##### Table of Contents



United States Securities And Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q/A
 (Amendment No. 1)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File No. 1-31900
 AMERICAN OIL & GAS, INC.
  Nevada
    
    88-0451554(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)1050 17th Street, Suite 2400, Denver, CO
    
    80265(Address of principal executive offices)
    
    (Zip Code)
 (303) 991-0173
 þ o
  o o þ
 o þ




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EXPLANATORY NOTE
       2




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##### 



AMERICAN OIL & GAS, INC.
FORM 10-Q/A
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    4Consolidated Balance Sheets  June 30, 2006 and December 31, 2005
    
    
    4Consolidated Statements of Income  Three and Six Months Ended June 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows  Six Months Ended June 30, 2006 and 2005
    
    
    6Consolidated Notes to Financial Statements
    
    
    7Summary of Significant Accounting Policies
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    25Signatures
    
    
    25Exhibit 31.1 CertificationExhibit 31.2 CertificationExhibit 32.1 CertificationExhibit 32.2 Certification
  3




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##### Table of Contents



PART I
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICAN OIL & GAS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 June 30, 2006
    
    
    December 31,(UNAUDITED)
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents (Note 1)
    
    $
    13,043,189
    
    
    $
    6,022,822Short-term investments (Note 5)
    
    
    4,280,000
    
    
    
    Trade receivables
    
    
    698,492
    
    
    
    1,481,543Receivable for sale of oil and gas properties
    
    
    3,699,312
    
    
    
    Inventory
    
    
    40,904
    
    
    
    40,904Advances and prepaid expenses
    
    
    247,606
    
    
    
    156,475Total Current Assets
    
    
    22,009,503
    
    
    
    7,701,744PROPERTY AND EQUIPMENT, AT COSTOil and gas properties, full cost method (including unevaluated costs
of $20,369,282 at 6/30/06 and $17,843,133 at 12/31/05)
    
    
    23,557,874
    
    
    
    26,547,922Other property and equipment
    
    
    187,135
    
    
    
    68,023Total property and equipment
    
    
    23,745,009
    
    
    
    26,615,945Less accumulated depreciation, depletion and amortization
    
    
    (2,255,402
    )
    
    
    (1,636,246
    )Net property and equipment
    
    
    21,489,607
    
    
    
    24,979,699OTHER ASSETSGoodwill
    
    
    11,670,468
    
    
    
    11,670,468Investment in Equity Securities (Note 5)
    
    
    1,610,000
    
    
    
    Other intangible assets
    
    
    690,000
    
    
    
    780,000Drilling prepayments and other
    
    
    20,043
    
    
    
    643,485$
    57,489,621
    
    
    $
    45,775,396LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities
    
    $
    395,240
    
    
    $
    954,544Deferred income taxes
    
    
    1,249,680
    
    
    
    Preferred dividends payable
    
    
    474,903
    
    
    
    479,342Total current liabilities
    
    
    2,119,823
    
    
    
    1,433,886LONG TERM LIABILITIESAsset retirement obligations
    
    
    112,267
    
    
    
    117,011Deferred income taxes
    
    
    5,174,038
    
    
    
    1,893,581COMMITMENTS AND CONTINGENCIES (Note 9)STOCKHOLDERS EQUITYSeries AA preferred stock, $.001 par value, authorized 400,000 shares
Issued and outstanding  250,000 shares at 6/30/06 and 12/31/2005.
Redemption value of $13,974,903 at 6/30/06; $13,979,342 at 12/31/05
    
    
    250
    
    
    
    250Common stock, $.001 par value, authorized 100,000,000 shares; Issued
and outstanding  36,724,209 shares at 6/30/06, 36,476,202 at
12/31/05
    
    
    36,724
    
    
    
    36,476Additional paid-in capital
    
    
    44,853,426
    
    
    
    43,225,408Deferred compensation
    
    
    (71,820
    )
    
    
    Retained earnings/(accumulated deficit)
    
    
    3,234,593
    
    
    
    (931,216
    )Accumulated other comprehensive income
    
    
    2,030,320
    
    
    
    50,083,493
    
    
    
    42,330,918$
    57,489,621
    
    
    $
    45,775,396
  4




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AMERICAN OIL & GAS, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESOil and gas sales
    
    $
    259,033
    
    
    $
    1,239,042
    
    
    $
    1,829,885
    
    
    $
    1,925,769Service fee
    
    
    1,530,000
    
    
    
    
    
    
    
    1,530,000
    
    
    
    1,789,033
    
    
    
    1,239,042
    
    
    
    3,359,885
    
    
    
    1,925,769OPERATING EXPENSESLease operating
    
    
    64,602
    
    
    
    57,400
    
    
    
    165,793
    
    
    
    94,503General and administrative
    
    
    758,749
    
    
    
    665,303
    
    
    
    1,831,319
    
    
    
    1,132,010Depletion, depreciation and amortization
    
    
    144,292
    
    
    
    417,507
    
    
    
    709,156
    
    
    
    560,971Accretion of asset retirement obligation
    
    
    808
    
    
    
    1,062
    
    
    
    1,787
    
    
    
    2,087968,451
    
    
    
    1,141,272
    
    
    
    2,708,055
    
    
    
    1,789,571INCOME FROM OPERATIONS
    
    
    820,582
    
    
    
    97,770
    
    
    
    651,830
    
    
    
    136,198OTHER INCOMEGain on sale of oil and gas properties (Note 4)
    
    
    2,897,616
    
    
    
    
    
    
    
    7,159,470
    
    
    
    Investment income
    
    
    137,929
    
    
    
    17,642
    
    
    
    170,527
    
    
    
    40,8763,035,545
    
    
    
    17,642
    
    
    
    7,329,997
    
    
    
    40,876INCOME BEFORE INCOME TAXES
    
    
    3,856,127
    
    
    
    115,412
    
    
    
    7,981,827
    
    
    
    177,074Income tax expense (reduction)-deferred
    
    
    1,624,412
    
    
    
    
    
    
    
    3,280,457
    
    
    
    NET INCOME
    
    
    2,231,715
    
    
    
    115,412
    
    
    
    4,701,370
    
    
    
    177,074Less dividends on preferred stock
    
    
    (269,260
    )
    
    
    
    
    
    
    (535,561
    )
    
    
    NET INCOME TO COMMON STOCKHOLDERS
    
    $
    1,962,455
    
    
    $
    115,412
    
    
    $
    4,165,809
    
    
    $
    177,074NET INCOME PER COMMON SHARE -BASIC
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.11
    
    
    $
    0.01NET INCOME PER COMMON SHARE
- DILUTED
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.11
    
    
    $
    0.01Basic Weighted Average Common Shares Outstanding
    
    
    36,687,937
    
    
    
    34,437,740
    
    
    
    36,654,267
    
    
    
    32,171,810Diluted Weighted Ave. Common Shares Outstanding
    
    
    37,270,724
    
    
    
    34,942,411
    
    
    
    37,237,054
    
    
    
    32,613,195
  5




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AMERICAN OIL & GAS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 UNAUDITED
 Six months ended June 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    4,701,370
    
    
    $
    177,074Adjustments to reconcile net income to
net cash provided by operating activitiesGain on sale of oil & gas properties
    
    
    (7,159,470
    )
    
    
    Deferred income taxes
    
    
    3,280,457
    
    
    
    Depletion, depreciation and amortization
    
    
    709,156
    
    
    
    560,971Share-based compensation
    
    
    885,467
    
    
    
    143,883Deferred compensation
    
    
    35,910
    
    
    
    141,250Accretion of asset retirement obligati
    
    
    1,787
    
    
    
    2,087Changes in current assets and liabilities, net of effects of property
acquisitions and divestitures:Decrease (increase) in receivables
    
    
    783,051
    
    
    
    (866,554
    )(Increase) in short-term investments, net of unrealized gains
    
    
    (1,000,000
    )
    
    
    Decrease in advances and prepaid expenses
    
    
    (91,131
    )
    
    
    22,406Increase in accounts payable and accrued liabilities
    
    
    310,066
    
    
    
    838,877Net cash provided by operating activities
    
    
    2,456,663
    
    
    
    1,019,994CASH FLOWS FROM INVESTING ACTIVITIESProceeds from the sale of oil and gas properties
    
    
    14,224,712
    
    
    
    Cash paid to acquire oil and gas properties
    
    
    (8,016,965
    )
    
    
    (3,606,770
    )Cash paid for office equipment and office lease improvements
    
    
    (119,112
    )
    
    
    (1,371
    )Investment in Equity Securities (Note 5)
    
    
    (1,610,000
    )
    
    
    Cash paid for drilling bond deposit
    
    
    (10,000
    )
    
    
    Net cash (used) provided by investing activities
    
    
    4,468,635
    
    
    
    (3,608,141
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from exercise of common stock warrants
    
    
    95,069
    
    
    
    152,600Preferred dividends paid in cash
    
    
    
    
    
    
    (18,864
    )Cash received from acquired company
    
    
    
    
    
    
    1,795Net cash provided by financing activities
    
    
    95,069
    
    
    
    135,531NET (DECREASE) INCREASE IN CASH
    
    
    7,020,367
    
    
    
    (2,452,616
    )CASH, BEGINNING OF PERIODS
    
    
    6,022,822
    
    
    
    5,251,889CASH, END OF PERIODS
    
    $
    13,043,189
    
    
    $
    2,799,273SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATIONCash paid for interest
    
    $
    
    
    
    $
    Cash paid for income taxes
    
    $
    170,000
    
    
    $
    SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIESProperty sales proceeds in the form of a receivable
    
    $
    3,699,312
    
    
    $
    Preferred dividends paid in shares of common stock
    
    $
    540,000
    
    
    $
    Stock issued for acquired company
    
    $
    
    
    
    $
    656,833Stock and share based compensation
    
    $
    885,467
    
    
    $
    306,205
  6




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AMERICAN OIL & GAS, INC.
 
 Notes to Consolidated Financial Statements
 (UNAUDITED)
June 30, 2006
   Nature of Business
   Note 1  Restatement and Significant Accounting Policies
 Restatement (dated as of April 11, 2007)
    7




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Table 1:
    
    Summary of Our Consolidated Balance Sheet at June 30, 2006, as Previously Reported and as Restated
 As Previously
    
    
    Adjustments
    
    
    AsReported
    
    
    TCC related
    
    
    Other
    
    
    RestatedASSETSCurrent Assets
    
    $
    22,019,546
    
    
    $
    
    
    
    $
    (10,043
    )
    
    $
    22,009,503Property and Equipment at Cost:Oil and gas properties, evaluated
    
    
    2,913,076
    
    
    
    275,516
    
    
    
    
    
    
    
    3,188,592Oil and gas properties, unevaluated
    
    
    16,879,763
    
    
    
    3,489,519
    
    
    
    
    
    
    
    20,369,282Oil and gas properties, total cost
    
    
    19,792,839
    
    
    
    3,765,035
    
    
    
    
    
    
    
    23,557,874Other property and equipment
    
    
    187,135
    
    
    
    
    
    
    
    
    
    
    
    187,135Total property and equipment
    
    
    19,979,974
    
    
    
    3,765,035
    
    
    
    
    
    
    
    23,745,009Less accumulated depreciation, depletion,
and amortization
    
    
    (2,102,402
    )
    
    
    (153,000
    )
    
    
    
    
    
    
    (2,255,402
    )Net property and equipment
    
    
    17,877,572
    
    
    
    3,612,035
    
    
    
    
    
    
    
    21,489,607Investment in equity securities
    
    
    1,610,000
    
    
    
    
    
    
    
    
    
    
    
    1,610,000Goodwill
    
    
    
    
    
    
    11,670,468
    
    
    
    
    
    
    
    11,670,468Other intangible assets
    
    
    
    
    
    
    690,000
    
    
    
    
    
    
    
    690,000Drilling prepayments and other
    
    
    10,000
    
    
    
    
    
    
    
    10,043
    
    
    
    20,043Total assets
    
    $
    41,517,118
    
    
    $
    15,972,503
    
    
    $
    
    
    
    $
    57,489,621LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities
    
    $
    2,416,186
    
    
    $
    
    
    
    $
    (296,363
    )
    
    $
    2,119,823Asset retirement obligations
    
    
    112,267
    
    
    
    
    
    
    
    
    
    
    
    112,267Deferred income taxes
    
    
    3,237,094
    
    
    
    1,640,581
    
    
    
    296,363
    
    
    
    5,174,038Stockholders Equity:Preferred stock
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Common stock
    
    
    36,724
    
    
    
    
    
    
    
    
    
    
    
    36,724Additional paid-in capital
    
    
    30,233,755
    
    
    
    14,539,167
    
    
    
    80,504
    
    
    
    44,853,426Deferred compensation
    
    
    (71,820
    )
    
    
    
    
    
    
    
    
    
    
    (71,820
    )Retained earnings
    
    
    3,522,342
    
    
    
    (207,245
    )
    
    
    (80,504
    )
    
    
    3,234,593Other comprehensive income
    
    
    2,030,320
    
    
    
    
    
    
    
    
    
    
    
    2,030,320Total equity
    
    
    35,751,571
    
    
    
    14,331,922
    
    
    
    
    
    
    
    50,083,493$
    41,517,118
    
    
    $
    15,972,503
    
    
    $
    
    
    
    $
    57,489,621
 Table 2:
    
    Summary of Our Statement of Operations for the six-month period ended June 30, 2006, as Previously Reported and as Restated
 As Previously
    
    
    Adjustments
    
    
    AsReported
    
    
    TCC related
    
    
    Other
    
    
    RestatedRevenue
    
    $
    3,359,885
    
    
    $
    
    
    
    $
    
    
    
    $
    3,359,885Lease operating expenses
    
    
    165,793
    
    
    
    
    
    
    
    
    
    
    
    165,793General and administrative expenses
    
    
    1,831,319
    
    
    
    
    
    
    
    
    
    
    
    1,831,319Depreciation, depletion and amortization
    
    
    506,156
    
    
    
    203,000
    
    
    
    
    
    
    
    709,156Accretion of asset retirement obligation
    
    
    1,787
    
    
    
    
    
    
    
    
    
    
    
    1,787Total operating expenses
    
    
    2,505,055
    
    
    
    203,000
    
    
    
    
    
    
    
    2,708,055(Loss) Income from operations
    
    
    854,830
    
    
    
    (203,000
    )
    
    
    
    
    
    
    651,830Gain on sale of oil and gas properties
    
    
    7,210,470
    
    
    
    (51,000
    )
    
    
    
    
    
    
    7,159,470Investment income
    
    
    170,527
    
    
    
    
    
    
    
    
    
    
    
    170,527Income before income taxes
    
    
    8,235,827
    
    
    
    (254,000
    )
    
    
    
    
    
    
    7,981,827Income tax provision
    
    
    3,376,457
    
    
    
    (96,000
    )
    
    
    
    
    
    
    3,280,457Net income
    
    
    4,859,370
    
    
    
    (158,000
    )
    
    
    
    
    
    
    4,701,370
 8




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As Previously
    
    
    Adjustments
    
    
    AsReported
    
    
    TCC related
    
    
    Other
    
    
    RestatedDividends on preferred stock
    
    
    535,561
    
    
    
    
    
    
    
    
    
    
    
    535,561Net income attributable to common stockholders
    
    $
    4,323,809
    
    
    $
    (158,000
    )
    
    $
    
    
    
    $
    4,165,809Net income per common share, basic and diluted
    
    $
    0.12
    
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    0.11
  1.
    
    Reclassification of the $296,363 current deferred income taxes as long-term deferred
income taxes, because the associated timing differences relate to oil and gas properties,
which are long-term assets,
 2.
    
    Reclassification from Current Assets to Long-Term Assets $10,043 in drilling
prepayments, which are to be applied in drilling oil and gas wells, which are long-term
assets, and
 3.
    
    Reclassification from Additional Paid-In Capital to Retained Earnings $80,504 in
preferred stock dividend payments made prior to 2006.
 Significant
Accounting Policies
 USE OF ESTIMATES
 CASH EQUIVALENTS
 SHORT-TERM INVESTMENTS 
 OIL AND GAS PROPERTIES 
  DEPLETION, DEPRECIATION AND AMORTIZATION 
 CEILING TEST
 9




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REVENUE RECOGNITION AND GAS BALANCING
 IMPAIRMENT 
 GOODWILL Goodwill and Other Intangible
Assets
  OTHER INTANGIBLE ASSETS
 SHARE BASED COMPENSATION 
 INCOME TAXES
 10




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ASSET RETIREMENT OBLIGATION
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning asset retirement obligation
    
    $
    110,245
    
    
    $
    42,461
    
    
    $
    117,011
    
    
    $
    40,702Liabilities incurred
    
    
    1,212
    
    
    
    902
    
    
    
    1,212
    
    
    
    1,636Reduction in liability from sold
properties
    
    
    
    
    
    
    
    
    
    
    (7,745
    )
    
    
    Accretion
    
    
    810
    
    
    
    1,062
    
    
    
    1,789
    
    
    
    2,087Ending asset retirement obligation
    
    $
    112,267
    
    
    $
    44,425
    
    
    $
    112,267
    
    
    $
    44,425
 NET EARNINGS (LOSS) PER SHARE
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income to common stock holders
    
    $
    1,962,455
    
    
    $
    115,412
    
    
    $
    4,165,809
    
    
    $
    177,074Adjustments for dilution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income adjusted for effects of dilution
    
    $
    1,962,455
    
    
    $
    115,412
    
    
    $
    4,165,809
    
    
    $
    177,074Basic Weighted Ave. Common Shares Outstanding
    
    
    36,687,937
    
    
    
    34,437,740
    
    
    
    36,654,267
    
    
    
    32,171,810Add dilutive effects of options and warrants
    
    
    582,787
    
    
    
    504,671
    
    
    
    582,787
    
    
    
    441,385Add dilutive effects of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted Weighted Ave. Common Shares Outstanding
    
    
    37,270,724
    
    
    
    34,942,411
    
    
    
    37,237,054
    
    
    
    32,613,195Net income per common share  basic
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.11
    
    
    $
    0.01Net income per common share  diluted
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.11
    
    
    $
    0.01
 11




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Note 2  Stock Options and Share-Based Compensation
  Adoption of SFAS 123(R)
 Share-Based Payment Share-Based Payment
  12




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##### Table of Contents



June 30, 2006
    
    June 30, 2005Expected option life (in years)
    
    
    5  8
    
    
    
    5Expected volatility over option life
    
    
    33%   63
    %
    
    
    58%  71
    %Risk-free interest rate
    
    
    4.5%  5.2
    %
    
    
    3.09  3.36
    %Pre-vesting forfeiture rate
    
    
    0
    %
    
    
    0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
  Pro-Forma Stock-Based Compensation Expense for the Quarterly and Six-Month Periods Ended June
30, 2005
  Three-month
    
    
    Six-MonthPeriod
    
    
    PeriodNet income to common stockholders, as reported
    
    $
    115,412
    
    
    $
    177,074Add stock-based compensation included in reported net
income
    
    
    134,375
    
    
    
    153,691Deduct stock-based compensation determined under fair
value method
    
    
    (340,259
    )
    
    
    (392,174
    )
 13




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##### Table of Contents



Three-month
    
    
    Six-MonthPeriod
    
    
    PeriodPro forma net income
    
    $
    (90,472
    )
    
    $
    (61,409
    )Net income (loss) per common share  basic and dilutedAs reported
    
    $
    0.00
    
    
    $
    0.01Pro forma
    
    $
    0.00
    
    
    $
    0.00Net income per common share  dilutedAs reported
    
    $
    0.00
    
    
    $
    0.01Pro forma
    
    $
    0.00
    
    
    $
    0.00
 Stock Options as of the Quarterly Period Ended June 30, 2006
  Wgtd. AverageNumber of shares
    
    
    Exercise PriceOptions outstanding at December 31, 2005
    
    
    1,459,010
    
    
    $
    2.94Granted
    
    
    509,000
    
    
    $
    4.80Less Exercised
    
    
    (21,340
    )
    
    $
    3.27Less Canceled or forfeited
    
    
    
    
    
    
    Options outstanding at June 30, 2006
    
    
    1,946,670
    
    
    $
    2.79Options exercisable at June 30, 2006
    
    
    898,668
    
    
    $
    2.52
  Weighted averageExercise price
    
    Number of shares
    
    
    remaining contractualper share
    
    Outstanding
    
    
    Exercisable
    
    
    life (years)$1.25
    
    
    403,000
    
    
    
    403,000
    
    
    
    3.72.38
    
    
    100,000
    
    
    
    75,000
    
    
    
    4.52.48
    
    
    90,000
    
    
    
    60,000
    
    
    
    4.53.27
    
    
    10,670
    
    
    
    10,670
    
    
    
    3.93.66
    
    
    750,000
    
    
    
    249,998
    
    
    
    6.34.30
    
    
    9,000
    
    
    
    
    
    
    
    6.44.57
    
    
    9,000
    
    
    
    
    
    
    
    6.64.65
    
    
    250,000
    
    
    
    50,000
    
    
    
    9.64.95
    
    
    250,000
    
    
    
    50,000
    
    
    
    10.05.80
    
    
    75,000
    
    
    
    
    
    
    
    6.21,946,670
    
    
    
    898,668Wgtd. Ave. remaining contractual
life
    
    6.5 years
    
    5.2 yearsAggregate intrinsic value
    
    $
    4,681,046
    
    
    $
    2,403,153
  14




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##### Table of Contents



Note 3  Income Taxes
 Accounting for Income
Taxes,
   Net Deferred Income Tax LiabilityCurrent
    
    
    Long-termBalance as of December 31, 2005
    
    $
    
    
    
    $
    1,893,581Add deferred income tax provision,
six months ended 6/30/06
    
    
    
    
    
    
    3,280,457Deferred taxes on unrecognized gain
reflected in other comprehensive
income (See Note 5.)
    
    
    1,249,680Balance as of June 30, 2006
    
    $
    1,249,680
    
    
    $
    5,174,038
 Note 4  Property and Equipment
  Oil and gas properties, full cost methodUnevaluated costs, not subject to amortization or ceiling test
    
    $
    20,369,282Evaluated costs (including $97,562 in asset retirement costs)
    
    
    3,188,59223,557,874Furniture and equipment
    
    
    187,13523,745,009Less accumulated depreciation, depletion and amortization
    
    
    (2,255,402
    )Property and equipment
    
    $
    21,489,607
  15




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##### Table of Contents



Big Sky
    
    
    Bear Creek
    
    
    Goliath
    
    
    TotalsContract sales price
    
    $
    11,500,000
    
    
    $
    1,080,000
    
    
    $
    6,165,520
    
    
    $
    18,745,520Effective date adjustments
    
    
    (821,496
    )
    
    
    0
    
    
    
    0
    
    
    
    (821,496
    )Adjusted sales price
    
    
    10,678,504
    
    
    
    1,080,000
    
    
    
    6,165,520
    
    
    
    17,924,024Allocated capitalized
costs using the relative
fair market value method
required under full cost
accounting
    
    
    (6,416,650
    )
    
    
    (648,443
    )
    
    
    (3,699,461
    )
    
    
    (10,764,554
    )Recognized gains on sales
of oil and gas properties
    
    $
    4,261,854
    
    
    $
    431,557
    
    
    $
    2,466,059
    
    
    $
    7,159,470
 Note 5  Service Fee Revenue and Short-term Investments
    16




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##### Table of Contents



Note 6  Common Stock
  
    
    Other Comprehensive Income of $2,030,320 was recorded for the net unrealized gain on
short-term investment available for resale as explained in Note 5.
    
    Additional paid-in capital increased by $217,296 for the periods share-based
compensation relating to stock options granted before June 30, 2006.
    
    Shares outstanding increased by 48,745 shares and additional paid-in capital increased
by $193,045 relating to shares issued for services and the exercise of stock options.
  
    
    We issued 23,200 shares of common stock resulting from a warrant exercise at $1.09 per
share and received proceeds of $25,288.
    
    Common stock warrants were exercised for issuance of 11,600 shares of common stock at
$0.75 per share. The terms of the warrants provided for a cashless exercise and 1,916
shares were used to exercise the warrants at the market price of $4.54 per share, resulting
in issuance of a net amount of 9,684 shares of common stock.
    
    We issued a total of 27,000 shares of common stock to a consulting firm who is assisting
us with our investor relations program. The firm vests ownership of these shares at the
rate of 1,500 shares per month through June 2007. We have recorded $107,730 as deferred
compensation associated with these shares and we included $17,955 in investor relations
expense for the quarter ended March 31, 2006.
    
    We paid a total of 10,000 shares of restricted common stock to our Vice-President of
Land as an additional component of his initial employment. We valued these shares at $4.65
per share, which was the closing price of our common stock on the date of payment, and
charged $46,500 to compensation expense.
    
    In conjunction with our Series AA Convertible Preferred Stock, we are required to pay an
8% dividend on a semi-annual basis. We can make the dividend payments in cash or
equivalent shares of our common stock, at our discretion. During the quarter ended March
31, 2006, we paid a semi-annual dividend payment of $540,000 by
issuing 130,378 common shares, which shares were valued at $4.14 per share in accordance with methodology
prescribed in the Certificate of Designation of Rights, Preferences and Privileges of
Series AA Preferred Stock.
 Note 7  Preferred Stock
  17




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##### Table of Contents



Note 8  Related Party Transactions
  rd
 Note 9  Commitments and Contingencies
  18




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##### Table of Contents



ITEM 2. MANAGEMENTS PLAN OF OPERATION AND DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    Overview
  Fetter Prospect and the Greater Douglas Project Area  Powder River Basin, Wyoming
   19




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##### Table of Contents



Krejci Oil Project (Powder River Basin, Wyoming)
   20




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##### Table of Contents



Goliath Project, Williston Basin, North Dakota
  Big Sky Project, Williston Basin, Montana
  Bear Creek Coal Bed Methane Prospect (Big Horn Basin, Montana)
  Results of Operations
  The Quarter Ended June 30, 2006 Compared with the Quarter Ended June 30, 2005
  21




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##### Table of Contents



Three months ended June 30,2006
    
    
    2005Oil sold (barrels)
    
    
    3,874
    
    
    
    22,233Average oil price
    
    $
    54.64
    
    
    $
    50.97Oil revenue
    
    $
    211,694
    
    
    $
    1,133,297Gas sold (mcf)
    
    
    6,753
    
    
    
    16,094Average gas price
    
    $
    7.01
    
    
    $
    6.57Gas revenue
    
    $
    47,339
    
    
    $
    105,745Total oil and gas revenues
    
    $
    259,033
    
    
    $
    1,239,042Less lease operating expenses
    
    
    (64,602
    )
    
    
    (57,400
    )Oil & gas amortization expense
    
    
    (94,527
    )
    
    
    (387,874
    )Producing revenues less direct expenses
    
    
    99,904
    
    
    
    793,768Less depreciation of office facilities
    
    
    (5,573
    )
    
    
    (695
    )Less amortization of other intangible asset
    
    
    (45,000
    )
    
    
    (30,000
    )Less general and administrative expenses
    
    
    (758,749
    )
    
    
    (665,303
    )Add service fee revenue
    
    
    1,530,000
    
    
    
    Income from operations
    
    $
    820,582
    
    
    $
    97,770Total barrels of oil equivalent (boe) sold
    
    
    5,000
    
    
    
    24,915Lease operating expense per boe sold
    
    $
    12.92
    
    
    $
    2.30Amortization expense per boe sold
    
    $
    18.91
    
    
    $
    15.57
    22




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##### Table of Contents



The Six-month Period ended June 30, 2006 Compared with the Six-month Period ended June 30,
2005
    Six months ended June 30,2006
    
    
    2005Oil sold (barrels)
    
    
    28,807
    
    
    
    35,958Average oil price
    
    $
    54.92
    
    
    $
    48.92Oil revenue
    
    $
    1,582,109
    
    
    $
    1,759,034Gas sold (mcf)
    
    
    29,790
    
    
    
    26,163Average gas price
    
    $
    8.32
    
    
    $
    6.37Gas revenue
    
    $
    247,776
    
    
    $
    166,735Total oil and gas revenues
    
    $
    1,829,885
    
    
    $
    1,925,769Less lease operating expenses
    
    
    (165,793
    )
    
    
    (94,503
    )Less oil & gas amortization expense
    
    
    (610,426
    )
    
    
    (486,695
    )1,053,666
    
    
    
    1,344,571Producing revenues less direct expenses
 23




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##### Table of Contents



Six months ended June 30,2006
    
    
    2005Less depreciation of office facilities
    
    
    (10,517
    )
    
    
    (1,363
    )Less amortization of other intangible asset
    
    
    (90,000
    )
    
    
    (75,000
    )Less general and administrative expenses
    
    
    (1,831,319
    )
    
    
    (1,132,010
    )Add service fee revenue
    
    
    1,530,000
    
    
    
    Income from operations
    
    $
    651,830
    
    
    $
    136,198Total barrels of oil equivalent (boe) sold
    
    
    33,772
    
    
    
    40,319Lease operating expense per boe sold
    
    $
    4.91
    
    
    $
    2.34Amortization expense per boe sold
    
    $
    18.07
    
    
    $
    12.07
     
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  
 Item 4. CONTROLS AND PROCEDURES
  24




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##### Table of Contents



PART II.
 OTHER INFORMATION
 
 Item 1A  RISK FACTORS
  
 Item 6. EXHIBITS
 Exhibit No.
    
    Description31.1
    
    302 Certification of Chief Executive Officer31.2
    
    302 Certification of Chief Financial Officer32.1
    
    906 Certification of Chief Executive Officer32.2
    
    906 Certification of Chief Financial Officer
 
 SIGNATURES
  Signatures
    
    Title
    
    Date/s/ Patrick D. OBrien

Patrick D. OBrien
    
    Chief Executive Officer and
Chairman of the Board of
Directors
    
    April 11, 2007/s/ Joseph B. Feiten

Joseph B. Feiten
    
    Chief Financial Officer
    
    April 11, 2007
 25




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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Description31.1
    
    302 Certification of Chief Executive Officer31.2
    
    302 Certification of Chief Financial Officer32.1
    
    906 Certification of Chief Executive Officer32.2
    
    906 Certification of Chief Financial Officer
 26