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UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-K

Mark One:

[X]Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.

For the fiscal year ended December 31, 2010; or

[   ] Transition Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________.

Commission File No.0-18956

AMERICAN NATURAL ENERGY
CORPORATION(Name of Small Business Issuer in its
Charter)

|Oklahoma                        | 73-1605215         
|------------------------------- | -------------------
|(State or Other Jurisdiction of | (IRS Employer      
|Incorporation or Organization)  | Identification No.)

6100 South Yale, Suite 300, Tulsa, Oklahoma
74136(Address of Principal Executive Offices) (Zip Code)

918-481-1440(Issuers Telephone
Number, Including Area Code)

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

|Title of Each Class | Name of Each Exchange on Which Registered
|------------------- | -----------------------------------------
|                    | None                                     

Securities Registered Pursuant to Section 12(g) of the Exchange
Act: Common Stock, par value $.001 per share(Title of Each Class)

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

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

[X] Yes    [   ] No

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

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company, Pursuant to Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]   
Accelerated filer [   ]    Non-accelerated filer
[   ]    Smaller reporting company [X]

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

Yes [ 
 ]     No [X]

State Issuers revenues for its most recent fiscal year:
$2,578,532.

State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked prices of such common
equity, as of March 31, 2011, was $4,096,746.(Non-affiliates have been
determined on the basis of holdings set forth in Item 12 of this Annual Report
on Form 10-K.)

The number of shares outstanding of each of the Issuers classes
of common equity, as of March 31, 2011, was 13,430,608 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

None

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Table of Contents

|               |                                                                                                                          | Page
|-------------- | ------------------------------------------------------------------------------------------------------------------------ | ----
|               |                                                                                                                          |     
|               | Part
      I                                                                                                             | 4   
|               |                                                                                                                          |     
|Item
      1.  | Description
      of Business                                                                                            | 4   
|               |                                                                                                                          |     
|Item
      1A  | Risk
      Factors                                                                                                       | 17  
|               |                                                                                                                          |     
|Item
      1B  | Unresolved
      Staff Comments                                                                                          | 24  
|               |                                                                                                                          |     
|Item
      2.  | Properties                                                                                                               | 24  
|               |                                                                                                                          |     
|Item
      3.  | Legal
      Proceedings                                                                                                  | 24  
|               |                                                                                                                          |     
|Item
      4.  | Submission
      of Matters to a Vote of Security Holders                                                                | 24  
|               |                                                                                                                          |     
|               | Part
      II                                                                                                            | 25  
|               |                                                                                                                          |     
|Item
      5.  | Market
      for Registrants Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities | 25  
|               |                                                                                                                          |     
|Item
      6   | Selected
      Financial Data                                                                                            | 26  
|               |                                                                                                                          |     
|Item
      7.  | Managements
      Discussion and Analysis of Financial Condition and Results of Operations                              | 26  
|               |                                                                                                                          |     
|Item
      7A  | Quantitative
      and Qualitative Disclosures About Market Risk                                                         | 36  
|               |                                                                                                                          |     
|Item
      8.  | Consolidated
      Financial Statements and Supplementary Data                                                           | 36  
|               |                                                                                                                          |     
|Item
      9.  | Changes
      In and Disagreements With Accountants On Accounting and Financial
      Disclosure                         | 36  
|               |                                                                                                                          |     
|Item
      9A  | Controls
      and Procedures                                                                                            | 36  
|               |                                                                                                                          |     
|Item
      9B  | Other
      Information                                                                                                  | 38  
|               |                                                                                                                          |     
|               | Part
      III                                                                                                           | 39  
|               |                                                                                                                          |     
|Item
      10. | Directors,
      Executive Officers And Corporate Governance                                                             | 39  
|               |                                                                                                                          |     
|Item
      11. | Executive
      Compensation                                                                                             | 42  
|               |                                                                                                                          |     
|Item
      12. | Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters               | 44  

2

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|Item 13. | Certain
      Relationships and Related Transactions, Director Independence | 46
|-------- | --------------------------------------------------------------------------- | --
|         |                                                                             |   
|Item 14. | Principal
      Accountant Fees and Services                                | 46
|         |                                                                             |   
|Item 15. | Exhibits                                                                    | 46

3

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PART I

Item 1 - Description of Business:

American
Natural Energy Corporation is engaged in the acquisition, development,
exploitation and production of oil and natural gas.

Our Oil and Natural Gas Interests

Through
our ownership we hold interests in approximately 1,320 acres of land in St.
Charles Parish, Louisiana. This acreage is the Bayou Couba leases in which we
hold a 97.25% working interest in the leasehold and 97.25% working interest in
all but 9 producing wells. The ownership results from our acquisition on
December 31, 2001, of the assets and outstanding stock of Couba Operating
Company (Couba") and consolidation of other working interests in the field
during 2009. We continue to need and seek material amounts of additional capital
to further our oil and natural gas development and exploitation activities.

Since
2002 through December 31, 2010, we returned to production 9 (8.75 net) well
bores drilled by the prior owners on the Couba properties we acquired. Our
drilling activities commenced in February 2003 and as of December 31, 2010, we
had drilled and completed 12 (7.14 net) wells. For the year ended December 31,
2010, our combined production from all our producing wells (21 gross, 15.9 net)
averaged approximately 162 (92 net) barrels of oil equivalent per day.
Production from our existing wells is subject to fluctuation from time to time
based upon the zones of the wells where we are obtaining production.

*Our
  Couba Properties.*Couba, organized in 1993, was primarily engaged
  in the production of oil from properties located in St. Charles Parish, Louisiana.
  Coubas principal acreage is the Bayou Couba Lease under which Couba owned
  a 72% working interest in 1,320 gross acres. Production from the wells commenced
  in 1941 and only oil and non-commercial quantities of natural gas were produced.
  Natural gas had never been produced in commercial quantities, and all gas production
  wells from the original development of the property were plugged.

The
principal asset of Couba that we acquired was the Bayou Couba Lease. The lessor
is Exxon-Mobil and the lease is held by production of oil and gas on the
property. The additional Couba assets we acquired include a gathering system
covering approximately 25 miles located on the Bayou Couba Lease, used solely as
a production collection system among the wells on the leased property leading to
a product distribution point, and various production facilities, geological
data, well logs and production information. The information includes 3-D seismic
information completed in 1997. The seismic information relates to an area of
approximately 23.5 square miles that includes the Bayou Couba Lease, among other
acreage. The gathering system we acquired was initially not in operable
condition. Subsequently, as part of approximately $1.1 million we expended to
restore existing wells to production, we refurbished and upgraded the system so
as to be usable. At present, the system, which consists of flow lines,
connections and related facilities, is used to transport our production of oil
and gas to points where it is trans-shipped and sold.

4

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Our
ExxonMobil Joint Development Agreement.In November 2002, we entered into a
four-year joint development agreement with ExxonMobil relating to both our Couba
properties and additional properties owned by ExxonMobil. The Joint Development
Agreement expired by mutual agreement of all parties in March 2009.

Our
Dune Energy Agreements.In September 2005, we entered into a participation
agreement with Dune Energy, Inc. (Dune Energy). Pursuant to the agreement,
Dune Energy acquired certain exploration and development rights within our Bayou
Couba Properties area. On September 1, 2007 Dune Energy was elected successor
operator under the Joint Operating Agreement.

On
August 4, 2009 we completed the terms of a Purchase Agreement whereby we
acquired all of Dune Energys interest in the producing properties on the Bayou
Couba lease, all of the Dune Energys interest in the undeveloped leasehold from
the surface to the top of the Cib Op formation and all of the outstanding
Debentures held by Dune Energy. Additionally, we assumed operations of the field
at that time. Dune Energy retained a 65% interest in the lease below the Cib Op
formation.

Our
TransAtlantic Agreements.In March 2003, we assigned a 10% participation
interest in the ExxonMobil Corp. AMI and joint development agreement to
TransAtlantic Petroleum Corp. ("TransAtlantic") in partial consideration for a
$2.0 million financing. This agreement, which has a term of four years or the
expiration of our agreement with ExxonMobil Corp., whichever is longer, granted
to TransAtlantic the right to acquire a 10% interest in any property we acquire
in the 23.5 square mile seismic survey area, including any property interests
acquired through our agreement with ExxonMobil Corp.

Effective
December 22, 2006, TransAtlantic sold its 10% participation interest in the AMI
to Dune Energy. Dune Energy also acquired $3.0 million principal amount of our
8% Convertible Subordinated Debentures formerly held by TransAtlantic. In
addition, subsequent to December 31, 2006, Dune Energy acquired from the holders
an additional $4,895,000 principal amount of Debentures, bringing Dune Energys
total holdings of our Debentures outstanding to $7,895,000 principal amount.
These Debentures were acquired as part of our August 4, 2009 Purchase Agreement
with Dune Energy.

As
of March 31, 2011, TransAtlantic remains the beneficial holder of a total of
223,714 shares of our common stock.

Our
State of Louisiana Lease. From February 2002 to February 2005, we leased
1,729 acres from the State of Louisiana, all within the boundaries of the
proprietary 1997 3-D seismic data we acquired from Couba. In January 2007, Dune
Energy re-leased the acreage plus an additional 769 acres for a total of 2,498
acres that became subject to the terms of the ExxonMobil AMI, and was intended
to be explored and developed pursuant to the participation percentages and terms
and conditions of our agreement with Dune Energy and the ExxonMobil Joint
Development Agreement. The lease expired in January 2010.

*Seismic
Survey Participation Agreement.*On March 8, 2006, we agreed to participate
in a 3D seismic survey covering 60 square miles covering our Bayou Couba lease
and surrounding acreage positions. The survey is part of a larger regional
survey being conducted by Seismic Exchange, Inc. We received the survey data in 2008 and
participated in a joint Pre-stack time migration processing of the data. We have
completed Pre-stack depth migration processing of the data and continue to
evaluate the deeper horizons of our Bayou Couba lease.

5

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Unless
the context otherwise requires, references to us in this Annual Report includes
American Natural Energy Corporation, an Oklahoma corporation, and our
wholly-owned subsidiary, Gothic Resources Inc., a corporation organized under
the Canada Business Corporation Act. References to Gothic refer exclusively to
our wholly-owned subsidiary, Gothic Resources Inc. and references to ANEC refer
exclusively to our parent corporation, American Natural Energy Corporation,
organized under the laws of Oklahoma. Through December 2001, our activities were
conducted through Gothic, and Gothic may be deemed a predecessor of ANEC.

Oil and Gas Reserves

Reserves EstimationWe engaged a third-party
engineering firm to prepare our reserve estimates comprising all of our
estimated proved reserves (by volume) at December 31, 2010. Our Manager of
Operations is the person primarily responsible for overseeing the preparation of
the companys reserve estimates. His qualifications include the following:

- 33 years of practical experience in geology, petroleum engineering and
  reserve evaluation
- Bachelor of Science degree in Geology

We
maintain internal controls such as the following to ensure the reliability of
reserves estimations:

- No employees compensation is tied to the amount of reserves booked.
- We follow comprehensive SEC-compliant internal policies to determine and
  report proved reserves. Reserves estimates are made by experienced third-party
  reservoir engineers.
- The Manager of Operations reviews all the companys reported proved
  reserves at the close of each quarter.
- Each quarter, the Manager of Operations and the Chief Executive Officer
  review all significant reserve changes and all new proved undeveloped reserves
  additions.

The tables below set forth information as of December 31, 2010
with respect to our estimated proved reserves, our estimated future net revenue
therefrom and the present value thereof at such date based on the report of
Summa Engineering, Inc. This report is included as Exhibit 99.1 to this Annual
Report on Form 10-K. The qualifications of the technical person at each of these
firms primarily responsible for overseeing his firms preparation of the
companys reserve estimates are set forth below.

- Bachelor of Science Degree in Petroleum Engineering
- Over 35 years of practical experience in petroleum engineering
- A registered Professional Engineer in the State of Oklahoma

The calculations which Summa Engineering, Inc. used in preparation of such
report were prepared using geological and engineering methods generally accepted
by the petroleum industry and in accordance with Securities and Exchange
Commission ("SEC") guidelines. All estimates were prepared based upon a review of production histories and
other geologic, economic, ownership and engineering data we believe to be
accurate. The present value of estimated future net revenue shown is not
intended to represent the current market value of the estimated oil and gas
reserves we own.

6

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|                               |  | OIL      |  |  | GAS    |  |  | TOTAL    | 
|------------------------------ |  | -------- |  |  | ------ |  |  | -------- | 
|                               |  | (Mbbl)   |  |  | (Mmcf) |  |  | (Mbble)  | 
|                               |  |          |  |  |        |  |  |          | 
|Proved developed producing     |  | 75.32    |  |  | -      |  |  | 75.32    | 
|Proved developed non-producing |  | -        |  |  | -      |  |  | -        | 
|Proved undeveloped             |  | 1,413.34 |  |  | -      |  |  | 1,413.34 | 
|Total proved                   |  | 1,488.66 |  |  | -      |  |  | 1,488.66 | 

|                                                               |   |           |  |  | Proved    |  |   |             |  |   |              | 
|-------------------------------------------------------------- | - | --------- |  |  | --------- |  | - | ----------- |  | - | ------------ | 
|                                                               |   | Proved    |  |  | Developed |  |   |             |  |   |              | 
|                                                               |   | Developed |  |  | Non-      |  |   | Proved      |  |   |              | 
|                                                               |   | Producing |  |  | producing |  |   | Undeveloped |  |   | Total Proved | 
|                                                               |   |           |  |  |           |  |   |             |  |   |              | 
|Estimated future net revenue(a)                                | $ | 3,394,466 |  |  | -         |  | $ | 68,632,878  |  | $ | 72,027,344   | 
|Present value of future net revenue(b)                         | $ | 2,685,715 |  |  | -         |  | $ | 44,024,021  |  | $ | 46,709,736   | 
|Standardized measure of discounted future
      net cash flows | $ | 2,685,715 |  |  | -         |  | $ | 44,024,021  |  | $ | 46,709,736   | 

_______________________ (a)
Estimated future net revenue represents estimated future gross revenue to be
generated from the production of proved reserves, net of estimated production
and future development costs, using prices and costs in effect at December 31,
2010. The amounts shown do not give effect to non-property related expenses,
such as general and administrative expenses, debt service and future income tax
expense or to depreciation, depletion and amortization, but do give effect to
net profits obligations arising out of agreements we made to acquire the Couba
assets in the plan of reorganization. The prices used in these estimates were
$77.54 per barrel of oil and $4.11 per mcf of gas.(b) Present value of
future net revenues represents estimated future net revenues discounted using an
annual discount rate of 10%. The present value of future net revenue is
equivalent to the standardized measure of discounted future net cash flows at
December 31, 2010 as there is no future income tax provision.

The
future net revenue attributable to our estimated proved undeveloped reserves is
calculated to be $68.6 million at December 31, 2010, with the present value
thereof to be $44.0 million, based on us expending approximately $9.0 million
during 2011 and an additional $449,000 in future periods to develop these
reserves. The amount and timing of these expenditures will depend on a number of
factors, including actual drilling results, product prices and the availability
of capital to us. At December 31, 2010, the capital necessary to develop these
additional reserves was unavailable to us. Through December 31, 2010, we had
expended approximately $15.8 million in exploration and development of the Bayou
Couba properties.

No
estimates of proved reserves comparable to those included herein have been
included in reports to any federal agency other than the SEC.

7

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Our
ownership interest used in calculating proved reserves and the estimated future
net revenue therefrom was determined after giving effect to the assumed maximum
participation by other parties to our farm-out and participation agreements.
There can be no assurance that all of the estimated proved reserves will be
produced and sold at the assumed prices or that existing contracts will be
honored or judicially enforced.

There
are numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond our control. Reserve engineering is
a subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates made by different engineers
often vary. In addition, results of drilling, testing and production subsequent
to the date of an estimate may justify revision of such estimates, and such
revisions may be material. Accordingly, reserve estimates are often different
from the actual quantities of oil and gas that are ultimately recovered.
Furthermore, the estimated future net revenue from proved reserves and the
present value thereof are based upon certain assumptions, including prices,
future production levels and costs that may not prove correct. Fluctuations in
commodities prices will impact the economic viability of the production of oil
and gas. Predictions about prices and future production levels are subject to
great uncertainty, and the foregoing uncertainties are particularly true as to
proved undeveloped reserves, which are inherently less certain than proved
developed reserves. Accordingly, our existing claimed reserves and any reserves
we may discover in the future are and will be subject to these uncertainties.

The
primary area of our operations is St. Charles Parish, Louisiana. As of December
31, 2010, all of our operations and reserves are located in that area.

Drilling Activity

The
following table sets forth information as to the wells we completed during the
periods indicated. In the table, "gross" refers to the total wells in which we
have a working interest and "net" refers to gross wells multiplied by our
working interest therein.

Year Ended December 31,2009
      2010Gross
      Net
      Gross
      NetDevelopmentProductive
      0.0
      0.0
      0.0
      0.0Non- productive
      -0-
      -0-
      -0-
      -0-ExploratoryProductive
      -0-
      -0-
      -0-
      -0-Non- productive
      -0-
      -0-
      -0-
      -0-


During
  2010 and 2009, Behind Pipe Zones that were classified as Proved Undeveloped
  Reserves were re-completed at a cost of approximately $223,700 (1 well) and
  $323,700 (2 wells) and reclassified as Proved Developed Producing at December
  31, 2010 and 2009, respectively. Additional Proved Undeveloped Reserves will
  be drilled and completed as cash flow or funding from third party sources becomes
  available.

8

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Past
Drilling and Development Activities

In
July 2002, we completed the restoration activities on the Bayou Couba Lease and
brought the operation into compliance with applicable regulatory requirements.
We also completed reprocessing the 1997 3-D seismic information we acquired as
part of the Couba transaction and we are continuing to review that data. We also
were able to get five well bores on the Bayou Couba lease that had been drilled
by the former owners into a producing condition.

Our
activities in 2002 also included refurbishing the gathering line connected to
the wells. This gathering line delivers our current production of natural gas to
the Transco pipeline for further delivery to an interstate pipeline.

In
February 2003, we commenced drilling on the Bayou Couba Lease and by December
31, 2003, we had drilled and completed 6 (2.19 net) wells on the property. One
well drilled during 2003 was unsuccessful and was plugged.

During
  2005, we restored to production 1 (.81 net) well that had been acquired as part
  of the original Bayou Couba acquisition. We also drilled and completed 3 (.61
  net) development wells.

During
  2006, we drilled and completed 2 (.05 net) development wells.

During
2009 we acquired all of the working interest of Dune Energy as well as other
small interest owners in the field. The acquisitions effectively added an
additional 6.56 net wells to our ownership interest.

For
  the year ended December 31, 2010, combined production from all our producing
  wells on the property averaged approximately 162 (98 net) barrels of oil equivalents
  per day. Production from our existing wells is subject to fluctuation from time
  to time based upon the zones of the wells where we are obtaining production.

Production Volumes, Revenue, Prices and Production Costs

The
following table sets forth certain information regarding the production volumes,
revenue, average prices received and average production costs associated with
our sale of oil and natural gas for the  years ended December 31, 2010 and 2009. All
of our production was from our properties located in St. Charles Parish,
Louisiana.

Year Ended December 31,2010
      2009Net Production:(1)Oil (Mbbl)
      31.5
      16.0Natural Gas (Mmcf)
      11.6
      0.0Oil Equivalent (Mbble )
      33.4
      16.0Oil and NaturalGas Sales: (2)Oil
      $2,464,419
      $1,054,390


9

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Natural Gas
    $59,311
    -Total
    $2,523,730
    $1,054,390Average SalesPrice:Oil ($per Bbl)
    $78.17
    $66.04Natural Gas ($per Mcf)
    $5.12
    -Oil Equivalent ($per Bble)
    $75.43
    $66.04Oil and NaturalGas Costs:Lease operating expenses
    $890,306
    $766,180Production Taxes
    $132,552
    $24,993Depreciation, depletion and amortization
    $695,061
    $466,803Average production cost per unit of
      production ($ per Bble)
    $30.82
    $49.56


(1) Includes only production owned by us and produced to our
interest, less royalties and production due others. 426 and 367 barrels of oil
were produced in December 2010 and 2009 but not sold until January 2011 and
2010, respectively, and are included in inventory at December 31, 2010 and 2009
at the lower of production cost and DD&A, or market.

Development, Exploration and Acquisition Expenditures

The
following table sets forth certain information regarding the costs we incurred
in our development, exploration and acquisition activities during the periods
indicated:

Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,2009
    
    
    2010Development Costs
    $
    633,321
    
    $
    334,887Exploration Costs
    
    -
    
    
    -Acquisition Costs
    $
    494,938
    
    
    -Sales of Properties
    
    -
    
    
    -Capitalized Interest
    
    -
    
    
    -Total
    $
    1,128,259
    
    $
    334,887


Acreage

The
following table sets forth as of December 31, 2010, the gross and net acres of
both developed and undeveloped oil and natural gas leases which we hold. "Gross"
acres are the total number of acres in which we own a working interest. "Net"
acres refer to gross acres multiplied by our fractional working interest.

10

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|          |              |                |             |     | Total Developed and
|--------- | ------------ | -------------- | ----------- | --- | -------------------
|          | Developed(1) | Undeveloped(1) | Undeveloped
|Area      | Gross        | Net            | Gross       | Net | Gross              
|Louisiana | 1,319        | 1,284          | -           | -   | 1,319              
|Total     | 1,319        | 1,284          | -           | -   | 1,319              

(1)
Net acreage assumes that we maintain our existing working interest percentage in
all future development.

Marketing

Our
oil production is sold under market sensitive or spot price contracts. Our
natural gas production is sold to purchasers under varying
percentage-of-proceeds and percentage-of-index contracts or by direct marketing
to end users or aggregators. By the terms of the percentage-of-proceeds
contracts, we receive a percentage of the resale price received by the purchaser
for sales of residue gas and natural gas liquids recovered after gathering and
processing our gas. The residue gas and natural gas liquids sold by these
purchasers are sold primarily based on spot market prices. The revenue we
received from the sale of natural gas liquids is included in natural gas sales.
During 2010, our oil and gas salestoTexon L.P. of $2,464,419
accounted for 98% of our total oil and gas sales. We believe we are not
materially dependent upon Texon for our sales as we believe there are numerous
other purchasers for our oil and gas production at competitive prices. We
believe that the loss of this customer would not have a material adverse effect
on our results of operations or our financial position.

We have
  no obligations to provide fixed or determinable quantities of oil or natural
  gas in the future under existing contracts or agreements.

Hedging Activities

We
have not utilized hedging strategies to hedge the price of our future oil and
gas production or to manage our fixed interest rate exposure.

Competition

The
oil and natural gas industry is highly competitive in all of its phases. We are
not a significant factor in the overall production of oil and natural gas. We
encounter competition from other oil and natural gas companies in all areas of
our operations, including the marketing of oil and natural gas and the
acquisition of producing properties. Most all of these companies possess greater
financial and other resources than we do. Because gathering systems are the only
practical method for the intermediate transportation of natural gas,
competition, as it relates to market access, is presented by other pipelines and
gas gathering systems. Because oil and natural gas is sold as a commodity,
pricing is not a factor in our competition. Competition may also be presented by
alternative fuel sources, including heating oil and other fossil fuels. Because
the primary markets for natural gas liquids are refineries, petrochemical plants
and fuel distributors, prices are generally set by or in competition with the
prices for refined products in the petrochemical, fuel and motor gasoline
markets.

11

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Regulation

*General*

Numerous
departments and agencies, federal, state and local, issue rules and regulations
binding on the oil and gas industry, some of which carry substantial penalties
for failure to comply. The regulatory burden on the oil and gas industry
increases our cost of doing business and, consequently, affects our
profitability. At December 31, 2010, we are unable to estimate the costs to be
incurred for compliance with environmental laws over the next twelve months;
however, management believes all such costs will be those ordinarily and
customarily incurred in the development and production of oil and gas and that
no unusual costs will be encountered.

*Exploration
and Production*

Our
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used or obtained in
connection with operations. Our operations are also subject to various
conservation regulations. These include the regulation of the size of drilling
and spacing units and the density of wells which may be drilled and the
unitization or pooling of oil and gas properties. In this regard, some states
(such as Oklahoma) allow the forced pooling or integration of tracts to
facilitate exploration while other states (including Louisiana) rely on
voluntary pooling of lands and leases. In areas where pooling is voluntary, it
may be more difficult to form units and, therefore, more difficult to develop a
prospect if the operator owns less than 100% of the leasehold. In addition,
certain state conservation laws may establish maximum rates of production from
oil and gas wells generally prohibit the venting or flaring of gas and impose
certain requirements regarding the ratability of production. The effect of these
regulations is to limit the amount of oil and gas we can produce from our wells
and to limit the number of wells or the locations at which we can drill. The
extent of any impact on us of such restrictions cannot be predicted.

*Environmental
and Occupational Regulation*

General.
Our activities are subject to existing federal, state and local laws and
regulations governing environmental quality and pollution control. It is
anticipated that, absent the occurrence of an extraordinary event, compliance
with existing federal, state and local laws, rules and regulations concerning
the protection of the environment and human health will not have a material
effect upon our operations, capital expenditures, earnings or competitive
position. We cannot predict what effect additional regulation or legislation,
enforcement policies thereunder and claims for damages for injuries to property,
employees, other persons and the environment resulting from our operations could
have on our activities.

Our activities with respect to exploration,
development and production of oil and natural gas are subject to stringent
environmental regulation by state and federal authorities including the United
States Environmental Protection Agency ("EPA"). Such regulation has increased
the cost of planning, designing, drilling, operating and in some instances,
abandoning wells. In most instances, the regulatory requirements relate to the
handling and disposal of drilling and production waste products and waste
created by water and air pollution control procedures. Although we believe that
compliance with environmental regulations will not have a material adverse effect on our operations or earnings, risks of
substantial costs and liabilities are inherent in oil and gas operations, and
there can be no assurance that significant costs and liabilities, including
criminal penalties, will not be incurred. Moreover, it is possible that other
developments, such as stricter environmental laws and regulations, and claims
for damages for injuries to property or persons resulting from our operations
could result in substantial costs and liabilities.

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Waste
Disposal. We currently own or lease, and have owned or leased, numerous
properties that for many years have been used for the exploration and production
of oil and gas. Although we believe operating and disposal practices that were
standard in the industry at the time were utilized, hydrocarbons or other wastes
may have been disposed of or released on or under the properties we owned or
leased or on or under other locations where such wastes have been taken for
disposal. In addition, these properties may have been operated by third parties
whose treatment and disposal or release of hydrocarbons or other wastes was not
under our control. State and federal laws applicable to oil and natural gas
wastes and properties have gradually become stricter. Under such laws, we could
be required to remove or remediate previously disposed wastes (including wastes
disposed of or released by prior owners or operators) or property contamination
(including groundwater contamination) or to perform remedial plugging operations
to prevent future contamination.

We
generate wastes, including hazardous wastes, that are subject to the Federal
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes.
The EPA and various state agencies have limited the disposal options for certain
hazardous and non-hazardous wastes and are considering the adoption of stricter
disposal standards for non-hazardous wastes. Furthermore, certain wastes
generated by our oil and natural gas operations that are currently exempt from
treatment as hazardous wastes may in the future be designated as hazardous
wastes, and therefore be subject to considerably more rigorous and costly
operating and disposal requirements.

Superfund.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
with respect to the release of a "hazardous substance" into the environment.
These persons include the owner and operator of a site and persons that disposed
of or arranged for the disposal of the hazardous substances found at a site.
CERCLA also authorizes the EPA and, in some cases, third parties to take actions
in response to threats to the public health or the environment and to seek to
recover from responsible classes of persons the costs of such action. In the
course of our operations, we may generate wastes that fall within CERCLA's
definition of "hazardous substances". We may also be an owner of sites on which
"hazardous substances" have been released. We may be responsible under CERCLA
for all or part of the costs to clean up sites at which such wastes have been
released. To date, however, we have not and, to our knowledge, our predecessors
or successors have not been named a potentially responsible party under CERCLA
or similar state superfund laws affecting property we owned or leased.

Air
Emissions. Our operations are subject to local, state and federal
regulations for the control of emissions of air pollution. Legal and regulatory
requirements in this area are increasing, and there can be no assurance that
significant costs and liabilities will not be incurred in the future as a result
of new regulatory developments. In particular, regulations promulgated under the
Clean Air Act Amendments of 1990 may impose additional compliance requirements
that could affect our operations. However, it is impossible to predict
accurately the effect, if any, of the Clean Air Act Amendments on us at this time. We may in
the future be subject to civil or administrative enforcement actions for failure
to comply strictly with air regulations or permits.

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These
enforcement actions are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could require us to forego construction or operation of certain air emission
sources.

OSHA.
We are subject to the requirements of the federal Occupational Safety and Health
Act ("OSHA") and comparable state statutes. The OSHA hazard communication
standard, the EPA community right-to-know regulations under Title III of the
federal Superfund Amendment and Reauthorization Act and similar state statutes
require us to organize information about hazardous materials used, released or
produced in our operations. Certain of this information must be provided to
employees, state and local governmental authorities and local citizens. We are
also subject to the requirements and reporting set forth in OSHA workplace
standards.

OPA
and Clean Water Act. Federal regulations require certain owners or operators
of facilities that store or otherwise handle oil, such as us, to prepare and
implement spill prevention control plans, countermeasure plans and facilities
response plans relating to the possible discharge of oil into surface waters.
The Oil Pollution Act of 1990 ("OPA") amends certain provisions of the federal
Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act
("CWA"), and other statutes as they pertain to the prevention of and response to
oil spills into navigable waters. The OPA subjects owners of facilities to
strict joint and several liability for all containment and cleanup costs and
certain other damages arising from a spill, including, but not limited to, the
costs of responding to a release of oil to surface waters. The CWA provides
penalties for any discharges of petroleum products in reportable quantities and
imposes substantial liability for the costs of removing a spill. State laws for
the control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of releases of petroleum or its derivatives into
surface waters or into the ground. Regulations are currently being developed
under OPA and state laws concerning oil pollution prevention and other matters
that may impose additional regulatory burdens on us. In addition, the CWA and
analogous state laws require permits to be obtained to authorize discharges into
surface waters or to construct facilities in wetland areas. The EPA has adopted
regulations concerning discharges of storm water runoff. This program requires
covered facilities to obtain individual permits, participate in a group permit
or seek coverage under an EPA general permit. We believe that we are in material
compliance with all permits we are required to obtain and obtaining such permits
in the future will not have a material adverse impact on our operations in the
future. With respect to our future operations, we believe we will be able to
obtain, or be included under, such permits, where necessary. Compliance with
such permits is not expected to have a material adverse effect on us.

NORM.
Oil and gas exploration and production activities have been identified as
generators of concentrations of low-level naturally-occurring radioactive
materials ("NORM"). NORM regulations have been adopted in several states. We are
unable to estimate the effect of these regulations, although based upon our
preliminary analysis to date, we do not believe that our compliance with such
regulations will have a material adverse effect on our operations or financial
condition.

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Safe
Drinking Water Act. Our operations may involve the disposal of produced
saltwater and other non-hazardous oilfield wastes by re-injection into the
subsurface. Under the Safe Drinking Water Act ("SDWA"), oil and gas operators,
such as us, must obtain a permit for the construction and operation of
underground Class II injection wells. To protect against contamination of drinking water, periodic mechanical integrity
tests are often required to be performed by the well operator. While we expect
to be able to obtain all such permits as are required, there can be no assurance
that these requirements may not cause us to incur additional expenses.

Toxic
Substances Control Act. The Toxic Substances Control Act ("TSCA") was
enacted to control the adverse effects of newly manufactured and existing
chemical substances. Under the TSCA, the EPA has issued specific rules and
regulations governing the use, labeling, maintenance, removal from service and
disposal of PCB items, such as transformers and capacitors used by oil and gas
companies. We may own such PCB items but do not believe compliance with TSCA
will have a material adverse effect on our operations or financial
condition.

Title To Properties

Title
to oil and gas properties is subject to royalty, overriding royalty, carried,
net profits, working and other similar interests and contractual arrangements
customary in the industry, to liens for current taxes not yet due and to other
encumbrances. As is customary in the industry in the case of undeveloped
properties, only cursory investigation of record title is made at the time of
acquisition. Drilling title opinions are usually prepared before commencement of
drilling operations. Although we have no basis to believe that such will occur,
there can be no assurance that our title to oil and gas properties may not be
challenged through legal proceedings.

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Operating Hazards and Insurance

The
oil and gas business involves a variety of operating risks, including the risk
of fire, explosions, blow-outs, pipe failure, abnormally pressured formations
and environmental hazards such as oil spills, gas leaks, ruptures or discharges
of toxic gases, the occurrence of any of which could result in substantial
losses to us due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and penalties and
suspension of operations.

We
maintain comprehensive general liability policies with coverage considered
adequate by management. Dune Energy carries insurance coverage covering their
activities as operator of the Bayou Couba field. While we believe these policies
are customary in the industry, they do not provide complete coverage against all
operating risks.

Employees

As
of December 31, 2010, we employed seven persons, of whom two were executive
officers and three were operations personnel and two were accounting staff. We
do not employ a significant number of temporary employees. None of our employees
is represented by a labor union, and we believe our relationship with our
employees is good.

Organization

We are
  an Oklahoma corporation organized in January 2001. In June 2001, we became a
  wholly-owned subsidiary of Gothic Resources Inc., a British Columbia corporation.
  In January 2002, as a result of an arrangement under Section 192 of the Canada
  Business Corporations Act and an order of the Supreme Court of British Columbia,
  we became the parent corporation of Gothic and the holders of Gothic shares
  exchanged their shares for our shares. Gothic may be deemed to be our predecessor.

Prior
to our acquisition of Couba, it had commenced in March 2000, an involuntary
Chapter 7 Bankruptcy proceeding which was converted to a Chapter 11 debtor in
possession proceeding the following month. In early 2000, Couba had depleted its
borrowing availability under a bank line of credit and had insufficient capital
to continue in operations. During the pendency of the proceeding, Couba
maintained nominal production from four wells on the Bayou Couba Lease in order
to maintain in effect the lease to the property. On May 1, 2001, we joined with
Couba in submitting to the Bankruptcy Court a plan of reorganization whereby we
would acquire substantially all the assets and capital stock of Couba. Coubas
only assets at the time were its physical oil and gas facilities and it had no
other business activities, employees, customers or rights. The plan was finally
confirmed by the Court on November 16, 2001.

Office

Our
  principal office is located at 6100 South Yale, Suite 300, Tulsa, Oklahoma 74136.
  Additionally, we maintain office space in The Woodlands, Texas. Our leased premises
  include approximately 4,899 square feet and are leased for various terms expiring
  in 2011. The annual aggregate rental is $95,531. The facilities are considered
  adequate for our present activities.

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Item 1A  Risk Factors:

An
investment in shares of our common stock involves a high degree of risk. You
should consider the following factors, in addition to the other information
contained in this annual report, in evaluating our business and proposed
activities before you purchase any shares of our common stock. You should also
see the Cautionary Statement for Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995 regarding risks and
uncertainties relating to us and to forward looking statements in this annual
report.

Risks Relating to Us and the Oil and Gas Industry

Our Ability to Continue as a Going Concern is
Uncertain

Our
consolidated financial statements have been prepared on a going concern basis
which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. We recorded a net
loss of $2,062,145 in 2010. However, we recorded net income of $23,953,000 for
the twelve months ended December 31, 2009 as the result of a $27,994,000 gain on
extinguishment of debt related to the re-purchase of our 8% Secured Debentures
and a settlement on debt owed to Dune Energy. We had a working capital
deficiency at December 31, 2010 of approximately $6.6 million. Although
production from our drilling program increased during 2010 compared to 2009, and
our revenue has not been sufficient to fund our operations. At December 31,
2010, we do not have any available borrowing capacity under existing credit
facilities and our current assets are $369,000 compared with current liabilities
of $6.9 million which include accounts payable, revenues payable, notes payable,
and other current obligations. We have substantial needs for funds to pay our
outstanding payables and debt due during 2011. All the foregoing lead to
questions concerning our ability to meet our obligations as they come due. We
also have a need for substantial funds to develop our oil and gas properties. We
have financed our activities using private debt and equity financings, and we
have no line of credit or other financing agreement providing borrowing
availability with a commercial lender. As a result of the losses incurred and
current negative working capital and other matters described above, there is no
assurance that the carrying amounts of our assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. Our ability
to continue as a going concern is dependent upon adequate sources of capital and
the ability to sustain positive results of operations and cash flows sufficient
to pay our current liabilities and to continue to explore for and develop our
oil and gas reserves.

The
independent registered public accounting firms report on our consolidated
financial statements as of and for the year ended December 31, 2010 includes an
explanatory paragraph which states that we have sustained a substantial loss in
2010 and have a working capital deficiency and an accumulated deficit at
December 31, 2010 that raise substantial doubt about our ability to continue as
a going concern.

Our Current Liabilities as of December 31, 2010 Exceed
Our Current Assets by $6.6 Million

As
of December 31, 2010, our current assets were approximately $369,000 and our
current liabilities were approximately $6.9 million. In order to meet our
current obligations, we will need to raise additional capital. At March 31, 2011, we
have no commitments from others to provide this capital and without additional
capital to meet these obligations, our continued operations cannot be assured.
There can be no assurance that we will be successful in raising additional
capital or that the terms on which such additional capital can be raised may not
be disadvantageous to the holders of our common stock or result in material
dilution. Our inability to reduce our current liabilities relative to our
current assets could lead creditors to refuse to extend us further credit which
could materially adversely affect our operations.

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Oil and Gas Prices Fluctuate Widely and Low Oil and Gas
Prices Could Adversely Affect Our Financial Results.

Our
revenues, operating results, cash flow and future rate of growth depend
substantially upon prevailing prices for oil and gas. Historically, oil and gas
prices and markets have been volatile, and they are likely to continue to be
volatile in the future. A significant decrease in oil and gas prices, such as
that experienced in 1998 and the first half of 1999, could have a material
adverse effect on our cash flow and profitability and would adversely affect our
financial condition and the results of our operations.

Prices
for oil and gas fluctuate in response to relatively minor changes in the supply
of and demand for oil and gas, market uncertainty and a variety of additional
factors that are beyond our control, including:

- political conditions in oil producing regions, including the Middle East;
- the domestic and foreign supply of oil and gas;
- the level of consumer demand;
- weather conditions;
- domestic and foreign government regulations;
- the price and availability of alternative fuels;
- overall economic conditions; and
- international political conditions.

In
addition, various factors may adversely affect our ability to market our oil and
gas production, including:

- the capacity and availability of oil and gas gathering systems and
  pipelines;
- our ability to produce oil and gas in commercial quantities and to enhance
  and maintain production from existing wells and wells proposed to be drilled;
- the effect of federal and state regulation of production and
  transportation;

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- general economic conditions;
- changes in supply due to drilling by other producers;
- the availability of drilling rigs and related crews; and
- changes in demand.

Lower Oil and Gas Prices May Adversely Affect Our Level
of Capital Expenditures, Reserve Estimates, Borrowing Capacity and Ability to
Repay Notes Payable .

In
the ordinary course of business and in order to pursue successfully our business
plan, we must make substantial capital expenditures for the exploration and
development of oil and natural gas reserves. In the past, we have financed our
capital expenditures, debt service and working capital requirements out of our
cash flow, through increases in vendor payables and notes payable and with the
proceeds of debt and equity offerings of our securities. Our cash flow from
operations is sensitive to the prices we receive for our oil and natural gas. A
reduction in capital spending or an extended decline in oil and natural gas
prices could result in less than anticipated cash flow from operations and a
lessened ability to repay outstanding notes payable, raise additional capital or
refinance our debt with current lenders or new lenders, which would likely have
a further material adverse effect on us.

Lower
oil and gas prices have various other adverse effects on our business. A smaller
capital expenditure program resulting from reduced cash flows will adversely
affect our ability to increase or maintain our oil and natural gas reserves and
production levels. Lower prices may also result in reduced oil and natural gas
reserve estimates, the write-off of impaired assets and decreased earnings or
losses due to lower oil and natural gas revenues and higher depreciation,
depletion and amortization expense.

Lower
oil and gas prices could adversely affect our ability to borrow funds in other
ways. Lower commodities prices for oil and natural gas adversely affects the
valuations of our oil and natural gas reserves which in turn adversely affects
the amounts lenders may loan to us secured by those oil and natural gas
reserves. Furthermore, reduction in such prices could impede our ability to fund
future potential acquisitions.

Additional Secured Indebtedness We May Incur In the
Future May Increase Our Exposure to Risks Associated With Higher Debt Levels and
Possible Defaults.

We
intend to seek to refinance our existing indebtedness .The issuance of material
amounts of indebtedness would expose us to significant risks including, among
others, the following:

- a portion of our cash flow from operations would be utilized for the
  payment of principal and interest on our indebtedness and would not be
  available for financing capital expenditures or other purposes;
- our level of indebtedness and the covenants governing our indebtedness
  could limit our flexibility in planning for, or reacting to, changes in our
  business because certain financing options may be limited or prohibited
  under the terms of our agreements relating to such indebtedness;

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- our level of indebtedness may make us more vulnerable to defaults during
  periods of low oil and gas prices or in the event of a downturn in our
  business because of our fixed debt service obligations; and
- the terms of our agreements may require us to make interest and principal
  payments and to remain in compliance with stated financial covenants and
  ratios. If the requirements of these agreements are not satisfied, the lenders
  would be entitled to accelerate the payment of all outstanding indebtedness
  and foreclose on the collateral securing payment of that indebtedness. In such
  event, we cannot assure you that we would have sufficient funds available or
  could obtain the financing required to meet our obligations, including the
  repayment of the outstanding principal and interest on this indebtedness.

In
addition to the risks described above, these risks may impose limits on our
ability to develop our oil and gas properties and restrict our ability to
replenish our reserves of oil and gas as they are depleted.

Our Existing Reserves of Oil and Natural Gas Will Be
Depleted Over Time by Production and Therefore Our Future Ability to Earn
Revenues and Meet Our Expenses And Repay Our Indebtedness Depends Upon Our
Ability to Find or Acquire Additional Oil and Natural Gas Reserves That Are
Economically Recoverable and Result in Revenues to Us.

Unless
we successfully replace the oil and natural gas reserves that we produce, our
reserves will decline, resulting eventually in a decrease in the quantities of
oil and natural gas we are able to produce and lower revenues and cash flow from
operations. We seek to replace reserves through exploitation, development and
exploration, as well as through acquisitions. We may not be able to continue to
replace reserves from our exploitation, development and exploration activities
at acceptable costs. Lower prices of oil and gas may further limit the kinds of
reserves that can be developed at an acceptable cost. Lower prices also decrease
our cash flow and may cause us to decrease capital expenditures. The business of
exploring for, developing or acquiring reserves is capital intensive. We may not
be able to make the necessary capital investment to maintain or expand our oil
and gas reserves if cash flow from operations is reduced and external sources of
capital become limited or unavailable. In addition, exploitation, development
and exploration involve numerous risks that may result in dry holes, the failure
to produce oil and gas in commercial quantities, the inability to fully produce
discovered reserves and the inability to enhance production from existing
wells.

If We Should Make Future Acquisitions of Oil and Gas
Properties Where We Believe Commercially Recoverable Quantities of Oil and
Natural Gas Exist, These Acquisitions Carry Unknown Risks Including Potential
Unsuccessful Drilling Activities or Environmental Problems.

We
expect to continue to evaluate and pursue acquisition opportunities available on
terms we consider favorable in order to replace and increase our reserves.
Successful acquisition of producing properties generally requires accurate
assessments of recoverable reserves, future oil and gas prices, operating costs,
potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact, and as estimates, their accuracy is
inherently uncertain.

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We cannot assure you that we will successfully consummate any
acquisition, that we will be able to acquire producing oil and gas properties
that contain economically recoverable reserves or that any acquisition will be
profitably integrated into our operations. Our inability to achieve these
objectives will restrict our growth and the development of our oil and gas
reserves. In addition, acquiring producing oil and gas properties may increase
our potential exposure to liabilities and costs for environmental and other
problems existing on such properties. Although we perform a review of the
acquired properties that we believe is consistent with industry practice, such
reviews are inherently incomplete and inexact.

Estimating Reserves and Future Net Revenues Involves
Uncertainties and Oil and Gas Price Declines May Lead to Impairment of Oil and
Gas Assets.

At
December 31, 2010, based on the report of Summa Engineering, Inc., we claimed
total estimated proved reserves of 1,488.7 Mbble of oil. Through December 31,
2010, we were able to return to production 9 (8.75 net) well bores drilled by
prior owners on the Couba properties we acquired, and we had successfully
completed 12 (7.14 net) wells. As of that time, our combined production from all
our producing wells was approximately 108 (66 net) barrels of oil equivalent per
day. Production from our existing wells is subject to fluctuation from time to
time based upon the zones of the wells where we are obtaining production. There
can be no assurance that we will be successful in our development activities or
that as a consequence we will claim any material amounts of additional proven
reserves as a result of these and further drilling activities. In any event,
there are numerous uncertainties inherent in estimating quantities of proved
reserves, including many factors beyond our control.

Reserve
information provided in this Annual Report and that we may provide in the future
will represent estimates based on reports prepared by our independent petroleum
engineers, as well as internally generated reports. Petroleum engineering is not
an exact science. Information relating to proved oil and gas reserves is based
upon engineering estimates derived after analysis of information we furnish or
furnished to us by the operator of the property. Estimates of economically
recoverable oil and gas reserves and of future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical production
from the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions concerning
future oil and gas prices, future operating costs, severance and excise taxes,
capital expenditures and workover and remedial costs, all of which may in fact
vary considerably from actual results. Oil and gas prices, which fluctuate over
time, may also affect proved reserve estimates. For these reasons, estimates of
the economically recoverable quantities of oil and gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows expected there from
prepared by different engineers or by the same engineers at different times may
vary substantially. Actual production, revenues and expenditures with respect to
our reserves will likely vary from estimates, and such variances may be
material. Either inaccuracies in estimates of proved undeveloped reserves or the
inability to fund development could result in substantially reduced reserves. In
addition, the timing of receipt of estimated future net revenues from proved
undeveloped reserves will be dependent upon the timing and implementation of
drilling and development activities estimated by us for purposes of the reserve
report.

Quantities
of proved reserves are estimated based on economic conditions in existence in
the period of assessment. Lower oil and gas prices may have the impact of
shortening the economic lives on certain fields because it becomes uneconomic to
produce all recoverable reserves on such fields, thus reducing proved property reserve
estimates. If such revisions in the estimated quantities of proved reserves
occur, it will have the effect of increasing the rates of depreciation,
depletion and amortization on the affected properties, which would decrease
earnings or result in losses through higher depreciation, depletion and
amortization expense. The revisions may also be sufficient to trigger impairment
losses on certain properties that would result in a further non-cash charge to
earnings.

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Our Reliance On a Limited Number of Key Management
Personnel Imposes Risks On Us That We Will Have Insufficient Management
Personnel Available If Their Services Are Unavailable.

We
are dependent upon the services of our President and Chief Executive Officer,
Michael K. Paulk, and Vice President, Finance and Chief Financial Officer,
Steven P. Ensz. The loss of either of their services could have a material
adverse effect upon us. The loss of the services of such persons would, in all
likelihood, require us to seek the services of one or more other persons who
would be less familiar with our oil and gas properties, our business objectives
and methods and would increase the risk that our activities would be
unsuccessful. We currently do not have employment agreements with either of such
persons.

Drilling For Oil and Natural Gas and Operating Oil and
Natural Gas Fields Involves Material Risks Including the Risk That No
Commercially Productive Reservoirs Will Be Encountered; We Have Uninsured
Risks.

Drilling
activities are subject to many risks, including the risk that no commercially
productive reservoirs will be encountered. There can be no assurance that new
wells drilled by us will be productive or that we will recover all or any
portion of our investment. Drilling for oil and gas may involve unprofitable
efforts, not only from dry wells, but from wells that are productive but do not
produce sufficient net revenues to return a profit after drilling, operating and
other costs. The cost of drilling, completing and operating wells is often
uncertain. Our drilling operations may be curtailed, delayed or canceled as a
result of numerous factors, many of which are beyond our control, including
economic conditions, mechanical problems, title problems, weather conditions,
compliance with governmental requirements and shortages or delays of equipment
and services. Our future drilling activities may not be successful and, if
unsuccessful, such failure may have a material adverse effect on our future
results of operations or financial condition.

In
addition to the substantial risk that wells drilled will not be productive,
hazards such as unusual or unexpected geologic formations, pressures, downhole
fires, mechanical failures, blowouts, cratering, explosions, uncontrollable
flows of natural gas, oil or well fluids, pollution and other physical and
environmental risks are inherent in oil and gas exploration and production.
These hazards could result in substantial losses to us due to injury and loss of
life, severe damage to and destruction of property and equipment, pollution and
other environmental damage and suspension of operations. As protection against
operating hazards, we maintain insurance coverage against some, but not all,
potential losses, as is common in the oil and natural gas industry. We do not
fully insure against all risks associated with our business either because such
insurance is not available or because the cost thereof is considered
prohibitive. The occurrence of an event that is not covered, or not fully
covered, by insurance could have a material adverse effect on our financial
condition and results of operations.

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Shortages of Oil Field Equipment, Services and Qualified
Personnel Could Adversely Affect Our Results Of Operations.

The
demand for qualified and experienced field personnel to drill wells and conduct
field operations, geologists, geophysicists, engineers and other professionals
in the natural gas and oil industry can fluctuate significantly, often in
correlation with natural gas and oil prices, causing periodic shortages. There
have also been shortages of drilling rigs and other equipment, as demand for
rigs and equipment has increased along with the number of wells being drilled.

These
factors also cause significant increases in costs for equipment, services and
personnel. Higher natural gas and oil prices generally stimulate increased
demand and result in increased prices for drilling rigs, crews and associated
supplies, equipment and services. We cannot be certain when we will experience
shortages or price increases, which could adversely affect our profit margin,
cash flow and operating results or restrict our ability to drill wells and
conduct ordinary operations.

Risks Relating to the Market for Our Securities

Absence of a Public Market for Our Common
Shares.

Our
  common shares presently have no trading market in the United States or Canada,
  and there can be no assurance as to the liquidity of any markets that may develop
  in the future for the common shares, the ability of the holders of common shares
  to sell their common shares in the United States or Canada or the price at which
  holders would be able to sell their common shares. Future trading prices of
  the common shares will depend on many factors, including, among others, our
  operating results and the market for similar securities.

CAUTIONARYSTATEMENTFORPURPOSESOFTHESAFEHARBORPROVISIONSOFTHEPRIVATESECURITIESLITIGATIONREFORMACTOF1996

With
the exception of historical matters, the matters we discussed below and
elsewhere in this Annual Report are forward-looking statements as defined
under the Securities Exchange Act of 1934, as amended that involve risks and
uncertainties. The forward-looking statements appear in various places including
under the headings Item 1. Description of Business and Item 6. Managements
Discussion and Analysis or Plan of Operation. These risks and uncertainties
relate to our ability to raise capital and fund our oil and gas well drilling
and development plans, our ability to fund the repayment of our current
liabilities, our ability to attain and maintain profitability and cash flow and
continue as a going concern, our ability to increase our reserves of oil and gas
through successful drilling activities and acquisitions, our ability to enhance
and maintain production from existing wells and successfully develop additional
producing wells, our access to debt and equity capital and the availability of
joint venture development arrangements, our ability to remain in compliance with
the terms of any agreements pursuant to which we borrow money and to repay the
principal and interest when due, our estimates as to our needs for additional
capital and the times at which additional capital will be required, our
expectations as to our sources for this capital and funds, our ability to
successfully implement our business strategy, our ability to identify, acquire
and integrate successfully any additional producing oil and gas properties we
acquire and operate such properties profitably, our ability to maintain
compliance with covenants of our loan documents and other agreements pursuant to
which we issue securities or borrow funds and to obtain waivers and amendments
when and as required, our ability to borrow funds or maintain levels of
borrowing availability under our borrowing arrangements, our ability to meet our
intended capital expenditures, our statements about quantities of production of oil and gas as it implies
continuing production rates of those levels, proved reserves or borrowing
availability based on proved reserves and our future net cash flows and their
present value.

23

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Readers
are cautioned that the risk factors and uncertainties referred to above, as well
as the risk factors described elsewhere in this Annual Report, in some cases
have affected, and in the future could affect, our actual results and could
cause our actual consolidated results during 2010 and beyond, to differ
materially from those expressed in any forward-looking statements made by or on
our behalf.

Item 1B  Unresolved Staff Comments:

As
of December 31, 2010, we did not have any unresolved comments from the SEC staff
that were received 180 or more days prior to year-end.

Item 2 - Properties:

A description
  of our properties appears in Item 1 of this Annual Report on Form 10-K.

Item 3 - Legal Proceedings:

No
legal proceedings are pending against us.

Item 4 - Submission of Matters to a Vote of Security
Holders:

No
matter was submitted during the fourth quarter of the year ended December 31,
2010 to a vote of security holders through the solicitation of proxies or
otherwise.

24

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PART II

Item 5 - Market for Registrants Common Equity, Related
Stockholder Matters and IssuerPurchases of Equity
Securities:

Our
common shares are traded on the TSX Venture Exchange, Inc. under the symbol
ANR.U. Our common shares are not currently traded on any United States stock
exchange or in the over-the-counter market in the United States, and,
accordingly, there is currently no public market for our common shares in the
United States.

The
reported high and low sales prices, reported in United States dollars, for our
common shares, as reported by the TSX Venture Exchange, on a calendar quarterly
basis for the calendar year ended December 31, 2008 through March 31, 2011 were
as follows.

|                                                       |       | Prices(1) |                
|------------------------------------------------------ | ----- | --------- | ---------------
|                                                       |       |           |                
|                                                       | High  | Low       | Share Volume(1)
|                                                       |       |           |                
|2008                                                   |       |           |                
|Fourth Quarter beginning    November 17,
      2008(2) | $0.40 | $0.10     | 194,688        
|                                                       |       |           |                
|2009                                                   |       |           |                
|First Quarter                                          | $0.30 | $0.10     | 154,273        
|Second Quarter                                         | $0.40 | $0.10     | 167,159        
|Third Quarter                                          | $1.00 | $0.30     | 425,354        
|Fourth Quarter                                         | $0.90 | $0.30     | 370,773        
|                                                       |       |           |                
|2010                                                   |       |           |                
|First Quarter                                          | $0.60 | $0.30     | 513,282        
|Second Quarter                                         | $0.65 | $0.40     | 546,196        
|Third Quarter                                          | $0.45 | $0.30     | 545,626        
|Fourth Quarter                                         | $0.44 | $0.23     | 783,196        
|                                                       |       |           |                
|2011                                                   |       |           |                
|First Quarter through   March 30,
      2011           | $0.38 | $0.22     | 474,117        

| | (1) | Effective October 26, 2010 the shareholders approved a 1
      for 10 reverse split of the issued and outstanding shares of our common
      stock reducing the outstanding shares from 134,306,080 to 13,430,608. Per
      share prices and share volumes pre-split have been adjusted to reflect
      this change.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Effective July 25, 2007, TSX Venture Exchange suspended
      trading in our securities as a result of the Cease Trade Order issued by
      the British Columbia Securities Commission. Effective November 17, 2008
      TSX Venture Exchange reinstated trading in our
  securities.                               

As
of March 31, 2011, we had 2,679 stockholders of record.

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On May 1, 2007, the British Columbia Securities Commission
issued a cease trade order (the "Management Cease Trade Order")
restricting trading in our securities by certain of our insiders until we file
the Annual Consolidated Financial Statements and related annual filings. As of
June 9, 2008 all of our filings were current and TSX Venture Exchange reinstated
trading in our securities on November 17, 2008.

We
intend to seek to have a trading market for our common shares develop in the
United States. There can be no assurance that we will be successful in this
regard. We do not meet the requirements to have our common shares included in
any NASDAQ trading system or listed on any national securities exchange.
However, we do intend to seek to have our shares quoted on the OTC Bulletin
Board®. In order to do so, a broker-dealer in securities in the United States
may be required to file with the National Association of Securities Dealers,
Inc. a notice that will enable the broker-dealer to enter quotations for our
common shares on the OTC Bulletin Board®. There can be no assurance that a
broker-dealer will file such a notice or, if filed, that quotations will be
accepted on the OTC Bulletin Board®. Further, there can be no assurance that if
a broker-dealer commences to enter bid and asked quotations for our common
shares in the OTC Bulletin Board® that a viable and active trading market will
develop.

Dividend Policy

We
do not intend to pay any dividends on our Common Stock for the foreseeable
future. Any determination as to the payment of dividends on our Common Stock in
the future will be made by our Board of Directors and will depend on a number of
factors, including future earnings, capital requirements, financial condition
and future prospects as well as such other factors as our Board of Directors may
deem relevant.

Issuer Purchases of Equity Securities

No
purchases of shares of our Common Stock, par value $.001 per share, were made by
us or on our behalf or by any affiliated purchaser, as defined in Rule
10b-18(a)(3) under the U.S. Securities Exchange Act of 1934, as amended, during
the year ended December 31, 2010.

Item 6  Selected Financial Data:

As
a smaller reporting company, we are not required to respond to this Item.

Item 7 - Managements Discussion and Analysis of
Financial Condition and Results ofOperations:

General

We
are engaged in the acquisition, development, exploitation and production of oil
and natural gas. Our revenues and profitability can be expected to be dependent,
to a significant extent, upon prevailing spot market prices for oil and natural
gas and upon the quantities of oil and natural gas we produce and sell. Prices
for oil and natural gas are subject to wide fluctuations in response to changes
in supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond
our control. Such factors include political conditions, weather conditions,
government regulations, the price and availability of alternative fuels and
overall economic conditions.

26

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Our
consolidated financial statements have been prepared on a going concern basis
which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. We recorded a net
loss of $2,062,145 in 2010. However, we recorded net income of $23,953,000 for
the twelve months ended December 31, 2009 as the result of a $27,994,000 gain on
extinguishment of debt related to the re-purchase of our 8% Secured Debentures
and a settlement on debt owed to Dune Energy. We had a working capital
deficiency at December 31, 2010 of approximately $6.6 million and an accumulated
deficit at December 31, 2010 whichleads to questions concerning our
ability to meet our obligations as they come due. We have a need for substantial
funds to pay current liabilities and to develop our oil and gas properties. We
have financed our activities using debt and equity financings and drilling
participations, and we have no bank or other line of credit or other financing
agreement providing borrowing availability with a commercial lender. Our cash
flow from operations is sensitive to the prices we receive for our oil and
natural gas in addition to the quantities of oil and natural gas we sell. A
reduction in planned capital spending or an extended decline in oil and gas
prices could result in less than anticipated cash flow from operations and a
lessened ability to sell more of our common stock or refinance our debt with
current lenders or new lenders, which would likely have a further material
adverse effect on us. The uncertainty as to whether or not we can raise
additional capital in the future is likely to have an effect on our future
revenues and operations if we are unable to raise that additional capital.

As
a result of the losses incurred and current negative working capital and other
matters described above, there is no assurance that the carrying amounts of our
assets will be realized or that liabilities will be liquidated or settled for
the amounts recorded. Our ability to continue as a going concern is dependent
upon adequate sources of capital and the ability to sustain positive results of
operations and cash flows sufficient to continue to explore for and develop our
oil and gas reserves. See the discussion under the caption How We Have Financed
Our Activities.

The
independent registered public accounting firms report on our consolidated
financial statements as of and for the year ended December 31, 2010 includes an
explanatory paragraph which states that we have sustained a substantial loss in
2010 and have a working capital deficiency and an accumulated deficit at
December 31, 2010 that raise substantial doubt about our ability to continue as
a going concern.

Statements of Operations

A Comparison of Operating Results for the Years Ended
December 31, 2010 and December 31, 2009

We
recorded a net loss of $2,062,145 during the year ended December 31, 2010
compared to net income of $23,953,000 during the year ended December 31, 2009.
During the year ended December 31, 2010, our revenues were comprised of oil and
gas sales totaling $2,523,730 compared with oil sales of $1,054,000 during the
same period of 2009. Our oil sales for the twelve months ended December 31, 2010
were higher as a result of higher oil prices and an increase in volumes. Our net
average daily production for the twelve month period ended December 31, 2010
increased by 109% over the same period of the prior year, from 124 (44 net) barrels of oil equivalent per day to 162 (92 net) barrels of
oil equivalent per day. The increase was due to a 31% increase in gross
production and the remaining increase was due to a higher net revenue interest.
Oil prices increased by 14% for the twelve month period ended December 31, 2010
over the same period of the prior year from $66.04 per barrel of oil equivalent
to $75.43 per barrel of oil equivalent. Production from our existing wells is
subject to fluctuation based upon which zones of wells are in production and
normal declines resulting as the reservoirs are depleted.

27

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We
had expenses of $4,640,677 for the year ended December 31, 2010 compared to
income of $22,869,000 for the year ended December 31, 2009 due to a gain on the
extinguishment of debt and exchange of non-monetary assets. Our general and
administrative expenses increased by $143,000 for the twelve months ended
December 31, 2010 compared to the same period in 2009 at $1,609,000 and
$1,465,000 respectively. The increase is due to higher stock based
compensation.

Interest
and financing costs decreased by $96,000 for the year ended December 31, 2010
compared to the same period in 2009 at $511,000 and $607,000 respectively.
Interest costs were lower as a result of a decrease in debt which was partially
due to the re-purchase of our debentures during the third quarter of 2009.

Lease
operating expenses of $890,000, production taxes of $133,000 and depletion,
depreciation and amortization of $911,628 during the year ended December 31,
2010 changed from $760,000, $25,000, and $576,000, respectively, during the year
ended December 31, 2009. Lease operating expenses increased as a result of
increased production and activity level of the operator of the field and our
increased working interest. Production taxes increased primarily as a result of
increased production and our increased working interest. The increase in
depletion, depreciation and amortization is primarily due to increased
production and our increased working interest.

During
the year ended December 31, 2010, we had a foreign exchange loss of $587,000,
compared to a $1,687,000 foreign exchange loss for the year ended December 31,
2009. Our foreign exchange gains and losses arise out of an inter-company
indebtedness we owe to our wholly-owned subsidiary, Gothic, which is payable in
Canadian dollars. The foreign exchange loss for the twelve months ended December
31, 2010 was caused by the weakening of the US dollar against the Canadian
dollar.

We
incurred a charge of $14,000 for the year ended December 31, 2009 to write-down
our inventory to lower of cost or market. There was no such charge for the year
ended December 31, 2010.

We
recorded a gain of $27,994,000 for the year ended December 31, 2009 as the
result of a gain on extinguishment of debt related to the re-purchase of our 8%
Secured Debentures, and a settlement on debt owed to Dune Energy. We also
settled $16,000 of vendor notes payable for a net gain of $10,000. There was no
such gain for the year ended December 31, 2010.

28

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Liquidity and Capital Resources

*General*

At
December 31, 2010, we do not have any available borrowing capacity under
existing credit facilities and our current assets are $369,000 compared with
current liabilities of $6.9 million which includes accounts payable, revenues
payable, notes payable, and other current obligations. We have substantial needs
for funds to pay our outstanding payables and debt due during 2010.

We
have substantial need for capital to develop our oil and gas prospects. Since
2001, we have funded our capital expenditures and operating activities through a
series of debt and equity capital-raising transactions, drilling participations
and through an increase in notes payable. We expect any future capital
expenditures for drilling and development to be funded from the sale of drilling
participations and equity capital. It is management's plan to raise additional
capital through the sale of interests in our drilling activities or other
strategic transactions; however, we currently have no firm commitment from any
potential investors and such additional capital may not be available to us in
the future.

Years Ended December 31, 2010 and December 31, 2009

Our
net cash provided by operating activities was $714,000 for the year ended
December 31, 2010 as compared to net cash used in operating activities of
$861,000 for the year ended December 31, 2009, an increase of $1.6 million. The
increase in net cash provided by operating activities for the year ended
December 31, 2010 compared to the same period of 2009 was primarily due to a
loss from non-cash items for the year ended 2009. Changes in working capital
items had the effect of increasing cash flows from operating activities by
$624,000 during the year ended December 31, 2010 due to a decrease in accounts
receivable and prepaid expense and an increase in accounts payable. Changes in
working capital items had the effect of increasing cash flows from operating
activities by $797,000 during the year ended December 31, 2009 due to an
increase in accounts payable, partially offset by an increase in accounts
receivable.

We
used $335,000 of net cash in investing activities during the year ended December
31, 2010 compared to net cash used of $969,000 for the same period of 2009. The
cash used in investing activities was for the purchase and development of oil
and gas properties for both years.

We
used $513,000 of net cash in financing activities for the year ended December
31, 2010 compared to $1.9 million of net cash provided by financing activities
for the same period in 2009. For the year ended December 31, 2010, net cash
outflows from financing activities were a result of payments against outstanding
notes of $229,304 offset by the issuance of notes to related parties of $333,000
and incurred financing costs of $15,000. On July 29, 2009 we closed the final
tranche of a Private Placement of 6.67 million shares of our common stock at
$0.30 per share for total proceeds of $2.0 million. In conjunction with this
placement, finders fees were paid to two firms in Vancouver, BC in the amount of
$96,839 and finders warrants were issued for the purchase of 538,000 shares of
common stock exercisable through July 29, 2010 at $0.50 per share. In addition
to proceeds from the Private Placement, we had issuance of notes payable of $1.6
million offset by payments against outstanding notes of $1.6 million during the
year ended December 31, 2009.

29

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We
have no other commitments to expend additional funds for drilling activities for
the rest of 2011.

Additional
information regarding liquidity and capital resources is included under the
caption Future Capital Requirements and Resources.

**How
We Have Financed Our Activities**

Our activities since 2002 have been financed primarily from
sales of debt and equity securities and drilling participations. These
transactions during this period of time included the following, among other
previously reported financing transactions we entered into during the period:

*Certain
Financing Transactions Prior to January 1, 2010:*

On
October 21, 2003 and October 31, 2003 we completed financing transactions of
$11.695 million and $305,000, respectively, by issuing our Convertible Secured
Debentures (the "Debentures"). Initially, the Debentures were repayable on
September 30, 2005 with interest payable quarterly commencing December 31, 2003
at 8% per annum. At the dates of issuance, the outstanding principal of the
Debentures was convertible by the holders into our common shares at a conversion
price of $4.50 per share, subject to antidilution adjustment. The Debentures are
collateralized by substantially all of our assets and have covenants limiting
unsecured borrowings to $2 million and restricting the payment of dividends and
capital distributions. A finder's fee in the amount of $360,000 was paid to
Middlemarch Partners Limited of London, England in connection with the
financing.

In
June 2005, the Debentures were amended with approval by approximately 86% of the
Debentureholders. The amendments extended the maturity date of the Debentures by
one year to September 30, 2006, reduced through the maturity date of the
Debentures the per share price at which the principal of the Debentures could be
converted into shares of common stock to $1.50 per share, and provided for the
partial release of the lien collateralizing the Debentures in the event a third
party entered into an agreement with us pursuant to which the third party is
granted the right to drill one or more wells on our properties and commenced
that drilling activity.

Under
the amendments, 7,216,667 shares were issuable upon full conversion of the
Debentures at the reduced conversion price; however, the conversion rights
feature expired on September 29, 2006 and was not renewed.

On
October 19, 2005 we executed a definitive Exploration and Development Agreement
(the Agreement) with Dune Energy, providing for the creation of an area of
mutual interest covering an area of approximately 31,367 acres. Pursuant to the
terms of the Agreement, Dune Energy agreed to pay us in instalments a prospect
fee in the amount of $1.0 million, all of which has been paid. Under the
original Agreement, in the event we and Dune Energy elected to complete the
first two exploratory wells drilled pursuant to the Agreement, upon the receipt
by Dune Energy of a log from either of those two wells, Dune Energy would pay to
us an additional prospect fee of $500,000. However, as a result of Dune Energy
paying 100% of the costs for our participation in the 3D seismic survey being
conducted by SEI and described above, the terms of the Agreement between us and
Dune Energy were amended to waive any additional prospect fees that may be due
from Dune. On June 26, 2007, Dune Energy increased its participation to 75% of our interest under these agreements, excluding the area
under the Bayou Couba lease itself where it retained a participation of 50% of
our interest, with the payment of $3 million. On September 1, 2007 Dune Energy
was elected successor operator under the joint development agreement and Dune
Energy paid us an additional $500,000. We used the proceeds from these payments
to reduce outstanding obligations.

30

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On
March 19, 2009 the TSX Venture Exchange approved the issuance of 106,000 shares
of our common stock as payment for an outstanding invoice owed to Wakabayahsi
Funds LLC in the amount of $10,600. The shares were issued on March 26, 2009.

On
July 29, 2009 we closed the final tranche of a Private Placement of 6.67 million
shares of our common stock at $0.30 per share for total proceeds of $2.0
million. In conjunction with this placement, finders fees were paid to two firms
in Vancouver, BC in the amount of $96,839 and finders warrants were issued for
the purchase of 538,000 shares of common stock exercisable through July 29, 2010
at $0.50 per share. The net proceeds of the private placement are being used to
close the Dune Transaction and for working capital purposes.

On
August 4, 2009 we re-purchased and retired $7.8 million, plus accrued and unpaid
interest, of its 8% Secured Debentures held by Dune (including release of
collateral rights), acquired Dunes interest in producing wells and certain
leasehold rights in the Bayou Couba field, resumed operations of the Bayou Couba
field and settled outstanding issues between the companies. In exchange, the
Company agreed to assign a portion of certain deep rights held by us and pay
Dune a total of $1.3 million dollars with $1 million due at closing and an
additional $300,000 due in quarterly payments commencing 90 days after resuming
operations of the field.

We
re-purchased its remaining outstanding 8% Secured Debenture debt totaling $2.0
million and an additional $821,000 of accrued interest with various holders with
the payment of $256,000 and the issuance of 1.17 million shares of its common
stock at a deemed price of US$0.30 per share. The issuance of the shares
occurred during the third quarter of 2009.

In
December 2009, we granted 160,000 common shares to a group of lenders as a share
bonus for the bridge loan related to the acquisition of an Overriding Royalty
Interest. The relative fair value of these shares of $42,585 was recorded as a
discount on the bridge loan. The issuance of the shares occurred in January
2010.

Future Capital Requirements and Resources

At
December 31, 2010, we do not have any available borrowing capacity under
existing credit facilities and our current assets are $369,000 compared with
current liabilities of $6.9 million which includes accounts payable, revenues
payable and notes payable (a portion of which is past due). We have substantial
needs for funds to pay our outstanding payables and debt due during 2011. In
addition, we have substantial need for capital to develop our oil and gas
prospects. At December 31, 2010, we have no commitments for additional capital
to fund drilling activities in 2011.

Since
2001, we have funded our capital expenditures and operating activities through a
series of debt and equity capital-raising transactions, drilling participations,
and through an increase in notes payable. Any capital expenditures for drilling
purposes during 2011, we expect will be funded from the sale of drilling
participations and equity capital. It is our intention to raise additional capital through the sale of interests in our
drilling activities or other strategic transactions; however, we currently have
no firm commitment from any potential investors and such additional capital may
not be available to us in the future.

31

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Our
business strategy requires us to obtain additional financing and our failure to
do so can be expected to adversely affect our ability to further grow our
revenues, oil and gas reserves and achieve and maintain a significant level of
revenues and profitability. There can be no assurance we will obtain this
additional funding. Such funding may be obtained through the sale of drilling
participations, joint ventures, equity securities or by incurring additional
indebtedness. Without such funding, our revenues will continue to be limited and
it can be expected that our operations will not be profitable. In addition, any
additional equity funding that we obtain may result in material dilution to the
current holders of our common stock.

Critical Accounting Policies

Oil and Gas Properties

We
account for our oil and gas exploration and development activities using the
full cost method of accounting prescribed by the SEC. Accordingly, all our
productive and non-productive costs incurred in connection with the acquisition,
exploration and development of oil and natural gas reserves are capitalized and
depleted using the units-of-production method based on proved oil and gas
reserves. We capitalize our costs including salaries and related fringe benefits
of employees directly engaged in the acquisition, exploration and development of
oil and natural gas properties, asset retirement costs, as well as other
directly identifiable general and administrative costs associated with these
activities. These costs do not include any costs related to production, general
corporate overhead, or similar activities. Our oil and natural gas reserves will
be estimated annually by independent petroleum engineers. Our calculation of
depreciation, depletion and amortization (DD&A) includes estimated future
expenditures that we believe we will incur in developing our proved reserves and
the estimated dismantlement and abandonment costs, net of salvage values.
Quarterly, we will perform a review of the carrying costs of our oil and gas
properties to assess whether such costs are fully recoverable from future cash
flows. In the event the unamortized cost of the oil and natural gas properties
we are amortizing exceeds the full cost ceiling as defined by the SEC, we will
charge the amount of the excess to expense in the period during which the excess
occurs. The full cost ceiling is based principally on the estimated future
discounted net cash flows from our oil and natural gas properties. Changes in
our estimates or declines in prevailing oil and natural gas prices could cause
us to reduce in the near term our carrying value of our oil and natural gas
properties. A write-down arising out of these conditions is referred to
throughout our industry as a full cost ceiling write-down.

We
evaluate oil and natural gas reserve acquisition opportunities in light of many
factors only a portion of which may be reflected in the amount of proved oil and
natural gas reserves that we propose to acquire. In determining the purchase
price to be offered, we do not solely rely on proved oil and gas reserves or the
value of such reserves determined in accordance with Rule 4-10 of Regulation S-X
adopted by the SEC. Factors we consider include the probable reserves of the
interests intended to be acquired, anticipated efficiencies and cost reductions
that we believe can be made in us operating the producing properties, the
additional reserves that we believe can be proven relatively inexpensively based
on our knowledge of the area where the interests are located and existing producing properties we may
own. We may also consider other factors if appropriate. We may conclude that an
acquisition is favorable, even if there may be a subsequent full cost ceiling
write-down associated with it, based on other factors we believe are important.
We do not perform a ceiling test for specific properties acquired because the
ceiling test is performed at each quarter and at year end for all of our
properties included in our cost center and is based on prices for oil and
natural gas as of that date which may be higher or lower than the prices used
when evaluating potential acquisitions. We review the transaction in the light
of proved and probable reserves, historic and seasonal fluctuations in the
prices of oil and natural gas, anticipated future prices for oil and natural
gas, the factors described above as well as other factors that may relate to the
specific properties under review.

32

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Revenue Recognition

Our
profitability and revenues are and will be dependent, to a significant extent,
upon prevailing spot market prices for oil and natural gas. Oil and natural gas
prices and markets have been volatile. Prices are subject to wide fluctuations
in response to changes in supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond our control.
Such factors include political conditions, weather conditions, government
regulations, the price and availability of alternative fuels and overall
economic conditions. Oil prices have fluctuated significantly over the past
twelve months.

We
use the sales method for recording natural gas sales. Our oil and condensate
production is sold, title passed, and revenue recognized at or near our wells
under short-term purchase contracts at prevailing prices in accordance with
arrangements, which are customary in our industry. Our gas sales are recorded as
revenues when the gas is metered and title transferred pursuant to the gas sales
contracts. During such times as our sales of gas exceed our pro rata ownership
in a well, such sales will be recorded as revenues unless total sales from the
well have exceeded our share of estimated total gas reserves underlying the
property at which time the excess will be recorded as a gas balancing
liability.

Income taxes

As
part of the process of preparing the consolidated financial statements, we are
required to estimate the federal and state income taxes in each of the
jurisdictions in which we operate. This process involves estimating the actual
current tax exposure together with assessing temporary differences resulting
from differing treatment of items, such as depreciation, depletion and
amortization, and certain accrued liabilities for tax and accounting purposes.
These differences and the net operating loss ("NOL") carryforwards result in
deferred tax assets and liabilities, which are included in our consolidated
balance sheet. We must then assess, using all available positive and negative
evidence, the likelihood that the deferred tax assets will be recovered from
future taxable income. If we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase or decrease this allowance in a period, we must include an
expense or reduction of expense within the tax provisions in the consolidated
statement of operations.

Under
FASB ASC 740, Accounting for Income Taxes, an enterprise must use
judgment in considering the relative impact of negative and positive evidence.
The weight given to the potential effect of negative and positive evidence
should be commensurate with the extent to which it can be objectively verified.
The more negative evidence that exists (a) the more positive evidence is
necessary and (b) the more difficult it is to support a conclusion that a
valuation allowance is not needed for some portion, or all of the
deferred tax asset. Among the more significant types of evidence that we
consider are:

33

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- taxable income projections in future years,
- whether the carryforward period is so brief that it would limit
  realization of tax benefits,
- future sales and operating cost projections that will produce more than
  enough taxable income to realize the deferred tax asset based on existing
  sales prices and cost structures, and
- our earnings history exclusive of the loss that created the future
  deductible amount coupled with evidence indicating that the loss is an
  aberration rather than a continuing condition.

Since
we have no earnings history to determine the likelihood of realizing the
benefits of the deferred tax assets, we are unable to determine our ability to
realize our NOL carryforwards prior to their expiration. Accordingly, we are
required to provide a valuation allowance against our deferred tax asset. As of
December 31, 2010 and 2009, we have a deferred tax asset of approximately $7.2
million and $6.4 million for which we have recognized a $7.2 million and $6.4
million valuation allowance, respectively.

Notes payable and long-term debt

We
account for notes payable and long-term debt by recording the face amount of the
debt instrument adjusted for any premium or discount realized on the issuance of
the instrument. The premium or discount is amortized to expense utilizing the
effective interest rate method for debt instruments with scheduled repayment
terms. Any un-amortized premium or discount remaining at early retirements of a
debt instrument is recorded as a gain or loss as applicable.

Asset Retirement Obligation

Effective
January 1, 2003, we adopted FASB ASC 410-20, Accounting for Asset Retirement
Obligations (ASC 410-20). This statement applies to obligations associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction and development of the assets.

Under
ASC 410-20 we recognize the fair value of a liability for a retirement
obligation in the period in which the liability is incurred. For oil and gas
properties, this is the period in which an oil or gas well is acquired or
drilled. The asset retirement obligation is capitalized as part of the carrying
amount of the asset at its discounted fair value. The liability is then accreted
each period until the liability is settled or the asset is sold, at which time
the liability is reversed.

Accounting Matters

On
December 31, 2008, the Securities and Exchange Commission (SEC) issued the final
rule, Modernization of Oil and Gas Reporting (Final Rule). The Final Rule
adopts revisions to the SECs oil and gas reporting disclosure requirements and
is effective for annual reports on Forms 10-K for years ending on or after
December 31, 2009. The revisions are intended to provide investors with a more
meaningful and comprehensive understanding of oil and gas reserves to help
investors evaluate their investments in oil and gas companies. The amendments are also designed to modernize the oil and gas disclosure
requirements to align them with current practices and technological advances.
Revised requirements in the Final Rule include, but are not limited to:

34

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- Oil and gas reserves must be reported using a 12-month
average of the closing prices on the first day of each of such months, rather
than a single day year-end price:
- Companies will be allowed to report, on a voluntary basis,
probable and possible reserves, previously prohibited by SEC rules; and
- Easing the standard for the inclusion of proved undeveloped
reserves (PUDs) and requiring disclosure of information indicating any progress
toward the development of PUDs.

We
have adopted the Final Rule and have begun complying with the disclosure
requirements in this annual report on Form 10-K for the year ended December 31,
2010.

In
January 2010, the FASB issued FASB Accounting Standards Update (ASU) No. 2010-03
Oil and Gas Estimations and Disclosures (ASU 2010-03). This update aligns the
current oil and natural gas reserve estimation and disclosure requirements of
the Extractive Industries Oil and Gas topic of the FASB ASC (Topic 932) with the
changes required by the SEC final rule ASC 2010-03, as discussed above. ASU
2010-03 expands the disclosures required for equity method investments, revises
the definition of oil and natural gas-producing activities to include
nontraditional resources in reserves unless not intended to be upgraded into
synthetic oil or natural gas, amends the definition of proved oil and natural
gas reserves to require 12-month average pricing in estimating reserves, amends
and adds definitions in the Master Glossary that is used in estimating proved
oil and natural gas quantities and provides guidance on geographic area with
respect to disclosure of information about significant reserves. ASU 2010-03
must be applied prospectively as a change in accounting principle that is
inseparable from a change in accounting estimate and is effective for entities
with annual reporting periods ending on or after a change in accounting estimate
and is effective for entities with annual reporting periods ending on or after
December 31, 2009. The impact on the Companys operating results, financial
position and cash flows has been recorded in the financial statements.

In
January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair
Value Measurements (ASU 2010-06). This update provides amendments to Subtopic
820-10 and requires new disclosures for 1) significant transfers in and out of
Level 1 and Level 2 and the reasons for such transfers and 2) activity in Level
3 fair value measurements to show separate information about purchases, sales,
issuances and settlements. In addition, this update amends Subtopic 820-10 to
clarify existing disclosures around the disaggregation level of fair value
measurements and disclosures for the valuation techniques and inputs utilized
(for Level 2 and Level 3 fair value measurements). The provisions in ASU 2010-06
are applicable to interim and annual reporting periods beginning subsequent to
December 15, 2009, with the exception of Level 3 disclosures of purchases,
sales, issuances and settlements, which will be required in reporting periods
beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact
the Company's operating results, financial position or cash flows, but did
impact the Company's disclosures on fair value measurements.

35

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Item 7A  Quantitative and Qualitative Disclosures About
Market Risk:

As a smaller reporting company, we are not required to respond
to this Item.

Item 8  Consolidated Financial Statements and
Supplementary Data:

The
response to this Item is included in a separate section of this report. See page
F-1.

Item 9A(T)  Controls and Procedures

(a)
Managements Annual Report on Internal Control Over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, as
amended, as a process designed by, or under the supervision of, a companys
principal executive and principal financial officers and effected by a companys
board of directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:

|* | pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      our assets;                                                                                                                                                                                          
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                       
|* | provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of consolidated financial
      statements in accordance with generally accepted accounting principles,
      and that our receipts and expenditures are being made only in accordance
      with authorizations of our management and directors;
|  |                                                                                                                                                                                                                                                                                                                                                       
|* | and provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use or disposition of our
      assets that could have a material effect on the consolidated financial
      statements.                                                                                                                 

36

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Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. In addition, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate. In order to evaluate the
effectiveness of our internal control over financial reporting as of December
31, 2010, as required by Sections 404 of the Sarbanes-Oxley Act of 2002, our
management commenced an assessment, based on the criteria set forth in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the " COSO Framework "). A material
weakness is a control deficiency, or a combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of our
annual or interim consolidated financial statements will not be prevented or
detected on a timely basis. In assessing the effectiveness of our internal
control over financial reporting, our management, including the chief executive
officer and chief financial officer, identified the following deficiencies: (1)
Deficiencies in Segregation of Duties. The Chief Executive Officer and the Chief
Financial Officer are actively involved in the preparation of the consolidated
financial statements, and therefore cannot provide an independent review and
quality assurance function within the accounting and financial reporting group.
The limited number of qualified accounting personnel discussed above results in
an inability to have independent review and approval of financial accounting
entries. Furthermore, management and financial accounting personnel have
wide-spread access to create and post entries in the Companys financial
accounting system. There is a risk that a material misstatement of the
consolidated financial statements could be caused, or at least not be detected
in a timely manner, due to insufficient segregation of duties, and (2) Our
financial statement closing process did not identify all the journal entries
that needed to be recorded as part of the closing process for certain complex
and non-routine transactions. As part of the audit, our independent registered
public accounting firm proposed certain entries that should have been recorded
as part of the normal closing process. Our internal control over financial
reporting did not detect such matters and, therefore, was not effective in
detecting misstatements in the consolidated financial statements.

To address the material weakness, we performed additional
analysis and other post-closing procedures in an effort to ensure our
consolidated financial statements included in this annual report have been
prepared in accordance with generally accepted accounting principles.
Accordingly, management believes that the consolidated financial statements
included in this report fairly present in all material respects our financial
condition, results of operations and cash flows for the periods presented. The
absence of the ability to conclude as to the sufficiency of internal controls is
a material weakness. This annual report does not include an attestation report
of our independent registered public accounting firm regarding internal control
over financial reporting. Our internal controls were not subject to attestation
by our independent registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit us to provide only
managements report in this annual report.

(b)
Changes in Internal Control Over Financial Reporting

There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonable
likely to materially affect, our internal controls over financial reporting.

This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report is not at this time subject to attestation by our
registered public accounting firm pursuant to temporary rules and amendments
thereto of the SEC that permit us to provide only management's report in this
annual report.

37

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Despite
the internal control deficiencies, we believe that our consolidated financial
statements contained in this Form 10-K filed with the SEC fairly present our
financial position, results of operations and cash flows for the fiscal year
ending December 31, 2010 in all material respects.

Item 9B  Other Information

No
information is required to be disclosed in response to this Item 8B.

38

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PART III

Item 10  Directors, Executive Officers and Corporate
Governance:

Directors, Executive Officers and Significant Employees

The
following table contains information concerning the current Directors, executive
officers and significant employees of the Company:

Name
    Age
    PositionDirectors and Executive Officers:Michael K. Paulk (1)
    62
    President and
      DirectorSteven P. Ensz
    59
    Vice President, Finance, and
      Chief Financial Officer and DirectorBennett G. Shelton(1)
    54
    DirectorWilliam A. Grant (1)
    49
    DirectorSignificant Employees:Richard O. Mulford
    58
    Manager of
      OperationsRobert G. Snead
    72
    Exploitation Manager


________________________          (1)
Member of our Audit Committee

Each
Director of our company has been elected to serve until our next annual meeting
of stockholders and until his successor has been elected and qualified.

Michael
K. Paulk: Mr. Paulk was elected President and Director of our company in
July 2001. From October 1994 to January 2001, when it was sold to Chesapeake
Energy Corporation, he was the President and a Director of Gothic Energy
Corporation ("GEC"). GEC is neither a predecessor nor affiliate of either us or
our subsidiary, Gothic, and there was no affiliation between Gothic and GEC
prior to January 2001. GEC was engaged, until its acquisition by Chesapeake
Energy Corporation in January 2001, in the acquisition, development, exploration
and production of natural gas and oil. Mr. Paulk has been engaged in the oil and
gas industry for more than 20 years.

**Steven
P. Ensz**: Mr. Ensz has been Vice-President, Finance and Chief Financial
Officer of our company since July 2001 and is responsible for our financial
activities. From March 1998 to January 2001, he held a similar position with
GEC. From July 1991 to February 1998, he was Vice-President, Finance of
Anglo-Suisse, Inc., an oil and natural gas exploration and producing company. He
has held various positions within the energy industry, including President of
Waterford Energy, an independent oil and gas producer, for more than 23 years.
He is a certified public accountant.

Bennett
G. Shelton:Mr. Shelton has been involved in oil and gas land and
acquisition management since graduating from Oklahoma Panhandle State University
in 1979. With a Bachelor Degree in Business Administration his career moved from
Phillips Petroleum Company to positions of increasing responsibility with
Andover Oil Company, ALN Resources, Inc. and Gothic Energy Corporation where he
served as Vice President of Land and Acquisitions. From June 2001 through January 2007 Mr. Shelton was Manager of Land
and Acquisitions for American Natural Energy Corporation and since February 2007
has been a Land Advisor with Broad Oak Energy, Inc.

39

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**William
A. Grant III:**Mr. Grant has held various leadership roles in the
banking and insurance industries for the past 23 years. Mr. Grant began his
career in a position in Bank of Oklahomas management training program and
advanced to the position of Vice President - energy lending. Subsequent to his
tenure at Bank of Oklahoma, he joined F&M Bank until he purchased an
interest and took the reins as President of the The Holmes Organisation in
1997.

Our Board of Directors has not adopted procedures by which
security holders may recommend nominees to our Board of Directors.

Significant Employees:

**Richard
O. Mulford:**Mr. Mulford has been Manager of Operations since June 2001.
From April 1995 to November 1998, he was employed as Operations Manager of GEC
and from November 1998 to January 2001 he was employed as Vice President of
Operations of GEC. He has been employed in the oil and natural gas industry
since 1978.

**Robert
G. Snead:**Mr. Snead has been our Exploitation Manager since June 2001
and served in the same position with GEC on a full-time consulting basis from
April 1997 to January 2001. Between early 1994 and April 1997, he was employed
as an independent geologist and from 1985 to 1994 was the Senior Vice-President/
Exploration Manager of LOGO, Inc., an oil and natural gas well operating
company.

Messrs.
Paulk and Ensz, as the founders of American Natural Energy Corporation, may be
deemed our founders.

Audit Committee and Audit Committee Financial Expert:

As of
  December 31, 2010, the members of our Audit Committee of our Board of Directors
  are Messrs. Shelton (Chairman), Grant and Paulk. Mr. Paulk has been a member
  of the Audit Committee since 2006. Mr. Grant was added during 2009, and Mr.
  Shelton was added during 2010. Our securities are not listed on any national
  securities exchange or listed on an automated inter-dealer quotation system.

Our
  Board of Directors has adopted an Audit Committee Charter. Our Audit Committee
  Charter, as adopted on April 22, 2004, was attached as Annex A to our Proxy
  Statement dated June 14, 2004. Under our Audit Committee Charter, our Audit
  Committees responsibilities include, among other responsibilities, the
  appointment, compensation and oversight of the work performed by our independent
  auditor, the adoption and assurance of compliance with a pre-approval policy
  with respect to services provided by the independent auditor, at least annually,
  obtain and review a report by our independent auditor as to relationships between
  the independent auditor and our company so as to assure the independence of
  the independent auditor, review the annual audited and quarterly consolidated
  financial statements with our management and the independent auditor, and discuss
  with the independent auditor their required disclosure relating to the conduct
  of the audit.

40

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Our
Board of Directors has determined that we do not have an Audit Committee
Financial Expert serving on our Audit Committee. We do not have an Audit
Committee Financial Expert serving on our Audit Committee because at this time
the limited magnitude of our revenues and operations does not, in the view of
our Board of Directors, justify or require that we obtain the services of a
person having the attributes required to be an Audit Committee Financial Expert
on our Board of Directors and Audit Committee. The Board of Directors may in the
future determine that a member elected to the Board in the future has the
attributes to be determined to be an Audit Committee Financial Expert.

Code of Ethics:

We
have adopted a Code of Ethics that applies to our principal executive officer
and principal financial and accounting officer. A copy of our Code of Ethics was
filed as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2003.

41

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Item 11 - Executive Compensation:

The
following table sets forth the compensation of our principal executive officer
and all of our other executive officers for the two fiscal years ended December
31, 2010 who received total compensation exceeding $100,000 for the year ended
December 31, 2010 and who served in such capacities at December 31, 2010.

SUMMARY COMPENSATION TABLEAnnual Compensation

Name and Principal Position
             (a)
    Year (b)
    Salary ($) (c)
    Bonus ($) (d)
    Stock Awards ($)(1) (e)
    Option Awards ($)(1) (f)
    Non- Equity Incentive Plan
      Compens ation ($) (g)
    Nonquali fied Deferred Compens
      ation Earnings ($) (h)
    All Other Compens ation ($)
      (i)
    Total ($) (j)Michael K. Paulk, President and CEO(2)
    2010 2009
    $150,000 $150,000
    -0- -0-
    -0- -0-
    $196,987 $97,491
    -0- -0-
    -0- -0-
    -0- -0-
    $346,987 $247,491Steven P. Ensz Executive Vice President
      and CFO(2)
    2010 2009
    $150,000 $150,000
    -0- -0-
    -0- -0-
    $196,987 $97,491
    -0- -0-
    -0- -0-
    -0- -0-
    $346,987 $247,491


(1)
    Represents the dollar amount recognized for financial
      statement reporting purposes with respect to the fiscal year in accordance
      with FASB ASC 718. See Note 1 to Notes to Consolidated Financial
      Statements for the year ended December 31, 2010.(2)
    Messrs. Paulk and Ensz are also Directors of our company;
      however they receive no additional compensation for serving in those
      capacities.


We
do not have any employment contracts with any of our executive officers or other
significant employees.

42

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Outstanding Equity Awards at December 31, 2010

The
following table provides information with respect to our named executive
officers above regarding outstanding equity awards held at December 31,
2010.

Option Awards
      Stock AwardsName 
        (a)
      Number of 
        securities 
        underlying 
        unexercised 
        Options 
        (#) 
        Exercisable/ 
        Unexercisable 
        (b-c)
      Equity 
        Incentive 
        Plan Awards: 
        Number of 
        Securities 
        Underlying 
        Unexercised 
        Unearned 
        Options (#) 
        (d)
      Option 
        Exercise 
        Price 
        ($) 
        (e)
      Option 
        Expiration 
        Date 
        (f)
      Number 
        of 
        shares 
        or units 
        of 
        Stock 
        held 
        that 
        have 
        not 
        vested 
        (#) 
        (g)
      Market 
        value of 
        shares 
        or units 
        of 
        Stock 
        held 
        that 
        have 
        not 
        vested 
        ($) 
        (h)
      Equity 
        Incentive 
        Plan 
        Awards: 
        Number of 
        Unearned 
        Shares, 
        Units or 
        Other Rights 
        That Have 
        Not Vested 
        (#) 
        (i)
      Equity Incentive 
        Plan Awards: 
        Market or 
        payout value of 
        Unearned 
        Shares, Units or 
        Other Rights 
        That Have Not 
        Vested 
        ($) 
        (j)Michael K. 
        Paulk
      150,000 
        660,000
      -0- 
        -0-
      0.90 
        0.30
      9/8/14 
        11/30/15
      -0- 
        -0-
      -0- 
        -0-
      -0- 
        -0-
      -0- 
        -0-Steven P. 
        Ensz
      150,000 
        660,000
      -0- 
        -0-
      0.90 
        0.30
      9/8/14 
        11/30/15
      -0- 
        -0-
      -0- 
        -0-
      -0- 
        -0-
      -0- 
        -0-


Director Compensation

The
following table provides information with respect to compensation of our
Directors during the year ended December 31, 2010. The compensation paid to our
named executive officers who are also Directors is reflected in the Summary
Compensation Table above.

Name (a)
    Fees earned or paid in cash
      ($) (b)
    Stock Awards ($)(1)
      (c)
    Option Awards ($)(1)
      (d)
    Non- Equity Incentive Plan
      Compensat ion ($) (e)
    Non- Qualified Deferred Compensat
      ion Earnings (f)
    All Other Compensat ion ($)
      (g)
    Total ($) (h)Bennett G. Shelton
    -0-
    -0-
    $14,923
    -0-
    -0-
    -0-
    $14,923William A. Grant III
    -0-
    -0-
    $11,939
    -0-
    -0-
    -0-
    $11,939


(1) Represents the dollar amount
recognized for financial statement reporting purposes with respect to the fiscal
year in accordance with FASB ASC 718. See Note 1 to Notes to Consolidated
Financial Statements for the year ended December 31, 2010.

Our
Directors do not receive any cash compensation for serving in that capacity;
however, they are reimbursed for their out-of-pocket expenses in attending
meetings. Pursuant to the terms of our 2001 Stock Incentive Plan, each
non-employee Director who is first elected or appointed after February 1, 2002
automatically receives an option grant for 5,000 shares on the date such person
joins the Board. In addition, on the date of each annual stockholder meeting,
provided such person has served as a non-employee Director for at least six
months, each non-employee Board member who is to continue to serve as a
non-employee Board member will automatically be granted an option to purchase 500 shares. Each
such option has a term of ten years, subject to earlier termination following
such person's cessation of Board service, and is subject to certain vesting
provisions.

43

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Item 12 - Security Ownership of Certain Beneficial Owners
and Management and RelatedStockholder Matters:

The
following table sets forth certain information regarding beneficial ownership of
our common stock as of March 31, 2011 (a) by each person who is known by us to
own beneficially more than five percent (5%) of our common shares, (b) by each
of our Directors and officers, and (c) by all Directors and officers as a group.
As of March 31, 2011, we had 13,430,608 common shares outstanding.

Percentage ofNumber of Shares
    OutstandingName and Address(1)(2)
    Owned
    Shares(3)Michael K. Paulk
    1,024,888(4)
    1.6%Steven P. Ensz
    1,374,832(5)
    4.2%Bennett G. Shelton 812
      Crane Drive Coppell, TX 75019
    203,174(6)
    1.1%William A. Grant 1350 S.
      Boulder, Suite 1000 Tulsa, OK 74119
    133,333(7)
    0.6%All Directors and officers as
      a group (4 persons)
    2,736,227
    7.5%


|(1) | This tabular information is intended to conform with Rule
      13d-3 promulgated under the Securities Exchange Act of 1934 relating to
      the determination of beneficial ownership of securities. The tabular
      information gives effect to the exercise of warrants or options
      exercisable within 60 days of the date of this table owned in each case by
      the person or group whose percentage ownership is set forth opposite the
      respective percentage and is based on the assumption that no other person
      or group exercise their option.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Unless otherwise indicated, the address for each of the
      above is c/o American Natural Energy Corporation, 6100 South Yale, Suite
      300, Tulsa, Oklahoma 74136.                                                                                                                                                                                                                                                                                                                                                                                                      
|(3) | The percentage of outstanding shares calculation is based
      upon 13,430,608 shares outstanding as of March 31, 2011, except as
      otherwise noted.                                                                                                                                                                                                                                                                                                                                                                                                                     
|(4) | Includes 150,000 shares issuable at an exercise price of
      $0.90 on exercise of an option and 660,000 shares issuable at an exercise
      price of $0.30 on exercise of an option.                                                                                                                                                                                                                                                                                                                                                                                       
|(5) | Includes 150,000 shares issuable at an exercise price of
      $0.90 on exercise of an option and 660,000 shares issuable at an exercise
      price of $0.30 on exercise of an option.                                                                                                                                                                                                                                                                                                                                                                                       
|(6) | Includes 50,000 shares issuable at an exercise price of
      $0.30 on exercise of an option.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(7) | Includes 10,000 shares issuable at an exercise price of
      $0.90 on exercise of an option and 40,000 shares issuable at an exercise
      price of $0.30 on exercise of an option .                                                                                                                                                                                                                                                                                                                                                                                        

Securities Authorized for Issuance Under Equity Compensation
Plans

We have
  one equity compensation plan for our employees, Directors and consultants pursuant
  to which options, rights or shares may be granted or issued. It is referred
  to as our 2001 Stock Incentive Plan. See Note 8 to the Notes to Consolidated
Financial Statements for further information on the material terms of this plan.

44

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The
following table provides information as of December 31, 2010 with respect to our
compensation plans (including individual compensation arrangements), under which
securities are authorized for issuance aggregated as to (i) compensation plans
previously approved by stockholders, and (ii) compensation plans not previously
approved by stockholders:

Equity Compensation Plan Information

|                                                                 | (a)                     | (b)                  | (c)                  
|---------------------------------------------------------------- | ----------------------- | -------------------- | ---------------------
|Plan Category                                                    | Number of securities    | Weighted-average     | Number of securities 
|                                                                 | to be issued upon       | exercise price of    | remaining available  
|                                                                 | exercise of outstanding | outstanding options, | for future issuance  
|                                                                 | options, warrants and   | warrants and rights  | under equity         
|                                                                 | rights                  |                      | compensation plans   
|                                                                 |                         |                      | (excluding securities
|                                                                 |                         |                      | reflected in column  
|                                                                 |                         |                      | (a))                 
|                                                                 |                         |                      |                      
|Equity compensation plans approved by
      security holders     | 2,515,000               | $0.41                | 2,485,000            
|                                                                 |                         |                      |                      
|Equity compensation plans not approved
      by security holders | -0-                     | -0-                  | -0-                  
|                                                                 |                         |                      |                      
|Total                                                            | 2,515,000               | $0.41                | 2,485,000            

45

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Item 13 - Certain Relationships and Related
Transactions:

On
May 4, 2006, the Company entered into a note payable with Mike Paulk, an officer
of the Company, in the amount of $198,000. During 2006 an additional $10,000 was
loaned to the Company while $12,000 was repaid. During 2008 an additional
$67,000 was loaned to the Company while $70,000 was repaid. During 2009, an
additional $68,000 was loaned to the Company and the note was repaid in full in
September 2009 with a payment of $261,000.

The
Company paid Mike Paulk $16,000 in interest in 2009 on the loans provided to the
Company.

Item 14. Principal Accountant Fees and Services

The
following sets forth fees we incurred for services provided by MaloneBailey, LLP
for the years ended December 31, 2010 and 2009, our independent registered
public accountants at those year ends.

| |      | Audit Fees | Audit Related | Tax Fees
| | ---- | ---------- | ------------- | --------
| |      |            | Fees          |         
| |      |            |               |         
| | 2010 | $74,000    | --            | -       
| | 2009 | $79,000    | --            | -       

Our
Board of Directors believes that the provision of the services during the years
ended December 31, 2010 and December 31, 2009 is compatible with maintaining the
independence of MaloneBailey, LLP. Our Audit Committee approves before the
engagement the rendering of all audit and non-audit services provided to our
company by our independent auditor. Engagements to render services are not
entered into pursuant to any pre-approval policies and procedures adopted by the
Audit Committee. The services provided by MaloneBailey, LLP included under the
caption Audit Fees include services rendered for the audit of our annual
consolidated financial statements, the review of our quarterly financial
reports, the issuance of consents, and assistance with review of documents filed
with the Securities and Exchange Commission.

Item 15  Exhibits:

|Exhibit |  | Description                                                                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                                                                                                                                                                
|2.0     |  | Second Amended Joint Plan of Reorganization Proposed by
      Couba Operating Company, American Natural Energy Corporation and Gothic
      Resources Inc. filed in the United States Bankruptcy Court, Western
      District of Oklahoma. Case No. 00-11837-W (Chapter 11)(4)
|        |  |                                                                                                                                                                                                                                                                                
|2.1     |  | Order Confirming Plan, filed November 16, 2001 with U.S.
      Bankruptcy                                                                                                                                                                                                      

46

---

|Exhibit |  | Description                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                          
|        |  | Court, Western District of Oklahoma(1)                                                                                                   
|        |  |                                                                                                                                          
|3.1     |  | Certificate of Incorporation of American Natural Energy
      Corporation(1)                                                             
|        |  |                                                                                                                                          
|3.2     |  | Certificate of Amendment filed March 23,
      2001(1)                                                                                   
|        |  |                                                                                                                                          
|3.3     |  | Certificate of Amendment filed December 20,
      2001(1)                                                                                
|        |  |                                                                                                                                          
|3.4     |  | Amended Certificate of Incorporation filed June 30,
      2005.(5)                                                                       
|        |  |                                                                                                                                          
|3.4     |  | By-laws, as amended through September 13,
      2004(5)                                                                                  
|        |  |                                                                                                                                          
|10.1    |  | 2001 Stock Incentive Plan(1)                                                                                                             
|        |  |                                                                                                                                          
|10.2    |  | Assignment, Conveyance and Bill of Sale from Dune Energy
      Inc to American Natural Energy Corporation dated August 4, 2009
      (11)
|        |  |                                                                                                                                          
|10.3    |  | Assignment, Conveyance and Bill of Sale from American
      Natural Energy Corporation to Dune Energy Inc dated August 4, 2009
      (11)
|        |  |                                                                                                                                          
|10.8    |  | Participation Agreement dated March 8, 2006 between the
      Registrant and Seismic Exchange, Inc.(9)                                   
|        |  |                                                                                                                                          
|14.1    |  | Code of Ethics(4)                                                                                                                        
|        |  |                                                                                                                                          
|21.0    |  | Subsidiaries of the Registrant as of December 31, 2005:                                                                                  

| | Name                    | State or Jurisdiction of Incorporation
| | ----------------------- | --------------------------------------
| | Gothic Resources, Inc.  | Canada Business Corporations
      Act
| | Couba Operating Company | Oklahoma                              

|23.1 | Consent
        of Summa Engineering (11)                                                                                 
|---- | --------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                           
|31.1 | Certification
        of President and Chief Executive Officer Pursuant to Rule 13a- 14(a)(11)                            
|     |                                                                                                                           
|31.2 | Certification
        of Chief Financial Officer Pursuant to Rule 13a-14(a)(11)                                           
|     |                                                                                                                           
|32.1 | Certification
        of President and Chief Executive Officer Pursuant to Section 1350 (furnished,
        not filed)(11)
|     |                                                                                                                           
|32.2 | Certification
        of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)(11)                      
|     |                                                                                                                           
|99.1 | Summa
        Engineering Inc. Report of American Natural Energy Corporation Reserve
        at December 31, 2010 (11)    

__________________________ (1)Filed as an
Exhibit to the Registrants registration statement on Form 10-SB filed on August
12, 2002 and amended on July 29, 2003. (File No. 0-18956). (2)Filed as an Exhibit to the Registrants Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2003. (File No. 0-18956). (3)Filed with Amendment No. 1 to Registration
Statement on Form SB-2 filed February 6, 2004 (File No. 333-111244).
(4)Filed with the Registrants Annual Report on Form 10-KSB for
the year ended December 31, 2003. (5)Filed as an Exhibit to the
Registrants Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 2005. (6)Filed as an Exhibit to the Registrants Current
Report on Form 8-K for June 29, 2005. (7)Filed as an Exhibit to
the Registrants Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 2005. (8)Filed as an Exhibit to the Registrants
Current Report on Form 8-K for October 19, 2005. (9)Filed as an
Exhibit to the Registrants Current Report on Form 8-K for March 8, 2006.
(10)Filed with this Annual Report on Form 10-KSB for the year
ended December 31, 2005. (11)Filed with this Annual Report on Form 10-K for the year ended
  December 31, 2010.

47

---







American Natural Energy Corporation



Consolidated Financial StatementsDecember 31, 2010 and 2009

F-1

---

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of American Natural
Energy Corporation Tulsa, Oklahoma

We have audited the accompanying consolidated balance sheets of
American Natural Energy Corporation (the Company) as of December 31, 2010 and
2009 and the related consolidated statements of operations and other
comprehensive income, stockholders equity (deficit), and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for purposes of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of American Natural Energy Corporation at December 31, 2010 and 2009,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America..

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
described in Note 2 of the consolidated financial statements, the Company
incurred a net loss in 2010 and has a working capital deficiency and an
accumulated deficit at December 31, 2010. These matters raise substantial doubt
about the Companys ability to continue as a going concern. Managements plan in
regard to these matters is also described in Note 2 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ MaloneBailey, LLP Houston, Texas
www.malonebailey.com March 31, 2011

F-2

---

AMERICAN NATURAL ENERGY CORPORATIONConsolidated Balance Sheets

|                                                                                                                                                                                                                      |  | December 31, |   |  | December 31, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------ | -
|                                                                                                                                                                                                                      |  | 2010         |   |  | 2009         |  
|                                                                                                                                                                                                                      |  | $            |   |  | $            |  
|ASSETS                                                                                                                                                                                                                |  |              |   |  |              |  
|Current assets:                                                                                                                                                                                                       |  |              |   |  |              |  
|Cash and cash
      equivalents                                                                                                                                                                                       |  | 8,658        |   |  | 142,488      |  
|Accounts receivable  joint interest
      billing                                                                                                                                                                    |  | 77,816       |   |  | 88,439       |  
|Accounts receivable 
      oil and gas sales                                                                                                                                                                         |  | 153,745      |   |  | 322,059      |  
|Prepaid expenses and other                                                                                                                                                                                            |  | 108,064      |   |  | 156,747      |  
|Oil inventory                                                                                                                                                                                                         |  | 20,779       |   |  | 12,815       |  
|Total current assets                                                                                                                                                                                                  |  | 369,062      |   |  | 722,548      |  
|Proved oil and natural gas properties, full
      cost method of accounting, net of accumulated depletion, depreciation,
      amortization and impairment of $21,241,298 and $20,637,643 respectively
      (Note 3) |  | 15,994,561   |   |  | 17,581,389   |  
|Unproved oil and natural gas properties                                                                                                                                                                               |  | 352,554      |   |  | 144,602      |  
|Equipment and other fixed assets, net of
      accumulated depreciation of $1,103,461 and $1,075,860 (Note 4)                                                                                                         |  | 74,770       |   |  | 102,371      |  
|Other deferred costs                                                                                                                                                                                                  |  | 15,000       |   |  | -            |  
|                                                                                                                                                                                                                      |  |              |   |  |              |  
|Total assets                                                                                                                                                                                                          |  | 16,805,947   |   |  | 18,550,910   |  
|                                                                                                                                                                                                                      |  |              |   |  |              |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                                                                                                                        |  |              |   |  |              |  
|Current liabilities:                                                                                                                                                                                                  |  |              |   |  |              |  
|Accounts payable and accrued
      liabilities                                                                                                                                                                        |  | 2,089,119    |   |  | 1,913,645    |  
|Revenue payable                                                                                                                                                                                                       |  | 3,288,180    |   |  | 3,103,090    |  
|Accrued interest                                                                                                                                                                                                      |  | 18,072       |   |  | -            |  
|Insurance note payable                                                                                                                                                                                                |  | 68,028       |   |  | 55,001       |  
|Notes payable  related parties                                                                                                                                                                                       |  | 161,062      |   |  | 234,383      |  
|Notes payable (Note 6)                                                                                                                                                                                                |  | 1,248,247    |   |  | 1,455,677    |  
|Taxes due on dissolution of subsidiary
      (Note 11)                                                                                                                                                                |  | 65,252       |   |  | 125,252      |  
|Total current liabilities                                                                                                                                                                                             |  | 6,937,960    |   |  | 6,887,048    |  
|Asset retirement obligation (Note 5)                                                                                                                                                                                  |  | 2,023,780    |   |  | 2,674,003    |  
|                                                                                                                                                                                                                      |  |              |   |  |              |  
|Total liabilities                                                                                                                                                                                                     |  | 8,961,740    |   |  | 9,561,051    |  
|Commitments and contingencies (Notes 11)                                                                                                                                                                              |  |              |   |  |              |  
|Stockholders equity (deficit):                                                                                                                                                                                       |  |              |   |  |              |  
|Common stock
      ( Note
      8)             Authorized
       250,000,000 shares with par value of
      $0.001             13,430,608
      and 13,398,108 shares issued and outstanding respectively            |  | 13,431       |   |  | 13,398       |  
|Additional paid-in capital                                                                                                                                                                                            |  | 23,112,711   |   |  | 22,783,144   |  
|Accumulated
      deficit, since January 1, 2002 (in conjunction with the
      quasi-             reorganization
      stated capital was reduced by an accumulated
      deficit             of
      $2,015,495)   |  | (19,322,589  | ) |  | (17,260,444  | )
|Accumulated other comprehensive income                                                                                                                                                                                |  | 4,040,654    |   |  | 3,453,761    |  
|Total stockholders equity (deficit)                                                                                                                                                                                  |  | 7,844,207    |   |  | 8,989,859    |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                  |  | 16,805,947   |   |  | 18,550,910   |  

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

F-3

---

AMERICAN NATURAL ENERGY CORPORATIONConsolidated Statements of Operations and Other Comprehensive Income

|                                                                        |  | Year Ended        |   |  | Year Ended        |  
|----------------------------------------------------------------------- |  | ----------------- | - |  | ----------------- | -
|                                                                        |  | December 31, 2010 |   |  | December 31, 2009 |  
|                                                                        |  | $                 |   |  | $                 |  
|Revenues:                                                               |  |                   |   |  |                   |  
|Oil and gas sales                                                       |  | 2,523,730         |   |  | 1,054,390         |  
|Operations income                                                       |  | 54,802            |   |  | 29,024            |  
|                                                                        |  |                   |   |  |                   |  
|                                                                        |  | 2,578,532         |   |  | 1,083,414         |  
|                                                                        |  |                   |   |  |                   |  
|Expenses:                                                               |  |                   |   |  |                   |  
|Lease operating expense                                                 |  | 890,306           |   |  | 760,147           |  
|Production taxes                                                        |  | 132,552           |   |  | 24,993            |  
|General and administrative                                              |  | 1,608,606         |   |  | 1,465,332         |  
|Foreign exchange loss                                                   |  | 586,893           |   |  | 1,687,029         |  
|Interest and bank charges                                               |  | 510,692           |   |  | 591,189           |  
|Related party interest                                                  |  | -                 |   |  | 16,148            |  
|Depreciation, depletion, and amortization - oil and gas                 |  |                   |   |  |                   |  
|properties                                                              |  | 603,655           |   |  | 230,595           |  
|Accretion of asset retirement obligation                                |  | 280,372           |   |  | 225,896           |  
|Depreciation and amortization  other
      assets                      |  | 27,601            |   |  | 119,432           |  
|Gain on settlement of notes payable                                     |  | -                 |   |  | (10,042           | )
|Write-down of inventory to market                                       |  | -                 |   |  | 14,012            |  
|Gain on extinguishment of debt and exchange of properties               |  | -                 |   |  | (27,994,215       | )
|                                                                        |  |                   |   |  |                   |  
|Total (income) expenses                                                 |  | 4,640,677         |   |  | (22,869,484       | )
|                                                                        |  |                   |   |  |                   |  
|Net income (loss)                                                       |  | (2,062,145        | ) |  | 23,952,898        |  
|                                                                        |  |                   |   |  |                   |  
|Other comprehensive income (loss):                                      |  |                   |   |  |                   |  
|Foreign exchange translation gain                                       |  | 586,893           |   |  | 1,687,029         |  
|                                                                        |  |                   |   |  |                   |  
|Other comprehensive income                                              |  | 586,893           |   |  | 1,687,029         |  
|                                                                        |  |                   |   |  |                   |  
|Comprehensive income (loss)                                             |  | (1,475,252        | ) |  | 25,639,927        |  
|                                                                        |  |                   |   |  |                   |  
|Net income (loss) per share  basic and
      diluted                   |  | (0.15             | ) |  | 2.74              |  
|                                                                        |  |                   |   |  |                   |  
|Weighted average number of shares
      outstanding  basic and diluted |  | 13,430,252        |   |  | 8,729,565         |  

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

F-4

---

AMERICAN NATURAL ENERGY CORPORATIONConsolidated Statements of Changes in Stockholders Equity (Deficit)

|                                           |  |                    |  |  |         |  |  |            |   |  |             |   |  | Accumu-     |  |  |             |  
|------------------------------------------ |  | ------------------ |  |  | ------- |  |  | ---------- | - |  | ----------- | - |  | ----------- |  |  | ----------- | -
|                                           |  |                    |  |  |         |  |  |            |   |  |             |   |  | lated other |  |  | Total       |  
|                                           |  |                    |  |  |         |  |  |            |   |  |             |   |  | compre-     |  |  | stock-      |  
|                                           |  |                    |  |  |         |  |  | Additional |   |  | Accumu-     |   |  | hensive     |  |  | holders    |  
|                                           |  | Common
      stock |  |  | paid-in |  |  | lated      |   |  | income      |   |  | equity      | 
|                                           |  | Shares             |  |  | Amount  |  |  | capital    |   |  | deficit     |   |  |             |  |  | (Deficit)   |  
|                                           |  |                    |  |  | $       |  |  | $          |   |  | $           |   |  | $           |  |  | $           |  
|                                           |  |                    |  |  |         |  |  |            |   |  |             |   |  |             |  |  |             |  
|                                           |  |                    |  |  |         |  |  |            |   |  |             |   |  |             |  |  |             |  
|Balance - December 31, 2008                |  | 5,299,767          |  |  | 5,299   |  |  | 20,368,924 |   |  | (41,213,342 | ) |  | 1,766,732   |  |  | (19,072,387 | )
|                                           |  |                    |  |  |         |  |  |            |   |  |             |   |  |             |  |  |             |  
|Shares issued to settle debt               |  | 106,000            |  |  | 106     |  |  | 10,494     |   |  | -           |   |  | -           |  |  | 10,600      |  
|Shares issued related to debt              |  | 160,000            |  |  | 160     |  |  | 42,425     |   |  | -           |   |  | -           |  |  | 42,585      |  
|Shares issued for private placement        |  | 6,666,667          |  |  | 6,667   |  |  | 1,993,333  |   |  | -           |   |  | -           |  |  | 2,000,000   |  
|Shares issued for repurchase of debentures |  | 1,165,674          |  |  | 1,166   |  |  | 348,536    |   |  | -           |   |  | -           |  |  | 349,702     |  
|Private placement costs                    |  | -                  |  |  | -       |  |  | (96,839    | ) |  | -           |   |  | -           |  |  | (96,839     | )
|Stock option compensation expense          |  | -                  |  |  | -       |  |  | 116,271    |   |  | -           |   |  | -           |  |  | 116,271     |  
|Foreign exchange translation gain          |  | -                  |  |  | -       |  |  | -          |   |  | -           |   |  | 1,687,029   |  |  | 1,687,029   |  
|Net income                                 |  | -                  |  |  | -       |  |  | -          |   |  | 23,952,898  |   |  | -           |  |  | 23,952,898  |  
|                                           |  |                    |  |  |         |  |  |            |   |  |             |   |  |             |  |  |             |  
|Balance - December 31, 2009                |  | 13,398,108         |  |  | 13,398  |  |  | 22,783,144 |   |  | (17,260,444 | ) |  | 3,453,761   |  |  | 8,989,859   |  

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

F-5

---

AMERICAN NATURAL ENERGY CORPORATIONConsolidated Statements of Changes in Stockholders Equity (Deficit)
  (cont.)

|                                     |  |                    |  |  |         |  |  |            |  |  |             |   |  | Accumu-     |  |  |            |  
|------------------------------------ |  | ------------------ |  |  | ------- |  |  | ---------- |  |  | ----------- | - |  | ----------- |  |  | ---------- | -
|                                     |  |                    |  |  |         |  |  |            |  |  |             |   |  | lated other |  |  | Total      |  
|                                     |  |                    |  |  |         |  |  |            |  |  |             |   |  | compre-     |  |  | stock-     |  
|                                     |  |                    |  |  |         |  |  | Additional |  |  | Accumu-     |   |  | hensive     |  |  | holders   |  
|                                     |  | Common
      stock |  |  | paid-in |  |  | lated      |  |  | income      |   |  | equity      | 
|                                     |  | Shares             |  |  | Amount  |  |  | capital    |  |  | deficit     |   |  |             |  |  | (Deficit)  |  
|                                     |  |                    |  |  | $       |  |  | $          |  |  | $           |   |  | $           |  |  | $          |  
|                                     |  |                    |  |  |         |  |  |            |  |  |             |   |  |             |  |  |            |  
|                                     |  |                    |  |  |         |  |  |            |  |  |             |   |  |             |  |  |            |  
|Balance - December 31, 2009          |  | 13,398,108         |  |  | 13,398  |  |  | 22,783,144 |  |  | (17,260,444 | ) |  | 3,453,761   |  |  | 8,989,859  |  
|                                     |  |                    |  |  |         |  |  |            |  |  |             |   |  |             |  |  |            |  
|Shares issued acquisition WIO rights |  | 32,500             |  |  | 33      |  |  | 22,092     |  |  | -           |   |  | -           |  |  | 22,125     |  
|Stock option compensation expense    |  | -                  |  |  | -       |  |  | 307,475    |  |  | -           |   |  | -           |  |  | 307,475    |  
|Foreign exchange translation gain    |  | -                  |  |  | -       |  |  | -          |  |  | -           |   |  | 586,893     |  |  | 586,893    |  
|Net loss                             |  | -                  |  |  | -       |  |  | -          |  |  | (2,062,145  | ) |  | -           |  |  | (2,062,145 | )
|                                     |  |                    |  |  |         |  |  |            |  |  |             |   |  |             |  |  |            |  
|Balance - December 31, 2010          |  | 13,430,608         |  |  | 13,431  |  |  | 23,112,711 |  |  | (19,322,589 | ) |  | 4,040,654   |  |  | 7,844,207  |  

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

F-6

---

AMERICAN NATURAL ENERGY CORPORATIONConsolidated Statements of Cash Flows

|                                                                   |  | December 31, 2010 |   |  | December 31, 2009 |  
|------------------------------------------------------------------ |  | ----------------- | - |  | ----------------- | -
|                                                                   |  | $                 |   |  | $                 |  
|Cash flows from operating activities:                              |  |                   |   |  |                   |  
|Net income (loss)                                                  |  | (2,062,145        | ) |  | 23,952,898        |  
|Non cash items:                                                    |  |                   |   |  |                   |  
|Depreciation, depletion
      and amortization                     |  | 631,256           |   |  | 350,027           |  
|Accretion
      of asset retirement obligation                     |  | 280,372           |   |  | 225,896           |  
|Foreign exchange (gain)
      loss                                 |  | 586,893           |   |  | 1,687,029         |  
|Noncash
      compensation expense                                 |  | 307,475           |   |  | 116,271           |  
|Amortization
      of debt discount                                |  | 346,343           |   |  | -                 |  
|Gain on
      settlement of notes payable                          |  | -                 |   |  | (10,042           | )
|Write-down of inventory
      to market                            |  | -                 |   |  | 14,012            |  
|Gain
      on extinguishment of debt and exchange of properties    |  | -                 |   |  | (27,994,215       | )
|Changes in working capital items:                                  |  |                   |   |  |                   |  
|Accounts
      receivable                                          |  | 157,545           |   |  | (240,462          | )
|Oil inventory                                                      |  | (7,452            | ) |  | (12,262           | )
|Prepaid
      expenses                                             |  | 155,373           |   |  | 20,203            |  
|Accounts
      payable, revenues payable and accrued liabilities   |  | 318,639           |   |  | 1,029,410         |  
|                                                                   |  |                   |   |  |                   |  
|Net cash provided by (used in) operating activities                |  | 714,299           |   |  | (861,235          | )
|                                                                   |  |                   |   |  |                   |  
|Cash flows from investing activities:                              |  |                   |   |  |                   |  
|Purchase and development
      of oil and gas properties           |  | (334,887          | ) |  | (968,919          | )
|                                                                   |  |                   |   |  |                   |  
|Net cash used in investing activities                              |  | (334,887          | ) |  | (968,919          | )
|                                                                   |  |                   |   |  |                   |  
|Cash flows from financing activities:                              |  |                   |   |  |                   |  
|Payment of notes payable  related party                           |  | (599,558          | ) |  | (260,852          | )
|Payment of notes payable                                           |  | (229,304          | ) |  | (1,366,874        | )
|Proceeds from issuance of notes payable                            |  | -                 |   |  | 1,573,045         |  
|Proceeds from issuance of
      notes payable-related party        |  | 330,620           |   |  | 68,000            |  
|Financing costs                                                    |  | (15,000           | ) |  | (96,839           | )
|Proceeds from issuance of
      common stock for private placement |  | -                 |   |  | 2,000,000         |  
|                                                                   |  |                   |   |  |                   |  
|Net cash provided by (used in) financing
      activities          |  | (513,242          | ) |  | 1,916,480         |  
|                                                                   |  |                   |   |  |                   |  
|Increase (decrease) in cash and cash
      equivalents             |  | (133,830          | ) |  | 86,326            |  
|                                                                   |  |                   |   |  |                   |  
|Cash and cash equivalents beginning of
      period                |  | 142,488           |   |  | 56,162            |  
|                                                                   |  |                   |   |  |                   |  
|Cash and cash equivalents end of period                            |  | 8,658             |   |  | 142,488           |  

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

F-7

---

AMERICAN NATURAL ENERGY CORPORATIONConsolidated Statements of Cash Flows (continued)

|                                                                                   |  | December 31, 2010 |   |  | December 31, 2009 |  
|---------------------------------------------------------------------------------- |  | ----------------- | - |  | ----------------- | -
|                                                                                   |  | $                 |   |  | $                 |  
|Supplemental disclosures:                                                          |  |                   |   |  |                   |  
|                                                                                   |  |                   |   |  |                   |  
|Interest paid                                                                      |  | 103,055           |   |  | 34,455            |  
|Taxes Paid                                                                         |  | 60,000            |   |  | 15,000            |  
|Non cash financing and
      investing activities:                                 |  |                   |   |  |                   |  
|Prepaid expenses financed                                                          |  | 112,364           |   |  | 104,629           |  
|Exchange of non-monetary
      assets                                              |  | -                 |   |  | 13,806,799        |  
|Asset retirement obligation addition                                               |  | -                 |   |  | 533,784           |  
|Asset retirement obligation
      revision                                         |  | (930,595          | ) |  | (36,718           | )
|Exchange of oil and gas leasehold interests                                        |  | 92,983            |   |  | -                 |  
|Offset of JIB Receivable and
      Note Payable                                    |  | 27,065            |   |  | -                 |  
|Reclassification of JIB unbilled                                                   |  | -                 |   |  | (216,413          | )
|Stock issued to settle debt                                                        |  | -                 |   |  | 10,600            |  
|Stock issued as partial payment for purchase
      of third party working interest |  | 22,125            |   |  | -                 |  
|Discount on notes payable                                                          |  | 108,141           |   |  | 238,202           |  

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

F-8

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|1 | Basis of presentation and summary of significant
      accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | Description of company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | American Natural Energy Corporation (ANEC) is an oil
      and natural gas exploration and production company engaged in the
      acquisition, exploration and development of oil and natural gas properties
      for the production of crude oil and natural gas. ANECs properties are
      located in Louisiana.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | ANEC, an Oklahoma corporation, was formed by amalgamation
      on July 9, 1991 under the Company Act (British Columbia)and was
      continued under the Canada Business Corporations Act on August 1, 1991. On
      January 22, 2002, Gothic Resources Inc. (Gothic) completed a plan of
      arrangement under Section 192 of the Canada Business Corporations Actwith ANEC which was at the time a wholly-owned subsidiary of Gothic,
      whereby all of the shareholders of Gothic exchanged their common shares in
      the capital of Gothic for common shares in the capital of ANEC, Gothic
      became a wholly owned subsidiary of ANEC and the former shareholders of
      Gothic became shareholders of ANEC. The plan of arrangement became
      effective February 8, 2002. The shares of Gothic are no longer listed on
      the Toronto Venture Exchange, Inc. and in their place, the shares of ANEC
      are listed on that exchange, quoted and traded in U.S. dollars under the
      symbol ANR.U. Also on that date, the shareholders approved the reduction
      of the stated capital of Gothic by the amount of the accumulated deficit
      of $2,015,495. This transaction has been accounted for as a
      quasi-reorganization. Gothic may be deemed a predecessor of the
      Company.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | The consolidated financial statements include the
      accounts of ANEC and its wholly-owned subsidiary Gothic (collectively, the
      Company). All significant intercompany accounts and transactions are
      eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | The consolidated financial statements contained herein
      have been prepared in accordance with accounting principles generally
      accepted in the United States of America, which differ in certain respects
      from accounting principles generally accepted in Canada.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | Cash and cash equivalents consist of short-term, highly
      liquid investments with maturities of 90 days or less at time of
      acquisition. Cash and cash equivalents are deposited with three
      institutions and the balance at either institution does not exceed the
      federally insured limits at December 31, 2010. While balances may
      periodically exceed the federal depository insurance limit, the Company
      has not experienced any losses on deposits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | Allowance for Doubtful Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | The Company establishes provisions for losses on accounts
      receivable if it determines that it will not collect all or part of the
      outstanding balance. The Company regularly reviews collectability and
      establishes or adjusts the allowance as necessary using the specific
      identification method. There is no significant allowance for doubtful
      accounts as of December 31, 2010 or 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-9

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

Oil and natural gas properties

The Company follows the full cost method
  of accounting for oil and natural gas properties. The Company defers the costs
  of exploring for and developing oil and natural gas reserves until such time
  as proved reserves are attributed to the properties. At that time, the deferred
  costs are amortized on a unit-of-production basis. Such costs include land acquisition
  costs, geological and geophysical costs, costs of drilling wells, asset retirement
  costs, interest costs on major development projects and overhead charges directly
  related to acquisition, exploration and development activities.

The capitalized costs are assessed
quarterly to determine whether it is likely such costs will be recovered in the
future. To the extent there are costs which are unlikely to be recovered in the
future, they are written off as impairment to the carrying value of oil and gas
properties. There was no impairment recorded in 2010 or 2009.

In certain instances, the Company may
capitalize interest on the cost of unevaluated oil and natural gas properties
excluded from amortization, based on the Company's weighted average cost of
borrowings used to finance the expenditures. For the years ended December 31,
2010 and 2009, the Company did not capitalize any interest to its unevaluated
properties.

Unevaluated oil and natural gas
properties are reviewed on an annual basis for impairment.

Proceeds from the sale of properties
are accounted for as reductions of capitalized costs unless such sales involve a
significant change in the relationship between costs and the value of proved
reserves or the underlying value of unproved properties, in which case a gain or
loss is recognized.

The Company is in the process of
exploring its unproved oil and natural gas properties and has not yet determined
whether these properties contain reserves that are economically recoverable. The
recoverability of amounts shown for oil and natural gas properties is dependent
upon the discovery of economically recoverable reserves, confirmation of the
Companys interest in the underlying oil and gas leases, the ability of the
Company to obtain necessary financing to complete their exploration and
development and future profitable production or sufficient proceeds from the
disposition thereof. The Company is, therefore, unable to estimate when these
costs will be included in the amortization computation.

Equipment and other fixed assets

Equipment and other fixed assets are
stated at cost less accumulated depreciation. Depreciation expense is determined
using a straight-line method over the estimated useful lives of the assets. The
ranges of estimated useful lives for financial reporting are as follows:

| | Computer equipment                    | 3    | years
| | ------------------------------------- | ---- | -----
| | Office furniture and equipment        | 5-7  | years
| | Leasehold improvements                | 3    | years
| | Barges and field equipment            | 5-10 | years
| | Gas gathering and production facility | 10   | years

F-10

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is reflected in income for the period. Maintenance
and repairs are charged to expense as incurred.

Foreign exchange and currency
translation

The Company's functional and reporting
currency is the U.S. dollar. Transactions denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect on the date of the
transactions. Exchange gains or losses on transactions are included in earnings.
For Gothic, whose functional currency is the Canadian dollar, the results of
operations are translated from local currencies into U.S. dollars using average
exchange rates during each period; assets and liabilities are translated using
exchange rates at the end of each period. Adjustments resulting from the
translation process are reported in a separate component of other comprehensive
income and are not included in the determination of the results of operations.

Revenue recognition

Revenues from the sale of oil produced
are recognized upon the passage of title, net of royalties and net profits
interests. Revenues from natural gas production are recorded using the sales
method, net of royalties and net profits interests, which may result in more or
less than the Company's share of pro-rata production from certain wells. When
natural gas sales volumes exceed the Company's entitled share and the
overproduced balance exceeds the Company's share of the remaining estimated
proved natural gas reserves for a given property, the Company will record a
liability. Imbalances at December 31, 2010 and 2009 were insignificant. The
Company's policy is to expense the pro-rata share of lease operating costs from
all wells as incurred.

The Companys oil production is sold
under market sensitive or spot price contracts. Oil sales to Texon L.P. of
$2,464,419 and $1,054,390 in 2010 and 2009, respectively, accounted for 98% and
100% of total oil and gas sales. The Companys accounts receivable are primarily
due from exploration and production companies which own an interest in the
properties the Company operates and from purchasers of oil and natural gas. The
industry concentration has the potential to impact the Companys exposure to
credit risk because such companies may be similarly affected by changes in
economic and industry conditions.

Operations income represents charges
billed to non-operator working interest owners who own a working interest in the
wells in which the Company serves as operator. The income is recognized in the
month in which oil and gas is produced.

Asset retirement obligations

Effective January 1, 2003, the Company
adopted Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 410-20, Accounting for Asset Retirement Obligations.
This statement applies to obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction and development
of the assets. ASC 410-20 requires that the fair value of a liability for a
retirement obligation be recognized in the period in which the liability is
incurred. For oil and gas properties, this is the period in which an oil or gas
well is acquired or drilled. The asset retirement obligation is capitalized as
part of the carrying amount of our oil and gas

F-11

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

properties at its discounted fair
value. The liability is then accreted each period until the liability is settled
or the well is sold, at which time the liability is reversed.

Income taxes

The Company accounts for income taxes
under Statement of FASB ASC 740, Accounting for Income Taxes.Deferred
tax assets and liabilities are determined based on the differences between the
tax bases of assets and liabilities and those reported in the consolidated
financial statements. The deferred tax assets or liabilities are calculated
using the enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are recognized to the extent that they
are considered more likely than not to be realized. Income taxes and liabilities
are recognized for the expected future tax consequences of events that have been
included in the financia1 statements or income tax returns.

Use of estimates

The preparation of consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period.
Significant areas requiring the use of estimates are assessing the
recoverability of capitalized oil and natural gas property costs, oil and gas
reserve estimates, asset retirement obligations and recoverability of deferred
tax assets. Actual results could differ from those estimates.

Earnings (loss) per share

Basic earnings (loss) per share are
computed by dividing net income or loss (the numerator) by the weighted average
number of shares outstanding during the period (the denominator). The
computation of diluted earnings per share is the same as for basic earnings per
share except the denominator is increased to include the weighted average
additional number of shares that would have been outstanding if previously
granted stock options had been exercised, unless they are anti-dilutive.

Comprehensive income (loss)

The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to report net income (loss)
as a component of comprehensive income (loss) in the consolidated financial
statements. Comprehensive income (loss) is defined as the change in equity of a
business enterprise arising from non-owner sources. The Company had other
comprehensive income of $586,893 and $1,687,029 for 2010 and 2009 respectively
as a result of foreign exchange translation gains and losses. As of December 31,
2010 and 2009, accumulated other comprehensive income (loss) was comprised
solely of foreign currency translation gains.

Stock-based compensation

During 2010, the Company recognized
compensation costs of $307,475 related to stock options issued November 30,
2010.

F-12

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

There were 2,050,000 stock options
issued November 30, 2010. At December 31, 2010, there were 919,375 options
outstanding and exercisable with a weighted average exercise price of $0.57. The
weighted average remaining contractual term for these options at December 31,
2010 was 4.50 years. These options had no intrinsic value at December 31,
2010.

New pronouncements

In January 2010, the FASB issued FASB
Accounting Standards Update (ASU) No. 2010-03 Oil and Gas Estimations and
Disclosures (ASU 2010-03). This update aligns the current oil and natural gas
reserve estimation and disclosure requirements of the Extractive Industries Oil
and Gas topic of the FASB ASC (Topic 932) with the changes required by the SEC
final rule ASC 2010-03, as discussed above. ASU 2010-03 expands the disclosures
required for equity method investments, revises the definition of oil and
natural gas-producing activities to include nontraditional resources in reserves
unless not intended to be upgraded into synthetic oil or natural gas, amends the
definition of proved oil and natural gas reserves to require 12-month average
pricing in estimating reserves, amends and adds definitions in the Master
Glossary that is used in estimating proved oil and natural gas quantities and
provides guidance on geographic area with respect to disclosure of information
about significant reserves. ASU 2010-03 must be applied prospectively as a
change in accounting principle that is inseparable from a change in accounting
estimate and is effective for entities with annual reporting periods ending on
or after a change in accounting estimate and is effective for entities with
annual reporting periods ending on or after December 31, 2009. The impact on the
Companys operating results, financial position and cash flows has been recorded
in the financial statements.

In January 2010, the FASB issued ASU
No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06).
This update provides amendments to Subtopic 820-10 and requires new disclosures
for 1) significant transfers in and out of Level 1 and Level 2 and the reasons
for such transfers and 2) activity in Level 3 fair value measurements to show
separate information about purchases, sales, issuances and settlements. In
addition, this update amends Subtopic 820-10 to clarify existing disclosures
around the disaggregation level of fair value measurements and disclosures for
the valuation techniques and inputs utilized (for Level 2 and Level 3 fair value
measurements). The provisions in ASU 2010-06 are applicable to interim and
annual reporting periods beginning subsequent to December 15, 2009, with the
exception of Level 3 disclosures of purchases, sales, issuances and settlements,
which will be required in reporting periods beginning after December 15, 2010.
The adoption of ASU 2010-06 did not impact the Company's operating results,
financial position or cash flows, but did impact the Company's disclosures on
fair value measurements. See Note 14, Fair Value Measurements."

In April 2010, the FASB issued ASU No.
2010-12, Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts
(ASU 2010-12). This update clarifies questions surrounding the accounting
implications of the different signing dates of the Health Care and Education
Reconciliation Act (signed March 30, 2010) and the Patient Protection and
Affordable Care Act (signed March 23, 2010). ASU 2010-12 states that the FASB
and the Office of the Chief Accountant at the SEC would not be opposed to view
the two Acts together for accounting purposes. The adoption of ASU 2010-12 did
not impact the Company's operating results, financial position, cash flows or
disclosures.

F-13

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|  | Reclassification of Prior Period
  Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  | Certain reclassifications of prior period consolidated
      financial statements balances have been made to conform to current
      reporting practices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|2 | Going Concern                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  | The Company currently has a severe shortage of working
      capital and funds to pay its liabilities. The Company has no current
      borrowing capacity with any lender. The Company recorded a net loss of
      $2,062,145 in 2010. The Company has a working capital deficiency and an
      accumulated deficit at December 31, 2010 which leads to substantial doubt
      concerning the ability of the Company to meet its obligations as they come
      due. The Company also has a need for substantial funds to develop its oil
      and gas properties and repay borrowings as well as to meet its other
      current liabilities.                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  | The accompanying consolidated financial statements have
      been prepared on a going concern basis which contemplates continuity of
      operations, realization of assets and liquidation of liabilities in the
      ordinary course of business. As a result of the losses incurred and
      current negative working capital, there is no assurance that the carrying
      amounts of assets will be realized or that liabilities will be liquidated
      or settled for the amounts recorded. The ability of the Company to
      continue as a going concern is dependent upon adequate sources of capital
      and the Companys ability to sustain positive results of operations and
      cash flows sufficient to continue to explore for and develop its oil and
      gas reserves and pay its obligations.                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  | Managements strategy has been to obtain additional
      financing or industry partners. It is managements intention to raise
      additional debt or equity financing to fund its operations and capital
      expenditures or to enter into another transaction in order to maximize
      shareholder value. Failure to obtain additional financing can be expected
      to adversely affect the Companys ability to pay its obligations, further
      the development of its properties, grow revenues, oil and gas reserves and
      achieve and maintain a significant level of revenues, cash flows, and
      profitability. There can be no assurance that the Company will obtain this
      additional financing at the time required, at rates that are favorable to
      the Company, or at all. Further, any additional equity financing that is
      obtained may result in material dilution to the current holders of common
      stock.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3 | Oil and Gas Properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  | As part of the transactions with Dune Energy on August 4,
      2009, the Company acquired Dunes interest in producing wells and certain
      leasehold rights in the Bayou Couba field and assumed operations of the
      Bayou Couba field. As part of the consideration in exchange, the Company
      assigned to Dune a portion of certain deep leasehold rights it held. The
      fair value of the assets acquired was $13,806,799. (Note 16)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  | In December 2009 the Company completed 8 agreements for
      the purchase of 5.875% of the working interest in the Companys Bayou
      Couba field. Each agreement provided for the purchase of all interests
      held by the selling party and was for a collective purchase price of
      approximately $175,000 which included cash of $161,000, netting
      outstanding joint interest billings of $34,000 against revenues owed of $20,000, and
      the issuance of 325,000 shares of the common shares of the
  Company.                                                                                                                                                                                                                                                                                                                                                                                                                           

F-14

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|  | On December 31, 2009 the Company completed the purchase
      of 93.4% of the Couba Operating Company Liquidation Agent overriding
      royalty interest for approximately $315,000. The acquisition of this
      burden amounted to a 2.547% overriding royalty interest on all of the
      Companys current and future producing properties.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                   
|4 | Equipment and other fixed assets                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                   
|  | The carrying value of equipment and other fixed assets as
      of December 31, 2010 and 2009 included the following
  components:                                                                                                                                                                                                                

| |                                                       |  | 2010       |   |  | 2009       |  
| | ----------------------------------------------------- |  | ---------- | - |  | ---------- | -
| |                                                       |  | $          |   |  | $          |  
| |                                                       |  |            |   |  |            |  
| | Computer, office furniture
      and equipment        |  | 163,060    |   |  | 163,060    |  
| | Leasehold improvements                                |  | 5,520      |   |  | 5,520      |  
| | Barges and field equipment                            |  | 802,014    |   |  | 802,014    |  
| | Gas gathering and production facility
      expansion |  | 207,637    |   |  | 207,637    |  
| |                                                       |  |            |   |  |            |  
| |                                                       |  | 1,178,231  |   |  | 1,178,231  |  
| |                                                       |  |            |   |  |            |  
| | Less: Accumulated depreciation                        |  | (1,103,461 | ) |  | (1,075,860 | )
| |                                                       |  |            |   |  |            |  
| |                                                       |  | 74,770     |   |  | 102,371    |  

|5 | Asset retirement obligations                                                                                                                                                                                                               
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                            
|  | The Companys asset retirement obligations relate to
      plugging and abandonment of oil and gas properties. The components of the
      change in the Companys asset retirement obligations during 2010 and 2009
      are shown below.

| |                                           |  | For the years ended December 31, |  
| | ----------------------------------------- |  | -------------------------------- | -
| |                                           |  | 2010                             |  
| |                                           |  | $                                |  
| | Asset retirement obligations, January 1   |  | 2,674,003                        |  
| | Additions and revisions                   |  | (930,595                         | )
| | Settlements and disposals                 |  | -                                |  
| | Accretion expense                         |  | 280,372                          |  
| |                                           |  |                                  |  
| | Asset retirement obligations, December 31 |  | 2,023,780                        |  

F-15

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|  | The revision in 2010 of $930,595 is due to a change in
      the plug and abandon timing. The addition in 2009 of $497,066 includes a
      $36,718 reduction due to change in the plug and abandon timing and
      $533,784 addition due to change in the working interest after settlement
      on debt owed to Dune Energy, see Note 8, and purchase of working interests
      from other interest owners in the Bayou Couba field.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|6 | Notes payable and long-term debt                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  | Notes payable and long-term debt as of December 31, 2010
      and 2009 consisted of the following:                                                                                                                                                                                                                                                                                                                                      

| |                                                                      |  | 2010       |   |  | 2009       |  
| | -------------------------------------------------------------------- |  | ---------- | - |  | ---------- | -
| |                                                                      |  | $          |   |  | $          |  
| | Accounts payable refinanced
      as notes payable                   |  | 19,930     |   |  | 75,217     |  
| | Note payable  Citizens Bank of Oklahoma                             |  | 448,255    |   |  | 500,000    |  
| | Note payable  Bank of
      Oklahoma                                |  | 250,000    |   |  | 250,000    |  
| | Note payable  Dune Energy (Note 7)                                  |  | 157,017    |   |  | 300,000    |  
| | Note payable  Leede
      Financial                                 |  | 373,045    |   |  | 373,045    |  
| | Discount on Leede note                                               |  | -          |   |  | (42,585    | )
| | Total third-party notes
      payable and long-term debt             |  | 1,248,247  |   |  | 1,455,677  |  
| |                                                                      |  |            |   |  |            |  
| |                                                                      |  |            |   |  |            |  
| | Note payable  TPC Energy                                            |  | 139,334    |   |  | 430,000    |  
| | Discount on TPC Note                                                 |  | -          |   |  | (195,617   | )
| | Note payable - Other                                                 |  | 21,728     |   |  | -          |  
| |                                                                      |  |            |   |  |            |  
| | Total related party notes payable and long-term debt                 |  | 161,062    |   |  | 234,383    |  
| |                                                                      |  |            |   |  |            |  
| | Total notes payable and long-term debt                               |  | 1,409,309  |   |  | 1,690,060  |  
| | Less: Current portion                                                |  | (1,409,309 | ) |  | (1,690,060 | )
| |                                                                      |  |            |   |  |            |  
| | Total notes payable and
      long-term debt, net of current portion |  | -          |   |  | -          |  

On December 16, 2005, the Company
converted its $99,000 accounts payable balance to Patterson Services to a note
payable and on March 31, 2010 a payment agreement was signed. As of December 31,
2010 $19,930 is outstanding and $6,643 is past due.

On September 10, 2009, the Company
entered into a $500,000 unsecured short-term note with interest at the rate of
6% per annum with Citizens Bank of Oklahoma. All accrued interest is payable
monthly and the maturity date of the loan is April 30, 2011. Proceeds of
$475,500 from the note were paid to the Company and the remaining proceeds of
$24,500 were used to pay off a prior note with Citizens Bank of Oklahoma.
Payments of $51,745 were made during the year ended December 31, 2010. The
Company evaluated the application of ASC 470-50 and ASC 470-60 and concluded
      that the revised terms constituted a debt modification, rather than a debt
      extinguishment or a troubled debt restructuring.

F-16

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|  | On September 2, 2009, the Company entered into a $250,000
      unsecured short-term note with a variable interest rate with Bank of
      Oklahoma. The note was paid in full on February 17, 2011. See additional
      details in Note 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | On January 20, 2010, the Company and TPC Energy entered
      into a note payable whereas TPC Energy agrees to advance up to $210,000 in
      addition to the $450,000 note issued during fiscal year 2009. Interest on
      the note accrues at 10% per annum and is payable monthly. Principal
      payments are to be paid monthly commencing March 31, 2010 at a rate of 75%
      of the net cash flow received from production of the recompleted DSCI 111
      well. The Company agreed it will not encumber or sell its interest in this
      well as long as the principal balance is unpaid. Upon payout of the
      principal and interest, the Company shall assign 25% interest in this well
      to TPC Energy. In January 2010, the Company borrowed $208,892 from TPC
      Energy. Based on the relative fair value of the well, a discount on the
      note of $108,141 was recorded. The discount will be amortized over the
      life of the loan using the effective interest rate method. In June 2010,
      the Company borrowed $100,000 from TPC Energy with an interest rate of 10%
      per annum. Principal and interest was due on December 31, 2010. During the
      year ended December 31, 2010, the Company paid a total of $599,558 to TPC
      Energy. The TPC note is included in Notes Payable  Related Parties on the
      balance sheet as of December 31, 2010 and December 31, 2009.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | On December 23, 2009, the Company entered into a $373,045
      unsecured short-term note with Leede Financial with an interest rate of
      12% per annum. The maturity date of the note has been extended to March
      31, 2011. Due to the unsecured nature of the note, Leede Financial
      received a bonus of 160,000 shares of the Companys common shares at a
      deemed price of US$0.30 per share. A discount on the note of $42,585 was
      recorded based on the relative fair value of the common shares issued. The
      Company evaluated the application of ASC 470-50 and ASC 470-60 and
      concluded that the revised terms constituted a debt modification, rather
      than a debt extinguishment or a troubled debt restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|7 | Convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | On August 4, 2009, the Company re-purchased and retired
      $7.895 million, plus $2.1 million accrued and unpaid interest, of its 8%
      Secured Debentures held by Dune (including release of collateral rights),
      acquired Dunes interest in producing wells and certain leasehold rights
      in the Bayou Couba field, resumed operations of the Bayou Couba field, and
      settled outstanding issues between the companies, which net to $2.1
      million payable to Dune. In exchange, the Company assigned a portion of
      certain deep rights held by the Company and paid Dune $1.0 million at the
      closing and issued a note payable of $300,000 payable in six consecutive
      quarterly payments of $50,000 each, with the first installment due and
      payable 90 days after resuming operations of the field. The second
      installment has not been paid yet at the time of the Form 10-K filing. The
      interests acquired from Dune were fair valued at $13.8 million based on
      the present value of the future cash flows of the proved reserves
      discounted at 10 percent. The certain deep rights assigned to Dune is
      unproved property with zero book value. The gain on the settlement of the
      debenture and exchange of properties with Dune was $24.86
  million.                                                                                           

F-17

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|  | The Company re-purchased its remaining outstanding 8%
      Secured Debenture debt totalling $2.93 million and an additional $821,000
      of accrued interest with various holders with the payment of $256,000 and
      the issuance of 1.17 million shares of its common stock at a fair market
      price of US$0.30 per share. The issuance of the shares occurred during the
      third quarter of 2009. The gain on the settlement of the debenture was
      $3.14 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|8 | Common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | In March 2009, the Company granted 106,000 common shares
      as payment for an outstanding invoice in the amount of $10,600. The fair
      value of the shares was $0.30 cents per share for a total of $10,600. No
      gain or loss was recognized in this transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | In June and July 2009, the Company granted 1,165,674
      common shares of the Companys common stock which were issued at a fair
      value of $0.30 per share for partial retirement of the Companys 8%
      Secured Debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | In December 2009, the Company granted 160,000 common
      shares to a group of lenders as a share bonus for the bridge loan related
      to the acquisition of the ORI. The relative fair value of these shares of
      $42,585 was recorded as a discount on the bridge loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | During 2009, the Company issued 6,666,667 common shares
      through a Private Placement at a price of $0.30 per share for total
      proceeds of $2.0 million. Private placement costs of $96,839 were recorded
      as a reduction to additional paid-in capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | During the first quarter of 2010, 32,500 common shares
      were issued for a total value of $22,125 for the acquisition of various
      working interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | The Company obtained the required stockholder and other
      approvals to file the necessary corporate and other documents to effect a
      one-for-ten reverse split of its outstanding shares of common stock. The
      reverse split and resulting amendment to the Companys Articles of
      Incorporation became effective at the close of business on October 26,
      2010 and the Companys outstanding shares of common stock was reduced to
      approximately 13,430,608 from 134,306,080 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|9 | Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | The Company adopted the 2001 Stock Incentive Plan during
      the year ended December 31, 2001. For options granted under the plan, the
      option price shall not be less than the discounted market price, as
      allowed by the TSX Venture Exchange, on the grant date. The expiration
      date for each option will be set by the board at the time of issue of the
      option and cannot be more than 5 years after the grant date. The maximum
      number of shares that may be issued pursuant to options granted under the
      plan will be 3,000,000 shares or such additional amount as may be approved
      from time to time by the shareholders of the Company. The number of shares issuable to any one optionee under the plan cannot exceed 5% of the total
      number of issued and outstanding shares on a non-diluted basis. The number
      of shares that can be issued under the plan within a one year period, in
      aggregate, shall not exceed 20% of the then outstanding options issued
      under the plan and, to any optionee who is an insider, shall not exceed 5%
      of the then outstanding options issued under the plan.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  | Stock option activity for the years ended December 31,
      2010 and 2009 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-18

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

| |                                       |  |           |   |  | Weighted       | 
| | ------------------------------------- |  | --------- | - |  | -------------- | 
| |                                       |  | Number of |   |  | Average        | 
| |                                       |  | Options   |   |  | Exercise price | 
| |                                       |  |           |   |  | $              | 
| | Outstanding - December 31,
      2008 |  | 90,000    |   |  | 4.50           | 
| |                                       |  |           |   |  |                | 
| | Issued                                |  | 465,000   |   |  | 0.90           | 
| | Expired                               |  | (90,000   | ) |  | 4.50           | 
| |                                       |  |           |   |  |                | 
| | Outstanding  December 31, 2009       |  | 465,000   |   |  | 0.90           | 
| |                                       |  |           |   |  |                | 
| | Issued                                |  | 2,050,000 |   |  | 0.30           | 
| |                                       |  |           |   |  |                | 
| | Outstanding  December 31, 2010       |  | 2,515,000 |   |  | 0.41           | 

At December 31, 2010 and 2009, 919,375
and 174,375 options have vested and are exercisable at a weighted average
exercise price of $0.57 and $0.90, respectively. The weighted average remaining
contractual life of options granted at December 31, 2010 and 2009 is 57 months.
There is no intrinsic value for the exercisable stock options at December 31,
2010.

On January 1, 2006, the Company adopted
ASC 718 which requires companies to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant date
fair value of the award. The fair value of the 2,515,000 stock options granted
during 2010 and 2009 totaled $944,617. The stock options granted to employees
and directors in 2010 vest at 25% immediately and 12.5% per quarter thereafter
and expire five years after the date of grant.

For the year ended December 31, 2010,
the Company recognized compensation costs of $307,475 related to stock options
granted. At December 31, 2010, there was $490,330 of total unrecognized
compensation costs related to non-vested stock options which will be recognized
over a weighted average period of approximately 10 months.

The fair value of stock options granted
was estimated on the date of the grant using a Black-Scholes valuation model
that uses the following weighted average assumptions:

Options Granted in 2010Expected term, in years
    4.25Risk-Free interest rate
    1.47%Expected volatility
    238.81%Expected Dividend Rate
    NoneOptions Granted in 2009Expected term, in years
    3.25Risk-Free interest rate
    2.38%Expected volatility
    352.71%Expected Dividend Rate
    None


F-19

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|   | The Company utilizes authorized but unissued shares when
      a stock option is exercised.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The 2001 Stock Incentive Plan, as amended (approved by
      the shareholders in June 2005), is comprised of a Discretionary Option
      Grant Program, a Salary Investment Option Grant Program, a Stock Issuance
      Program, an Automatic Option Grant Program, and a Director Fee Option
      Grant. The 2001 Stock Incentive Plan terminates upon the earliest of (i)
      December 14, 2011, (ii) the date on which all shares available for
      issuance under the plan have been issued as fully-vested shares, or (iii)
      the termination of all outstanding options in connection with a change in
      control.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10 | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Warrant activity for the years ended December 31, 2010
      and 2009 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                 |  |           |   |  | Weighted       | 
| | ------------------------------- |  | --------- | - |  | -------------- | 
| |                                 |  | Number of |   |  | Average        | 
| |                                 |  | warrants  |   |  | Exercise price | 
| |                                 |  |           |   |  | $              | 
| | Outstanding - December 31, 2008 |  | -         |   |  | -              | 
| | Issued                          |  | 538,000   |   |  | 0.50           | 
| |                                 |  |           |   |  |                | 
| | Outstanding  December 31, 2009 |  | 538,000   |   |  | 0.50           | 
| | Expired                         |  | (538,000  | ) |  | 0.50           | 
| |                                 |  |           |   |  |                | 
| | Outstanding  December 31, 2010 |  | -         |   |  | -              | 

|   | The Company granted a total of 538,000 warrants on July
      28 and July 29, 2009 with an exercise price of $0.50 as a finders fee for
      the common share private placement. The warrants vested immediately and
      expired on the one year anniversary of the grant date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|11 | Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company rents office space under a long-term
      operating lease that expires December 2011. At December 31, 2010, the
      future minimum lease payments required under the operating lease amounted
      to $96,000 and is to be paid in 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Rent expense on all operating leases amounted to
      approximately $89,000 and $93,000 in 2010 and 2009,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | With respect to the acquisition of the Companys Bayou
      Couba lease acreage, the Company agreed that the Class 7 creditors to the
      ANEC/Couba Reorganization Plan (the Plan) would receive a contingent
      payable from future production of the properties in the amount of
      approximately $4.9 million plus interest accruing at 8% per annum
      commencing January 1, 2002, and would receive payment of 100% of their
      allowed claims out of an overriding royalty interest in the amount of 3%
      of the production from existing and new wells on the Bayou Couba Lease. In
      addition, such claims are to be paid out of a net profits interest granted
      to the creditors whereby such creditors are allocated 50% of the net
      profits from production from the workover of wells existing on December
      31, 2001 on the Bayou Couba Lease, 15% of the net profits from production
      from the drilling after December 31, 2001 of new wells on the Bayou Couba
      Lease and 6% of the net profits from production from the drilling after
      December 31, 2001 of new wells on a 23.5 square mile area of mutual
      interest, excluding, however, the Bayou Couba Lease. Upon payment
      of their allowed claims, inclusive of interest, such royalty and net
      profits interests is eliminated. The Company is accounting for any
      contingent purchase price payments to the Class 7 creditors as additions
      to the full cost pool as production occurs. The Company holds 93.4% of the
      Class 7 claims.

F-20

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company agreed that, after repayment to the Company
      of 200% of all costs of bankruptcy, drilling, development and field
      operations from net revenues of the Bayou Couba Lease and the 23.5 square
      mile area of mutual interest, including payments made by the Company to
      all creditors of all classes under the plan, the former holders of equity
      securities of Couba will be entitled to a working interest in the wells in
      the Bayou Couba Lease equal to 25% of the working interest obtained by the
      Company directly from Couba at the time of confirmation and as a result of
      the plan of reorganization of Couba, and a 25% interest in the Companys
      interest in the 23.5 square mile area of mutual interest held by the
      Company on the effective date of the plan.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | On January 31, 2005, the Company made application with
      applicable Canadian authorities to dissolve and terminate Gothic Resources
      Inc. ("Gothic"). In conjunction with the application for dissolution, the
      prior tax returns and tax status of Gothic have been reviewed by the
      Canada Customs and Revenue Agency (CRA). The CRA has assessed Gothic
      $190,000 (Cdn$187,000) in additional taxes and interest based on the
      review of such returns. Approximately $65,000 remains unpaid at December
      31, 2010.                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company, as an owner or lessee of oil and gas
      properties, is subject to various federal, states and local laws and
      regulations relating to discharge of materials into, and protection of,
      the environment. These laws and regulations, may, among other things,
      impose liability on the lessee under an oil and gas lease for the cost of
      pollution clean-up resulting from operations and subject the lessee to
      liability for pollution damages. In some instances, the Company may be
      directed to suspend or cease operations in the affected area. We maintain
      insurance coverage, which we believe is customary in the industry,
      although we are not fully insured against all environmental
  risks.                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|12 | Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company borrowed an additional $68,000 during 2009
      from Mike Paulk, an officer of the Company. The note payable was later
      repaid in full with a payment of $261,000. The Company paid Mike Paulk
      $16,000 for interest on the loans provided to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | As part of the Private Placement of common shares during
      2009, Steven P. Ensz, an officer and director of the Company and Brian
      Bayley, a director of the Company each purchased 250,000 shares at the
      issue price of US $0.30 per share for a total of US $150,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|13 | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The tax effects of temporary differences between the tax
      bases of assets and liabilities and their financial reporting amounts and
      the tax credits and other items that give rise to significant portions of
      the deferred tax assets and deferred tax liabilities at December 31, 2010
      and 2009 are presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-21

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

| |                                                                                                           |  | 2010       |   |  | 2009       |  
| | --------------------------------------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | -
| |                                                                                                           |  | $          |   |  | $          |  
| | Deferred tax assets                                                                                       |  |            |   |  |            |  
| | Asset retirement costs                                                                                    |  | 768,227    |   |  | 1,015,052  |  
| | Foreign exchange loss                                                                                     |  | 1,075,301  |   |  | 852,516    |  
| | Acquisition, exploration and development
      costs and related depreciation, depletion and amortization |  | 2,006,167  |   |  | 1,866,432  |  
| | Contribution carryovers                                                                                   |  | 4,814      |   |  | 4,814      |  
| | Change in accounting principle                                                                            |  | 123,894    |   |  | 123,894    |  
| | Net operating loss carryforwards                                                                          |  | 3,259,772  |   |  | 2,544,002  |  
| | Deferred tax asset                                                                                        |  | 7,238,175  |   |  | 6,406,710  |  
| |                                                                                                           |  |            |   |  |            |  
| | Less: Valuation allowance                                                                                 |  | (7,238,175 | ) |  | (6,406,710 | )
| |                                                                                                           |  |            |   |  |            |  
| | Total deferred tax asset (liability)                                                                      |  | -          |   |  | -          |  

The provision for income taxes is
different than the amounts computed using the applicable statutory federal
income tax rate. The differences for the years ended December 31, 2010 and 2009
are summarized as follows:

| |                                       |  | 2010     |   |  | 2009       |  
| | ------------------------------------- |  | -------- | - |  | ---------- | -
| |                                       |  | $        |   |  | $          |  
| |                                       |  |          |   |  |            |  
| | Federal tax benefit at statutory rate |  | 701,130  |   |  | (8,143,985 | )
| | State taxes, net of federal taxes     |  | 86,739   |   |  | (1,008,966 | )
| | Other                                 |  | (440,457 | ) |  | (585,353   | )
| | Less: valuation allowance             |  | (347,412 | ) |  | 9,738,304  |  
| |                                       |  |          |   |  |            |  
| | Total provision for income taxes      |  | -        |   |  | -          |  

|   | As of December 31, 2010, the Company has a net operating
      loss carry-forward benefit of approximately $10.2 million which is
      available to reduce future taxable income, if any, through 2030.
      Management has determined that it is more likely than not that the benefit
      of the deferred tax asset will not be realized and thus has provided a
      100% valuation allowance against the deferred tax asset. If certain
      substantial changes in the Company's ownership should occur, there would
      be an annual limitation on the amount of the carry-forward which can be
      utilized.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|14 | Fair Value Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | As defined in ASC 820-Fair Value Measurements and
      Disclosures, fair value is the price that would be received to sell an
      asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date (exit price). This statement
      requires disclosure that establishes a framework for measuring fair value
      and expands disclosure about fair value measurements. The statement
requires fair value measurements be classified and disclosed in one of the
following categories:                                                                       

F-22

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

Level 1 - Unadjusted quoted prices in
active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities. We consider active markets as those in which
transactions for the assets or liabilities occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.

Level 2 - Quoted prices in markets that
are not active or inputs which are observable, either directly or indirectly,
for substantially the full term of the asset or liability.

Level 3 - Measured based on prices or
valuation models that require inputs that are both significant to the fair value
measurement and less observable from objective sources (i.e. supported by little
or no market activity). This category includes the proved property acquired from
Dune as part of the settlement of the 8% Secured Debentures held by Dune (see
Note 7) that we valued using the present value of the future cash flows of the
proved reserves discounted at 10 percent. Substantially all of these inputs are
observable in the marketplace throughout the full term of the proved properties,
can be derived from observable data or supported by observable levels at which
transactions are executed in the marketplace.

As required by ASC 820, financial
assets and liabilities are classified based on the lowest level of input that is
significant to the fair value measurement. Our assessment of the significance of
a particular input to the fair value measurement requires judgment and may
affect the valuation of the fair value of assets and liabilities and their
placement within the fair value hierarchy levels. The following table summarizes
the valuation of our investments and financial instruments by ASC 820 pricing
levels as of December 31, 2009. There was no fair value measurement for 2010
related to this transaction, since this was a one-time transaction that occurred
in 2009.

| |                   |  | Fair value measurement |  |  |             |  |  |            | 
| | ----------------- |  | ---------------------- |  |  | ----------- |  |  | ---------- | 
| |                   |  | Level 1                |  |  | **Level 2** |  |  | Level 3    | 
| | Proved Properties |  | -                      |  |  | -           |  |  | 13,806,799 | 
| | Total             |  | -                      |  |  | -           |  |  | 13,806,799 | 

|15 | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Pursuant to FASB ASC 855, the Company evaluated all
      events or transactions that occurred from January 1, 2011 through March
      31, 2011, the date of issuance of the audited consolidated financial
      statements. During this period we did not have any material recognizable
      subsequent events, except as disclosed below:                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | On February 17, 2011, the Company entered into a $500,000
      unsecured short-term note with interest at the rate of 10% per annum with
      Michael Paulk and Steven Ensz, officers and directors of the Company. All
      accrued interest is payable monthly and the maturity date of the loan is
      February 15, 2012. Proceeds of from the note were used to pay the
      outstanding obligation to Bank of Oklahoma and the balance for working
      capital.

F-23

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

|16 | Disclosures About Oil and Gas Producing Activities
      (Unaudited)                  
|-- | --------------------------------------------------------------------------------------
|   |                                                                                       
|   | Net Capitalized Costs                                                                 
|   |                                                                                       
|   | The following summarizes net capitalized costs as of
      December 31, 2010 and 2009.

| |                                                                                |  | $           |   |  | $           |  
| | ------------------------------------------------------------------------------ |  | ----------- | - |  | ----------- | -
| | Oil and gas properties                                                         |  |             |   |  |             |  
| | Proved                                                                         |  | 37,235,859  |   |  | 38,219,032  |  
| | Unproved                                                                       |  | 352,554     |   |  | 144,602     |  
| | Total                                                                          |  | 37,588,413  |   |  | 38,363,634  |  
| |                                                                                |  |             |   |  |             |  
| | Less accumulated depreciation, depletion
      and amortization and impairment |  | (21,241,298 | ) |  | (20,637,643 | )
| |                                                                                |  |             |   |  |             |  
| | Net capitalized costs                                                          |  | 16,347,115  |   |  | 17,725,991  |  

Unproved Property Costs

The following summarizes the
capitalized unproved property costs excluded from amortization as of December
31, 2010 and 2009. All costs represent investment in unproved property in
Louisiana and will be evaluated over several years as the properties are
explored.

| |                            |  | 2010    |  |  | 2009   |  |  | Prior Years |   |  | Total      |  
| | -------------------------- |  | ------- |  |  | ------ |  |  | ----------- | - |  | ---------- | -
| |                            |  | $       |  |  | $      |  |  | $           |   |  | $          |  
| |                            |  |         |  |  |        |  |  |             |   |  |            |  
| | Property acquisition costs |  | 207,952 |  |  | 40,223 |  |  | (1,324,831  | ) |  | (1,076,656 | )
| | Capitalized interest       |  | -       |  |  | -      |  |  | 1,429,210   |   |  | 1,429,210  |  
| |                            |  |         |  |  |        |  |  |             |   |  |            |  
| |                            |  | 207,952 |  |  | 40,223 |  |  | 104,379     |   |  | 352,554    |  

Costs Incurred in Oil and Gas
Acquisition, Exploration and Development

| |                   |  | 2010    |  |  | 2009    | 
| | ----------------- |  | ------- |  |  | ------- | 
| |                   |  | $       |  |  | $       | 
| |                   |  |         |  |  |         | 
| | Development costs |  | 334,887 |  |  | 473,981 | 
| | Exploration costs |  | -       |  |  | -       | 
| | Acquisition costs |  |         |  |  |         | 
| | Proved            |  | -       |  |  | 494,938 | 
| | Unproved          |  | -       |  |  | -       | 
| |                   |  |         |  |  |         | 
| |                   |  | 334,887 |  |  | 968,919 | 

F-24

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

Results of Operations from Oil and
Gas Producing Activities

The Companys results of operations
from oil and gas producing activities are presented below for the years 2010 and
2009. The following table includes revenues and expenses associated directly
with the Companys oil and gas producing activities. It does not include any
general and administrative costs or any interest costs.

| |                                                                                                          |  | 2010      |   |  | 2009      |  
| | -------------------------------------------------------------------------------------------------------- |  | --------- | - |  | --------- | -
| |                                                                                                          |  | $         |   |  | $         |  
| | Oil and gas sales                                                                                        |  | 2,523,730 |   |  | 1,054,390 |  
| | Operations income                                                                                        |  | 54,802    |   |  | 29,024    |  
| | Lease operating expenses                                                                                 |  | (890,307  | ) |  | (760,147  | )
| | Production taxes                                                                                         |  | (132,552  | ) |  | (24,993   | )
| | Depreciation, depletion and amortization                                                                 |  | (911,628  | ) |  | (466,803  | )
| |                                                                                                          |  |           |   |  |           |  
| | Results of operations from oil and gas
      activities, excluding corporate overhead and interest costs |  | 644,045   |   |  | (168,529  | )

Oil and Gas Reserve Quantities
(unaudited)

The reserve information presented below
is based on reports prepared by independent petroleum engineers Summa
Engineering, Inc.

The information is presented in
accordance with regulations prescribed by the Securities and Exchange
Commission. Reserve estimates are inherently imprecise. These estimates were
generally based upon extrapolation of historical production trends, analogy to
similar properties and volumetric calculations. Accordingly, these estimates are
expected to change, and such change could be material and occur in the near term
as future information becomes available.

Proved oil and gas reserves represent
the estimated quantities of crude oil, natural gas and natural gas liquids which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under current economic and
operating conditions. Proved developed oil and gas reserves are those expected
to be recovered through existing equipment and operating methods. All of the
Companys oil and natural gas producing activities are located in the United
States of America.

December 31, 2010

| |                                             |  | Oil      |   |  | Gas    |   |  | Total    | 
| | ------------------------------------------- |  | -------- | - |  | ------ | - |  | -------- | 
| |                                             |  | (Mbbl)   |   |  | (Mmcf) |   |  | (Mbble)  | 
| | Proved reserves, beginning of period        |  | 1,375.52 |   |  | -      |   |  | 1,375.52 | 
| | Extensions, discoveries and other additions |  | -        |   |  | -      |   |  | -        | 
| | Revisions of previous estimates             |  | 144.67   |   |  | 11.59  |   |  | 146.60   | 
| | Production                                  |  | (31.53   | ) |  | (11.59 | ) |  | (33.46)  | 
| | Sale of reserves in place                   |  | -        |   |  | -      |   |  | -        | 
| | Purchase of reserves in place               |  | -        |   |  | -      |   |  | -        | 
| |                                             |  |          |   |  |        |   |  |          | 
| | Proved reserves, end of period              |  | 1,488.66 |   |  | -      |   |  | 1,488.66 | 

F-25

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

| |                            |  |        |  |  |      |  |  |        | 
| | -------------------------- |  | ------ |  |  | ---- |  |  | ------ | 
| |                            |  |        |  |  |      |  |  |        | 
| | Proved developed reserves: |  |        |  |  |      |  |  |        | 
| | Beginning of period        |  | 103.07 |  |  | 0.00 |  |  | 103.07 | 
| |                            |  |        |  |  |      |  |  |        | 
| | End of period              |  | 75.32  |  |  | -    |  |  | 75.32  | 

December 31, 2009

| |                                             |  | Oil      |   |  | Gas     |   |  | Total    |  
| | ------------------------------------------- |  | -------- | - |  | ------- | - |  | -------- | -
| |                                             |  | (Mbbl)   |   |  | (Mmcf)  |   |  | (Mbble)  |  
| | Proved reserves, beginning of period        |  | 360.07   |   |  | 268.84  |   |  | 404.88   |  
| | Extensions, discoveries and other additions |  | -        |   |  | -       |   |  | -        |  
| | Revisions of previous estimates             |  | 495.17   |   |  | (268.84 | ) |  | 450.37   |  
| | Production                                  |  | (15.97   | ) |  | (0.00   | ) |  | (15.97   | )
| | Sale of reserves in place                   |  | -        |   |  | -       |   |  | -        |  
| | Purchase of reserves in place               |  | 536.25   |   |  | -       |   |  | 536.25   |  
| |                                             |  |          |   |  |         |   |  |          |  
| | Proved reserves, end of period              |  | 1,375.52 |   |  | -       |   |  | 1,375.52 |  
| |                                             |  |          |   |  |         |   |  |          |  
| | Proved developed reserves:                  |  |          |   |  |         |   |  |          |  
| | Beginning of period                         |  | 31.56    |   |  | 1.22    |   |  | 31.76    |  
| |                                             |  |          |   |  |         |   |  |          |  
| | End of period                               |  | 103.07   |   |  | 0.00    |   |  | 103.07   |  

The Company has recognized positive
revisions in the years ended December 31, 2010 and December 31, 2009. The
positive revisions of 146.60 Mbble in 2010 and 450.37 Mbble in 2009 were due to
positive price revisions.

Standardized Measure of Discounted
Future Net Cash Flows (unaudited)

FASB ASC 932, Disclosures About Oil
and Gas Producing Activities,("ASC 932") prescribes guidelines for
computing the standardized measure of future net cash flows and changes therein
relating to estimated proved reserves. The Company has followed these guidelines
which are briefly discussed below.

Future cash inflows from oil and gas
reserves use the unweighted arithmetic average of the price on the first day of
each month within the 12-month period prior to the end of the reporting period.
Future production and development costs are determined by applying year-end
prices and costs to the estimated quantities of oil and gas to be produced. The
prices used at December 31, 2010 and December 31, 2009 were $77.54 and $58.83
per barrel for oil, respectively. There were no gas reserves at December 31,
2010 or December 31, 2009. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced based on
year-end economic conditions. Estimated future income taxes are computed using
current statutory income tax rates including consideration for current tax basis
of properties and related carryforwards, giving effect to permanent differences
and tax credits. The resulting future net cash flows are reduced to present
value amounts by applying a 10% annual discount factor.

F-26

---

American Natural Energy CorporationNotes to
Consolidated Financial Statements 
  December 31, 2010 and 2009

The assumptions used to compute the
standardized measure are those prescribed by the Financial Accounting Standards
Board and, as such, do not necessarily reflect our expectations of actual
revenue to be derived from those reserves nor their present worth. The
limitations inherent in the reserve quantity estimation process, as discussed
previously, are equally applicable to the standardized measure computations
since these estimates are the basis for the valuation process.

The following sets forth our future net
cash flows relating to proved oil and gas reserves based on the standardized
measure prescribed in ASC 932:

| |                                                          |  | December 31, |  
| | -------------------------------------------------------- |  | ------------ | -
| |                                                          |  | 2010         |  
| |                                                          |  | $            |  
| | Future cash inflows                                      |  | 115,430,820  |  
| | Future development costs                                 |  | (9,479,971   | )
| | Future production costs                                  |  | (33,923,506  | )
| |                                                          |  |              |  
| | Net future cash flows                                    |  | 72,027,343   |  
| | Less effect of a 10% discount factor                     |  | (25,317,607  | )
| |                                                          |  |              |  
| | Standardized measure of discounted future net cash flows |  | 46,709,736   |  

The principal sources of change in the
standardized measure of discounted future net cash flows are as follows:

| |                                                        |  | December 31, |  
| | ------------------------------------------------------ |  | ------------ | -
| |                                                        |  | 2010         |  
| |                                                        |  | $            |  
| | Standardized measure, beginning of period              |  | 24,830,127   |  
| | Sales of oil and gas produced, net of production costs |  | (1,500,872   | )
| | Development costs incurred                             |  | 334,886      |  
| | Changes in future development costs                    |  | (1,173,713   | )
| | Revisions of previous quantity estimates               |  | 4,966,233    |  
| | Net change due to extensions and discoveries           |  | -            |  
| | Net change in prices and production costs              |  | 15,706,648   |  
| | Changes in production rate                             |  | (674,412     | )
| | Purchases of properties                                |  | -            |  
| | Accretion of discount                                  |  | 4,974,809    |  
| | Other                                                  |  | (753,970     | )
| |                                                        |  |              |  
| | Standardized measure, end of period                    |  | 46,709,736   |  

F-27

---

SIGNATURES

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

| |     | American Natural Energy
      Corporation
| | --- | -----------------------------------------
| |     |                                          
| | By: | /s/ Michael K. Paulk                     
| |     | Michael K. Paulk,
      President        

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.

Signature
    Title
    Date/s/ Michael K. Paulk
    President (Principal
    March 31, 2011Michael K. Paulk
    Executive Officer) and Director/s/ Steven P. Ensz
    Director and Principal Financial
    March 31, 2011Steven P. Ensz
    and Accounting Officer/s/ William Grant
    Director
    March 31, 2011William Grant/s/ Ben Shelton
    Director
    March 31, 2011Ben Shelton


---