UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON
D.C.  20549


__________





FORM
10-KSB


__________


(Mark
One)





[X]
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
fiscal year ended December 31,
2007





[  ]
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from ________________ to _____________________




Commission
File Number 0-50436




American
Energy Production, Inc.


(Name of
Small Business Issuer in Its Charter)





Delaware
            74-2945581(State
      or Other Jurisdiction of
            (I.R.S.
      Employerof
      Incorporation or Organization)
            Identification
      No.)




6073 Hwy 281 South, Mineral
      Wells, TX
            76067(Address
      of Principal Executive Offices)
            (Zip
      Code)




(210)-410-8158


(Issuer’s
Telephone Number, Including Area Code)





Securities
registered under Section 12(b) of the Exchange Act:





Title of Each Class
            Name of Each Exchange on Which
      RegisteredNone
            None





Securities
registered under Section 12(g) of the Exchange Act:




Common
Stock, $0.0001 Par Value Per Share


(Title of
Class)





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. [  ]





Check
whether the issuer:  (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the small business issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.


Yes
[X]    No [  ]





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of small business issuer’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]





Indicate
by check mark whether the small business issuer is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
[  ]    No [X]





State
Issuer’s revenues for its most recent fiscal
year.   $1,581,661





As of
March 15, 2008, the aggregate market value of our common stock, $0.001 par
value, held by non-affiliates was approximately $7,181,809, based on 19,410,295
non-affiliate shares outstanding at $0.37 per share, which was the last reported
sales price of the Company’s common stock on the Pink Sheets for such
date).  (See definition of affiliate in Rule 12b-2 of the Exchange
Act.)





As of
March 15, 2008, there were 19,767,055 shares of our common stock issued and
outstanding.





Transitional
Small Business Disclosure Format (check one): Yes
[  ]    No [X]


-1-





TABLE
OF CONTENTS





PART
      I
            
            PageItem
      1.
            Description of Business
            4Item
      2.
            Description of Property
            25Item
      3
            Legal Proceedings
            25Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            25PART
      IIItem
      5.
            Market
      for Common Equity,andRelated
      Stockholder Matters and Small Business Issuer Purchases of Equity
      Securities
            26Item
      6.
            Management’s
      Discussion and Analysis
      or Plan of Operation
            27Item
      7.
            Financial Statements
            37Item
      8.
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            37Item
      8A. (T)
            Controls and Procedures
            37Item
      8B.
            Other Information
            38PART
      IIIItem
      9.
            Directors, Executive Officers, Promoters and Control Persons
      and Corporate Governance; Compliance with Section 16(a) of the Exchange
      Act
            39Item
      10.
            Executive Compensation
            41Item
      11.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            43Item
      12.
            Certain Relationships and Related Transactions, and Director
      Independence
            44Item
      13.
            Exhibits
            45Item
      14.
            Principal Accountant Fees and Services
            46SIGNATURES


-2-





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





In
addition to historical information, this Annual Report contains statements that
plan for or anticipate the future, including without limitation statements under
the captions “Description of Business,” “Risk Factors” and “Management’s
Discussion and Analysis or Plan of Operation.”  These forward-looking
statements include statements about our future business plans and strategies,
future actions, future performance, costs and expenses, interest rates, outcome
of contingencies, financial condition, results of operations, liquidity,
objectives of management, and other such matters, as well as certain projections
and business trends, and most other statements that are not historical in
nature, that are “forward-looking”.





Because
we are a “penny stock”, you cannot rely on the Private Securities Litigation
Reform Act of 1995. Forward-looking information may be included in this Annual
Report or may be incorporated by reference from other documents we have filed
with the Securities and Exchange Commission (the “SEC”).  You can
identify these forward-looking statements by the use of words such as “may,”
“will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,”
“estimate,” “forecast,” “potential,” “intend,” “continue” and variations of
these words or comparable words.  Forward-looking statements do not
guarantee future performance, and because forward-looking statements involve
future risks and uncertainties, there are factors that could cause actual
results to differ materially from those expressed or implied.  These
risks and uncertainties include, without limitation, those described under “RISK
FACTORS” in Item 1 of this Annual Report and those detailed from time to time in
our filings with the SEC.





We have
based the forward-looking statements relating to our operations on management’s
current expectations, estimates, and projections about us and the industry in
which we operate.  These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that we cannot
predict.  In particular, we have based many of these forward-looking
statements on assumptions about future events that may prove to be
inaccurate.  Because forward-looking statements involve future risks
and uncertainties, there are factors that could cause actual results to differ
materially from those anticipated by these forward-looking statements. For
example, a few of the uncertainties that could affect the accuracy of
forward-looking statements include:





·
            Changes
      in general economic and business conditions affecting
  us;


·
            Changes
      in the assumptions used in making forward-looking
    statements;


·
            Legal
      or policy developments that diminish our
appeal;


·
            Changes
      in our business strategies;


·
            Our
      limited operating history;


·
            The
      degree and nature of our
competition;


·
            Our
      ability to employ and retain qualified employees;
  and


·
            The
      other factors referenced in this Annual Report, including without
      limitation, under the captions “Description of Business,” “Risk Factors”
      and “Management’s Discussion and Analysis or Plan of
      Operation.”





These
risks are not exhaustive. Other sections of this Annual Report include
additional factors which could adversely impact our business and financial
performance.  Moreover, we operate in a competitive and changing
environment.  New risk factors emerge from time to time and it is not
possible for our management to predict all risk factors, nor can we assess the
impact of all factors on our business or to the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.  Given these risks and
uncertainties, we caution you not to place undue reliance on forward-looking
statements as a prediction of actual results.  All forward-looking
statements are made only as of the date of this Annual Report.  Except
for our ongoing obligation to disclose material information as required by
federal securities laws, we do not intend to update you concerning any future
revisions to any forward-looking statements to reflect events or circumstances
occurring after the date of this Annual Report.  We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information or future events. -3-





PARTI





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. -4-




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.





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 March
20, 2008, the Company submitted an offer of settlement to the SEC staff,
pursuant to which it would consent, without admitting or denying the findings,
to the entry of an order by the SEC instituting public administrative and
cease-and-desist proceedings and imposing sanctions (the “Order”).




In
summary, the Order finds that since electing to be regulated as a business
development company (“BDC”) in January 2004, the Company has, among other
things, issued senior securities without the required asset coverage, issued
warrants without approval of its shareholders, issued prohibited non-voting
stock, issued securities for services, failed to make and keep required
records, and
failed to establish a majority of non-interested directors on its board of
directors. As a result, the Company violated certain provisions of the
Investment Act of 1940 (the “1940 Act”). In addition, the Company failed to
obtain a fidelity bond and implement a compliance program as required under the
1940 Act. Finally, the Company failed to comply with certain provisions for
exemption from registration under the 1933 Act as related to Rule 609 of
Regulation E because it did not file required offering status reports in
connection with a securities offering commenced in January 2004.




In
determining the Order, the SEC considered remedial acts promptly undertaken by
the Company and cooperation afforded the SEC staff. The Order would
require:




·
            The
      Company cease and desist from committing or causing any violations and any
      future violations of the 1940 Act. The 1940 Act is only available to BDC
      companies and does not apply to the Company in its current structure as an
      oil and gas operating company.


·
            The
      Regulation E exemption of the Company is permanently suspended. Regulation
      E is only available to BDC companies and does not apply to the Company in
      its current structure as an oil and gas operating
  company.




The
Company has reached an agreement in principle with the staff of the SEC
regarding its offer of settlement, subject to approval by the Commission.
Although the ultimate outcome of the settlement negotiations cannot be predicted
with certainty, under the settlement as currently proposed, the Company would
not incur any fines or other penalties, and no action would be taken against any
individuals. -5-




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.




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, 2007, 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 175 gross wells drilled to a 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. -6-





Additionally,
through Bend Arch Petroleum, Inc. (“Bend Arch”), our wholly owned subsidiary, we
own leases covering approximately 6,200 gross acres of land primarily in the
counties of Palo Pinto, Eastland and Comanche, Texas.  The leases have
45 gross 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 tables present information as of December 31, 2007 with respect to our
estimated proved reserves.




Net
      Proved Reserve Summary and PV-10 Forecast from December 31,
      2007Reserve
                Categories
            
            Oil
                (BBL)
            
            
            Gas
                (MCF)
            
            
            Cash
      Flow
                ($)
            
            
            PV-10
                ($)(c)PDP
      (b)
            
            
            6,934,193
            
            
            
            1,574,830
            
            
            $
            479,330,566
            
            
            $
            435,755,060Total Proved(a)
            
            
            6,934,193
            
            
            
            1,574,830
            
            
            $
            479,330,566
            
            
            $
            435,755,060





(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 developed reserves that are expected to be recovered from existing
      wells.




(c)
            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, 2007.  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,
              2007St  Standardized
      measure of discounted future net cash flows (d)
            
            $
            435,755,060A  Add:
      Present value of future income tax discounted at 10%
            
            
            0P   PV-10
            
            $
            435,735,060 -7-




(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, 2007 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.




December 31, 2007Developed(a)
            
            Undeveloped(b)
            
            TotalPlay/Trend
            Gross
            
            
            Net
            
            Gross
            
            
            Net
            
            Gross
            
            
            NetTexas
            7,811
            
            
            7,394
            
            -
            
            
            -
            
            7,811
            
            7,394





(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 31,2007ProductionOil
      (bbls)
            
            
            14,144Natural
      gas (mcf)
            
            
            81,928Natural
      gas equivalent (mcfe)
            
            
            13,655Total
      equivalent (bbls)
            
            
            27,799Oil and natural gas
      salesOil
      sales
            
            $
            972,254Natural
      gas sales
            
            
            607,664Total
            
            $
            1,579,918Average sales priceOil
      ($ per bbl)
            
            $
            68.74Natural
      gas ($ per mcf)
            
            
            7.42Natural
      gas equivalent ($ per mcfe)
            
            
            44.52Average production
      costTotal
      equivalent ($ bbls)
            
            $
            83.88


-8-


(A)
Excludes $1,743 of oil and gas royalty income included in Total Revenue for
consolidated financial statements.





The
following table sets forth information at December 31, 2007, 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.




December 31, 2007Play/Trend
            
            Gross
              Wells
            
            
            Net
              WellsTexas
            
            
            220
            
            
            
            215





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, 2007
            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. -9-




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.




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. -10-




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.




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. -11-




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.




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. -12-




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.




Our
Employees





As of
December 31, 2007, we have 11 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.




-13-





RISK
FACTORS





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 $2,283,978 for the year ended December 31, 2007.  Additionally, the
Company has a negative working capital balance of $5,020,647, a stockholders’
deficit of $906,599 at December 31, 2007 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, 2007, we had $5,155,387 of
current liabilities as compared to only $134,740 of current assets. Accordingly,
the Company does not have sufficient cash resources or current assets to pay
these obligations.


-14-





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 March 31, 2008.  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, 2008 (iii)
no prepayment penalty (iv) payment made in excess of sixty (60) days after the
due date of December 31, 2008 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.  We expect to spend
approximately $5,000,000 on additional drilling and development activities for
our fiscal year ending December 31, 2008.  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.


-15-




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.




-16-




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.


-17-




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, 2007 and no impairment was necessary at December 31,
2007.




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.


-18-




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.




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.


-19-




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.




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.


-20-




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





We do not have a full time Chief FinancialOfficer 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 and for preparing our required SEC
reporting requirements including this Form
10-KSB.    Charles
Bitters, our Chief Executive Officeris 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.


-21-





We were
required to comply with Section 404(a) effective for this year ended December
31, 2007.  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, 2007 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 2008 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.





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.


-22-





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.


-23-





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.




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.


-24-




Item
      2.
            Description of Property.





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.





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





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.





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.


-25-





PART II





Item
      5.
            Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities.





Market
Information





As of
March 15, 2008, the Company had 19,767,055 shares of common stock issued and
outstanding and had approximately 449 certificate stockholders of record.
Additionally, the Company had 596,000 shares issuable.





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 2007 and 2006 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
            
            $
            2.25
            
            
            $
            1.50Second
      Quarter
            
            $
            1.75
            
            
            $
            0.75Third
      Quarter
            
            $
            1.00
            
            
            $
            0.25Fourth
      Quarter
            
            $
            0.49
            
            
            $
            0.22Fiscal
      Year Ending 2007First
      Quarter
            
            $
            3.35
            
            
            $
            1.24Second
      Quarter
            
            $
            1.90
            
            
            $
            0.86Third
      Quarter
            
            $
            0.89
            
            
            $
            0.30Fourth
      Quarter
            
            $
            0.80
            
            
            $
            0.30





On March
15, 2008, the closing bid price for a share our common stock, as reported by the
OTCBB was $0.37.





Holders





As of
March 15, 2008, there were approximately 411 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.


-26-





Securities
Authorized For Issuance Under Equity Compensation Plans





The
Company has no shares of our common stock authorized for issuance under any
equity compensation plan.




Recent
Sales of Unregistered Securities





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.





Item
      6.
            Management’s
      Discussion andAnalysis or Plan of
    Operation.





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.  As discussed
above, 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
February 18, 2008, Shelley International CPA (“Shelley”) declined to stand for
re-election as the Company’s independent registered public accounting
firm.  Shelley informed the Company that it would not continue as the
auditor because the firm is no longer auditing public
companies.  Shelley served as the Company's independent registered
public accounting firm for the unaudited quarterly reviews of the balance sheets
at March 31, 2007, June 30, 2007 and September 30, 2007 and the related
statements of operations, stockholders’ equity and cash flows for the periods
then ended.  There were no disagreements with Shelley on any matter of
accounting principles or practices, financial statement disclosure, or scope or
procedures, which disagreement(s), if not resolved to the satisfaction of Shelly
would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its reports.





On
February 18, 2008, the Company's board of directors authorized the appointment
of Moore and Associates Chartered (“Moore”) to serve as the Company's
independent registered public accounting firm for the audit of the Company’s
consolidated financial statements for the years ended December 31, 2007 and
2006.




On March
20, 2008, the Company submitted an offer of settlement to the SEC staff,
pursuant to which it would consent, without admitting or denying the findings,
to the entry of an order by the SEC instituting public administrative and
cease-and-desist proceedings and imposing sanctions (the “Order”).


-27-




In
summary, the Order finds that since electing to be regulated as a business
development company (“BDC”) in January 2004, the Company has, among other
things, issued senior securities without the required asset coverage, issued
warrants without approval of its shareholders, issued prohibited non-voting
stock, issued securities for services, failed to make and keep required
records, and
failed to establish a majority of non-interested directors on its board of
directors. As a result, the Company violated certain provisions of the
Investment Act of 1940 (the “1940 Act”). In addition, the Company failed to
obtain a fidelity bond and implement a compliance program as required under the
1940 Act. Finally, the Company failed to comply with certain provisions for
exemption from registration under the 1933 Act as related to Rule 609 of
Regulation E because it did not file required offering status reports in
connection with a securities offering commenced in January 2004.




In
determining the Order, the SEC considered remedial acts promptly undertaken by
the Company and cooperation afforded the SEC staff. The Order would
require:




·
              The
      Company cease and desist from committing or causing any violations and any
      future violations of the 1940 Act. The 1940 Act is only available to BDC
      companies and does not apply to the Company in its current structure as an
      oil and gas operating company.


·
            The
      Regulation E exemption of the Company is permanently suspended. Regulation
      E is only available to BDC companies and does not apply to the Company in
      its current structure as an oil and gas operating
  company.




The
Company has reached an agreement in principle with the staff of the SEC
regarding its offer of settlement, subject to approval by the Commission.
Although the ultimate outcome of the settlement negotiations cannot be predicted
with certainty, under the settlement as currently proposed, the Company would
not incur any fines or other penalties, and no action would be taken against any
individuals.




Effective
March 15, 2008, Bent Arch executed a Third Modification and Extension Agreement
(the “Third Extension”) in relation to the Note that was to become due and
payable on March 31, 2008.  The Third Extension modified the terms of
the Note as follows;




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





GOING
CONCERN




Our
long-term viability as a going concern is dependent on certain key factors, as
follows:




·
            The
      ability to continue to obtain sources of outside financing to support near
      term operations and to allow us to continue to make
      investments.




·
            The
      ability to increase profitability and sustain a cash flow level that will
      ensure support for continuing
operations.





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.


-28-





As
reflected in the accompanying financial statements, the Company had a net loss
of $2,283,978 for the year ended December 31, 2007.  Additionally, the
Company has a negative working capital balance of $5,020,647, a stockholders’
deficit of $906,599 at December 31, 2007 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, 2007, we had $5,155,387 of
current liabilities as compared to only $134,740 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 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.




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.


-29-




GOING
CONCERN




The
independent registered public accounting firms’ reports to our financial
statements at December 31, 2007 and 2006 and for the years ended December 31,
2007 and 2006, include an explanatory paragraph in addition to their audit
opinion stating that our recurring losses from operations, net cash used in
operations, stockholders’ (deficiency) equity 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.





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, 2007 or
2006.


-30-




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.




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, 2007
was $799,392.  Net operating loss carry-forwards aggregate
approximately $2,259,111 and expire in the years through 2028.





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.


-31-





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-KSB.




Years
      EndedDecember
      31,2007
            
            
            2006Revenues:Oil
      sales, net
            
            $
            1,581,661
            
            
            $
            1,807,475Operating
      ExpensesCompensation
            
            
            213,718
            
            
            
            131,127Consulting
            
            
            3,260
            
            
            
            149,139Depreciation,
      depletion and accretion
            
            
            540,677
            
            
            
            487,587Rent
            
            
            36,527
            
            
            
            12,326General
      and administrative
            
            
            338,603
            
            
            
            289,671Production
            
            
            2,331,739
            
            
            
            3,438,339Professional
            
            
            173,393
            
            
            
            249,105Taxes
            
            
            86,137
            
            
            
            50,489Total
      Operating Expenses
            
            
            3,724,053
            
            
            
            4,807,783Operating
      Loss
            
            
            (2,142,392
            )
            
            
            (3,000,308
            )Other
      Income (Expense)Other
      income
            
            
            19,097
            
            
            
            20,000Interest
      expense
            
            
            (183,986
            )
            
            
            (411,553
            )Payroll
      tax expense and penalties
            
            
            (6,004
            )
            
            
            (6,004
            )Total
      Other Income (Expense)
            
            
            (141,585
            )
            
            
            (397,557
            )Net
      Loss
            
            $
            (2,283,978
            )
            
            $
            (3,397,865
            )





Year Ended December 31, 2007
compared to December 31, 2006





Revenues:




Revenues
decreased $225,813 or 12%, to $1,581,661 for 2007 from $1,807,475 for
2006.  The decrease was due to the Company not being able to focus on
its oil and gas operations because of insufficient operating cash and the issues
surrounding the change from a BDC to an oil and gas operating
company.


-32-





Operating
Expenses:





Operating
expenses decreased $1,083,730, or 23%, to $3,724,053 for 2007 from $4,807,783
for 2006.  The decrease was primarily the result of a $1,106,600
decrease in production 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.





Other Income
(Expense):





Other
income (expense) decreased $252,972 of expense, or 647% to $141,585 of expense
for 2007 from $397,557 of expense for 2006.  The change was primarily
from a decrease in interest expense in 2007 from 2006.




Liquidity
and Capital Resources:





Cash and
cash equivalents were $133,220 at December 31, 2007 as compared to $106,902 at
December 31, 2006, and working capital deficit was $5,020,647 at December 31,
2007 as compared to a working capital deficit of $3,238,489 at December 31,
2006.  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 $122,368 for the year ended December 31,
2007 compared to cash used of $2,115,790 for the year ended December 31,
2006.  The decrease in cash used in operations from 2006 to 2007 was
primarily from an increase in the due to related parties and accrued interest
payable balances in 2007 as compared to 2006.





Investing
Activities





Cash used
in investing activities was $144,178 for the year ended December 31, 2007
compared to cash used of $668,096 for the year ended December 31,
2006.  The decrease in cash used resulted primarily from a decrease in
the investment in oil and gas properties due to the Company not being able to
focus on its oil and gas operations because of insufficient operating
cash.





Financing
Activities





Cash
provided by financing activities was $48,127 for the year ended December 31,
2007 compared to $2,374,365 of cash provided for the year ended December 31,
2006.  The change was primarily that in 2006, the Company had
$2,335,245 of net cash proceeds from the issuance of common stock compared to
$89,000 in 2007.





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.


-33-





Debt:





Our
debt at December 31, 2007 and 2006 consisted of the following:





Lease
Payable


December
      31,2007
            
            
            2006$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, 2007, the Company has
recorded a total of $17,568 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.




As of
December 31, 2007, 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, 2007.




Notes
Payable




December
      31,2007
            
            
            2006$2,000,000
      Promissory Note, dated February 20, 2003, bearinginterest
      at 8% per annum and due on March 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.
            
            
            23,714
            
            
            
            24,220$82,825
      Promissory Note, dated July 29, 1999, bearinginterest
      at 8% per annum and due
            
            
            -
            
            
            
            40,367$
            2,023,714
            
            
            $
            2,064,587


-34-




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.




Effective
March 15, 2008, Bent Arch executed a Third Modification and Extension Agreement
(the “Third Extension”) in relation to the Note that was to become due and
payable on March 31, 2008.  The Third Extension modified the terms of
the Note as follows;




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




As of
December 31, 2007, the Company has accrued $638,247 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, 2007. As of December 31, 2007, the outstanding balance is $23,714
and is included in the Note Payable balance in the accompanying consolidated
financial statements.


-35-





On July
29, 1999, PRI entered into an $82,825 promissory note with a financial
institution that replaced an existing promissory note.  The promissory
note was secured by certain oil and gas leases of PRI in Hondo, Medina County,
Texas and guaranteed by the President of PRI.  On December 13, 2007,
PRI sold the J.N. Wilson “A” lease containing 190 acres of land and $49,250 of
historical cost including oil and gas properties and equipment.  The
sales price of the lease was $75,000 and $45,618 of the proceeds was utilized to
pay off the outstanding balance of the promissory note and accrued
interest.  As a result, the balance of the promissory note is zero as
of December 31, 2007.




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, 2006, our contractual obligations
and commitments by type and period:


Payments Due by PeriodContractual Obligations
            
            Total
            
            
            Less than 1 year
            
            
            1-3 years
            
            
            4-5 years
            
            
            After 5 yearsDebt:Lease
      Payable
            
            $
            16,131
            
            
            $
            16,131
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Notes
      Payable
            
            
            2,023,714
            
            
            
            2,023,714
            
            
            
            -
            
            
            
            -
            
            
            
            -Accrued
      Interest Payable
            
            
            778,486
            
            
            
            778,486
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Debt
            
            $
            2,818,341
            
            
            $
            2,818,341
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -





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.





2008
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.


-36-




Item 7.
            Financial
      Statements.





Our
Financial Statements are attached as Appendix A (following the Exhibits) and are
hereby incorporated by reference and included as part of this Annual
Report.  An index to our Financial Statements is provided in response
to Item 13 of this Annual Report.





Item 8.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.





In
February 2008, Shelly International LLC (“Shelly”) declined to stand for
reelection as the Company’s principal public accountant, and the Company engaged
Moore and Associates Chartered (“Moore”) with respect to the audit of the
Company’s financial statements for the years ended December 31, 2007 and
2006.  This change was not the result of any disagreements with
Shelly.  The decision to engage Moore was approved by the Company’s
Board of Directors.


Item 8A(T).
              Controls
      and Procedures.


Disclosure
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, 2007 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.


-37-





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.





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 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 recover
      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, 2007 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.





Item 8B .
Other Information.




None.


-38-


PART
III





Item9.
            Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(A) Of the Exchange
  Act.





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
            62
            Chief
      Executive Officer, President  and Director
            2002





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.





On March
13, 2007, the Shareholders of the Company elected Charles Bitters, Larry P.
Horner and John D. Powell to serve as Directors until the next annual meeting of
the Shareholders of the Company or until their successors have been duly elected
and qualified.  Effective October 24, 2007, Larry P. Horner resigned
his position as a director of the Company due to time constraints as a result of
a new full time employment position with another company. There were no
disagreements with the Company on any matter related to the Company’s
operations, policies or practices.  Effective November 21, 2007, John
Powell resigned his position as a director of the Company due to time
constraints as a result of his own company. There were no disagreements with the
Company on any matter related to the Company’s operations, policies or
practices.  As a result, Charles Bitters is the sole director 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 a sole member, Mr. Bitters, which makes such committee’s
impracticable. Mr. Bitters is the sole director 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.





Section
16(a) Beneficial Ownership Reporting Compliance




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, 2007, all Section 16(a) filing requirements applicable to such
persons were met in a timely manner.


-39-




Code
of Ethics, Whistleblower and Insider Trading Policies




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-KSB. 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.





Family
Relationships





On
February 20, 2003, the Company acquired certain oil and gas properties located
in Comanche and Eastland counties in the State of Texas for $2,000,000 from
Proco Operating Co., Inc. (“Proco”), a company controlled by the brother of the
Company's President in exchange for a promissory note.  The promissory
note was transferred to Bend Arch, a wholly-owned
subsidiary.   The oil and gas properties were also transferred to
Bend Arch.  Subsequently,  the promissory note (“Note”) has
been amended and is accruing interest at 8% with a maturity date of March 31,
2008.  The purpose of the Note is to secure payment for the oil and
gas properties.




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 March 31, 2008 (iii) no
prepayment penalty (iv) payment made in excess of sixty (60) days after the due
date of March 31, 2008 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.




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


-40-




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.




Item10.
            Executive
      Compensation.





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 theyear ended December
31, 2007,the compensation awarded or paid bythe Companyto 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 and
              Principal
              Position(1)
            Year
            Salary
              ($) (2)
            Bonus
              ($)
            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
            2007
              2006
            120,000
              120,000
            -
              -
            -
              -
            -
              -
            -
              -
            -
              -
            -
              -
            120,000
              120,000





1 Mr.
Bitters serves as the sole director on the Company’s board of directors and does
not receive any compensation for his director roles.


2 Salary
is total base salary earned, rather paid or not.  For both 2006 and
2007, Mr. Bitters earned $120,000 of salary that was accrued and
unpaid.




We do not
have a stock option, stock warrant, retirement, pension, or profit-sharing
program for the benefit of directors, officers, or other
employees.





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


-41-





Option Grants in Last Fiscal Year





We have no stock options at December 31, 2007 and we do
not have a stock option program for the benefit of directors, officers, or other
employees.





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





We have no stock options at December 31, 2007 and we do
not have a stock option program for the benefit of directors, officers, or other
employees.





Outstanding Equity Awards at Fiscal
Year-End





We do not
have a stock option, stock warrant, retirement, pension, or profit-sharing
program for the benefit of directors, officers, or other employees and no equity
awards are outstanding at December 31, 2007.




DirectorCompensation





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, 2007.





Employment
Contracts and Termination of Employment, and Change-in-Control
Arrangements





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, 2006, the Company owed the Chief Executive
Officer $98,225 for unpaid amounts under the agreement.  During the
year ended December 31, 2007, the Company accrued but did not pay $120,000 for
compensation, reduced the balance $3,000 as a correction of a deposit
incorrectly recorded in fiscal 2006, reduced the balance $40,000 for payments
made to the Chief Executive Officer, increased the balance $10,000 as a
correction for advances made by the Chief Executive Officer previously and the
Chief Executive Officer advanced $121,200 of funds on behalf of the
Company.  As a result, the accrued balance as of December 31, 2007 is
$306,425 and is classified as a component of Due To Related Parties in the
accompanying 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.




Item 11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.





Security
Ownership of Certain Beneficial Owners





The
following table summarizes certain information as of March 15, 2008with 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.


-42-




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 ofBeneficial Owner(a)
            Amount
      andNature
      of
              BeneficialOwnership
            Percent
      ofClassCommon
      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.
              1401
      19th
      Street
              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 March 15, 2008, the Company had
      19,767,055 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.




-43-




Item 12.
            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, 2006, the Company owed the Chief Executive
Officer $98,225 for unpaid amounts under the agreement.  During the
year ended December 31, 2007, the Company accrued but did not pay $120,000 for
compensation, reduced the balance $3,000 as a correction of a deposit
incorrectly recorded in fiscal 2006, reduced the balance $40,000 for payments
made to the Chief Executive Officer, increased the balance $10,000 as a
correction for advances made by the Chief Executive Officer previously and the
Chief Executive Officer advanced $121,200 of funds on behalf of the
Company.  As a result, the accrued balance as of December 31, 2007 is
$306,425 and is classified as a component of Due To Related Parties in the
accompanying financial statements.





As of
December 31, 2007, the Chief Executive Officer of the Company is owed $704,703
for advances and unpaid equipment rental charges made on behalf of Bend Arch,
the Company’s wholly-owed subsidiary.  As of December 31, 2006, Bend
Arch owed the Chief Executive Officer $76,222 for previous advances and
equipment rental charges at $4,500 per month.  During the year ended
December 31, 2007, the Chief Executive Officer advanced $752,432 of funds to
Bend Arch; the Company recorded $54,000 for equipment rental charges and repaid
$177,950 to the Chief Executive Officer resulting in the $704,703 balance at
December 31, 2007 classified as a component of Due to Related Parties in the
accompanying financial statements.




At
December 31, 2006, the operator of the Company’s oil and gas properties owed
$88,229 to the Company and this was classified as Due from Related Party in the
accompanying consolidated financial statements.  At December 31, 2007,
the net amount due to the operator of the Company’s oil and gas production
activities was $552,192 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.





At
December 31, 2006, PRI, a wholly-owned subsidiary of the Company owed $2,285 to
the President of PRI for advances and this amount was classified as a component
of Due to Related Parties in the accompanying financial
statements.  On December 13, 2007, PRI sold the J.N. Wilson “A” lease
in Medina County, Texas to a third party.   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.  The
remaining $29,832 of cash was paid as a bonus to the President of
PRI.  As a component of the payment, the Due to Related Party balance
of $2,285 was offset against the bonus and is zero as of December 31,
2007.




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.




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.




DirectorIndependence





Our common stock trades on theOver 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.


-44-





We are not currently subject to corporate governance
standards defining the independence of our directors, and wehave 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 thatsince
we have only one director and who isalso
the Chief Executive Officer and Chief Financial Officer of the Company, we do
notcurrently qualify ashas having anyindependent directors.  We do not list the
“independent”definition we use on our Internet website.




Item 13.
            Exhibits





Exhibits
are incorporated herein by reference or are filed with this Form 10-KSB as
indicated below (numbered in accordance with Item 601 of
Regulation S-B):





Exhibit
No.                     Exhibit
Description





2.1
            
            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)14.1
            
            Code
      of Ethics *20.1
            
            Oil and Gas property valuation by Blue Ridge Enterprises
      as of December 31, 2007 *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.





-45-


Item 14.
              Principal
      Accountant Fees And Services





On
February 18, 2008, Shelley International CPA (“Shelley”) declined to stand for
re-election as the Company’s independent registered public accounting
firm.  Shelley informed the Company that it would not continue as the
auditor because the firm is no longer auditing public
companies.  Shelley had served as the Company's independent registered
public accounting firm for the unaudited quarterly reviews of the balance sheets
at March 31, 2007, June 30, 2007 and September 30, 2007 and the related
statements of operations, stockholders’ equity and cash flows for the periods
then ended.  There were no disagreements with Shelley on any matter of
accounting principles or practices, financial statement disclosure, or scope or
procedures, which disagreement(s), if not resolved to the satisfaction of Shelly
would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its reports. There were no reportable events
as set forth in Item 304(a)(1)(iv) of Regulation S-B.




The
Company's board of directors has authorized the appointment of Moore and
Associates Chartered (“Moore”) to serve as the Company's independent registered
public accounting firm for the audit of the Company’s consolidated financial
statements for the years ended December 31, 2007 and
2006.   Prior to the appointment of Moore, neither the Company,
nor anyone on its behalf, consulted with Moore regarding any of the accounting
or auditing concerns stated in Item 304(a)(2) of Regulation S-B. The Company has
provided Shelley a copy of this report prior to its filing with the Securities
and Exchange Commission (SEC) and requested Shelley to furnish a letter
addressed to the SEC stating whether Shelley agrees with the above statements. A
letter from Shelley is attached as Exhibit 16 to this Form 8-K.




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, 2007, fees
incurred by the Company from Shelly were an aggregate of $23,000 for the
quarterly review associated with our Form 10-QSB filings and any amendments
thereto.  For the years ended December 31, 2007 and 2006, fees
incurred by the Company from Moore were zero for the annual audit of the
Company's financial statements included as part of our Form 10-KSB
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, 2007 and 2006.




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, 2007 and 2006.




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, 2007 and 2006.




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.


-46-




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.




The Board
has reviewed the audited financial statements and met and held discussions with
management regarding the audited 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
financial statements be included in the Company's Annual Report on Form 10-KSB
for the years ended December 31, 2007 and 2006, for filing with the
SEC.


-47-




SIGNATURES





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




AMERICAN
      ENERGY PRODUCTION, INC.March
      31, 2008
              By:
              /s/ Charles
      BittersCharles
      BittersChief
      Executive Officer and Chief Financial Officer


In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the small business issuer 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)
            March
      31, 2008





-48-


American
Energy Production, Inc. and Subsidiaries
 Page
No.
 
 Report
      of Independent Registered Public Accounting Firm
              F-1Consolidated
      Balance Sheets at December 31, 2007 and 2006
              F-2Consolidated
      Statements of Operations for the years ended December 31, 2007 and
      2006
              F-3Consolidated
      Statements of Changes in Stockholders’ Equity (Deficit) for the years
      ended December 31, 2007 and 2006
              F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2006
              F-5Notes
      to Consolidated Financial Statements
              F-6Supplemental
      Oil and Gas Data (Unaudited)
              F-21
 
 
 -i-
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Stockholders of
 American
Energy Production, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of American Energy
Production, Inc. and Subsidiaries, as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for the years ended December 31, 2007 and 2006.  These
consolidated financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American Energy
Production, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2007 and 2006 in conformity with accounting principles
generally accepted in the United States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had losses from operations
for the years ended December 31, 2007 and 2006, and at December 31, 2007 has
minimal cash, a net working capital deficiency, a stockholders deficit and is
subject to certain contingencies as discussed in Note 10, which raises
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. These
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
  Company NameMarch
      31, 2008
                By:
                /s/ More
      & Associates CharteredMore
      & Associates CharteredLas
      Vegas, Nevada
 F-1
 American
Energy Production, Inc. and Subsidiaries
 Consolidated
Balance Sheets
 
 ASSETS12/31/2007
              
              
              12/31/2006Current
      AssetsCash
              
              $
              133,220
              
              
              $
              106,902Accounts
      receivable
              
              
              1,205
              
              
              
              1,327Due
      from related parties
              
              
              -
              
              
              
              88,229Other
      current assets
              
              
              316
              
              
              
              4,196Total
      Current Assets
              
              
              134,740
              
              
              
              200,654Property
      and equipment, net
              
              
              4,365,765
              
              
              
              4,781,069Other
      AssetsDevelopment
      programs - related party
              
              
              104,392
              
              
              
              78,626Other
              
              
              168,379
              
              
              
              184,700Total
      Other Assets
              
              
              272,771
              
              
              
              263,326Total
      Assets
              
              
              4,773,277
              
              
              
              5,245,049LIABILITIESCurrent
      LiabilitiesAccounts
      payable
              
              $
              373,403
              
              
              $
              327,191Other
      current liabilities
              
              
              175,548
              
              
              
              165,303Due
      to related parties
              
              
              1,707,759
              
              
              
              176,732Notes
      payable
              
              
              2,023,714
              
              
              
              2,064,587Accrued
      interest payable
              
              
              778,486
              
              
              
              616,622Accrued
      payroll taxes and penalties
              
              
              80,346
              
              
              
              72,576Lease
      payable
              
              
              16,131
              
              
              
              16,131Total
      Current Liabilities
              
              
              5,155,387
              
              
              
              3,439,143Asset
      Retirement Obligations
              
              
              524,488
              
              
              
              517,527Total
      Liabilities
              
              $
              5,679,875
              
              
              $
              3,956,670Commitments
      and Contingencies (Note 7)STOCKHOLDERS' EQUITY
      (DEFICIT)Convertible
      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, 19,767,055 shares
              
              
              1,977
              
              
              
              1,977Common
      stock issuable, 596,000 and 3,000 shares
              
              
              60
              
              
              
              0Additional
      paid in capital
              
              
              24,067,655
              
              
              
              23,978,714Accumulated
      deficit
              
              
              (24,074,640
              )
              
              
              (21,790,662
              )(4,599
              )
              
              
              2,190,379Less:  Subscription
      Receivable
              
              
              (902,000
              )
              
              
              (902,000
              )Total
      Stockholders' Equity (Deficit)
              
              
              (906,599
              )
              
              
              1,288,379Total
      Liabilities and Stockholders' Equity (Deficit)
              
              $
              4,773,277
              
              
              $
              5,245,049
 
 See
accompanying notes to consolidated financial statements.
 F-2
 American
Energy Production, Inc. and Subsidiaries
 Consolidated
Statements of Operations
 
 Years
      EndedDecember
      31,2007
              
              
              2006Revenues:Oil
      sales, net
              
              $
              1,581,661
              
              
              $
              1,807,475Operating
      ExpensesCompensation
              
              
              213,718
              
              
              
              131,127Consulting
              
              
              3,260
              
              
              
              149,139Depreciation,
      depletion and accretion
              
              
              540,677
              
              
              
              487,587Rent
              
              
              36,527
              
              
              
              12,326General
      and administrative
              
              
              338,603
              
              
              
              289,671Production
              
              
              2,331,739
              
              
              
              3,438,339Professional
              
              
              173,393
              
              
              
              249,105Taxes
              
              
              86,137
              
              
              
              50,489Total
      Operating Expenses
              
              
              3,724,053
              
              
              
              4,807,783Operating
      Loss
              
              
              (2,142,392
              )
              
              
              (3,000,308
              )Other
      Income (Expense)Other
      income
              
              
              19,097
              
              
              
              20,000Interest
      expense
              
              
              (183,986
              )
              
              
              (411,553
              )Payroll
      tax expense and penalties
              
              
              (6,004
              )
              
              
              (6,004
              )Total
      Other Income (Expense)
              
              
              (141,585
              )
              
              
              (397,557
              )Net
      Loss
              
              $
              (2,283,978
              )
              
              $
              (3,397,865
              )Net
      Loss Per Share - Basic and Diluted
              
              $
              (0.12
              )
              
              $
              (0.17
              )Weighted
      average Shares Outstanding
              
              
              19,799,299
              
              
              
              19,770,055
 
 See
accompanying notes to consolidated financial statements.
 F-3
 American
Energy Production, Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)
 Years
Ended December 31, 2007 and 2006
 
 Common
      Stock
              
              
              
              
              
              Additional
              
              
              
              
              
              TotalPreferred
      Stock
              
              
              Common
      Stock
              
              
              Issuable
              
              
              Subscription
              
              
              Paid-In
              
              
              Accumulated
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Receivable
              
              
              Capital
              
              
              Deficit
              
              
              Equity
      (Deficit)Balance
      at December 31, 2005
              
              
              4,000,000
              
              
              $
              400
              
              
              
              18,114,803
              
              
              $
              1,811
              
              
              
              3,000
              
              
              $
              -
              
              
              $
              (809,500
              )
              
              $
              21,518,584
              
              
              $
              (18,392,797
              )
              
              $
              2,318,498Common
      stock issued for subscription receivable
              
              
              -
              
              
              
              -
              
              
              
              100,000
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              (125,000
              )
              
              
              124,990
              
              
              
              
              
              
              
              -Proceeds
      from payment of subscription receivable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              32,500
              
              
              
              -
              
              
              
              
              
              
              
              32,500Common
      stock issuable for cash, net of offering costs
              
              
              -
              
              
              
              -
              
              
              
              1,492,000
              
              
              
              149
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,335,097
              
              
              
              
              
              
              
              2,335,246Common
      stock issued for conversion of preferred stock
              
              
              (500,000
              )
              
              
              (50
              )
              
              
              60,000
              
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              44
              
              
              
              
              
              
              
              -Adjustment
      for reverse split fractional shares
              
              
              -
              
              
              
              -
              
              
              
              252
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -Net
      loss, year ended December 31, 2006
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,397,865
              )
              
              
              (3,397,865
              )Balance
      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 issuable for sale of stock - $0.15 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              593,000
              
              
              
              60
              
              
              
              -
              
              
              
              88,941
              
              
              
              -
              
              
              
              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
              )
              
              $
              (906,598
              )
 
 
 See
accompanying notes to consolidated financial statements
 F-4
 American
Energy Production, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
 
 Years
      EndedDecember
      31,2007
              
              
              2006Cash
      Flows From Operating Activities:Net
      loss
              
              $
              (2,283,978
              )
              
              $
              (3,397,865
              )Adjustments
      to reconcile net loss tonet
      cash provided by (used in) operations:Depreciation
      expense
              
              
              443,062
              
              
              
              384,118Depletion
      expense
              
              
              74,337
              
              
              
              80,969Accretion
      expense
              
              
              23,278
              
              
              
              22,500Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              122
              
              
              
              18,245Other
      current assets
              
              
              3,880
              
              
              
              74,445Other
      assets
              
              
              16,321
              
              
              
              (68,793
              )Accounts
      payable
              
              
              46,212
              
              
              
              16,708Other
      current liabilities
              
              
              10,245
              
              
              
              44,429Due
      from related party
              
              
              88,229
              
              
              
              285,911Due
      to related party
              
              
              1,531,027
              
              
              
              4,895Accrued
      interest payable
              
              
              161,864
              
              
              
              408,868Accrued
      payroll taxes payable
              
              
              7,770
              
              
              
              9,779Net
      Cash Provided By (Used In) Operating Activities
              
              
              122,368
              
              
              
              (2,115,790
              )Cash
      Flows From Investing Activities:Investment
      in oil and gas properties
              
              
              (118,411
              )
              
              
              (629,616
              )Payments
      for development programs - related party
              
              
              (25,767
              )
              
              
              (38,480
              )Net
      Cash Used In Investing Activities
              
              $
              (144,178
              )
              
              $
              (668,096
              )Cash
      Flows From Financing Activities:Proceeds
      from note payable
              
              
              -
              
              
              
              6,620Proceeds
      from common stock issuable, net ofoffering
      costs of $0 and $86,660
              
              
              89,000
              
              
              
              2,335,245Proceeds
      from repayment of subscription receivable
              
              
              -
              
              
              
              32,500Repayment
      of note payable
              
              
              (40,873
              )
              
              
              -Net
      Cash Provided By Financing Activities
              
              
              48,127
              
              
              
              2,374,365Net
      Increase (decrease) in Cash
              
              
              26,318
              
              
              
              (409,521
              )Cash
      at Beginning of Period
              
              
              106,902
              
              
              
              516,423Cash
      at End of Period
              
              
              133,220
              
              
              
              106,902Supplemental
      disclosure of  cash flow informationCash
      interest and taxes paid during the period
              
              $
              -
              
              
              $
              -Supplemental
      disclosure of  non-cash transactionsCapitalized
      asset retirement obligation
              
              $
              3,841
              
              
              $
              14,038Retirement
      of asset retirement obligation from sale of properties
              
              
              20,158
              
              
              
              -Conversion
      of preferred stock to common stock
              
              
              -
              
              
              
              150Common
      stock issued for subscription receivable
              
              
              -
              
              
              
              250
 
 See
accompanying notes to consolidated financial statements
 F-5
 1.  HISTORY AND NATURE 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).
 F-6
  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. A 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.
 
 2.  GOING
CONCERN
  As
reflected in the accompanying consolidated financial statements, the Company had
a net loss of $2,283,978 and $3,397,865 for the years ended December 31, 2007
and 2006, respectively.  Additionally, at December 31, 2007, the
Company has minimal cash, a negative working capital balance of $5,020,647, a
stockholders’ deficit of $906,599 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.
 
 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.
 
 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.
 F-7
  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-KSB of
Regulation S-B.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements include the general accounts of
American Energy and its wholly-owned subsidiaries as of December 31, 207 and
2006 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-8
  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, 2007 and 2006.
  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, 2007 and
2006.
 F-9
  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.
 
 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 exceeded the federally insured limit of $100,000.  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 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 were no interest or selling, general and
administrative expenses accrued or recognized related to income taxes for the
year ended December 31, 2007.  The Company has not taken a tax
position that would have a material effect on the financial statements or the
effective tax rate for the year ended December 31, 2007 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
 F-10
  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 are 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, is limited to financial assets and liabilities. The Company
does not believe the initial adoption of SFAS 157 will have a material effect on
its financial condition or results of operations. However, the Company is still
in the process of evaluating this standard with respect to its effect on
nonfinancial assets and liabilities and therefore has not yet determined the
impact that it will have on the Company’s financial statements upon full
adoption.
  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 Company is currently evaluating the effect of adopting SFAS 159, but does
not expect it to have a material impact on its consolidated results of
operations or financial condition.
  In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”)  110
Share-Based Payment. SAB 110 amends and replaces Question 6 of Section D.2 of
Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series.
Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding
the use of the “simplified” method in developing an estimate of the expected
term of “plain vanilla” share options and allows usage of the “simplified”
method for share option grants prior to December 31, 2007. SAB 110 allows public
companies which do not have historically sufficient experience to provide a
reasonable estimate to continue use of the “simplified” method for estimating
the expected term of “plain vanilla” share option grants after December 31,
2007. SAB 110 is effective January 1, 2008. The Company currently uses the
“simplified” method to estimate the expected term for share option grants as it
does not have enough historical experience to provide a reasonable estimate. The
Company will continue to use the “simplified” method until it has enough
historical experience to provide a reasonable estimate of expected term in
accordance with SAB 110. The Company does not expect SAB 110 will have a
material impact on its consolidated balance sheets, statements of operations and
cash flows.
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 141R, Business Combinations, and Statement No. 160,
Non-controlling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51. Statement No. 141R modifies the accounting and disclosure
requirements for business combinations and broadens the scope of the previous
standard to apply to all transactions in which one entity obtains control over
another business. Statement No. 160 establishes new accounting and reporting
standards for non-controlling interests in subsidiaries. The Company will be
required to apply the provisions of the new standards in the first quarter of
2009. Early adoption is not permitted for these new standards.
 
 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-11
  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
      31,2007
                  
                  
                  2006Oil
      and gas properties, successful efforts
                  
                  $
                  4,320,602
                  
                  
                  $
                  4,362,610Other
      property and equipment
                  
                  
                  1,520,261
                  
                  
                  
                  1,376,159Total
                  
                  
                  5,840,863
                  
                  
                  
                  5,738,769Less:
      Accumulated depreciation and depletion
                  
                  
                  1,475,098
                  
                  
                  
                  957,700Property
      and equipment, net
                  
                  $
                  4,365,765
                  
                  
                  $
                  4,781,069
  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, 2007 and 2006 consisted of the following:
 
 Lease
Payable
 December
      31,2007
              
              
              2006$21,238
      computer equipment lease, bearing interest at 10% per
      annum
              
              $
              16,131
              
              
              $
              16,131
  F-12
 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, 2007, the Company has
recorded a total of $17,568 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, 2007, 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, 2007.
  Notes
Payable
  December
      31,2007
              
              
              2006$2,000,000
      Promissory Note, dated February 20, 2003, bearing
                interest
      at 8% per annum and due on March 31, 2008
              
              $
              2,000,000
              
              
              $
              2,000,000$25,000
      Line of Credit, dated October 28, 2005, bearing
                simple
      variable interest at 6% per annum and due on
                February
      28, 2008.
              
              
              23,714
              
              
              
              24,220$82,825
      Promissory Note, dated July 29, 1999, bearing
                interest
      at 8% per annum and due
              
              
              -
              
              
              
              40,367$
              2,023,714
              
              
              $
              2,064,587
  F-13
 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.
  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, 2007, the Company has accrued $638,247 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, 2007. As of December 31, 2007, the outstanding balance is $23,714
and is included in the Note Payable balance in the accompanying consolidated
financial statements.
 
 On July
29, 1999, PRI entered into an $82,825 promissory note with a financial
institution that replaced an existing promissory note.  The promissory
note was secured by certain oil and gas leases of PRI in Hondo, Medina County,
Texas and guaranteed by the President of PRI.  In 2001, the Promissory
note came due and was extended with a new due date of xoxoxo.
 
 On
December 13, 2007, PRI sold the J.N. Wilson “A” lease containing 190 acres of
land and $49,250 of historical cost including oil and gas properties and
equipment.  The sales price of the lease was $75,000 and $45,618 of
the proceeds was utilized to pay off the outstanding balance of the promissory
note and accrued interest.  As a result, the balance of the promissory
note is zero as of December 31, 2007.
 F-14
  6.  DUE TO AND FROM RELATED
PARTIES
  Due to Related
      Parties:
              
              December
      31,2007
              
              
              2006Due
      to Chief Executive Officer from salary andrental
      agreement with Company.
              
              $
              306,425
              
              
              $
              98,225Due
      to Chief Executive Officer from advances
                and
      rental agreement with Bend Arch
              
              
              704,703
              
              
              
              76,222Due
      to Operator of oil and gas properties
              
              
              696,631
              
              
              
              -Due
      to President of PRI
              
              
              -
              
              
              
              2,285Total
      Due To Related Parties
              
              $
              1,707,759
              
              
              $
              176,732
 
 
 Due from Related
      Parties:
              
              December
      31,2007
              
              
              2006Due
      from Operator of oil and gas properties.
              
              $
              -
              
              
              $
              88,229Total
      Due From Related Parties
              
              $
              -
              
              
              $
              88,229
  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, 2006, the Company owed the Chief Executive
Officer $98,225 for unpaid amounts under the agreement.  During the
year ended December 31, 2007, the Company accrued but did not pay $120,000 for
compensation, reduced the balance $3,000 as a correction of a deposit
incorrectly recorded in fiscal 2006, reduced the balance $40,000 for payments
made to the Chief Executive Officer, increased the balance $10,000 as a
correction for advances made by the Chief Executive Officer previously and the
Chief Executive Officer advanced $121,200 of funds on behalf of the
Company.  As a result, the accrued balance as of December 31, 2007 is
$306,425 and is classified as a component of Due To Related Parties in the
accompanying financial statements.
 
 As of
December 31, 2007, the Chief Executive Officer of the Company is owed $704,703
for advances and unpaid equipment rental charges made on behalf of Bend Arch,
the Company’s wholly-owed subsidiary.  As of December 31, 2006, Bend
Arch owed the Chief Executive Officer $76,222 for previous advances and
equipment rental charges at $4,500 per month.  During the year ended
December 31, 2007, the Chief Executive Officer advanced $752,432 of funds to
Bend Arch; the Company recorded $54,000 for equipment rental charges and repaid
$177,950 to the Chief Executive Officer resulting in the $704,703 balance at
December 31, 2007 classified as a component of Due to Related Parties in the
accompanying financial statements.
 F-15
  At
December 31, 2006, the operator of the Company’s oil and gas properties owed
$88,229 to the Company and this was classified as Due from Related Party in the
accompanying consolidated financial statements.  At December 31, 2007,
the net amount due to the operator of the Company’s oil and gas production
activities was $552,192 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).
  At
December 31, 2006, PRI, a wholly-owned subsidiary of the Company owed $2,285 to
the President of PRI for advances and this amount was classified as a component
of Due to Related Parties in the accompanying financial
statements.  On December 13, 2007, PRI sold the J.N. Wilson “A” lease
in Medina County, Texas to a third party (See Note 4 – Property and
Equipment).   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.  As a component of the payment, the Due to Related Party balance
of $2,285 was offset against the bonus and is zero as of December 31,
2007.
  7.  ASSET
RETIREMENT OBLIGATIONS
  The
following represents a reconciliation of the asset retirement obligations for
the years ended December 31, 2007 and 2006:
 
 December
      31,2007
              
              
              2006Asset
      retirement obligations at beginning of period
              
              $
              517,526
              
              
              $
              480,989Revision
      to estimate and additions
              
              
              3,841
              
              
              
              14,038Other
      adjustments
              
              
              (20,157
              )
              
              
              -Liabilities
      settled during the period
              
              
              -
              
              
              
              -Accretion
      of discount
              
              
              23,277
              
              
              
              22,499Asset
      retirement obligations at end of period
              
              $
              524,487
              
              
              $
              517,526
  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 19,767,055 were issued and outstanding as of
December 31, 2007.  Additionally, as of December 31, 2007, 596,000
shares were issuable as discussed below.
 F-16
  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 common stock or preferred stock outstanding balances for
the year ended December 31, 2007, except for the one-for-twenty five reverse
stock split discussed previously.
 
 Common Stock
Issuable:
 
 As of
December 31, 2007 and 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.
  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.
  9.  INCOME
TAXES
  There was
no income tax during the years ended December 31, 2007 and 2006 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, 2007 and 2006 (computed by applying the Federal
Corporate tax rate of 35% for 2007 and 34% for 2006 to loss before taxes), as
follows:
 Years
      Ended December 31,2007
              
              
              2006Computed
      “expected” tax benefit
              
              $
              (799,392
              )
              
              $
              (1,155,274
              )Valuation
      allowance
              
              
              799,392
              
              
              
              1,155,274Net
      taxable benefit
              
              $
              -
              
              
              $
              -
 
 F-17
 The tax
effects of temporary differences that gave rise to significant portions of
deferred tax assets and liabilities at December 31 are as follows:
 
 2007
              
              
              2006Deferred
      tax assets:Net
      operating loss carryforward
              
              $
              790,689
              
              
              $
              1,320,894Accrued
      bonus
              
              
              42,000
              
              
              
              40,800Asset
      retirement obligations
              
              
              8,147
              
              
              
              7,650Total
      deferred tax assets
              
              
              840,836
              
              
              
              1,369,344Deferred
      tax liabilities:Oil
      and gas properties
              
              
              (41,444
              )
              
              
              (214,069
              )Net
      deferred tax asset
              
              
              799,392
              
              
              
              1,155,274Valuation
      allowance
              
              
              (799,392
              )
              
              
              (1,155,274
              )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, 2007, 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 $2,259,111 and expire in years through 2028 (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.
 F-18
 
 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 $80,346 of unpaid federal payroll taxes and employee
withholdings and related penalties and interest in its accrued expenses as of
December 31, 2007.  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.
 
 The
Company has $373,403 of accounts payable as of December 31, 2007 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, 2007 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.
  As
previously discussed, in May 2006, the Company received a letter of inquiry from
the SEC, primarily related to its operations as a BDC and its compliance with
the requirements thereto. In response to the SEC correspondence, the Company
conducted a review of its compliance with the 1940 Act and determined that it
was not in compliance with the 1940 Act. On March 13, 2007, a Special Meeting of
Shareholders (the “Special Meeting”) of the Company was held to authorize the
Board of Directors of the Company (the “Board”) to withdraw the Company’s
election to be treated as a BDC under the 1940 Act and to elect to the Board,
Mr. John D. Powell, Mr. Larry P. Horner and Mr. Charles Bitters.  As a
result of the Special Meeting, the Shareholders approved both items and on April
3, 2007, the Company filed a Form N-54C with the SEC to effect the BDC
withdrawal (See Note 12 – Subsequent Events).
  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).
 F-19
  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
20, 2008, the Company submitted an offer of settlement to the SEC staff,
pursuant to which it would consent, without admitting or denying the findings,
to the entry of an order by the SEC instituting public administrative and
cease-and-desist proceedings and imposing sanctions (the “Order”).
  In
summary, the Order finds that since electing to be regulated as a business
development company (“BDC”) in January 2004, the Company has, among other
things, issued senior securities without the required asset coverage, issued
warrants without approval of its shareholders, issued prohibited non-voting
stock, issued securities for services, failed to make and keep required
records, and
failed to establish a majority of non-interested directors on its board of
directors. As a result, the Company violated certain provisions of the
Investment Act of 1940 (the “1940 Act”). In addition, the Company failed to
obtain a fidelity bond and implement a compliance program as required under the
1940 Act. Finally, the Company failed to comply with certain provisions for
exemption from registration under the 1933 Act as related to Rule 609 of
Regulation E because it did not file required offering status reports in
connection with a securities offering commenced in January 2004.
  In
determining the Order, the SEC considered remedial acts promptly undertaken by
the Company and cooperation afforded the SEC staff. The Order would
require:
  ·
              The
      Company cease and desist from committing or causing any violations and any
      future violations of the 1940 Act. The 1940 Act is only available to BDC
      companies and does not apply to the Company in its current structure as an
      oil and gas operating company.
  ·
              The
      Regulation E exemption of the Company is permanently suspended. Regulation
      E is only available to BDC companies and does not apply to the Company in
      its current structure as an oil and gas operating
  company.
  F-20
  The
Company has reached an agreement in principle with the staff of the SEC
regarding its offer of settlement, subject to approval by the Commission.
Although the ultimate outcome of the settlement negotiations cannot be predicted
with certainty, under the settlement as currently proposed, the Company would
not incur any fines or other penalties, and no action would be taken against any
individuals.
  Effective
March 15, 2008, Bent Arch executed a Third Modification and Extension Agreement
(the “Third Extension”) in relation to the Note that was to become due and
payable on March 31, 2008 (See Note 5 – Debt).  The Third Extension
modified the terms of the Note as follows;
  ·
              The
      maturity date of the Note was extended to December 31,
    2008.
  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 as follows:
 
 Acquisition
      of proved properties
              
              $
              --Acquisition
      of unproved properties
              
              $
              --Development
      costs
              
              $
              118,411Exploration
      costs
              
              $
              --
  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, 2007:
 
 Revenues,
      net of royalties
              
              $
              1,581,661Production
      costs
              
              
              (2,331,739
              )Depletion,
      depreciation, and valuation provisions
              
              
              (540,677
              )Exploration
      costs
              
              
              --(209,401
              )Income
      tax expense
              
              
              -Results
      of operations for producing activities (excluding corporate overhead and
      interest costs)
              
              $
              (1,290,755
              )
 
 F-21
 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(Bbls.)
              
              
              (MCF)Changes
      in proved developed producing reserves:Conversion
      from a BDC company to an oil and gas operating company – April 1,
      2007
              
              
              6,944,318
              
              
              
              1,634,943Production
      – April 1, 2007 to Dec. 31, 2007
              
              
              (10,125
              )
              
              
              (60,140
              )Balance
      at December 31, 2007
              
              
              6,934,193
              
              
              
              1,574,803
 
 Proved
      developed producing reserves:December
      31, 2007
              
              
              6,934,193
              
              
              
              1,574,803
  Standardized
Measure of Discounted Future Net Cash Flow and Changes Therein Relating to
Proved Oil and Gas Reserves
 
 The
following table, which presents a standardized measure of discounted future cash
flows and changes therein relating to proved oil and gas reserves, is presented
pursuant to SFAS No. 69.  In computing this data, assumptions other
than those required by the Financial Accounting Standards Board could produce
different results.  Accordingly, the data should not be construed as
being representative of the fair market value of the Company’s proved oil and
gas reserves.
 
 Future
cash inflows were computed by applying existing contract and year-end prices of
oil and gas relating to the Company’s proved reserves to the estimated year-end
quantities of those reserves.  Future price changes were considered
only to the extent provided by contractual arrangements in existence at year
end.  Future development and production costs were computed by
estimating the expenditures to be incurred in developing and producing the
proved oil and gas reserves at the end of the year, based on year-end
costs.  Future income tax expenses were not considered in the future
cash flows relating to the Company’s proved oil and gas reserves.  The
standardized measure of discounted future cash flows at December 31, 2007, which
represents the present value of estimated future cash flows using a discount
rate of 10% a year, follows:
 
 Future
      cash inflows
              
              $
              512,426,856Future
      production and development costs
              
              
              (33,604,245
              )Future
      net cash flows
              
              
              479,330,55610%
      annual discount for estimated timing of cash flows
              
              
              (43,595,407
              )Standardized
      measure of discounted future net cash flows
              
              $
              435,755,160
  See the
following table for average prices utilized for the disclosed amounts
above.
  December
      31,
                2007Average
      crude oil price per Bbl
              
              $
              97.00Average
      natural gas price per Mcf
              
              $
              7.19
 
 F-22