
maturities.  Based on prevailing interest rates and the short-term
maturity of all of our indebtedness, management believes that the fair value of
our obligations approximates book value at December 31, 2008 and
2007.
  Stock-Based
Compensation
  The
Company adopted SFAS No. 123R, Share-Based Payment, as of January 1, 2006, using
the modified prospective application method. This statement requires the
recognition of compensation expense when we obtain employee services in
stock-based payment transactions.
 
 Prior to
January 1, 2006, the Company recognized compensation cost associated with
stock-based awards under the recognition and measurement principles of
Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Under APB 25, the difference
between the quoted market price as of the date of the grant and the contractual
purchase price of shares was charged to operations over the vesting period on a
straight-line basis. No compensation cost was recognized for fixed stock options
with exercise prices equal to the market price of the stock on the dates of
grant.
 F-10
 
 Upon the
adoption of SFAS 123R, the Company began recording compensation cost related to
all new stock based compensation grants after our adoption date. The
compensation cost to be recorded is based on the fair value at the grant
date.
  Concentration of
Risk
  Our
financial instruments that are potentially exposed to credit risk consist
primarily of cash and accounts receivable for which the carrying amounts
approximate fair value.  At certain times, our demand deposits held in
banks may exceed the federally insured limits.  The Company has not
experienced any losses related to these deposits.
  Income
Taxes
  Income
taxes are accounted for under the asset and liability method of SFAS No. 109,
Accounting for Income
Taxes (“SFAS 109”).  Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.  Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
  Impact of Recently Issued
Accounting Standards
 
 In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP No. FAS
157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (“FSP FAS 157-4”).  FSP FAS 157-4 provides
guidance on estimating fair value when market activity has decreased and on
identifying transactions that are not orderly.  Additionally, entities
are required to disclose in interim and annual periods the inputs and valuation
techniques used to measure fair value.  This FSP is effective for
interim and annual periods ending after June 15, 2009.  The Company
does not expect the adoption of FSP FAS 157-4 will have a material impact on its
financial condition or results of operation.
 
 In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active,” (“FSP FAS
157-3”), which clarifies application of SFAS 157 in a market that is not
active.  FSP FAS 157-3 was effective upon issuance, including prior
periods for which financial statements have not been issued.  The
adoption of FSP FAS 157-3 had no impact on the Company’s results of operations,
financial condition or cash flows.
 
 In
December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities.”  This disclosure-only FSP
improves the transparency of transfers of financial assets and an enterprise’s
involvement with variable interest entities, including qualifying
special-purpose entities.  This FSP is effective for the first
reporting period (interim or annual) ending after December 15, 2008, with
earlier application encouraged.  The Company adopted this FSP
effective January 1, 2009.  The adoption of the FSP had no impact
on the Company’s results of operations, financial condition or cash
flows.
 
 In
December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”).  FSP
FAS 132(R)-1 requires additional fair value disclosures about employers’ pension
and postretirement benefit plan assets consistent with guidance contained in
SFAS 157.  Specifically, employers will be required to disclose
information about how investment allocation decisions are made, the fair value
of each major category of plan assets and information about the inputs and
valuation techniques used to develop the fair value measurements of plan assets.
This FSP is effective for fiscal years ending after December 15,
2009.  The Company does not expect the adoption of FSP FAS 132(R)-1
will have a material impact on its financial condition or results of
operation.
 
 In
September 2008, the FASB issued exposure drafts that eliminate qualifying
special purpose entities from the guidance of SFAS No. 140, “Accounting for
Transfers and Servicing of Financial  Assets and  Extinguishments of
Liabilities,” and  FASB  Interpretation 46 (revised December 2003),
“Consolidation of  Variable  Interest Entities − an
interpretation of ARB  No. 51,” as well as other
modifications.  While the proposed revised pronouncements have not
been finalized and the proposals are subject to further public comment, the
Company anticipates the changes will not have a significant impact on the
Company’s financial statements.  The changes would be effective March
1, 2010, on a prospective basis.
 F-11
 
 In
June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the computation of earnings per share under
the two-class method as described in FASB Statement of Financial Accounting
Standards No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. We are not required
to adopt FSP EITF 03-6-1; neither do we believe that FSP EITF 03-6-1 would have
material effect on our consolidated financial positionand results of
operations if adopted.
 
 In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts-and interpretation of FASB Statement No.
60”.  SFAS No. 163 clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement of
premium revenue and claims liabilities. This statement also requires expanded
disclosures about financial guarantee insurance contracts. SFAS No. 163 is
effective for fiscal years beginning on or after December 15, 2008, and interim
periods within those years. SFAS No. 163 has no effect on the Company’s
financial position, statements of operations, or cash flows at this
time.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”.  SFAS No. 162 sets forth the level of
authority to a given accounting pronouncement or document by category. Where
there might be conflicting guidance between two categories, the more
authoritative category will prevail. SFAS No. 162 will become effective 60 days
after the SEC approves the PCAOB’s amendments to AU Section 411 of the AICPA
Professional Standards. SFAS No. 162 has no effect on the Company’s financial
position, statements of operations, or cash flows at this time.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.  This
standard requires companies to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company has not yet adopted the provisions of SFAS No. 161, but
does not expect it to have a material impact on its consolidated financial
position, results of operations or cash flows.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS No. 123 (R), Share-Based Payment.  In particular,
the staff indicated in SAB 107 that it will accept a company's election to use
the simplified method, regardless of whether the company has sufficient
information to make more refined estimates of expected term. At the time SAB 107
was issued, the staff believed that more detailed external information about
employee exercise behavior (e.g., employee exercise patterns by industry and/or
other categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a
company to use the simplified method for share option grants after December 31,
2007. The staff understands that such detailed information about employee
exercise behavior may not be widely available by December 31, 2007. Accordingly,
the staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. The Company currently uses the
simplified method for “plain vanilla” share options and warrants, and will
assess the impact of SAB 110 for fiscal year 2009. It is not believed that this
will have an impact on the Company’s consolidated financial position, results of
operations or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”.  This
statement amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It 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. Before this statement was issued,
limited guidance existed for reporting noncontrolling interests. As a result,
considerable diversity in practice existed. So-called minority interests were
reported in the consolidated statement of financial position as liabilities or
in the mezzanine section between liabilities and equity. This statement improves
comparability by eliminating that diversity. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 (that is, January 1, 2009, for entities with calendar
year-ends). Earlier adoption is prohibited. The effective date of this statement
is the same as that of the related Statement 141 (revised 2007). The Company
will adopt this Statement beginning March 1, 2009. It is not believed that this
will have an impact on the Company’s consolidated financial position, results of
operations or cash flows.
 
 In
December 2007, the FASB issued FAS No. 141 (revised 2007), Business
Combinations’.  This Statement replaces FASB Statement No. 141,
Business Combinations, but retains the fundamental requirements in
Statement 141.  This Statement establishes principles and
requirements for how the acquirer: (a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and (c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. An entity may not
apply it before that date. The effective date of this statement is the same as
that of the related FASB Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”.  The Company will adopt this
statement beginning March 1, 2009. It is not believed that this will have an
impact on the Company’s consolidated financial position, results of operations
or cash flows.
 F-12
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities—Including an Amendment of FASB Statement No.
115.  This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities. Most of the provisions in FAS 159 are elective;
however, an amendment to FAS 115 Accounting for Certain Investments in Debt and
Equity Securities applies to all entities with available for sale or trading
securities. Some requirements apply differently to entities that do not report
net income. SFAS No. 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157 Fair Value Measurements.  The Company
adopted SFAS No. 159 on March 1, 2008 and it did not have a material impact on
the Company’s consolidated statement of operations or financial
condition.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements.  The statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change
current practice. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year,
including financial statements for an interim period within that fiscal year.
The Company adopted this statement March 1, 2008, and it did not have a material
impact on the Company’s consolidated statement of operations or financial
position.
 
 In 2006,
the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes — an Interpretation of FASB Statement No. 109 Accounting for Income
Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS
109.  FIN 48 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.  FIN 48
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.  The Company
adopted FIN 48 as of January 1, 2007, as required.
  The
current Company policy classifies any interest recognized on an underpayment of
income taxes as interest expense and classifies any statutory penalties
recognized on a tax position taken as selling, general and administrative
expense.  There was no interest or selling, general and administrative
expenses accrued or recognized related to income taxes for the years ended
December 31, 2008 or 2007.  The Company has not taken a tax position
that would have a material effect on the consolidated financial statements or
the effective tax rate for the year ended December 31, 2008 or during the prior
three years applicable under FIN 48.  It is determined not to be
reasonably possible for the amounts of unrecognized tax benefits to
significantly increase or decrease within twelve months of the
adoption
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a market-based framework or
hierarchy for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is applicable whenever another accounting pronouncement
requires or permits assets and liabilities to be measured at fair value. SFAS
157 does not expand or require any new fair value measures; however the
application of this statement may change current practice. The requirements of
SFAS 157 were first effective for the Company’s fiscal year beginning January 1,
2008. However, in February 2008 the FASB decided that an entity need not apply
this standard to nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis
until the subsequent year. Accordingly, the Company’s adoption of this standard
on January 1, 2008, was limited to financial assets and liabilities. The
adoption of SFAS 157 did not have a material effect on the
Company’s consolidated results of operations or financial
condition.
  In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115.” The fair value option permits entities to choose to measure eligible
financial instruments at fair value at specified election dates. The entity will
report unrealized gains and losses on the items on which it has elected the fair
value option in earnings. SFAS 159 is effective beginning in fiscal year 2008.
The adoption of SFAS 159 did not have a material impact on the Company’s
consolidated results of operations or financial condition.
  Net Income (Loss) per Common
Share
  Basic
earnings per share are computed only on the weighted average number of common
shares outstanding during the respective periods.
 F-13
  BDC
Conversion
  As a
result of the Company’s conversion from a BDC company to an oil and gas
operating company, the change in accounting is considered a change in accounting
principle. As a result, in accordance with Statement of Financial Accounting
Standard 154, Accounting for
Changes and Error Corrections, which requires that a change in accounting
principle be retrospectively applied to all prior periods presented, the
Company’s financial statements are presented on an operating and consolidated
basis for all current and prior periods presented on a retrospective basis
without regard to the BDC method of accounting.  The Company does not
believe that withdrawing its election to be regulated as a BDC will have any
impact on its federal income tax status, because the Company never elected to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. Instead, the Company has always been subject to corporate level
federal income tax on its income (without regard to any distributions it makes
to its shareholders) as a “regular” corporation under Subchapter C of the
Internal Revenue Code.
 
 4.    PROPERTY AND
EQUIPMENT
 Property
and equipment is comprised of the following:
  December
      31,2008
                  
                  
                  2007Oil
      and gas properties, successful efforts
                  
                  $
                  4,283,365
                  
                  
                  $
                  4,362,610Other
      property and equipment
                  
                  
                  1,744,067
                  
                  
                  
                  1,520,261Total
                  
                  
                  6,027,431
                  
                  
                  
                  5,840,863Less:
      Accumulated depreciation and depletion
                  
                  
                  2,015,528
                  
                  
                  
                  1,475,098Property
      and equipment, net
                  
                  $
                  4,011,903
                  
                  
                  $
                  4,365,765
   On
December 13, 2007, Production Resources, Inc. (“PRI”), a wholly-owned subsidiary
of the Company,  sold the J.N. Wilson “A” lease in Medina County,
Texas to a third party.  The lease included 190 acres of land, $49,250
of oil and gas properties and equipment at historical cost, $16,599 of oil and
gas properties recorded as an asset for asset retirement obligations, offset by
$20,158 of asset retirement obligation liabilities.  The sales price
of the lease was $75,000 and $45,618 of the proceeds was utilized to pay off the
outstanding balance of a promissory note and accrued interest (See Note 5 –
Debt).  The remaining $29,832 of cash was paid as a bonus to the
President of PRI (See Note 6 – Due to and From Related Parties).  As a
result of the transaction, the Company recorded a $29,309 gain on the sale of
properties.
  5.   DEBT
 
 Our
debt at December 31, 2008 and 2007 consisted of the following:
 
 Lease
Payable
 December
      31,2008
                            
                            
                            2007$21,238
      computer equipment lease, bearing interest at 10% per
annum
                            
                            $
                            16,131
                            
                            
                            $
                            16,131
 
 F-14
 On April
16, 2001, the Company leased computer equipment under a 36-month lease that was
accounted for as a capital lease in the amount of $21,238.  The lease
was secured by the computer equipment and perfected by a financing statement;
however, the Company liquidated the equipment in 2006 (with the lessor approval)
and paid the resulting $4,000 of proceeds to the lessor.  As a result
of the computer liquidation other payments, the remaining unpaid balance of
principal has been $16,131 since March 31, 2006.  The payable is
personally guaranteed by a former officer/director and the Chief Executive
Officer of the Company.  As of December 31, 2008, the Company has
recorded a total of $25,029 in accrued interest for this payable in the
accompanying Balance Sheet.
 
 In
November 2003, a settlement was negotiated with the lessor discussed above to
forgive the outstanding principal and accrued interest on the lease payable once
the transfer of 4,000 shares (100,000 shares prior to the one-for-twenty five
reverse stock split) of the Company’s common stock personally held by the
Company’s Chief Executive office occurs.  The Chief Executive Officer
of the Company transferred these shares on September 15,
2003.  However, as of December 31, 2007, the transaction has not been
finalized as the lessor has not agreed to the settlement. The Company expects to
fully resolve this matter in the future at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized – (see
Note 7 – Commitments and Contingencies and Note 8 – Related Party
Transactions).
  As of
December 31, 2008, the Company has recorded $122,671 of accrued interest for
previously issued convertible debentures.  Several convertible
debenture holders previously elected to convert all or a portion of the
convertible debentures into common stock.  However, the conversion did
not include accrued interest that was specified in the convertible debenture
documentation.  Although the Company believes that no further common
stock will be issued for these conversions, the accrued interest balance for
these converted debentures is included in the accrued interest balance as of
December 31, 2008.
  Notes
Payable
  December
      31,2008
                  
                  
                  2007$2,000,000
      Promissory Note, dated February 20, 2003, bearinginterest
      at 8% per annum and due on December 31, 2008
                  
                  $
                  2,000,000
                  
                  
                  $
                  2,000,000$25,000
      Line of Credit, dated October 28, 2005, bearingsimple
      variable interest at 6% per annum and due onFebruary
      28, 2008.
                  
                  
                  24,062
                  
                  
                  
                  23,714$103,000
      Note, dated March, 2008, not formalized and not bearing
      interest
                  
                  
                  91,000
                  
                  
                  
                  -$
                  2,115,062
                  
                  
                  $
                  2,023,714
  On June
15, 2004, Bend Arch Petroleum, Inc. (“Bend Arch”), a wholly-owned subsidiary of
the Company executed a $2,000,000 promissory note accruing interest at 8% with
Proco Operating Co., Inc., a company controlled by the brother of the Company’s
Chief Executive Officer (See Note 9 – Related Party Transactions and Note 10 –
Operator Agreement) with a maturity date of July 25, 2007.  The
purpose of the Note is to secure payment for oil and gas leases and wells
located in Comanche and Eastland counties in the State of Texas sold to Bend
Arch by Proco on June 15, 2004. The Note replaced a $2,000,000 convertible
debenture dated January 5, 2004.
  The terms
of the Note included (i) the payment of interest at a rate of eight percent (8%)
per annum (ii) principal and interest due and payable on July 25, 2007 (iii) no
prepayment penalty (iv) payment made in excess of sixty (60) days after the due
date of July 25, 2007 is a default of the Note and Bend Arch will forfeit all
ownership of the related leases and wells and relinquish operations on the lease
and wells to Proco, and (v) upon a default of the Note, Bend Arch will vacate
the leases with no rights of ownership and execute the necessary documents to
transfer the leases and wells to Proco or its assigns.
  Effective
July 25, 2007, Bent Arch executed a Modification and Extension Agreement (the
“First Extension”) in relation to the Note that became due and payable on the
same date.
  The First
Extension modified the terms of the Note as follows:
  ·
              The
      maturity date of the Note was extended to September 25,
    2007.
 ·
              Bend
      Arch covenants that as long as the Note is outstanding and unpaid, no
      transfer, assignment or sale of the underlying leases and wells securing
      the payment of the Note will be allowed without the written approval of
      Proco.
   F-15
 Effective
September 25, 2007, Bent Arch executed a Second Modification and Extension
Agreement (the “Second Extension”) in relation to the Note that became due and
payable on the same date. The Second Extension modifies the terms of the Note as
follows:
  ·
              The
      maturity date of the Note was extended to March 31, 2008. (See Note 10-
      Subsequent Events)
  As of
December 31, 2008, the Company has accrued $798,685 of accrued interest on the
Promissory Note and is included as a component of accrued interest payable in
the accompanying financial statements.
  On
October 28, 2005, Bend Arch entered into a $25,000 line of credit facility with
a financial institution for working capital purposes. The line of credit is
secured by a certificate of deposit held by the financial institution and bears
simple interest per annum at a variable rate which is six percent (6%) as of
December 31, 2008. As of December 31, 2008, the outstanding balance is $24,062
and is included in the Note Payable balance in the accompanying consolidated
financial statements.
  In March
2008, the Company purchased oilfield property and equipment for a price of
$150,000.  The terms included a cash payment of $47,000 and a note
payable for the balance of $103,000.  During the nine months ended
September 30, 2008, the Company paid down $12,000 of principal and the balance
is $91,000 as of December 31, 2008 and classified as a component of Note Payable
in the accompanying consolidated financial statements.  As of December
31, 2008, no formal agreement of the terms of the note payable had been
finalized and the Company has a verbal agreement to pay the principal back at a
rate of $10,000 monthly.  It is anticipated that a formal agreement
will be negotiated and finalized in the future.
   6.  DUE TO AND FROM RELATED
PARTIES
  Due to Related Parties:
                  
                  December
      31,2008
                  
                  
                  2007Due
      to Chief Executive Officer from salary andrental
      agreement with Company.
                  
                  $
                  510,925
                  
                  
                  $
                  306,425Due
      to Chief Executive Officer from advancesand
      rental agreement with Bend Arch
                  
                  
                  894,103
                  
                  
                  
                  704,703Due
      to President of Oil America Group, Inc. from salary agreement with
      Company
                  
                  
                  260,000
                  
                  
                  
                  -Due
      to Operator of oil and gas properties
                  
                  
                  1,630,734
                  
                  
                  
                  696,631Total
      Due To Related Parties
                  
                  $
                  3,295,763
                  
                  
                  $
                  1,707,759
 
 
 Effective
July 1, 2003, the Company entered into a salary and equipment rental agreement
with its Chief Executive Officer.  As of January 1, 2005, the $3,500
per month equipment rental agreement with the Chief Executive Officer was
terminated. As of December 31, 2007, the Company owed the Chief Executive
Officer $306,425 for unpaid amounts under the agreement.  During the
year ended December 31, 2008, the Company accrued but did not pay $120,000 for
compensation, reduced the balance $8,500 for payments made to the Chief
Executive Officer, and increased the balance $93,000 for advances made by the
Chief Executive Officer on behalf of the Company.  As a result, the
accrued balance as of December 31, 2008 is $510,925 and is classified as a
component of Due To Related Parties in the accompanying financial
statements.
 
 As of
December 31, 2008, the Chief Executive Officer of the Company is owed $894,103
for advances and unpaid equipment rental charges made on behalf of Bend Arch,
the Company’s wholly-owned subsidiary.  As of December 31, 2007, Bend
Arch owed the Chief Executive Officer $704,703 for previous advances and
equipment rental charges at $4,500 per month.  During the year ended
December 31, 2008, the Chief Executive Officer advanced $162,400 of funds to
Bend Arch; the Company recorded $54,000 for equipment rental charges and repaid
$27,000 to the Chief Executive Officer resulting in the $894,103 balance at
December 31, 2008 classified as a component of Due to Related Parties in the
accompanying financial statements.
 F-16
  At
December 31, 2008, the President of Oil America Group, Inc. is owed $260,000 for
unpaid salary per an agreement effective January 1, 2005.  The
agreement is for annual compensation of $65,000 and none of this amount has been
paid since the inception of the agreement.
  At
December 31, 2007, the operator of the Company’s oil and gas properties was owed
$696,631 for services as the operator of the Company’s oil and gas production
activities.  During the year ended December 31, 2008, the operator
balance owed was increased for the net activities performed such that as of
December 31, 2008, the net amount due to the operator of the Company’s oil and
gas production activities was $1,630,734 and is classified as a component of Due
to Related Parties in the accompanying financial statements.  The
operator is Proco Operating Co., Inc. (“Proco”) and is a related party as Proco
is controlled by the brother of the Company’s Chief Executive Officer (See Note
10 – Operating Agreement).
  7.  ASSET
RETIREMENT OBLIGATIONS
  The
following represents a reconciliation of the asset retirement obligations for
the years ended December 31, 2008 and 2007:
 
 December
      31,2007
                  
                  
                  2006Asset
      retirement obligations at beginning of period
                  
                  $
                  524,487
                  
                  
                  $
                  517,526Revision
      to estimate and additions
                  
                  
                  (37,237
                  )
                  
                  
                  3,841Other
      adjustments
                  
                  
                  -
                  
                  
                  
                  (20,157
                  )Liabilities
      settled during the period
                  
                  
                  -
                  
                  
                  
                  -Accretion
      of discount
                  
                  
                  21,905
                  
                  
                  
                  23,277Asset
      retirement obligations at end of period
                  
                  $
                  509,155
                  
                  
                  $
                  524,487
  8.  STOCKHOLDERS’
EQUITY
  Capital
Structure
  The
Company is authorized to issue up to 500,000,000 shares of common stock, $0.0001
par value per share, of which 20,360,389 were issued and outstanding as of
December 31, 2008
  Effective
September 14, 2007, the Company announced that all of the required steps had
been completed for a one-for-twenty five reverse stock split of its common
stock. In connection with the reverse stock split, the shares outstanding prior
to the reverse split were 494,170,082 and after the stock split there are
19,767,055, giving effect to rounding adjustments.  In accordance with
FAS 128, all share and per share amounts have been retroactively adjusted to the
beginning of the period to reflect the amendment to our Articles of
Incorporation for the reverse stock split.
  The
Company is authorized to issue up to 5,000,000 shares of preferred stock,
$0.0001 par value per share, of which 3,500,000 were issued and outstanding as
of December 31, 2007.  All of the preferred stock is held by the Chief
Executive Officer of the Company. Under the terms of the designation, these
Series A shares are not entitled to dividends.  The shares are
convertible, at the option of the holder, at any time, into three times as many
common shares as Series A, preferred that are held.  There are no
liquidation rights or preferences to Series A, preferred stock holders as
compared to any other class of stock.  These shares are non-voting,
however, the holders, as a class may elect two directors.
 
 There
were no changes in the preferred stock outstanding balance for the year ended
December 31, 2008.
 F-17
 
 Common
Stock:
 
 Since
December 31, 2005, 3,000 shares (75,000 shares adjusted for the one-for-twenty
five reverse stock split) remained issuable to an overseas investor who had
subscribed for an amount exceeding the shares that were actually issued under
the terms of an offering in fiscal 2003.  The investor had paid for
the full subscription, and as such, no amounts are due to the Company. However,
the Company has attempted to contact the investor several times in order to
process the certificate but has been unable to reach the investor.  In
June 2008, the Company made the decision to write off the 3,000 issuable shares
that had a post-reverse split historical balance of thirty cents
($0.30).  As a result, the Company no longer classifies the 3,000
shares as issuable and the $0.30 historical cost was offset against other income
in the consolidated financial statements.
  On
December 13, 2007, the Company received $89,000 of proceeds from the sale of
593,000 shares of its $0.0001 par value common stock at $.15 per
share.  The $.15 per share price was determined based upon a 40%
discount to the closing market price of $.25 per share on the sale date of
December 13, 2007.  The discount reflects there is no active market
for the stock because it is thinly traded and that the $.25 per share is a more
reflective value of the fair market value on the sales date.  At
December 31, 2007, the shares were classified as common stock issuable in the
consolidated financial statements. In January 2008, the shares were issued by
the Company’s transfer agent and as such, are no longer classified as common
stock issuable.
  Options
  In
September 2008, the Company’s Board of Directors approved the issuance of up to
10,000,000 shares of common stock under the 2008 Non-Qualified Stock Option Plan
(the “Plan”).  The Plan is to assist the Company in securing and
retaining Key Participants of outstanding ability by making it possible to offer
them an increased incentive to join or continue in the service of the Company
and to increase their efforts for its welfare through participation in the
ownership and growth of the Company.  On September 25, 2008, the
Company filed a Form S-8 with the SEC for the registration of the underlying
shares of stock from the plan.  As of December 31, 2008, no grants
under the Plan had been issued by the Company.
  9.  INCOME
TAXES
  There was
no income tax during the years ended December 31, 2008 and 2007 due to the
Company’s net loss and valuation allowance position.
 
 The
Company’s tax expense differs from the “expected” tax expense (benefit) for the
years ended December 31, 2008 and 2007 (computed by applying the Federal
Corporate tax rate of 35% for 2008 and 2007 to loss before taxes), as
follows:
 Years
      Ended December 31,2008
                
                
                2007Computed
      “expected” tax benefit
                
                $
                (751,993
                )
                
                $
                (799,392
                )Valuation
      allowance
                
                
                751,993
                
                
                
                799,392Net
      taxable benefit
                
                $
                -
                
                
                $
                -
 
 F-18
 The tax
effects of temporary differences that gave rise to significant portions of
deferred tax assets and liabilities at December 31 are as follows:
 
 2008
                  
                  
                  2007Deferred
      tax assets:Net
      operating loss carryforward
                  
                  $
                  1,548,597
                  
                  
                  $
                  790,689Accrued
      compensation
                  
                  
                  64,750
                  
                  
                  
                  42,000Asset
      retirement obligations
                  
                  
                  7,666
                  
                  
                  
                  8,147Total
      deferred tax assets
                  
                  
                  1,621,013
                  
                  
                  
                  840,836Deferred
      tax liabilities:Oil
      and gas properties
                  
                  
                  (78,332
                  )
                  
                  
                  (41,444
                  )Net
      deferred tax asset
                  
                  
                  1,542,682
                  
                  
                  
                  799,392Valuation
      allowance
                  
                  
                  (1,542,682
                  )
                  
                  
                  (799,392
                  )Net
      deferred taxes
                  
                  $
                  -
                  
                  
                  $
                  -
 
 In
assessing the recognition of deferred tax assets, management estimates it is
more likely than not that the Company will be in a net loss position for the
year ended December 31, 2008, the Company’s fiscal year end.  As a
result, the valuation allowance has been recorded for the entire amount of the
net deferred tax asset.  Net operating loss carry-forwards aggregate
approximately $4,424,563 and expire in years through 2029 (see note
below).
 
 As
discussed previously, on April 3, 2007, the Company filed a Form N-54C to
withdraw its election to be regulated as a BDC and as of that date, is no longer
a BDC under the 1940 Act.  The Company is no longer a BDC with
unconsolidated majority-owned portfolio companies but rather an oil and gas
operating company with consolidated subsidiaries. The results of operations for
April 1, 2007 through April 3, 2007 were not material and therefore, the Company
has utilized April 1, 2007 as the inception date for the new business as an oil
and gas operating company.  As a result of this change, and IRS
Section 382 rules, the net operating loss carry-forwards from previous years to
April 1, 2007 will not be allowable and are not included in the above
disclosures.
  10.  COMMITMENTS AND
CONTINGENCIES
  From time
to time we may become subject to proceedings, lawsuits and other claims in the
ordinary course of business including proceedings related to environmental and
other matters.  Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance.
 
 Prior to
December 31, 2007, the Company and certain of its wholly-owned subsidiaries were
delinquent in the filing of franchise tax reports with the State of Texas and
the State of Delaware and as a result, the Company and certain of its
wholly-owned subsidiaries were not in good standing.  The Company and
its wholly-owned subsidiaries have filed the required reports and as a result,
management anticipates that the Company and all of its wholly-owned subsidiaries
will be declared in good standing in the near future.  However, the
Company may face certain penalties and interest due to the delinquent status of
the reports before they were filed.
 
 In
November 2003, a settlement was negotiated with a lessor to forgive the
outstanding principal and interest on the related note payable resulting from
leased computers once the transfer of 4,000 shares (100,000 shares prior to the
one-for-twenty five reverse stock split) personally held by the Company’s Chief
Executive Officer occurred (see Note 5 – Debt and Note 8 – Related Party
Transactions).  As of December 31 the transaction has not been
finalized as the lessor has not agreed to the settlement.  However,
the shares were transferred to the lessor in September 2003.  The
Company expects to fully resolve this matter in the future at which time the
value of the shares exchanged and any related gain or loss will be determined
and recognized.
 
 The
Company has included $84,161 of unpaid federal payroll taxes and employee
withholdings and related penalties and interest in its accrued expenses as of
December 31, 2008.  Although the unpaid federal taxes are from the
predecessor company, Communicate Now.com, Inc., such amounts are subject to
potential federal tax liens for the Company.
 F-19
 
 The
Company has $312,903 of accounts payable as of December 31, 2008 and the
majority of this balance is from the predecessor company, Communicate Now.com,
Inc.  Since these trade accounts payable have been outstanding for an
extended period of time with no communication between the Company and any of the
vendors, the Company is commencing the process of eliminating the liabilities
from its records.  However, there can be no assurance that the Company
will be successful in its efforts to eliminate the liabilities.
  In
December 2005 and January 2006, the Company determined that certain issuances of
common stock had not been properly disclosed in reports made by the Company’s
transfer agent. The Company discussed these items with the transfer agent and
the transactions have been reconciled and recorded properly in the Company
records. However, the Company believes that two of these transactions, an
unauthorized issuance by the transfer agent of 600,000 shares (15,000,000 shares
prior to the one-for-twenty five reverse stock split) and an additional
unauthorized issuance of 100,000 shares (2,500,000 shares prior to the
one-for-twenty five reverse stock split), should be reimbursed to the Company by
either the third party who received the shares or the transfer agent. The
Company has recorded the fair market valuation of the two transactions in the
amount of $875,000 as a subscription receivable as of December 31, 2008 and is
in discussions with both the third party and the transfer agent to resolve the
issue. As of the date of these financial statements, no resolution of the matter
has been completed.
  11.  RELATED PARTY
TRANSACTIONS
  We
currently do not have a lease and we are not paying rent on our space. It is
being provided to the Company by the Chief Executive Officer free of
charge.
  On
November 1, 2003, the Company entered into an operating agreement for its oil
and gas production activities with Proco, a company controlled by the brother of
the Company’s Chief Executive Officer (See Note 5 – Due to Related Parties). The
term of the operating agreement is equal to the term of the oil and gas leases
held by the Company.  In general, the operator incurs costs which are
billed to the Company and the operator markets and sells oil and collects
payments from customers. Such payments are then remitted to the
Company.  The operator has a first and preferred lien on the leasehold
interests of the Company against any sums due to the Operator by the
Company.
  See Note
6 – Due to Related Parties for additional related party
transactions.
  12.  SUBSEQUENT
EVENTS
  On March
6, 2009 but effective December 31, 2008, Bent Arch executed a Fourth
Modification and Extension Agreement (the “Fourth Extension”) in relation to the
Note that was to become due and payable on December 31, 2008 (See Note 5 –
Debt).  The Fourth Extension modified the terms of the Note as
follows;
  ·
              The
      maturity date of the Note was extended to December 31,
    2009.
  SUPPLEMENTAL OIL AND GAS DATA (UNAUDITED)
 
 The
following tables set forth supplementary disclosures for oil and gas producing
activities in accordance with SFAS No. 69, Disclosures about Oil and Gas
Producing Activities.
 
 Costs
Incurred
 
 A summary
of costs incurred in oil and gas property acquisition, development, and
exploration activities (both capitalized and charged to expense) for the year
ended December 31, 2008 as follows:
 
 Acquisition
      of proved properties
                  
                  $
                  -Acquisition
      of unproved properties
                  
                  $
                  -Development
      costs
                  
                  $
                  -Exploration
      costs
                  
                  $
                  -
  F-20
 Results
of Operations for Producing Activities
 
 The
following table presents the results of operations for the Company’s oil and gas
producing activities for the year ended December 31, 2008:
 
 Revenues,
      net of royalties
                  
                  $
                  1,842,059Production
      costs
                  
                  
                  (2,265,456
                  )Depletion,
      depreciation, and valuation provisions
                  
                  
                  (580,723
                  )Exploration
      costs
                  
                  
                  --(1,004,120
                  )Income
      tax expense
                  
                  
                  -Results
      of operations for producing activities (excluding corporate overhead and
      interest costs)
                  
                  $
                  (1,004,120
                  )
 
 Reserve
Quantity Information
 
 The
following table presents the Company’s estimate of its proved oil and gas
reserves all of which are located in the United States.  The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
reserves related to new discoveries are more imprecise than those for producing
oil and gas properties.  Accordingly, the estimates are expected to
change as future information becomes available.  The estimates have
been prepared with the assistance of an independent petroleum reservoir
engineering firm.  Oil reserves, which include condensate and natural
gas liquids, are stated in barrels and gas reserves are stated in thousands of
cubic feet.
 
 Oil
                  
                  
                  Gas(MBBL)
                  
                  
                  (BCF)Proved
      reserves as of December 31,
                  
                  2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Beginning
      of period
                  
                  
                  6.934
                  
                  
                  
                  -
                  
                  
                  
                  1.575
                  
                  
                  
                  -Conversion
      from a BDC company to an oil and gas operating company – April 1,
      2007
                  
                  
                  -
                  
                  
                  
                  6.944
                  
                  
                  
                  -
                  
                  
                  
                  1.635Production
                  
                  
                  (0.012
                  )
                  
                  
                  (0.010
                  )
                  
                  
                  (0.089
                  )
                  
                  
                  (0.060
                  )Revisions
      of previous estimates
                  
                  
                  0.806
                  
                  
                  
                  -
                  
                  
                  
                  39.036
                  
                  
                  
                  -End
      of period
                  
                  
                  7.728
                  
                  
                  
                  6.934
                  
                  
                  
                  40.522
                  
                  
                  
                  1.575
  Standardized
Measure of Discounted Future Net Cash Flow and Changes Therein Relating to
Proved Oil and Gas Reserves
  The
following information is based on the Company’s best estimate of the required
data for the Standardized Measure of Discounted Future Net Cash Flows as of
December 31, 2008 and 2007 in accordance with SFAS No. 69, “Disclosures About
Oil and Gas Producing Activities” which requires the use of a 10% discount rate.
This information is not the fair market value, nor does it represent the
expected present value of future cash flows of the Company’s proved oil and gas
reserves.
 F-21
  December
      31,2008
                  
                  
                  2007Future
      cash inflows
                  
                  $
                  576,028,283
                  
                  
                  $
                  512,426,856Future
      production costs (1)
                  
                  
                  (83,582,682
                  )
                  
                  
                  (33,096,290
                  )Future
      development costs
                  
                  
                  (13,500,000
                  )
                  
                  
                  --Future
      income tax expenses  (2)
                  
                  
                  (167,630,960
                  )
                  
                  
                  (167,765,698
                  )Future
      net cash flows
                  
                  
                  311,314,641
                  
                  
                  
                  311,564,86810%
      annual discount for estimated timing of cash flows
                  
                  
                  (215,734,906
                  )
                  
                  
                  (215,908,308
                  )Standardized
      measure of discounted future net cash flows at the end of the
      year
                  
                  $
                  95,579,735
                  
                  
                  $
                  95,656,560
  (1)
              Production
      costs include oil and gas operations expense, production ad valorem taxes,
      transportation costs and general and administrative expense supporting the
      Company’s oil and gas operations.(2)
              Previously
      for the December 31, 2007 report, the Company did not calculate future
      income tax expense and this has been reflected in the current
      report.
  See the
following table for average prices utilized for the disclosed amounts
above.
  December
      31,
                    2008Average
      crude oil price per Bbl
                  
                  $
                  44.60Average
      natural gas price per Mcf
                  
                  $
                  5.71
  Future
production and development costs, which include dismantlement and restoration
expense, are computed by estimating the expenditures to be incurred in
developing and producing the Company’s proved crude oil and natural gas reserves
at the end of the year, based on year-end costs, and assuming continuation of
existing economic conditions.
  Future
income tax expenses are computed by applying the appropriate year-end statutory
tax rates to the estimated future pretax net cash flows relating to the
Company’s proved crude oil and natural gas reserves, less the tax bases of the
properties involved. The future income tax expenses give effect to tax credits
and allowances, but do not reflect the impact of general and administrative
costs and exploration expenses of ongoing operations relating to the Company’s
proved crude oil and natural gas reserves.
  Sources of Changes in Discounted
Future Net Cash Flows
  Principal
changes in the aggregate standardized measure of discounted future net cash
flows attributable to the Company’s proved crude oil and natural gas reserves,
as required by SFAS No. 69, at year end are set forth in the table
below.
  Year
      ended December 31, 2008
                  
                  
                  Year
      ended December 31, 2007Standardized
      measure of discounted future net cash flows at the beginning of the
      year
                  
                  $
                  95,656,560
                  
                  
                  $
                  -Extensions,
      discoveries and improved recovery, less related costs
                  
                  
                  -
                  
                  
                  
                  -Conversion
      from a BDC company to an oil and gas operating company
                  
                  
                  -
                  
                  
                  
                  513,176,934Revisions
      of previous quantity estimates
                  
                  
                  258,843,160
                  
                  
                  
                  -Changes
      in estimated future development costs
                  
                  
                  (63,986,392)
                  
                  
                  
                  (33,096,290)Purchases
      (sales) of minerals in place
                  
                  
                  -
                  
                  
                  
                  -Net
      changes in prices and production costs
                  
                  
                  (143,217,588)
                  
                  
                  
                  -Accretion
      of discount
                  
                  
                  173,403
                  
                  
                  
                  (215,908,308)Sales
      of oil and gas produced, net of production costs
                  
                  
                  (423,397
                  )
                  
                  
                  (750,078)Development
      costs incurred during the period
                  
                  
                  --
                  
                  
                  
                  --Change
      in timing of estimated future production and other
                  
                  
                  --
                  
                  
                  
                  --Net
      change in income taxes
                  
                  
                  (51,466,011)
                  
                  
                  
                  (167,765,698)Standardized
      measure of discounted future net cash flows at the end of the
      year
                  
                  $
                  95,579,735
                  
                  
                  $
                  95,656,560






F-22