UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10 – Q





QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT
OF 1934.





For
the quarterly period ended September 30, 2009





333-52812


(Commission
File Number)





American
Energy Production, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
            
            74-2945581(State
      or other jurisdiction of incorporation)
            
            (IRS
      Employer Identification Number)


6073 Hwy 281 South, Mineral
Wells, TX 76067


(Address of principal executive
offices including zip code)





(940)
445-0698


(Registrant’s telephone number,
including area code)




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





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


Large accelerated filer o                                        Accelerated
filer     o


Non-accelerated filer   o                                         
Smaller reporting company x


(Do
not check if a smaller reporting company)





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





As of
November 13, 2009, the Registrant had 59,594,526 shares outstanding and issuable
of its $0.0001 par value common stock.


-1-





American
Energy Production, Inc. and Subsidiaries


Form 10-Q
Index


September
30, 2009


PagePart I-Financial InformationItem 1. Financial Statements
            3Consolidated Balance Sheets at September 30, 2009 (Unaudited)
      andDecember 31, 2008
            3Consolidated Statements of Operations for the Three and Nine
      MonthsEnded September 30,
              2009 and 2008 (Unaudited)
            4Consolidated Statements of Cash Flows for the Three and Nine
      MonthsEnded September 30,
              2009 and 2008 (Unaudited)
            5Notes to Consolidated Financial Statements
      (Unaudited)
            6Item 2. Management's Discussion and Analysis of Financial
      Condition and Results of Operations
            17Item 4T. Controls and Procedures
            22Part II-Other InformationItem 6. Exhibits
            24Signatures
            25








-2-


PARTI FINANCIAL
INFORMATION


Item
1-Consolidated Financial Statements (Unaudited)





American
Energy Production, Inc. and Subsidiaries


Consolidated
Balance Sheets





ASSETSUnaudited9/30/2009
            
            
            12/31/2008Current
      AssetsCash
            
            $
            49,627
            
            
            $
            88,937Accounts
      receivable
            
            
            33,553
            
            
            
            -Due
      from related party
            
            
            5,733
            
            
            
            -Other
      current assets
            
            
            -
            
            
            
            146Total
      Current Assets
            
            
            88,913
            
            
            
            89,083Property
      and equipment, net
            
            
            3,643,454
            
            
            
            4,011,903Other
      AssetsDevelopment
      programs - related party
            
            
            142,275
            
            
            
            134,092Other
            
            
            82
            
            
            
            1,188Total
      Other Assets
            
            
            142,357
            
            
            
            135,280Total
      Assets
            
            $
            3,874,722
            
            
            $
            4,236,266LIABILITIESCurrent
      LiabilitiesAccounts
      payable
            
            $
            19,218
            
            
            $
            312,903Other
      current liabilities
            
            
            12,204
            
            
            
            11,855Due
      to related parties
            
            
            149,910
            
            
            
            3,295,763Notes
      payable
            
            
            125,421
            
            
            
            2,115,062Accrued
      interest payable
            
            
            -
            
            
            
            946,385Accrued
      payroll taxes and penalties
            
            
            15,665
            
            
            
            84,161Lease
      payable
            
            
            -
            
            
            
            16,131Total
      Current Liabilities
            
            
            322,418
            
            
            
            6,782,260Long-Term
      LiabilitiesDeferred
      other income
            
            
            484,455
            
            
            
            -Asset
      retirement obligations
            
            
            526,323
            
            
            
            509,155Total
      Long-Term Liabilities
            
            
            1,010,778
            
            
            
            509,155Total
      Liabilities
            
            $
            1,333,196
            
            
            $
            7,291,415Commitments
      and Contingencies (Note 9)STOCKHOLDERS' EQUITY
    (DEFICIT)Convertible
      preferred stock, Series A, $0.0001 par
      value,  5,000,000shares
      authorized, none and 3,500,000 shares outstanding,
      respectively
            
            $
            -
            
            
            $
            350Common
      stock, $0.0001 par value, 500,000,000 shares authorized,36,243,849
      and 20,360,349 shares outstanding, respectively
            
            
            3,624
            
            
            
            2,037Common
      stock issuable, 23,350,677 shares and none issuable and outstanding,
      respectively
            
            
            2,335
            
            
            
            -Additional
      paid in capital
            
            
            30,781,018
            
            
            
            24,067,655Accumulated
      deficit
            
            
            (27,343,451
            )
            
            
            (26,223,191
            )3,443,526
            
            
            
            (2,153,149
            )Less:  Subscription
      Receivable
            
            
            (902,000
            )
            
            
            (902,000
            )Total
      Stockholders' Equity (Deficit)
            
            
            2,541,526
            
            
            
            (3,055,150
            )Total
      Liabilities and Stockholders' Equity (Deficit)
            
            $
            3,874,722
            
            
            $
            4,236,266


See
accompanying notes to unaudited consolidated financial statements.


-3-


American
Energy Production, Inc. and Subsidiaries


Consolidated
Statements of Operations


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenues:Oil
      sales, net
            
            $
            319,279
            
            
            $
            539,132
            
            
            $
            815,123
            
            
            $
            1,530,796Operating
      ExpensesCompensation
            
            
            62,493
            
            
            
            46,243
            
            
            
            287,053
            
            
            
            138,727Consulting
            
            
            -
            
            
            
            -
            
            
            
            43,496
            
            
            
            -Depreciation,
      depletion and accretion
            
            
            121,899
            
            
            
            148,760
            
            
            
            385,617
            
            
            
            441,611Rent
            
            
            1,539
            
            
            
            22,920
            
            
            
            4,939
            
            
            
            45,182General
      and administrative
            
            
            39,946
            
            
            
            66,452
            
            
            
            111,438
            
            
            
            185,204Production
            
            
            330,544
            
            
            
            755,724
            
            
            
            921,645
            
            
            
            1,813,817Professional
            
            
            10,078
            
            
            
            15,600
            
            
            
            81,690
            
            
            
            92,700Taxes
            
            
            24,769
            
            
            
            13,508
            
            
            
            67,362
            
            
            
            75,584Total
      Operating Expenses
            
            
            591,268
            
            
            
            1,069,208
            
            
            
            1,903,240
            
            
            
            2,770,476Operating
      Loss
            
            
            (271,989
            )
            
            
            (530,076
            )
            
            
            (1,088,117
            )
            
            
            (1,239,680
            )Other
      Income (Expense)Other
      income (expense)
            
            
            (28,096
            )
            
            
            2,574
            
            
            
            53,785
            
            
            
            2,877Interest
      expense
            
            
            (939
            )
            
            
            (42,903
            )
            
            
            (85,930
            )
            
            
            (127,711
            )Payroll
      tax expense and penalties
            
            
            -
            
            
            
            (1,501
            )
            
            
            -
            
            
            
            (4,503
            )Total
      Other Income (Expense)
            
            
            (29,035
            )
            
            
            (41,831
            )
            
            
            (32,145
            )
            
            
            (129,337
            )Net
      Loss
            
            $
            (301,024
            )
            
            $
            (571,907
            )
            
            $
            (1,120,262
            )
            
            $
            (1,369,017
            )Net
      Loss Per Share - Basic and Diluted
            
            $
            (0.01
            )
            
            $
            (0.03
            )
            
            $
            (0.02
            )
            
            $
            (0.07
            )Weighted
      average Shares Outstanding
            
            
            59,438,651
            
            
            
            20,360,389
            
            
            
            51,877,025
            
            
            
            20,363,377


See
accompanying notes to unaudited consolidated financial statements


-4-


American
Energy Production, Inc. and Subsidiaries


Consolidated Statements of Cash
Flows


(Unaudited)


Nine
      Months EndedSeptember
      30,2009
            
            
            2008Cash
      Flows From Operating Activities:Net
      loss
            
            $
            (1,120,262
            )
            
            $
            (1,369,017
            )Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities:Depreciation
      expense
            
            
            311,769
            
            
            
            364,223Depletion
      expense
            
            
            56,680
            
            
            
            59,706Accretion
      expense
            
            
            17,168
            
            
            
            17,682Stock
      options issued for compensation
            
            
            104,990
            
            
            
            -Stock
      options issued for consulting
            
            
            41,996
            
            
            
            -Write
      off of payroll taxes and penalties
            
            
            (69,851
            )
            
            
            -Common
      stock issued for oil and gas equipment
            
            
            1,750
            
            
            
            -Changes in operating assets and
      liabilities:Accounts
      receivable
            
            
            (33,553
            )
            
            
            -Due
      from related party
            
            
            (5,733
            )
            
            
            -Other
      current assets
            
            
            146
            
            
            
            -Other
      assets
            
            
            1,106
            
            
            
            (89,387
            )Accounts
      payable
            
            
            22,604
            
            
            
            (54,000
            )Other
      current liabilities
            
            
            349
            
            
            
            87,911Due
      to related party
            
            
            484,317
            
            
            
            1,023,685Accrued
      interest payable
            
            
            83,677
            
            
            
            125,553Accrued
      payroll taxes payable
            
            
            1,356
            
            
            
            2,314Net
      Cash Provided By (Used In) Operating Activities
            
            
            (101,491
            )
            
            
            168,670Cash
      Flows From Investing Activities:Investment
      in property and equipment
            
            
            -
            
            
            
            (222,605
            )Payments
      for development programs - related party
            
            
            (8,183
            )
            
            
            (22,604
            )Purchase
      of oil lease
            
            
            -
            
            
            
            -Net
      Cash Used In Investing Activities
            
            
            (8,183
            )
            
            
            (245,208
            )Cash
      Flows From Financing Activities:Proceeds
      from sale of common stock
            
            
            60,005
            
            
            
            103,000Proceeds
      from issuance of notes payable
            
            
            14,505
            
            
            
            -Repayment
      of note payable
            
            
            (4,146
            )
            
            
            (12,028
            )Net
      Cash Provided By Financing Activities
            
            
            70,364
            
            
            
            90,972Net
      (Decrease) Increase in Cash
            
            
            (39,310
            )
            
            
            14,434Cash
      at Beginning of Period
            
            
            88,937
            
            
            
            133,220Cash
      at End of Period
            
            $
            49,627
            
            
            $
            147,654Supplemental disclosure of cash flow
      informationIncome
      taxes paid
            
            $
            -
            
            
            $
            -Cash
      interest paid
            
            $
            -
            
            
            $
            -Supplemental disclosure of  non-cash
      investing and financing activitiesConversion
      of note payable and accrued interest to common stock
            
            $
            535,000
            
            
            $
            -Conversion
      of due to related parties and accrued interest to common
    stock
            
            $
            714,260
            
            
            $
            -Related
      party gain included in stockholders’ equity from conversion of
      note
              payable
      and accrued interest to common stock
            
            $
            1,965,000
            
            
            $
            -Related
      party gain included in stockholders’ equity from conversion
of
              due
      to related parties and accrued interest to common stock
            
            $
            2,623,408
            
            
            $
            -Capital
      contribution from forgiveness of accrued interest by related
      party
            
            $
            378,027
            
            
            $
            -Capital
      contribution from forgiveness of accrued compensation by related
      party
            
            $
            292,500
            
            
            $
            -


See
accompanying notes to unaudited consolidated financial statements


-5-


American
Energy Production, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


September
30, 2009


(Unaudited)






1.   BASIS AND
PRESENTA TIO N





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
of Regulation S-K.  They do not include all information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. However, except as disclosed herein,
there has been no material change in the information disclosed in the notes to
the consolidated financial statements at December 31, 2008 included in the
Company's Form 10-K (“2008 10-K”) filed with the Securities and Exchange
Commission (“SEC”) on May 6, 2009. The interim unaudited consolidated financial
statements should be read in conjunction with those consolidated financial
statements included in the 2008 10-K.




In the
opinion of Management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been
made.  Operating results for the nine months ended September 30, 2009
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.




2.  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.




3.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Going
Concern





As
reflected in the accompanying unaudited consolidated financial statements, the
Company had a net loss of $1,120,262 for the nine months ended September 30,
2009 as compared to a net loss of $1,369,017 for the nine months ended September
30, 2008.  Additionally, at September 30, 2009, the Company has
minimal cash and has a negative working capital balance of $233,505, which could
have a material impact on the Company’s financial condition and operations. The
negative working capital balance was significantly reduced from a balance of
$6,950,142 at March 31, 2009 to the September 30, 2009 balance by the write off
of the obligations discussed below along with the conversion of notes payable,
accrued interest and due to related parties to common stock during the three
months ended June 30, 2009.  As a result, the Company has
stockholder’s equity of $2,541,526 at September 30, 2009 as compared to a
stockholders’ deficit of $3,055,150 at December 31,
2008.   However, 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.


-6-


American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)


On July
29, 2009, but effective June 30, 2009 (the “Effective Date”), the
Company  and certain of its wholly-owned subsidiaries (the “Company”)
eliminated certain debt obligations by converting them into $0.0001 par value
common stock (“Stock”) of the Company.  Additionally, the Company
successfully negotiated and eliminated a substantial amount of obligations that
were incurred from a predecessor company and converted an existing preferred
stock agreement to Stock.




As a
result of the above restructuring of the Company’s consolidated balance sheet,
the Company has eliminated the majority of its debt and will issue or has issued
33,850,678 shares of Stock, 23,350,678 from the conversion of debt obligations
and 10,500,000 from the conversion of preferred stock. See Note 5 – Debt and
Note 8 – Stockholders’ Equity.




Additionally,
on May 11, 2009, the Company granted 9,800,000 non-qualified stock options to
purchase the Company’s $0.0001 par value common stock to employees and
consultants of the Company.  These stock options were previously
registered in 2008 by the Company on Form S-8 with the Securities and Exchange
Commission.  The stock options were issued with an exercise price of
$0.015 per share; the closing price of the Company’s traded stock on the date of
grant. See Note 8 – Stockholders’ Equity.




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.  Management believes that as a result of
restructuring of the balance sheet as discussed above, the Company will have
several options available to obtain financing from third parties in order to
carry out the business plan of the Company.





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 unaudited
consolidated financial statements include going concern, oil and gas properties,
property and equipment, the evaluation of whether our assets are impaired, asset
retirement obligations, fair value of financial instruments and revenue
recognition.  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.




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.




Asset Retirement
Obligations




The
Company accounts for asset retirement obligations in accordance with SFAS No.
143, Accounting for Asset
Retirement Obligations (ASC 410). 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 included in
property and equipment. Periodic accretion of the discount related to the
estimated liability is recorded as an expense in the statement of
operations.  The discount rate utilized by the Company is 4.5% with a
twenty (20) year estimate life for the properties.




-7-


American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)




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 (ASC 360), 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 nine months ended September 30, 2009 and 2008.




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
measure our financial assets and liabilities in accordance SFAS 157, Fair Value Measurements and
Disclosures (ASC 820).  For certain of our financial
instruments, including cash, accounts receivable, due from related party,
accounts payable, other current liabilities, due to related parties and accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities.  Amounts recorded for other assets, notes payable,
deferred other income and asset retirement obligations also approximate fair
value because current interest rates available to us for debt with similar terms
and maturities are substantially the same.





Effective
January 1, 2008, we adopted accounting guidance for financial assets and
liabilities.  The adoption did not have a material impact on our
results of operations, financial position or liquidity.  This standard
defines fair value, provides guidance for measuring fair value and requires
certain disclosures.  This standard does not require any new fair
value measurements, but rather applies to all other accounting pronouncements
that require or permit fair value measurements.  This guidance does
not apply to measurements related to share-based payments.  This
guidance discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash
flow), and the cost approach (cost to replace the service capacity of an asset
or replacement cost).  The guidance utilizes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels.  The following is a brief description of
those three levels:





Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.





Level
2: Inputs other than quoted prices that are observable, either directly or
indirectly.  These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets
or liabilities in markets that are not active.





Level
3: Unobservable inputs in which little or no market data exists, therefore
developed using estimates and assumptions developed by us, which reflect those
that a market participant would use.





Financial Assets and
Liabilities





We
currently measure and report the fair value liability for asset retirement
obligations. The fair value liability for asset retirement obligations has
been recorded as determined by calculating the present value of estimated cash
flows related to the liability.  The following table summarizes our
financial liabilities measured at fair value on a recurring basis as of
September 30, 2009 (in thousands):








-8-




American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)
 Balance
      at September 30, 2009
              
              
              Quoted
      priced in active markets for identical assets
              
              
              Significant
      other observable inputs
              
              
              Significant
      unobservable inputs(Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)Liabilities:Asset
      Retirement Obligations
              
              $
              526,323
              
              
              $
              -
              
              
              $
              -
              
              
              $
              526,323Total
      financial liabilities
              
              $
              526,323
              
              
              $
              -
              
              
              $
              -
              
              
              $
              526,323




Following is a roll forward through September 30, 2009
of the fair value measurements using significant unobservable Level 3
inputs:




Balance
      at December 31, 2008
              
              $
              509,155Accretion
      of discount
              
              
              17,168Ending
      balance at September 30, 2009
              
              $
              526,323


Non-Financial Assets and
Liabilities





The
Company evaluated and determined that there was no non-financial assets and
liabilities as of September 30, 2009.





Stock-Based
Compensation




The
Company adopted SFAS No. 123R, Share-Based Payment (ASC 718), as of January 1,
2006, using the modified prospective application method. This statement requires
the recognition of compensation expense measured at fair value when we obtain
employee services in stock-based payment transactions.





Concentration of
Risk




Our
financial instruments that are potentially exposed to credit risk consist
primarily of cash and accounts receivable for which the carrying amounts
approximate fair value.  At certain times, our demand deposits held in
banks may exceed the federally insured limits.  The Company has not
experienced any losses related to these deposits.




Impact of Recently Issued
Accounting Standards





On
December 31, 2008, the SEC adopted major revisions to its rules governing
oil and gas company reporting requirements. These include provisions that permit
the use of new technologies to determine proved reserves and that allow
companies to disclose their probable and possible reserves to investors. The
current rules limit disclosure to only proved reserves. The new disclosure
requirements also require companies to report the independence and
qualifications of the person primarily responsible for the preparation or audit
of reserve estimates, and to file reports when a third party is relied upon to
prepare or audit reserves estimates. The new rules also require that oil and gas
reserves be reported and the full-cost ceiling value calculated using an average
price based upon the prior 12-month period. The new oil and gas reporting
requirements are effective for annual reports on Form 10-K for fiscal years
ending on or after December 31, 2009, with early adoption not permitted. We
are in the process of assessing the impact of these new requirements on our
consolidated financial position, results of operations and financial
disclosures.    -9-
  American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)





In April
2009, accounting guidance was released with respect to interim disclosures about
fair value of financial instruments to require disclosures about the fair value
of financial instruments for interim reporting periods, effective for reporting
periods ending after June 15, 2009.  We have incorporated required
disclosures in these unaudited consolidated financial statements with no effect
on our financial position, results of operations or cash flows.





In May
2009, accounting guidance was issued regarding subsequent events, which
establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  In particular, guidance sets forth the period
after the balance sheet date during which management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date, and the
disclosures that should be made about such events or transactions. This
accounting guidance is effective for reporting periods ending after
June 15, 2009, and should not result in significant changes in subsequent
events that an entity reports, either through recognition or disclosure, in
financial statements.  Among other things, this guidance requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. We have
incorporated required disclosures in these unaudited consolidated financial
statements.





In
June 2009, the Financial Accounting Standards Board (“FASB”) approved the
FASB Accounting Standards Codification (“the Codification”) as the single source
of authoritative nongovernmental GAAP. All existing accounting standard
documents, such as FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force and other related literature, excluding guidance from
the SEC, have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of the Company’s financial statements
or disclosures as a result of implementing the Codification during the quarter
ended September 30, 2009.





As a
result of the Company’s implementation of the Codification during the quarter
ended September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current quarter unaudited
consolidated financial statements, the Company will provide reference to the
both the old and new guidance to assist in understanding the impacts of recently
adopted accounting literature, particularly for guidance adopted since the
beginning of the current fiscal year but prior to the Codification.  
New references will use the term Accounting Standards Codification (“ASC”)
followed by the relevant ASC section.





Net Income (Loss) per Common
Share




The
Company computes earnings (loss) per share in accordance with SFAS No. 128
(ASC 260-10), “Earnings per
Share.” ASC 260-10 requires presentation of both basic and diluted
earnings per share (“EPS”) on the face of the income statement. Basic EPS is
computed by dividing net income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the
period. Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive. At September 30, 2009, there were options to purchase
9,800,000 shares of the Company's common stock which may dilute future earnings
per share.





4.
            PROPERTY
      AND EQUIPMENT




Property
and equipment is comprised of the following:


Sep.
      30,
            
            
            Dec.
      31,2009
            
            
            2008Oil
      and gas properties, successful efforts method
            
            $
            4,283,365
            
            
            $
            4,283,365Other
      property and equipment
            
            
            1,744,067
            
            
            
            1,744,0676,027,432
            
            
            
            6,027,431Less:
      Accumulated depreciation and depletion
            
            
            2,283,978
            
            
            
            2,015,528Property
      and equipment, net
            
            $
            3,643,454
            
            
            $
            4,011,903


-10-
  American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)


5.
            DEBT





On July
29, 2009, but effective June 30, 2009 (the “Effective Date”), the Company and
certain of its wholly-owned subsidiaries eliminated certain debt obligations by
converting them into $0.0001 par value common stock as follows:





Bend Arch
Petroleum, Inc. (“Bend Arch”), a wholly-owned subsidiary of the Company, had a
$2,000,000 Promissory Note (Note”) that was due and payable on December 31,
2009.  The Note was issued to Proco Operating Co., Inc. (“Proco”), a
company controlled by the brother of the Company’s Chief Executive Officer and a
director.  The purpose of the Note was 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. As of the Effective
Date, the Note has been converted into 8,000,000 shares of Stock based upon a
conversion price of $0.25 per share, a significant premium to the market price
of the Stock.  Additionally, the Note accrued interest at a rate of
eight percent (8%) per annum and as of the Effective Date, accrued interest was
$878,027.  An agreement was reached whereby Proco forgave $378,027 of
the accrued interest and the remaining $500,000 has been converted into
2,000,000 shares of Stock based upon a conversion price of $0.25 per share, a
significant premium to the market price of the Stock.




The
Company evaluated the conversion of the Note and the accrued interest in
accordance with paragraph 20 of APB 26 (ASC 470-50-40) and recorded a $1,965,000
gain representing the difference between the reacquisition price and the net
carrying amount of the extinguished debt and since the gain was from a
transaction with a related party, the $1,965,000 was recorded to additional paid
in capital as a component of Stockholders’ Equity.





As a
result of the conversions discussed above, the Company will issue 10,000,000
shares of Stock and as of September 30, 2009, these have been recorded as
issuable in the unaudited consolidated financial statements.




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 and other payments, the remaining unpaid balance of
principal has been $16,131 since March 31, 2006.  The payable is
personally guaranteed by the Chief Executive Officer of the
Company.  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 the Effective Date, the transaction has not been finalized as the lessor
had not formerly executed the settlement agreement. The Company has researched
the matter and believes that consideration was provided by the Company and
accepted by the Lessor for the settlement and that no further consideration or
action is required by the Company.  Accordingly, the $16,131 debt
obligation and $25,029 of accrued interest have been reclassified to Deferred
Other Income, a component of Long-Term Liabilities in the unaudited consolidated
financial statements. (See Note 7 – Deferred Other Income).




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 company unrestricted certificate of deposit held by the financial
institution and bears simple interest per annum at a variable rate which
is 3.25% as of September 30, 2009. As of September 30, 2009, the
outstanding balance is $23,073 and is included in the Note Payable balance in
the accompanying unaudited consolidated financial statements.




In March
2008, the Company purchased oilfield property and equipment for a price of
$150,000.  The terms included a cash payment of $47,000 and a note
payable for the balance of $103,000.  During the nine months ended
September 30, 2008, the Company paid down $12,000 of principal and the balance
is $91,000 as of June 30, 2009 and classified as a component of Note Payable in
the accompanying unaudited consolidated financial statements.  As of
September 30, 2009, no formal agreement of the terms of the note payable had
been finalized and the Company has a verbal agreement to pay the principal back
at a rate of $10,000 monthly.  It is anticipated that a formal
agreement will be negotiated and finalized in the future.




In July
2009, the Company received $10,000 of proceeds from a short-term note from an
unrelated third party.  As of September 30, 2009, no formal agreement
of the terms of the note payable had been finalized and the
Company.  It is anticipated that a more formal agreement will be
negotiated and finalized in the future.


-11-
  American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)


As a
result of these transactions, the Company has the following remaining debt
outstanding as of September 30, 2009:


$25,000
      Line of Credit, dated October 28, 2005, bearing simple variable interest
      at 3.25%
              per
      annum and due on February 28, 2008.
            
            $
            24,421$10,000
      Note, dated July of 2009, not formalized and not bearing
      interest
            
            
            10,000$103,000
      Note, dated March of 2008, not formalized and not bearing
      interest
            
            
            91,000$
            125,421


6.  ASSET
RETIREMENT OBLIGATIONS




The
following represents a reconciliation of the asset retirement obligations for
the nine months ended September 30, 2009:





Asset
      retirement obligations at December 31, 2008
            
            $
            509,155Revision
      to estimate and additions
            
            
            -Other
      adjustments
            
            
            -Liabilities
      settled during the period
            
            
            -Accretion
      of discount
            
            
            17,168Asset
      retirement obligation at end of period
            
            $
            526,323




7.  DEFERRED
OTHER INCOME




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 and
other payments, the remaining unpaid balance of principal has been $16,131 since
March 31, 2006.  The payable is personally guaranteed by the Chief
Executive Officer of the Company.  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 the Effective Date, the transaction
has not been finalized as the lessor had not formerly executed the settlement
agreement. The Company has researched the matter and believes that consideration
was provided by the Company and accepted by the Lessor for the settlement and
that no further consideration or action is required by the
Company.  Accordingly, the $16,131 debt obligation and $25,029 of
accrued interest have been reclassified to Deferred Other Income, a component of
Long-Term Liabilities in the unaudited consolidated financial
statements.  Currently, the Company intends to write this amount off
by December 31, 2009 (See Note 5 – Debt).




As of the
Effective Date, 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.  The Company has researched the matter and believes
that no further common stock will be issued for these
conversions.  Accordingly, the $122,671 of accrued interest has been
reclassified to Deferred Other Income, a component of Long-Term Liabilities in
the unaudited consolidated financial statements.  Currently, the
Company intends to write this amount off by December 31, 2009.




As of the
Effective Date, the Company had recorded approximately $262,000 of accounts
payable 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 commenced the process of eliminating the liabilities from its
records.  As of the Effective Date, these accounts payable have been
removed from the Company’s unaudited consolidated financial
statements.  Additionally, the Company determined additional accounts
payable in the amount of approximately $54,000 were not valid and should be
eliminated.  Accordingly, as of the Effective Date, accounts payable
has been reduced by $316,289 and has been reclassified to Deferred Other Income,
a component of Long-Term Liabilities in the unaudited consolidated financial
statements.  Currently, the Company intends to write this amount off
by December 31, 2009.


-12-
  American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)


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 36,243,849 were issued and outstanding as of
September 30, 2009.  Additionally, the Company has 23,350,677 shares
issuable as of September 30, 2009 as discussed below.  In total, the
Company has 59,594,526 shares outstanding and issuable at September 30,
2009.




The
Company is authorized to issue up to 5,000,000 shares of preferred stock,
$0.0001 par value per share, of which none were issued and outstanding as of
September 30, 2009.




The
Company is authorized to issue up to 10,000,000 shares of common stock under the
2008 Non-Qualified Stock Option Plan (the “Plan”).  The Plan is to
assist the Company in securing and retaining Key Participants of outstanding
ability by making it possible to offer them an increased incentive to join or
continue in the service of the Company and to increase their efforts for its
welfare through participation in the ownership and growth of the
Company.  As of September 30, 2009, 9,800,000 stock options have been
granted under the Plan and issued by the Company.





Common
Stock:








Effective
May 11, 2009, the Company received $50,000 of proceeds from the sale of
5,000,000 shares of Stock at $0.01 per share.  The $0.01 per share
price was determined based upon a 33% discount to the closing market price of
$0.015 per share on the sale date of May 11, 2009.




Effective
June 30, 2009, the Chief Executive Officer elected to convert 3,500,000 shares
of $0.0001 par value preferred stock into 10,500,000 shares of Stock per the
terms of the preferred stock.




Effective
September 6, 2009, the Company received $10,005 from the sale of 333,500 shares
of stock at $0.03 per share.  The $0.03 per share price was determined
based upon a 33% discount to the closing market price of $.0105 per share on the
sale date of September 6, 2009.




As
a result of the above, the Company has 36,243,849 outstanding shares at
September 30, 2009.




Common Stock
Issuable:




On the
Effective Date, the Company and certain of its wholly-owned subsidiaries
eliminated certain debt obligations by converting them into Stock of the
Company.




Bend Arch
had a $2,000,000 Note that was due and payable on December 31,
2009.  The Note was issued to Proco, a company controlled by the
brother of the Company’s Chief Executive Officer and a director.  The
purpose of the Note was 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. As of the Effective Date, the Note
has been converted into 8,000,000 shares of Stock based upon a conversion price
of $0.25 per share, a significant premium to the market price of the
Stock.  These shares are recorded as issuable at September 30, 2009. Additionally,
the Note accrued interest at a rate of eight percent (8%) per annum and as of
the Effective Date, accrued interest was $878,027.  An agreement was
reached whereby Proco forgave $378,027 of the accrued interest and the remaining
$500,000 has been converted into 2,000,000 shares of Stock based upon a
conversion price of $0.25 per share, a significant premium to the market price
of the Stock.  These shares have been recorded as issuable at
September 30, 2009.


-13-
 American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)


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 the Effective Date, the Company owed the Chief Executive
Officer $593,735 for unpaid amounts under the salary and equipment rental
agreement and has been converted into 2,374,940 shares of Stock based upon a
conversion price of $0.25 per share, a significant premium to the market price
of the Stock.  These shares have been recorded as issuable at
September 30, 2009.




As of the
Effective Date, Bend Arch, the Company’s wholly-owned subsidiary, owed the Chief
Executive Officer $1,007,715 for previous advances and equipment rental charges
at $4,500 per month.  This amount has been converted into 4,030,860
shares of Stock based upon a conversion price of $0.25 per share, a significant
premium to the market price of the Stock.  These shares have been
recorded as issuable at September 30, 2009.




As of the
Effective Date, the operator of the Company’s oil and gas properties was owed
$1,736,219 for services as the operator of the Company’s oil and gas production
activities.  The operator is Proco and is a related party as Proco is
controlled by the brother of the Company’s Chief Executive
Officer.  This amount has been converted into 6,944,877 shares of
Stock based upon a conversion price of $0.25 per share, a significant premium to
the market price of the Stock.  These shares have been recorded as
issuable at September 30, 2009.




As a
result of the above, the Company has 23,350,677 shares classified as issuable at
September 30, 2009.




Preferred
Stock:




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 the Effective Date.  All of the preferred stock outstanding was
held by the Chief Executive Officer of the Company. Under the terms of the
designation, these Series A shares are not entitled to dividends and are
convertible, at the option of the holder 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.




As of the
Effective Date, the holder elected to convert the preferred stock and the
Company issued 10,500,000 shares of Stock.




Stock
Options:




On May
11, 2009, the Company granted 9,800,000 non-qualified stock options to employees
and consultants under the Plan as described above.  Of the 9,800,000
stock options granted, 7,000,000 were issued to employees and 2,800,000 were
issued to consultants.  All of the options were vested 100% upon the
grant date of May 11, 2009.




The
Company evaluated the stock options in accordance with SFAS 123R (ASC 718) and
utilized the Black Scholes method to determine valuation.  As a result
of our analysis, the total value for the stock option issuance was $146,986
recorded as $104,990 of compensation expense and $41,996 as consulting
expense.




The
Company used the following in the calculation:





Stock
      Price (grant date)
            
            $
            0.015Exercise
      Price
            
            $
            0.015Expected
      Life (between vesting period and term of warrants)
            
            
            5.00Volatility
            
            
            348
            %Annual
      Rate of Quarterly Dividends
            
            
            0.00
            %Risk
      Free Interest Rate (10 year T-bill rate)
            
            
            3.17
            %




-14-


American
Energy Production, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


September
30, 2009


(Unaudited)




9.  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 for both 12-31-07
and 12-31-08 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 has not received notice that all of the
filings have been accepted and as a result, may face certain penalties and
interest due to the delinquent status of the reports before they were
filed.




As of the
Effective Date, the Company had recorded $83,812 of unpaid federal payroll taxes
and employee withholdings and related penalties and interest.  These
unpaid federal taxes are entirely from CommunicateNow.com (Communicate”), the
predecessor company.  The previous Chief Executive Officer of
Communicate structured a settlement payment agreement with the Internal Revenue
Service and has personally paid the balance of the obligation down to $13,961 as
of the Effective Date.  Accordingly, the Company has reduced the
balance recorded to $13,961 as of the Effective Date and the difference of
$69,851 has been recorded to Other Income in the unaudited consolidated
financial statements at September 30, 2009.  Since the previous Chief
Executive Officer is no longer affiliated with the Company in any way and is not
a related party, the Company determined that this was not a capital transaction
and should be recorded to Other Income.  The remaining balance of
$13,961 is included as accrued payroll taxes and penalties in the Company’s
unaudited consolidated financial statements because of potential federal tax
liens against the Company until the balance is paid in full.




From May
2004 to March 2005, the Company issued 108,000 shares of common stock (2,700,000
shares prior to the one-for-twenty five reverse stock split) in exchange for a
$27,000 subscription receivable. As of September 30, 2009, the subscription
receivable is still outstanding and no resolution of this matter has been
completed.


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 September 30, 2009 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.




10.  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.





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 the Effective Date, the Company owed the Chief Executive
Officer $593,735 for unpaid amounts under the agreement which has been converted
into 2,374,940 shares of Stock based upon a conversion price of $0.25 per share,
a significant premium to the market price of the Stock.




As of the
Effective Date, Bend Arch, the Company’s wholly-owned subsidiary, owed the Chief
Executive Officer $1,007,715 for previous advances and equipment rental charges
at $4,500 per month.  This amount has been converted into 4,030,860
shares of Stock based upon a conversion price of $0.25 per share, a significant
premium to the market price of the Stock.




As of the
Effective Date, we owed the operator of the Company’s oil and gas properties
$1,736,219 for services as the operator of the Company’s oil and gas production
activities.  The operator is Proco and is a related party as Proco is
controlled by the brother of the Company’s Chief Executive
Officer.  This amount has been converted into 6,944,877 shares of
Stock based upon a conversion price of $0.25 per share, a significant premium to
the market price of the Stock.




The
Company evaluated the conversion of each of the above due to related party and
the accrued interest in accordance with paragraph 20 of APB 26 (ASC 470-50-40)
and recorded an aggregate $2,623,408 gain representing the difference between
the reacquisition price and the net carrying amount of the extinguished
debt.  Since the gain was from transactions with related parties, the
$2,623,408 was recorded to additional paid in capital as a component of
Stockholders’ Equity.




As of the
Effective Date, the President of Oil America Group, Inc. (“OAG”) was owed
$292,500 for unpaid salary per an agreement effective January 1,
2005.  The agreement is for annual compensation of $65,000 and none of
this amount has been paid since the inception of the agreement.  The
unpaid salary of $292,500 has been forgiven by the President of OAG as of the
Effective Date.  As a result of the transaction and since the
President of OAG is an officer of the Company and is a related party, the
$292,500 of accrued compensation forgiven was classified as a capital
transaction and recorded to additional paid in capital.




-15-


American
Energy Production, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 September
30, 2009
 (Unaudited)




The
balance outstanding for Due from and to Related Parties at September 30, 2009 is
as follows.




Due from Related Party:Sep.
      30,
            
            
            Dec.
      31,2009
            
            
            2008Due
      from Operator of oil and gas properties
            
            $
            5,733
            
            
            $
            -Total
      Due From Related Party
            
            $
            5,733
            
            
            $
            -




The
operator of the Company’s oil and gas properties owed Bend Arch $5,733 for
services related to the Company’s oil and gas production
activities.  The operator is Proco and is a related party as Proco is
controlled by the brother of the Company’s Chief Executive
Officer.  As of September 30, 2009, the amount is recorded as a
component of Due from Related Party in the accompanying unaudited consolidated
financial statements.




Due to Related Parties:Sep.
      30,
            
            
            Dec.
      31,2009
            
            
            2008Due
      to Chief Executive Officer from advances and salary agreement with
      Company.
            
            $
            37,300
            
            
            $
            555,125Due
      to Chief Executive Officer from advances
              and
      rental agreement with Bend Arch
            
            
            89,860
            
            
            
            932,561Due
      to Chief Executive officer from advances to Oil America Group,
      Inc.
            
            
            1,500
            
            
            
            -Due
      to President of Oil America Group, Inc. from advances and salary agreement
      with Company
            
            
            21,500
            
            
            
            276,250Total
      Due To Related Parties
            
            $
            149,910
            
            
            $
            3,483,236




As a
result of the previously discussed conversion to Stock (see Note 5- Debt), the
balance of the Due to related parties was zero as of June 30,
2009.  For the three months ended September 30, 2009, the following
transactions occurred related to Due To Related Parties:




Under the
July 1, 2003 salary and equipment rental agreement with the Chief Executive
Officer, the Company accrued $30,000 for salary obligation, the Chief Executive
Officer advanced $11,500 to the Company and the Company repaid $4,500 of the
amount advanced to the Chief Executive Officer.  As of September 30,
2009, the amount outstanding is $37,300 and is recorded as a component of Due to
Related Parties in the accompanying unaudited consolidated financial
statements.




Under the
previous $4,500 per month equipment rental agreement between the Company and
Bend Arch, Bend Arch accrued $13,500 per the agreement, the Chief Executive
officer advanced $96,500 to Bend Arch and Bend Arch repaid $19,240 to the Chief
Executive Officer.  As of September 30, 2009, the amount outstanding
is $89,860 and is recorded as a component of Due to Related Parties in the
accompanying unaudited consolidated financial statements.




The Chief
Executive Office advanced $1,500 to OAG and as of September 30, 2009, the amount
is recorded as a component of Due to Related Parties in the accompanying
unaudited consolidated financial statements.




Under a
salary agreement with the President of OAG, $16,500 was accrued for salary by
OAG.  Additionally, the President advanced OAG $5,000.  As
of September 30, 2009, the amount outstanding is $21,500 and is recorded as a
component of Due to Related Parties in the accompanying unaudited consolidated
financial statements.


-16-




Item
2. Management's Discussion andAnalysis of Financial Condition
and Results of Operations.





The
following analysis of our financial condition and results of operations
contained in this section should be read in conjunction with our financial
statements and related notes and schedules thereto appearing elsewhere in this
Quarterly Report, as well as the sections entitled "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes and
schedules thereto included in our annual report on Form 10-K for the year ended
December 31, 2008 filed with the SEC on May 6, 2009.





This
Quarterly Report, including the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements that involve substantial risks and uncertainties. These
forward-looking statements are not historical facts, but rather are based on
current expectations, estimates and projections about our industry, our beliefs,
and our assumptions. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seeks", and "estimates" and variations of these words and similar
expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements, including
without limitation:


•
            economic
      downturns or recessions may impair our portfolio companies'
      performance;


•
            a
      contraction of available credit and/or an inability to access the equity
      markets could impair our lending and investment
  activities;


•
            the
      risks associated with the possible disruption in the Company's operations
      due to terrorism;


•
            future
      changes in laws or regulations and conditions in our operating areas;
      and•
            the
      risks, uncertainties and other factors we identify from time to time in
      our filings with the Securities and Exchange Commission, including our
      Form 10-Ks, Form 10-Qs and Form
8-Ks.





Although
we believe that the assumptions on which these forward-looking statements are
based are reasonable, any of those assumptions could prove to be inaccurate and
as a result, the forward-looking statements based on those assumptions also
could be inaccurate. In light of these and other uncertainties, the inclusion of
a projection or forward-looking statement in this Quarterly Report should not be
regarded as a representation by us that our plans and objectives will be
achieved. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly Report. We
undertake no obligation to update such statements to reflect subsequent
events.





OVERVIEW





American
Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”,
“our”)  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.  We
have expanded our scope of business to include the drilling of new wells with
its own equipment through our wholly-owned subsidiary companies.




Our
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.




We
believe 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.  We believe that oil and
natural gas will remain a key yet volatile component of the world energy future
and furthermore, that 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.




As
reflected in the accompanying unaudited consolidated financial statements, the
Company had a net loss of $1,120,262 for the nine months ended September 30,
2009 as compared to a net loss of $1,369,017 for the nine months ended September
30, 2008.  Additionally, at September 30, 2009, the Company has
minimal cash and has a negative working capital balance of $233,505, which could
have a material impact on the Company’s financial condition and operations. The
negative working capital balance was significantly reduced from a balance of
$6,950,142 at March 31, 2009 to the September 30, 2009 balance by the write off
of the obligations discussed below along with the conversion of notes payable,
accrued interest and due to related parties to common stock during the three
months ended June 30, 2009.  As a result, the Company has
stockholder’s equity of $2,541,526 at September 30, 2009 as compared to a
stockholders’ deficit of $3,055,150 at December 31,
2009.   However, 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.


-17-





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.





RESULTS
OF OPERATIONS





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




American
      Energy Production, Inc. and SubsidiariesStatements
      of Operations(Unaudited)Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenues:Oil
      sales, net
              
              $
              319,279
              
              
              $
              539,132
              
              
              $
              815,123
              
              
              $
              1,530,796Operating
      ExpensesCompensation
              
              
              62,493
              
              
              
              46,243
              
              
              
              287,053
              
              
              
              138,727Consulting
              
              
              -
              
              
              
              -
              
              
              
              43,496
              
              
              
              -Depreciation,
      depletion and accretion
              
              
              121,899
              
              
              
              148,760
              
              
              
              385,617
              
              
              
              441,611Rent
              
              
              1,539
              
              
              
              22,920
              
              
              
              4,939
              
              
              
              45,182General
      and administrative
              
              
              39,946
              
              
              
              66,452
              
              
              
              111,438
              
              
              
              185,204Production
              
              
              330,544
              
              
              
              755,724
              
              
              
              921,645
              
              
              
              1,791,468Professional
              
              
              10,078
              
              
              
              15,600
              
              
              
              81,690
              
              
              
              92,700Taxes
              
              
              24,769
              
              
              
              13,508
              
              
              
              67,362
              
              
              
              75,584Total
      Operating Expenses
              
              
              591,268
              
              
              
              1,069,208
              
              
              
              1,903,240
              
              
              
              2,770,477Operating
      Loss
              
              
              (271,989
              )
              
              
              (530,076
              )
              
              
              (1,088,117
              )
              
              
              (1,239,680
              )Other
      Income (Expense)Other
      income (expens)
              
              
              (28,096
              )
              
              
              2,574
              
              
              
              53,785
              
              
              
              2,877Interest
      expense
              
              
              (939
              )
              
              
              (42,903
              )
              
              
              (85,930
              )
              
              
              (127,711
              )Payroll
      tax expense and penalties
              
              
              -
              
              
              
              (1,501
              )
              
              
              -
              
              
              
              (4,503
              )Total
      Other Income (Expense)
              
              
              (29,035
              )
              
              
              (41,831
              )
              
              
              (32,145
              )
              
              
              (129,337
              )Net
      Loss
              
              $
              (301,024
              )
              
              $
              (571,907
              )
              
              $
              (1,120,262
              )
              
              $
              (1,369,017
              )Weighted
      average Shares Outstanding
              
              
              59,438,651
              
              
              
              20,360,386
              
              
              
              51,877,025
              
              
              
              20,363,377





-18-


Three Months ended September
30, 2009 compared to 2008.





Revenues:





Revenues
decreased $219,853 or 41%, to $319,279 for 2009 from $539,132 for
2008.  Revenues for 2009 were comprised of $226,072 of oil sales
(3,745 barrels of oil at an average price of $60.37 per barrel), $89,594 of
natural gas sales (18,085 MCF at an average price of $4.95 per MCF), $113 of
royalties and $3,500 of management fees.   Revenues for 2008 were
comprised of $274,343 of oil sales (2,416 barrels of oil at an average price of
$113.57 per barrel), $263,934 of natural gas sales (25,258 MCF at an average
price of $10.58 per MCF) and $854 of royalties.  Although oil
production volume increased significantly by 44% for 2009 from 2008, revenues
decreased due to significantly reduced market pricing for oil and gas
products.





Operating
Expenses:





Operating
expenses decreased $477,940, or 45%, to $591,268 for 2009 from $1,069,208 for
2008.  The decrease was primarily related to a reduction in production
expense related to the downturn in the oil and gas market as well as the entire
economy.  Additionally, the Company made a concerted effort to reduce
expenses everywhere and this resulted in a significant decrease in general and
administrative expense.





Other Income
(Expense):





Other
income (expense) decreased $12,795 of expense, or 31% to $29,035 of expense for
2009 from $41,831 of expense for 2008.  The decrease in expense was
primarily from $41,964 reduction in interest expense due to the conversion of
debt to stock, offset by a $30,670 increase in other income.





Nine Months ended September
30, 2009 compared to 2008.





Revenues:





Revenues
decreased $715,673 or 47%, to $815,123 for 2009 from $1,530,796 for
2008.  Revenues for 2009 were comprised of $531,412 of oil sales
(11,152 barrels of oil at an average price of $47.65 per barrel), $267,310 of
natural gas sales (59,667 MCF at an average price of $4.48 per MCF), $620 of
royalties and $15,782 of management fees.  Revenues for 2008 were
comprised of $895,957 of oil sales (8,553 barrels of oil at an average price of
$104.75 per barrel), $633,323 of natural gas sales (61,067 MCF at an average
price of $10.37 per MCF) and $1,517 of royalties.  Although oil
production volume increased significantly by 30% for 2009 from 2008, revenues
decreased due to significantly reduced market pricing for oil and gas
products.





Operating
Expenses:





Operating
expenses decreased $867,236, or 31%, to $1,903,240 for 2009 from $2,770,476 for
2008.  The decrease was primarily related to a reduction in production
expense related to the downturn in the oil and gas market as well as the entire
economy.  Additionally, the Company made a concerted effort to reduce
expenses everywhere and this resulted in a significant decrease in general and
administrative expense.  These were offset by an increase in
compensation and consulting expense primarily related to a non-cash expense from
a Black-Scholes calculation for the issuance of non-qualified stock options in
2009 with no comparable amount in 2008.




Other Income
(Expense):





Other
income (expense) decreased $97,192 of expense, or 75% to $32,145 of expense for
2009 from $129,337 of expense for 2008.  The decrease in expense was
primarily from the write off of payroll taxes and penalties from a predecessor
company determined to not be payable by the Company and a reduction in interest
expense due to the conversion of debt to stock.





Liquidity
and Capital Resources


Cash was
$49,627 at September 30, 2009 as compared to $88,937 at December 31, 2008, and
working capital deficit was $233,505 at September 30, 2009 as compared to a
working capital deficit of $6,693,177 at December 31, 2008.  The
decrease in the working capital deficit was primarily from the conversion of
debt to stock.


-19-





Operating
Activities





Cash used
in operating activities was $101,491 for the nine months ended September 30,
2009 compared to cash provided of $168,670 for the nine months ended September
30, 2008.  The decrease in cash provided by operations to cash used in
operations from 2008 to 2009 was primarily from a decrease in the change for due
to related parties and a decrease in other assets for 2009 as compared to an
increase in 2008.





Investing
Activities





Cash used
in investing activities was $8,183 for the nine months ended September 30, 2009
compared to cash used of $245,208 for the nine months ended September 30,
2008.  The decrease in cash used resulted primarily from a decrease in
the investment in property and equipment in 2008 to zero in 2009.





Financing
Activities





Cash
provided by financing activities was $70,364 for the nine months ended September
30, 2009 compared to $90,972 cash provided by financing activities for the nine
months ended September 30, 2008. The reduction from 2008 to 2009 is primarily
from the sale of common stock.


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, notes payable and issuing common
stock.  During the nine months ended September 30, 2009, the Company
significantly reduced its debt obligations through the conversion to common
stock and or the write off of balances not determined to be
payable.





Debt





On July
29, 2009, but effective June 30, 2009 (the “Effective Date”), the Company and
certain of its wholly-owned subsidiaries eliminated certain debt obligations by
converting them into $0.0001 par value common stock as follows:




Bend Arch
Petroleum, Inc. (“Bend Arch”), a wholly-owned subsidiary of the Company, had a
$2,000,000 Promissory Note (Note”) that was due and payable on December 31,
2009.  The Note was issued to Proco Operating Co., Inc. (“Proco”), a
company controlled by the brother of the Company’s Chief Executive Officer and a
director.  The purpose of the Note was 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. As of the Effective
Date, the Note has been converted into 8,000,000 shares of Stock based upon a
conversion price of $0.25 per share, a significant premium to the market price
of the Stock.  Additionally, the Note accrued interest at a rate of
eight percent (8%) per annum and as of the Effective Date, accrued interest was
$878,027.  An agreement was reached whereby Proco forgave $378,027 of
the accrued interest and the remaining $500,000 has been converted into
2,000,000 shares of Stock based upon a conversion price of $0.25 per share, a
significant premium to the market price of the Stock.




The
Company evaluated the conversion of the Note and the accrued interest in
accordance with paragraph 20 of APB 26 (ASC 470-50-40) and recorded a $1,965,000
gain representing the difference between the reacquisition price and the net
carrying amount of the extinguished debt.  Since the gain was from a
transaction with a related party, the $1,965,000 was recorded to additional paid
in capital as a component of Stockholders’ Equity.




As a
result of the conversions discussed above, the Company will issue 10,000,000
shares of Stock and as of September 30, 2009, these have been recorded as
issuable in the unaudited consolidated financial statements.




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 and other payments, the remaining unpaid balance of
principal has been $16,131 since March 31, 2006.  The payable is
personally guaranteed by the Chief Executive Officer of the
Company.  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.




-20-


However,
as of the Effective Date, the transaction has not been finalized as the lessor
had not formerly executed the settlement agreement. The Company has researched
the matter and believes that consideration was provided by the Company and
accepted by the Lessor for the settlement and that no further consideration or
action is required by the Company.  Accordingly, the $16,131 debt
obligation and $25,029 of accrued interest have been re-classed to Deferred
Other Income, a component of Long-Term Liabilities in the unaudited consolidated
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 Company unrestricted certificate of deposit held by the financial
institution and bears simple interest per annum at a variable rate which
is 3.25% as of September 30, 2009. As of September 30, 2009, the
outstanding balance is $23,073 and is included in the Note Payable balance in
the accompanying unaudited consolidated financial statements.




In March
2008, the Company purchased oilfield property and equipment for a price of
$150,000.  The terms included a cash payment of $47,000 and a note
payable for the balance of $103,000.  During the nine months ended
September 30, 2008, the Company paid down $12,000 of principal and the balance
is $91,000 as of June 30, 2009 and classified as a component of Note Payable in
the accompanying unaudited consolidated financial statements.  As of
September 30, 2009, no formal agreement of the terms of the note payable had
been finalized and the Company has a verbal agreement to pay the principal back
at a rate of $10,000 monthly.  It is anticipated that a formal
agreement will be negotiated and finalized in the future.






In July
2009, the Company received $10,000 of proceeds from a short-term note from an
unrelated third party.  As of September 30, 2009, no formal agreement
of the terms of the note payable had been finalized and the
Company.  It is anticipated that a more formal agreement will be
negotiated and finalized in the future.




As a
result of these transactions, the Company has the following remaining debt as of
September 30, 2009:




$25,000
      Line of Credit, dated October 28, 2005, bearing simple variable interest
      at 3.25%per
      annum and due on February 28, 2008.
            
            $
            24,421$10,000
      Note, dated July of 2009, not formalized and not bearing
      interest
            
            
            10,000$103,000
      Note, dated March of 2008, not formalized and not bearing
      interest
            
            
            91,000$
            125,421


Equity
Financing




Effective
April 1, 2009, the Company issued 50,000 shares of Stock to an unrelated third
party for oil and gas related equipment.  The Stock was valued at
$1,750 or $0.035 per share, the closing trading price of the Stock on April 1,
2009.


Effective
May 11, 2009, the Company received $50,000 of proceeds from the sale of
5,000,000 shares of Stock at $0.01 per share.  The $0.01 per share
price was determined based upon a 33% discount to the closing market price of
$0.015 per share on the sale date of May 11, 2009.




Effective
June 30, 2009, the Chief Executive Officer elected to convert 3,500,000 shares
of $0.0001 par value preferred stock into 10,500,000 shares of Stock per the
terms of the preferred stock.




Effective
September 6, 2009, the Company received $10,005 from the sale of 333,500 shares
of stock at $0.03 per share.  The $0.03 per share price was determined
based upon a 33% discount to the closing market price of $0.105 per share on the
sale date of September 6, 2009.




Additionally,
the Company will issue 23,350,677 shares of Stock from the conversion of debt
obligations.


-21-




Liquidity




To
continue with our business plan, we will require additional working capital as
we have not been generating sufficient cash from operations to fund our
operating activities through the end of fiscal 2009.  The ability of
the Company to continue as a going concern is dependent on the Company’s ability
to raise capital and generate revenues and cash flow from its business plan as
an oil and gas operating company.




Our
ability to obtain additional financing depends on many factors beyond our
control, including the state of the capital markets, the market price of our
common stock and the prospects for our business.  Additionally, any
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. Failure to obtain commitments for interim financing and subsequent
project financing would have a material adverse effect on our business, results
of operations and financial condition. If the financing we require to sustain
our working capital needs is unavailable or insufficient or we do not receive
the necessary financing, we may be unable to continue as a going
concern.





Management
believes that as a result of restructuring of the balance sheet as discussed
above, the Company will have several options available to obtain financing from
third parties in order to carry out the business plan of the
Company.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.





Item
4T.  Controls andProcedures




Under the
supervision and with the participation of our senior management, consisting of
our chief executive officer and our chief financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report (the "Evaluation Date").  Based on that evaluation, the
Company’s management, including our chief executive officer and chief financial
officer, concluded that as of the Evaluation Date our disclosure controls and
procedures are not effective to ensure that the information relating to us
required to be disclosed in our Securities and Exchange Commission ("SEC")
reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.





Management's Quarterly
Report on Internal Control Over Financial Reporting. (a) The Company's
management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f)).  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 and that our financial reporting controls were not
effective.  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 recovery
      plan, no server, and the company accounting records are maintained through
      a consultant accountant.  The Company should consider the
      purchase and implementation of a server and proper backups off site to
      ensure that accounting information is
  safeguarded.


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





-22-


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. The Company has
retained a third-party accounting and financial consulting firm to assist with
the complex technical oil and gas issues and as soon as our finances allow, we
will hire sufficient accounting staff and implement appropriate procedures as
described above.





This
quarterly report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this quarterly report.





(b)  Changes
in Internal Control over Financial Reporting.  There were no changes
in our internal control over financial reporting that occurred during the last
fiscal quarter that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting







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PART
II -OtherInformation







Item
6.  Exhibits





The
following exhibits are filed with this report or are incorporated herein by
reference to a prior filing, in accordance with Rule 12b-32 under the Securities
Exchange Act of 1934.





Exhibit
      No.
            
            Description
      of Exhibit








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)3.12
            
            Form
      S-8 Registration Statement under the Securities Act of 1933 filed
      September 25, 2008. (1)14.1
            
            Code
      of Ethics (1)20.1
            
            Oil
      and Gas property valuation by Blue Ridge Enterprises as of December 31,
      2007 (1)20.2
            
            Oil
      and Gas property valuation by Blue Ridge Enterprises as of December 31,
      2008 (1)21.1
            
            Subsidiaries
      of American Energy Production, Inc. (1)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.





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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons on behalf of American Energy
Production, Inc., in the capacities and on the dates indicated.







Signature
            Title
            Date/s/ Charles
      Bitters
              Charles
      Bitters
            Chief
      Executive Officer, Principal Executive and Financial Officer,
      Director
            November
      16, 2009











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