UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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





For the
quarterly period ended October 31,
2010





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





For the
transition period from 
to





Commission
File Number:333-143626







AMERICAN
EAGLE ENERGY INC.


(Exact
name of registrant as specified in its charter)





Nevada
            20-8642477(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





27 North 27thStreet, Suite 21G, Billings,
      MT
              
              59101(Address
      of principal executive offices)
              
              (Zip
      Code)





(406) 294-9765(Registrant’s
      telephone number, including area
code)





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





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





(Check
one):





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
            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 o No x





Indicate the number of shares
outstanding of each of the issuer’s classes of common equity, as of the latest
practicable date:


55,060,000
shares of common stock issued and outstanding at December 13, 2010.







AMERICAN
EAGLE ENERGY INC.


FORM
10-Q


QUARTERLY
PERIOD ENDED OCTOBER 31, 2010





INDEX





A
      Note About Forward Looking Statements
              1PART
      I - FINANCIAL INFORMATIONItem
      1 – Condensed Financial Statements (Unaudited)
              2Condensed
      Balance Sheets as of October 31, 2010 and April 30, 2010
              F-1Condensed
      Statements of Operations For the Period for Each of the Three-Month and
      Six-Month Periods Ended October 31, 2010 and 2009 and for the Period from
      March 14, 2007 (Inception) through October 31, 2010
              F-2Condensed
      Statements of Cash Flows for Each of the Six-Month Periods Ended October
      31, 2010 and 2009 and for the Period from March 14, 2007 (Inception)
      through October 31, 2010
              F-4Notes
      to the Condensed Financial Statements (Unaudited)
              F-5Item
      2 - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
              4Item
      4 - Controls and Procedures
              9PART
      II - OTHER INFORMATIONItem
      6 – Exhibits
              10Signatures
              12










A
Note About Forward-Looking Statements





This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 that are based
on management’s current expectations.  These statements may be
identified by their use of words like “plans,” “expect,” “aim,” “believe,”
“projects,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and
other expressions that indicate future events and trends.  All
statements that address expectations or projections about the future, including
statements about our business strategy, expenditures, and financial results, are
forward-looking statements.  We believe that the expectations
reflected in such forward-looking statements are accurate.  However,
we cannot assure you that such expectations will occur.





Actual
results could differ materially from those in the forward looking statements due
to a number of uncertainties including, but not limited to, those discussed in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.  Factors that could cause future results to differ from
these expectations include general economic conditions; further changes in our
business direction or strategy; competitive factors; market uncertainties; and
an inability to attract, develop, or retain consulting or managerial agents or
independent contractors.  As a result, the identification and
interpretation of data and other information and their use in developing and
selecting assumptions from and among reasonable alternatives requires the
exercise of judgment.  To the extent that the assumed events do not
occur, the outcome may vary substantially from anticipated or projected results,
and accordingly, no opinion is expressed on the achievability of those
forward-looking statements.  No assurance can be given that any of the
assumptions relating to the forward-looking statements specified in the
following information are accurate, and we assume no obligation to update any
such forward-looking statements.  You should not unduly rely on these
forward-looking statements, which speak only as of the date of this Quarterly
Report.  Except as required by law, we are not obligated to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances occurring after the date of this report or to reflect the
occurrence of unanticipated events.


1




PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS.


American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Condensed
Financial Statements
  As
of October 31, 2010 and April 30, 2010 and
 For
Each of the Three-Month and Six-Month Periods Ended October 31, 2010 and 2009
and for the
 Period
from March 14, 2007 (Inception) Through October 31, 2010
  2
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Index
to the Condensed Financial Statements (Unaudited)
 
 Condensed
      Financial Statements of American Eagle Energy, Inc.:Condensed
      Balance Sheets as of October 31, 2010 and April 30, 2010
                  F-1Condensed
      Statements of Operations For Each of the Three-Month and Six-Month Periods
      Ended October 31, 2010 and 2009 and For the Period from March 14, 2007
      (Inception) Through October 31, 2010
                  F-2Condensed
      Statements of Cash Flows For Each of the Six-Month Periods Ended October
      31, 2010 and 2009 and For the Period from March 14, 2007 (Inception)
      Through October 31, 2010
                  F-4Notes
      to the Condensed Financial Statements (Unaudited)
                  F-5
  3
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Condensed
Balance Sheets
  (Unaudited)
  
 
 October 31,
                                                  
                                                  
                                                  April 30,2010
                                                  
                                                  
                                                  2010ASSETSCurrent
      assets:Cash
                                                  
                                                  $
                                                  14,176
                                                  
                                                  
                                                  $
                                                  825,419Total
      current assets
                                                  
                                                  
                                                  14,176
                                                  
                                                  
                                                  
                                                  825,419Oil
      and gas properties — subject to amortization
                                                  
                                                  
                                                  1,009,968
                                                  
                                                  
                                                  
                                                  -Oil
      and gas properties — not subject to amortization
                                                  
                                                  
                                                  1,312,067
                                                  
                                                  
                                                  
                                                  1,822,599Marketable
      securities - related party
                                                  
                                                  
                                                  252,295
                                                  
                                                  
                                                  
                                                  -Total
      assets
                                                  
                                                  $
                                                  2,588,506
                                                  
                                                  
                                                  $
                                                  2,648,018LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
                                                  
                                                  $
                                                  737,331
                                                  
                                                  
                                                  $
                                                  899,506Amounts
      due to Eternal Energy for our 50% portion of oil and gas
    costs
                                                  
                                                  
                                                  254,844
                                                  
                                                  
                                                  
                                                  -Due
      to related parties
                                                  
                                                  
                                                  20,000
                                                  
                                                  
                                                  
                                                  87,281Convertible
      debenture, net of discount of $128,567 and $268,823,
      respectively
                                                  
                                                  
                                                  871,433
                                                  
                                                  
                                                  
                                                  731,177Total
      current liabilities
                                                  
                                                  
                                                  1,883,608
                                                  
                                                  
                                                  
                                                  1,717,964Commitments
      and contingencies (Note 6)Stockholders'
      equity:Common
      stock, $.001 par value, 150,000,000 shares authorized, 55,060,000 shares
      issued and outstanding
                                                  
                                                  
                                                  55,060
                                                  
                                                  
                                                  
                                                  55,060Additional
      paid-in capital
                                                  
                                                  
                                                  1,090,451
                                                  
                                                  
                                                  
                                                  1,090,451Accumulated
      deficit
                                                  
                                                  
                                                  (668,273
                                                  )
                                                  
                                                  
                                                  (215,457
                                                  )Accumulated
      other comprehensive income - unrealized gain on marketable
      securities
                                                  
                                                  
                                                  227,660
                                                  
                                                  
                                                  
                                                  -Total
      stockholders' equity
                                                  
                                                  
                                                  704,898
                                                  
                                                  
                                                  
                                                  930,054Total
      liabilities and stockholders' equity
                                                  
                                                  $
                                                  2,588,506
                                                  
                                                  
                                                  $
                                                  2,648,018
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-1
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Condensed
Statements of Operations (Unaudited)
   
 For thePeriod FromMarch 14,2007(Inception)FortheThree-MonthPeriod
                                      
                                      
                                      FortheSix-MonthPeriod
                                      
                                      
                                      ThroughEnded October 31,
                                      
                                      
                                      Ended October 31,
                                      
                                      
                                      October 31,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010Revenues:Oil
      and gas sales
                                      
                                      $
                                      65,239
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      65,239
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      65,239Operating
      expenses:Exploration
      and production
                                      
                                      
                                      69,161
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      69,161
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      77,041Impairment
      of mineral and oil and gas properties
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,936
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      14,586General
      and administrative
                                      
                                      
                                      46,900
                                      
                                      
                                      
                                      1,290
                                      
                                      
                                      
                                      91,616
                                      
                                      
                                      
                                      1,689
                                      
                                      
                                      
                                      123,332General
      and administrative - related party
                                      
                                      
                                      65,000
                                      
                                      
                                      
                                      4,569
                                      
                                      
                                      
                                      65,000
                                      
                                      
                                      
                                      9,138
                                      
                                      
                                      
                                      77,927Professional
      fees
                                      
                                      
                                      20,220
                                      
                                      
                                      
                                      3,696
                                      
                                      
                                      
                                      105,814
                                      
                                      
                                      
                                      7,196
                                      
                                      
                                      
                                      245,077Total
      operating costs
                                      
                                      
                                      201,281
                                      
                                      
                                      
                                      9,555
                                      
                                      
                                      
                                      337,527
                                      
                                      
                                      
                                      18,023
                                      
                                      
                                      
                                      537,963Total
      operating loss
                                      
                                      
                                      (136,042
                                      )
                                      
                                      
                                      (9,555
                                      )
                                      
                                      
                                      (272,288
                                      )
                                      
                                      
                                      (18,023
                                      )
                                      
                                      
                                      (472,724
                                      )Interest
      expense
                                      
                                      
                                      20,272
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      40,272
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      43,605Accretion
      of debenture discount
                                      
                                      
                                      70,128
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      140,256
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      151,944Net loss
                                      
                                      $
                                      (226,442
                                      )
                                      
                                      $
                                      (9,555
                                      )
                                      
                                      $
                                      (452,816
                                      )
                                      
                                      $
                                      (18,023
                                      )
                                      
                                      $
                                      (668,273
                                      )Net
      loss per common share:Basic
      and diluted
                                      
                                      $
                                      0.00
                                      
                                      
                                      $
                                      0.00
                                      
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      0.00
                                      
                                      
                                      $
                                      (0.01
                                      )Weighted
      average number of shares outstanding:Basic
      and diluted
                                      
                                      
                                      55,060,000
                                      
                                      
                                      
                                      60,000,000
                                      
                                      
                                      
                                      55,060,000
                                      
                                      
                                      
                                      60,000,000
                                      
                                      
                                      
                                      54,237,679
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-2
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Condensed
Statements of Cash Flows (Unaudited)
  
 For thePeriod FromMarch 14,2007(Inception)For the Six-Month Period
                          
                          
                          ThroughEnded October 31,
                          
                          
                          October 31,2010
                          
                          
                          2009
                          
                          
                          2010Cash
      flows provided by (used in) operating activities:Net
      loss
                          
                          $
                          (452,816
                          )
                          
                          $
                          (18,023
                          )
                          
                          $
                          (668,273
                          )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Accretion
      of discount on debenture
                          
                          
                          140,256
                          
                          
                          
                          -
                          
                          
                          
                          151,944Impairment
      of oil and gas properties
                          
                          
                          5,937
                          
                          
                          
                          -
                          
                          
                          
                          5,937Impairment
      of mineral properties
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          8,650Changes
      in operating assets and liabilities:Accounts
      payable and accrued liabilities
                          
                          
                          92,669
                          
                          
                          
                          2,939
                          
                          
                          
                          992,175Amounts
      due to related parties
                          
                          
                          (67,281
                          )
                          
                          
                          14,975
                          
                          
                          
                          20,000Net
      cash provided by (used in) operating activities
                          
                          
                          (281,235
                          )
                          
                          
                          (109
                          )
                          
                          
                          510,433Cash
      flows used in investing activities:Acquisition
      of mineral rights
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (8,650
                          )Acquisition
      of oil and gas properties - subject to amortization
                          
                          
                          (243,348
                          )
                          
                          
                          -
                          
                          
                          
                          (249,285
                          )Acquisition
      of oil and gas properties - not subject to amortization
                          
                          
                          (406,088
                          )
                          
                          
                          -
                          
                          
                          
                          (2,222,750
                          )Sale
      of oil and gas properties - not subject to amortization
                          
                          
                          144,063
                          
                          
                          
                          -
                          
                          
                          
                          144,063Investment
      in marketable securities
                          
                          
                          (24,635
                          )
                          
                          
                          -
                          
                          
                          
                          (24,635
                          )Net
      cash used in investing activities
                          
                          
                          (530,008
                          )
                          
                          
                          -
                          
                          
                          
                          (2,361,257
                          )Cash
      flows provided by financing activities:Sale
      of common stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          865,000Issuance
      of a convertible debenture
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,000,000Net
      cash provided by financing activities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,865,000Net
      increase (decrease) in cash
                          
                          
                          (811,243
                          )
                          
                          
                          (109
                          )
                          
                          
                          14,176Cash
      - beginning of period
                          
                          
                          825,419
                          
                          
                          
                          7,157
                          
                          
                          
                          -Cash
      - end of period
                          
                          $
                          14,176
                          
                          
                          $
                          7,048
                          
                          
                          $
                          14,176
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
  F-3
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Condensed
Statements of Cash Flows (Unaudited)
  
  Supplemental
Disclosure of Cash Flow Information
 
 For thePeriod FromMarch 14,2007(Inception)For the Six-Month Period
                                          
                                          
                                          ThroughEnded October 31,
                                          
                                          
                                          October 31,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010Cash paid during the six-month period
      for:Interest
                                          
                                          $
                                          16,939
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          16,939Income
      taxes
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Non-Cash
      Investing and Financing ActivitiesValue
      of warrants issued along with convertible debenture accounted for as a
      discount on the debenture
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          280,511Unrealized
      gain on marketable securities
                                          
                                          $
                                          227,660
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          227,660Transfer
      of amount from full cost pool not subject to amortization to full cost
      pool subject to amortization resulting from exchange of 50% of the
      Spyglass Prospect for 50% of the Hardy Prospect
                                          
                                          $
                                          766,620
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          766,620Cancellation
      of common shares
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (16,000
                                          )
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-4
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 1.
              Description of
      Business
  American
Eagle Energy, Inc. (the "Company") was incorporated in the state of Nevada in
March 2007 under the name Yellow Hill Energy, Inc.  On October 5,
2009, Yellow Hill Energy, Inc. merged with its wholly owned subsidiary, American
Eagle Energy Inc., which was formed for the sole purpose of changing the
name.  On October 14, 2009, the Company’s board of directors
authorized a forward split of the Company’s common stock at a ratio of 2:1,
resulting in an increase in the number of shares then authorized from 75,000,000
to 150,000,000 and an increase in the number of shares then outstanding from
30,000,000 to 60,000,000.
  The
Company was initially formed to serve as a vehicle for pursuing and acquiring
existing businesses and, as a result, operated as a “shell” company from the
date of inception through September 2009.  In October 2009, the
Company shifted its focus from business acquisition activities to engaging in
the acquisition, exploration and development of oil and gas
properties.  As of October 31, 2010, the Company had acquired working
interests in oil and gas prospects located in North Dakota, Texas and
southeastern Saskatchewan, Canada.
  Because
the Company has yet to recognize recurring revenues from operations, the Company
is currently considered to be an exploration stage entity and is subject to the
reporting requirements of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification section 915 (“ASC 915”).  ASC 915
requires certain disclosures regarding the Company’s operations as well as the
presentation of statements of operations and cash flows for the period from the
date of inception through the end of the most current reporting
period.
  2.
              Summary of Significant
      Accounting Policies
  Basis
of Presentation
  These
condensed financial statements are presented in United States dollars and have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC
Regulation S-X. The principles for interim financial information do not require
the inclusion of all the information and footnotes required by generally
accepted accounting principles for complete financial statements. Therefore,
these financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended April 30, 2010. The condensed
financial statements included herein are unaudited; however, in the opinion of
management, they contain all normal recurring adjustments necessary for a fair
statement of the results for the interim periods. Operating results for the
three-month and six-month periods ended October 31, 2010 are not necessarily
indicative of the results that may be expected for the year ending April 30,
2011.
  F-5
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 The
Company has evaluated subsequent events through the date that the financial
statements were issued and included in the Company’s Quarterly Report on Form
10-Q for the six-month period ended October 31, 2010.
  Revenue
Recognition
  The
Company records the sale of its interests in prospects as a reduction to the
cost pool when the terms of the transaction are final and the sales price is
determinable. Spud fee revenue is recognized when drilling
commences.  Working interest, royalty and net profit interests are
recognized as revenue when oil and gas is sold.
  Concentration
of Credit Risk
  At
October 31, 2010, the Company did not have any funds on deposit that exceeded
the United States (FDIC) federally insurance limit of $250,000 per
bank.  The Company believes that, when funds on deposit exceed the
insurance limit, this credit risk is mitigated by the financial strength of the
financial institutions with which the Company has placed its funds on
deposit.
  Foreign
Currency Adjustments
  The
Company’s functional currency for all operations worldwide is the U.S. dollar.
Nonmonetary assets and liabilities are translated at historical rates and
monetary assets and liabilities are translated at exchange rates in effect at
the end of the year. Income statement accounts are translated at average rates
for the year. Gains and losses from translation of foreign currency financial
statements into U.S. dollars are included in current results of operations.
Gains and losses resulting from foreign currency transactions are also included
in current results of operations.
  Components
of Other Comprehensive Income
  Comprehensive
income consists of net income and other gains and losses affecting shareholders’
equity that, under generally accepted accounting principles are excluded from
net income. For the Company, such items consist solely of unrealized gains and
losses on marketable equity investments. The changes in other comprehensive
income for the three-month and six-month periods ended October 31, 2010 and from
March 14, 2007 (inception) to October 31, 2010 are $77,972, $227,660 and
$227,660, respectively.  There were no components of other
comprehensive income prior to June 2010.
  F-6
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
    Oil
and Gas Properties
  The
Company follows the full-cost method of accounting for its investments in oil
and gas properties. Under the full-cost method, all costs associated with the
exploration of properties are capitalized into appropriate cost centers within
the full-cost pool.  Internal costs that are capitalized are limited
to those costs that can be directly identified with acquisition, exploration,
and development activities undertaken and do not include any costs related to
production, general corporate overhead, or similar activities.  Cost
centers are established on a country-by-country basis.
  Capitalized
costs within the cost centers are amortized on the unit-of-production basis
using proved oil and gas reserves.  The cost of investments in
unproved properties and major development projects are excluded from capitalized
costs to be amortized until it is determined whether or not proved reserves can
be assigned to the properties.  Until such a determination is made,
the properties are assessed annually to ascertain whether impairment has
occurred.  The costs of drilling exploratory dry holes are included in
the amortization base immediately upon determination that the well is
dry.
  As of the
end of each reporting period, the capitalized costs of each cost center are
subject to a ceiling test, in which the costs shall not exceed the cost center
ceiling.  The cost center ceiling is equal to i) the present value of
estimated future net revenues computed by applying current prices of oil and gas
reserves (with consideration of price changes only to the extent provided by
contractual arrangements) to estimated future production of proved oil and gas
reserves as of the date of the latest balance sheet presented, less estimated
future expenditures (based on current costs) to be incurred in developing and
producing the proved reserves computed using a discount factor of ten percent
and assuming continuation of existing economic conditions; plus ii) the cost of
properties not being amortized; plus iii) the lower of cost or estimated fair
value of unproven properties included in the costs being amortized; less iv)
income tax effects related to differences between the book and tax basis of the
properties.  If unamortized costs capitalized within a cost center,
less related deferred income taxes, exceed the cost center ceiling, the excess
is charged to expense and separately disclosed during the period in which the
excess occurs.
  Long-Lived
Assets
  The
carrying values of intangible assets and other long-lived assets are reviewed on
a regular basis for the existence of facts or circumstances that may suggest
impairment.  The Company recognizes impairment when the sum of the
expected undiscounted future cash flows is less than the carrying amount of the
asset.  Impairment losses, if any, are measured as the excess of the
carrying amount of the asset over its estimated fair value.
  F-7
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 Fair
Value of Financial Instruments
  Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs.
  The
Company utilizes the market approach to measure fair value for our financial
assets and liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities. The standard describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:
  Level
1:  Quoted prices (unadjusted) in active markets that are accessible
at the measurement date for assets or liabilities. The fair value hierarchy
gives the highest priority to Level 1 inputs.
  Level
2:  Observable prices that are based on inputs not quoted on active
markets, but corroborated by market data.
  Level
3:  Unobservable inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority to Level 3
inputs.
  In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as the consideration of counterparty credit risk in its
assessment of fair value.
  The
adoption of this statement did not have a material impact on our results of
operations and financial condition. The carrying values of our cash, cash
equivalents and marketable securities, carried at fair value as of October 31,
2010, are classified in the table below in one of the three categories described
above:
  Fair
Value Measurements at October 31, 2010:
  Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3
                          
                          
                          TotalCash
      & equivalents
                          
                          $
                          14,176
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          14,176Marketable
      securities - related party
                          
                          
                          252,295
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          252,295$
                          266,471
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          266,471
  F-8
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 Marketable
Securities
  The
Company determines the appropriate classification of its investments in equity
securities at the time of purchase and reevaluates such determinations at each
balance-sheet date. Marketable equity securities not classified as
held-to-maturity or as trading are classified as available-for-sale, and are
carried at fair market value, with the unrealized gains and losses, net of tax,
included in the determination of comprehensive income and reported in
shareholders’ equity.
  The fair
value of substantially all securities is determined by quoted market prices. The
estimated fair value of securities for which there are no quoted market prices
is based on similar types of securities that are traded in the market. Warrants
to purchase common stock are calculated using the Black Scholes Option Pricing
Model.
  Convertible
Debt
  The
Company has allocated a portion of the proceeds received from the issuance of
convertible debentures to additional paid in capital to recognize the value of
the common stock warrants issued in connection with the convertible
debentures.  The amount charged to additional paid in capital has been
offset by a charge to debt discount.  Debt discounts are amortized
using the straight-line method over the life of the corresponding debt
instrument.
  Basic
and Diluted Loss Per Share
  Basic
loss per common share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per common share is computed in the same way as
basic earnings per common share except that the denominator is increased to
include the number of additional common shares that would be outstanding if all
potential common shares had been issued and if the additional common shares were
dilutive. However, diluted loss per common share for the three-month and
six-month periods ended October 31, 2010 is computed in the same way as basic
loss per common share as the inclusion of additional common shares that would be
outstanding if all potential common shares had been issued would be
anti-dilutive.  See Note 7 for the calculation of basic and diluted
weighted average common shares outstanding for the three-month and six-month
periods ended October 31, 2010 and 2009 and for the period from March 14, 2007
(inception) through October 31, 2010.
  F-9
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 Income
Taxes
  The
Company follows the liability method of accounting for income taxes. Under this
method, deferred income tax assets and liabilities are recognized for the future
tax benefits and consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax balances. Deferred income tax assets and liabilities are measured
using enacted or substantially enacted tax rates expected to apply to the
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
date of enactment or substantive enactment.
  Use
of Estimates and Assumptions
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent obligations in the financial
statements and accompanying notes. The Company’s most significant assumptions
are the estimates used in the determination of the fair value of financial
instruments, the deferred income tax asset valuation allowance and the
allocation of proceeds received from the disposition of certain oil and gas
prospects to the remaining prospects included in the Company’s full-cost
pool.  The estimation process requires assumptions to be made about
future events and conditions, and as such, is inherently subjective and
uncertain. Actual results could differ materially from these
estimates.
  New
Accounting Pronouncements
  In June
2009, the FASB established the FASB Accounting Standards Codification (the
“Codification” or “ASC”) as the official single source of authoritative U.S.
generally accepted accounting principles (“GAAP”). All guidance contained in the
Codification carries an equal level of authority.  The Codification
also includes all relevant SEC guidance organized using the same topical
structure in separate sections within the Codification.  The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented.  Except for the disclosure requirements, the
adoption of this statement did not have an impact on the determination or
reporting of the Company’s financial statements.  The Company is
providing the Codification cross-reference alongside the references to the
standards issued and adopted prior to the adoption of the
Codification.
  F-10
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 In June
2009, the FASB issued authoritative guidance that requires companies to perform
an analysis to determine whether such companies’ variable interest or interests
give it a controlling financial interest in a variable interest entity. This
analysis identifies the primary beneficiary of a variable interest entity as the
enterprise that has both the power to direct the activities of a variable
interest entity that most significantly impact the entity’s economic
performance, and the obligation to absorb losses or the right to receive
benefits of the entity that could potentially be significant to the variable
interest entity. This guidance also requires ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity and
eliminates the quantitative approach previously required for determining the
primary beneficiary. We adopted the provisions of this guidance in the first
quarter of 2010, and determined that none of the entities with which we
currently conduct business or collaborations are variable interest entities to
be consolidated.
  In
January 2010, the FASB issued Accounting Standards Update 2010-06, Improving
Disclosures about Fair Value Measurements (“FASB 2010-06”), which amends ASC
820-10 and requires, among other things, new disclosures regarding the transfers
in and out of hierarchy levels 1 and 2 as well as the gross presentation of
changes in estimated measurements for level 3 measurements.  In
addition, FASB 2010-06 provides clarifying direction with respect to disclosures
regarding the various levels of disaggregation and about specific inputs and
valuation techniques.  FASB 2010-06 is effective for interim and
annual reporting periods beginning after April 30, 2010, except for the gross
presentation of level 3 measurement activities, which is effective for fiscal
years beginning after December 15, 2010.  The adoption of FASB 2010-06
is not expected to have a material effect on the Company’s financial
statements.
  In
February 2010, the FASB issued Accounting Standards Update 2010-09, Amendments
to Certain Recognition and Disclosure Requirements, which amended ASC 855 and
which requires issuers of financial statements to evaluate subsequent events
through the date on which the financial statements are issued.  FASB
2010-09 was effective immediately, but has not had a material effect on the
Company’s financial statements.
  In
January 2010, the FASB issued Accounting Standards Update 2010-03, Oil and Gas
Reserve Estimation and Disclosures (“FASB 2010-03”), which amended Extractive
Activities – Oil and Gas (Topic 932).  The pronouncement expands the
definition of oil and gas producing activities and requires companies to use a
twelve-month average price, rather than a year-end price, when estimating
whether reserve quantities are economical to
produce.    Additionally, it requires separate reserve
disclosures for geographical areas containing more than fifteen percent of an
entity's total reserves and provides guidance with respect to the applicability
of reporting requirements for equity investments in oil and gas producing
entities.  FASB 2010-03 became effective for the Company's annual
reporting as of April 30, 2011.  The adoption of FASB 2010-03 is not
expected to have a material effect on the Company’s financial
statements.
  F-11
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 3.
              Marketable
      Securities
  Available-for-sale
marketable securities at October 31, 2010 consist of the following:
  Gains
      inAccumulatedFair
                                
                                
                                OtherValue
                                
                                
                                ComprehensiveMeasurement
                                
                                
                                IncomeNoncurrent
      assets:Common
      stock and warrants
                                
                                $
                                252,295
                                
                                
                                $
                                227,660Total
      available-for-sale marketable securities
                                
                                $
                                252,295
                                
                                
                                $
                                227,660
  There
were no sales of marketable securities for the three-month or six-month periods
ended October 31, 2010.
  In June
2010, the Company purchased 500,000 units of Covenant Resources Inc.
(“Covenant”), a Canadian resources company traded on the Canadian National Stock
Exchange, at a purchase price of $0.05 per unit.  Each unit consisted
of one share of common stock and a warrant to purchase an additional share of
Covenant’s common stock at a purchase price of $0.05 per share.  The
warrants have a two-year life and expire on June 23, 2012.  Total
consideration paid to acquire the common shares and warrants was $24,635
($25,000 $CDN).  The Company was restricted from selling the Covenant
shares or exercising the associated warrants until October
2010.  Management considers the investment in Covenant as “available
for sale” but has no intention of liquidating the investments during the
upcoming twelve-month period.  Accordingly, the marketable securities
have been classified as non-current assets.
  At
Covenant's December 2010 Annual General Meeting, Covenant increased their number
of directors to eight, one of which is the Company's VP of
Operations.  As a result, the investment in Covenant is now classified
as a related party asset.  Covenant also announced that they are in
the process of executing a name change to Passport Energy Ltd.
  F-12
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 4.
              Oil and Gas
      Properties
  As of
October 31, 2010, all of the Company's investments in oil and gas properties are
divided into two cost pools; one pool that is subject to amortization because
drilling activities have commenced and one pool that is not subject to
amortization because no proven reserves have been identified related to these
properties.  The two cost pools are further split into cost centers
based on the geographical location of the properties included in the
pools.
  As of
October 31, 2010 and April 30, 2010, the Company’s cost centers are as
follows:
  October31,2010
                          
                          
                          April30,2010Amortizable
                          
                          
                          Non-Amortizable
                          
                          
                          Amortizable
                          
                          
                          Non-AmortizableUnited States
                          
                          $
                          -
                          
                          
                          $
                          1,312,067
                          
                          
                          $
                          -
                          
                          
                          $
                          1,822,599Canada
                          
                          
                          1,009,968
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          1,009,968
                          
                          
                          $
                          1,312,067
                          
                          
                          $
                          -
                          
                          
                          $
                          1,822,599
  The
Company has entered into participation agreements in four exploratory oil and
gas properties. Unproven exploratory prospects are excluded from its respective
amortizable cost pool until such a time when proven reserves are
identified.  Each prospect’s costs are transferred into the
amortization base on an ongoing (well-by-well or property-by-property) basis as
the prospect is evaluated and proved reserves are established or impairment is
determined.
  Musta
Prospect
  In
December 2009 and January 2010, the Company incurred $10,995 of brokerage costs
related to potential lease acquisitions, in Divide County, North Dakota (the
“Musta Prospect”).  As of October 31, 2010, the Company has yet to
enter into any oil and gas leases within the Musta Prospect.  The
Company’s management is currently evaluating its opportunities within the Musta
Prospect.
  Mississippi
and Texas Prospects
  In
January 2010, the Company entered into two assignment agreements with
Murrayfield Limited, a United Kingdom company, pursuant to which the Company
paid $150,000 in cash to acquire a 15% working interest in a contemplated well
located in Wilkinson County, Mississippi (the “Mississippi Prospect”) and
$137,500 in cash to acquire a 12.5% working interest in an oil and gas lease
located in Willacy County, Texas (the “Texas Prospect”).  In June
2010, the Company resold its interest in the Mississippi Prospect to the
original seller.  Net proceeds from the sale totaled $144,063, which
represent the original purchase price of $150,000, less preliminary drilling
costs incurred to date of $5,937.
  F-13
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 Sidney
North Prospect
  From June
through September 2010, the Company acquired oil and gas leases on approximately
178 acres located in Richland County, Montana (the “Sidney North Prospect”) at
an aggregate cost of $103,344.
  Spyglass
Prospect
  Beginning
in February 2010, the Company acquired oil and gas leases on approximately 6,300
net acres in Divide County, North Dakota (the “Spyglass Prospect”). Because no
proven reserves have been identified, the Spyglass Prospect has been assigned to
the full-cost pool that is not subject to amortization.  Management is
currently in the process of developing its exploration strategy relative to the
Spyglass Prospect.  The Company is evaluating the results of nearby
wells drilled by other companies in order to make a determination on the future
of the Spyglass Prospect.
  Hardy
Prospect
  In June
2010, the Company sold 50% of its working interest in the Spyglass Prospect to
Eternal Energy Corp. (“Eternal”) in exchange for a 50% working interest in
approximately 4,480 net acres located in Southeastern Saskatchewan (the “Hardy
Property”), which included related equipment valued at approximately
$238,681.  The Hardy Property contained one existing oil well that, at
acquisition, was shut-in due to mechanical issues.  As a result, the
Company reclassified $766,620 (half of the then-cost-basis of its Spyglass
Prospect) to the newly acquired Hardy Property which is part of the cost pool
subject to amortization.  The Company and Eternal have agreed that
Eternal will oversee all future exploration and operational activities
associated with their shared acreage.  The Company is obligated to pay
50% of the cost of any exploration or development costs incurred.
  During
the three-month period ended October 31, 2010, Eternal performed a workover
operation to restore the Hardy well to production and restarted commercial
production in September 2010.  The Company is in the process of having
a reserve report prepared.  When completed, the Company will begin
depleting the cost pool.
  F-14
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 5.
              Convertible
      Debenture
  On April
15, 2010, the Company entered into a Securities Purchase Agreement, pursuant to
which the Company sold a $1 million Secured, Convertible Debenture to a
third-party investor.  The Debenture bears interest at a rate of 8%
per annum.  Interest expense on the debenture of $20,000, $40,000 and
$43,333 was incurred during the three-month and six-month periods ended October
31, 2010 and the period from March 14, 2007 (inception) to October 31, 2010,
respectively.  Accrued interest payable as of October 31, 2010 and
April 30, 2010 totaled $26,667 and $3,333, respectively.  The
Debenture is due April 15, 2011 and, accordingly, is presented as a current
liability on the Company’s October 31, 2010 and April 30, 2010 balance
sheets.  Interest is payable on a quarterly basis, either in cash or
through the issuance of additional shares of the Company’s common stock at an
initial conversion price of $0.75 per share, or a combination
thereof.  The Debenture is secured by substantially all of the
Company’s existing assets.
  At any
time, or from time to time, the holder of the Debenture may elect to convert all
or a portion of the Debenture into shares of the Company’s common stock at an
initial conversion price of $0.75 per share. The initial conversion price is
subject to reduction in the event that the Company subsequently sells, or grants
any option to purchase, shares of the Company’s common stock at an effective
price that is less than the initial conversion price. The initial conversion
price is also subject to reduction in the event that the Company pays dividends,
declares a stock split or engages into a merger transaction.  Because
the initial trading value of the Company’s stock on the date the Debentures were
issued was less than the initial conversion price, the Debentures are not deemed
to contain a beneficial conversion feature.  Because the initial
conversion price is less than the trading value of the Company’s stock as of
year-end, the amount by which the Debenture’s “if converted value” exceeded its
principal amount was $200,000 as of October 31, 2010.
  The
Debenture may not be converted if, immediately after, the conversion would
result in the holder of the Debenture possessing a beneficial ownership interest
in excess of 4.99% of the Company’s then-outstanding common
shares.  Upon providing 60 days prior written notice, the holder of
the Debenture may increase or decrease such ownership limit, but in no instance
can the ownership limit exceed 9.99% of the Company’s outstanding
shares.
  F-15
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 Attached
to the convertible debentures are 625,000 warrants to purchase shares of the
Company’s common stock at an initial exercise price of $0.80 per share (Note
6).  A portion of the net proceeds from the issuance of the Debenture
has been allocated to the warrants and recorded as an increase to additional
paid in capital. Accordingly, the Company recorded a debt discount in the amount
of $280,511.  The debt discount is being accreted using the straight
line method over the life of the Debenture.  The Company recognized
accretion expense associated with the debt discount of $70,128, $140,256 and
$151,944 for the three-month and six-month periods ended October 31, 2010 and
the period from March 14, 2007 (inception) to October 31, 2010,
respectively.  The amount of the unamortized debt discount was
$128,567 and $268,823 as of October 31, 2010 and April 30, 2010,
respectively.
  The
Company has reserved 1,333,333 shares of its common stock in the event that the
Debenture is converted and an additional 625,000 shares of its common stock in
the event that the Warrants are exercised.
  6.
              Commitments,
      Contingencies and Management's
Plan
  Going
Concern
  The
Company did not have any revenue from inception until October 2010 and has
incurred net losses for the six-month period ended October 31, 2010 and for the
period from inception through October 31, 2010.  These factors raise
substantial doubt about the Company's ability to continue as a going
concern.  Accordingly, the Company’s management is developing and
implementing plans to sustain the Company’s cash flow from operating activities
and/or acquire additional capital funding.
  No
assurances can be given that the Company will obtain sufficient working capital,
either through the sale of oil and gas properties, the issuance of common stock
or by leveraging the Company's current assets, or that the implementation of its
business plan will generate sufficient revenues in the future to sustain ongoing
operations. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going
concern.
  F-16
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 7.
              Loss Per
      Share
  The
following is a reconciliation of the number of shares used in the calculation of
basic loss per share and diluted loss per share for the three-month and
six-month periods ended October 31, 2010 and 2009 and the period from March 14,
2007 (inception) through October 31, 2010:
  For thePeriod FromMarch 14,2007For the Three-Month
                      
                      
                      For the Six-Month
                      
                      
                      (Inception)Period Ended October 31,
                      
                      
                      Period Ended October 31,
                      
                      
                      October 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010Net
      loss
                      
                      $
                      (226,442
                      )
                      
                      $
                      (9,555
                      )
                      
                      $
                      (452,816
                      )
                      
                      $
                      (18,023
                      )
                      
                      
                      (668,273
                      )Weighted-average
      number of common shares outstanding - basic and diluted
                      
                      
                      55,060,000
                      
                      
                      
                      60,000,000
                      
                      
                      
                      55,060,000
                      
                      
                      
                      60,000,000
                      
                      
                      
                      54,237,679Net
      loss per share: basic and diluted
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.00
                      
                      
                      $
                      (0.01
                      )
  The
following securities were not included in the computation of diluted net loss
per share as their effect would have been anti-dilutive:
  2010
                      
                      
                      2009Convertible
      debentures
                      
                      
                      1,333,333
                      
                      
                      
                      1,333,333Warrants
                      
                      
                      625,000
                      
                      
                      
                      625,000
  8.
              Equity
      Transactions
  The
Company was originally incorporated with 75,000.000 shares authorized with a par
value of $0.001 per share.
  Forward
Stock Split
  On
October 14, 2009, the Company’s board of directors approved a forward split of
the Company’s common stock on a 1 old share for 2 new shares
basis.  As a result, the Company’s authorized common shares increased
from 75,000,000 to 150,000,000.  Par value remained
unchanged.
  F-17
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 Cancellation
of Shares
  In
December 2009, 16,000,000 common shares held by two of the Company’s original
founders’ were returned to the Company and cancelled.
  Private
Placements
  In
January 2010, the Company issued an aggregate of 10,000,000 restricted shares of
its common stock at a price of $0.001 to four individuals in a private
transaction.  Two of the individuals are our sole officers at October
31, 2010.  Proceeds received from the sale of the stock were
$10,000.
  Also in
January 2010, the Company issued 1,060,000 restricted shares of the Company’s
common stock at a price of $0.75 per share in a private
transaction.  Proceeds received from the sale of the stock totaled
$795,000.
  Issuance
of Warrants
  In
connection with the sale of the Convertible Debenture (Note 5), the Company also
granted to the purchaser of the Debenture warrants to purchase up to 625,000
shares of the Company’s common stock at an initial exercise price of $0.80 per
share.  The warrants will expire on April 15, 2012.
  No
warrants have been issued during the six-month period ended October 31,
2010.
  The
exercise price of the warrants are subject to reductions in the event that the
Company subsequently sells, or grants any option to purchase, shares of the
Company’s common stock at an effective price that is less than the initial
conversion price. The initial conversion price is also subject to a reduction in
the event that the Company issues dividends, declares a stock split or engages
in a merger transaction.
  A summary
of warrant activity for the year ended April 30, 2010 and the six-month period
ended October 31, 2010 is presented below:
  WeightedWeighted
                                
                                
                                AverageAverage
                                
                                
                                Remaining
                                
                                
                                AggregateExercise
                                
                                
                                Contract
                                
                                
                                IntrinsicWarrants
                                
                                
                                Price
                                
                                
                                Term
                                
                                
                                ValueOutstanding at
      April 30, 2009
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                -
                                
                                
                                
                                -Issued
                                
                                
                                625,000
                                
                                
                                $
                                0.80
                                
                                
                                2
      years
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                $
                                -
                                
                                
                                -
                                
                                
                                
                                -Outstanding
      at April 30, 2010 and October 31, 2010
                                
                                
                                625,000
                                
                                
                                $
                                0.80
                                
                                
                                1.46 years
                                
                                
                                $
                                -Exercisable
      at October 31, 2010
                                
                                
                                625,000
                                
                                
                                $
                                0.80
                                
                                
                                1.46 years
                                
                                
                                $
                                -
  F-18
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
    The
assumptions used in the Black-Scholes option pricing model for the warrants
granted during the year ended April 30, 2010 were as follows:
  Risk-free
      interest rate
                      
                      
                      1.04
                      %Expected
      volatility of common stock
                      
                      
                      250
                      %Dividend
      yield
                      
                      $
                      0.00Expected
      life of warrants
                      
                      2
      yearsWeighted
      average fair market value of warrants granted
                      
                      $
                      0.62
  Shares
Reserved for Future Issuance
  As stated
in Note 5, as of October 31, 2010, the Company has reserved 1,333,333 shares of
its common stock in the event that the Debenture is converted and an additional
625,000 shares of its common stock in the event that the Warrants are
exercised.
  9.
              Related Party
      Transactions
  For the
period from May 1, 2009 through December 14, 2009, the Company rented office
space from an entity owned by a related party who is a former officer and
Director of the Company.  Rents paid to the former officer and
Director totaled $4,569, $9,138 and $12,927 for the three-month and six-month
periods ended October 31, 2009 and the period from March 14, 2007 (inception) to
October 31, 2010, respectively.
  In August
2009, the Company obtained a $14,975 unsecured loan from the same former officer
and Director of the Company.  The loan bears no interest rate and has
no specific term for repayment.  The loan amount is outstanding as of
October 31, 2010, but is no longer classified as due from a related party as the
individual is no longer and officer or Director of the Company.
  In
January 2010, the Company engaged Synergy Resources LLC (“Synergy”) to provide
geological and engineering consulting services. The Company’s President and
Director is also a member of Synergy’s management team.  Geological
and engineering consulting service fees provided by Synergy during the
three-month and six-month periods ended October 31, 2010 and for the period from
March 14, 2007 (inception) to October 31, 2010 totaled $30,000, $65,000 and
$125,000, respectively.
  As
discussed in Note 8, in January 2010, the Company issued an aggregate of
10,000,000 restricted shares of its common stock at a price of $0.001 to four
individuals in a private transaction.  6,333,333 of the shares were
purchased by two of the individuals who are our sole officers at October 31,
2010.  The proceeds received from the sale of the stock was $10,000.
Proceeds from the two related parties totaled $6,333.
  F-19
  American
Eagle Energy, Inc.
 (An
Exploration Stage Company)
  Notes
to the Condensed Financial Statements (Unaudited)
  
 As
discussed in Note 3, at Covenant Resources, Ltd's December 2010 Annual General
Meeting, Covenant increased their number of directors to eight, one of which is
the Company's VP of Operations.  As a result, the investment in
Covenant is now classified as a related party asset.  Covenant also
announced that they are in the process of executing a name change to Passport
Energy Ltd.
  F-20




ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.


THE
FOLLOWING PRESENTATION OF OUR MANAGEMENT’S DISCUSSION AND ANALYSIS SHOULD BE
READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS REPORT.
  A
Note About Forward-Looking Statements
  This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 that are based
on current management’s expectations. These statements may be identified by
their use of words like “plans,” “expect,” “aim,” “believe,” “projects,”
“anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other
expressions that indicate future events and trends. All statements that address
expectations or projections about the future, including statements about our
business strategy, expenditures, and financial results are forward-looking
statements. We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur.
  Actual
results could differ materially from those in the forward looking statements due
to a number of uncertainties including, but not limited to, those discussed in
this section. Factors that could cause future results to differ from these
expectations include general economic conditions, further changes in our
business direction or strategy, competitive factors, oil and gas exploration
uncertainties, and an inability to attract, develop, or retain technical,
consulting, or managerial agents or independent contractors. As a result, the
identification and interpretation of data and other information and their use in
developing and selecting assumptions from and among reasonable alternatives
requires the exercise of judgment. To the extent that the assumed events do not
occur, the outcome may vary substantially from anticipated or projected results,
and accordingly, no opinion is expressed on the achievability of those
forward-looking statements. No assurance can be given that any of the
assumptions relating to the forward-looking statements specified in the
following information are accurate, and we assume no obligation to update any
such forward-looking statements. You should not unduly rely on these
forward-looking statements, which speak only as of the date of this Quarterly
Report, except as required by law; we are not obligated to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
occurring after the date of this report or to reflect the occurrence of
unanticipated events.
  Industry
Overview
  The
petroleum industry is highly competitive and subject to significant volatility
due to numerous market forces. Crude oil and natural gas prices are affected by
market fundamentals such as weather, inventory levels, competing fuel prices,
overall demand, and the availability of supply.
  Worldwide
oil prices reached historical highs during the last half of 2008, before
tumbling amid worldwide economic crisis. Oil prices stabilized during 2009 and
remained stable through the early part of 2010. Future economic instability
could impact demand, caused by a consumer shift to alternative fuel sources
and/or supply, driven largely by concerns regarding the economic viability of
extracting natural resources, thus affecting crude oil prices.
  Oil
prices have significantly affected profitability and returns for upstream
producers. Oil prices cannot be predicted with any certainty. During the past
ten years, the industry has experienced wide fluctuations in prices. While local
supply/demand fundamentals are a decisive factor affecting domestic natural gas
prices over the long term, day-to-day prices may be more volatile in the futures
markets, such as on the NYMEX and other exchanges, making it difficult to
forecast prices with any degree of confidence.
  Company
Overview
  The
address of our principal executive office is 27 North 27th Street,
Suite 21G, Billings, MT 59101. Our telephone number is
406-294-9765.
  Our
common stock is quoted on the OTC Bulletin Board under the symbol
“AMZG.”
  4
  Our
Company was incorporated in the State of Nevada under the name “Yellow Hill
Energy Inc.” on March 14, 2007 and is engaged in the acquisition, exploration,
and development of natural resource properties of merit. On October 5, 2009, we
filed documents with the Nevada Secretary of State to affect a change of our
name from “Yellow Hill Energy Inc.” to “American Eagle Energy Inc.” by way of a
merger with our wholly owned subsidiary, American Eagle Energy Inc., which was
formed solely to facilitate the name change.
  On June
18, 2010, we formed a wholly-owned subsidiary named AEE Canada Inc. for the
purpose of conducting operations and holding title to certain assets located
within Canada.
  We have
not been involved in any bankruptcy, receivership, or similar proceedings, nor
have we been a party to any material reclassifications, merger, consolidation or
purchase or sale of a significant amount of assets not in the ordinary course of
our business.
  On
October 9, 2008, Scott Lindsay resigned as our President and Chief Financial
Officer and as a Director and Sean Mitchell resigned as our Secretary and
Treasurer and as a Director. As a result, on October 9, 2008, Jay Jhaveri was
appointed by us to serve in these roles. On December 14, 2009, Mr. Jhaveri
resigned and was replaced by Richard Findley. Mr. Findley currently serves as
our President, Chief Financial Officer, Secretary, and Treasurer and as a
Director. In performing his duties, Mr. Findley currently devotes approximately
10 hours per week, for which he receives no monetary or stock-based
compensation.
  On June
7, 2010, we hired Tom Lantz to server as our Vice President of Operations. Mr.
Lantz is currently our only paid employee.
  Current
Business
  We are an
exploration stage company engaged in the exploration and production of oil and
gas properties.
  On
October 14, 2009, our board of directors approved a forward split of our common
stock on a one (old) for two (new) basis, such that our authorized capital
increased from 75,000,000 shares with a par value of $0.001 to 150,000,000
shares with the same par value. As a result, our issued and outstanding shares
of common stock increased from 30,000,000 shares to 60,000,000 shares. The
effective date of the forward split was October 26, 2009.
  On
January 13, 2010, we issued 10,000,000 shares of our common stock at par value
to a group of four individuals. Gross proceeds received from the issuance
totaled $10,000. The shares are restricted from trading for periods ranging from
six-months to one year from the date of issuance and are subject to certain
performance standards.
  On
January 14, 2010, we issued 1,060,000 shares of our common stock at a price of
$0.75 per share in a private transaction. Gross proceeds from the issuance
totaled $795,000. The shares are restricted from trading for a period of one
year from the date of issuance.
  On
January 15, 2010, we entered into an assignment agreement with Murrayfield
Limited (“Murrayfield”), a United Kingdom company, pursuant to which we acquired
a 15% working interest in an anticipated oil and gas well in Wilkinson County,
Mississippi for $150,000 in cash.
  On
January 21, 2010, we entered into a second assignment agreement with
Murrayfield, pursuant to which we acquired a 12.5% working interest in an oil
and gas lease covering 908 net acres located in Willacy County, Texas for
$137,500 in cash.
  In
February 2010, the Company began acquiring oil and gas leases in Divide County,
North Dakota (the “Spyglass Prospect”), a region known for its Bakken and Three
Forks zone oil production.
  On April
15, 2010, we entered into a Securities Purchase Agreement, whereby we sold a
one-year 8% Convertible Debenture with an initial principal amount of
$1,000,000, convertible at $0.75 per share, and a two-year warrant for the
purchase of 625,000 shares of our common stock, exercisable at $0.80 per share,
to an otherwise unaffiliated third-party investor.
  5
  On June
16, 2010, we resold our interest in the Mississippi Prospect to the original
seller and received net proceeds of $144,063, which represented the original
purchase price of $150,000, less preliminary drilling costs incurred to date of
$5,937.
  On June
18, 2010, we sold 50% of our working interest in the Spyglass Prospect to, and
purchased a 50% working interest in approximately 4,320 net acres located in
southeastern Saskatchewan, Canada (the “Hardy Property”) from, Eternal Energy
Corp. (“Eternal”). The Hardy Property contains an existing oil well that has
been shut-in since due to mechanical issues. Concurrently, we entered into an
agreement with Eternal, whereby Eternal will oversee the development and
operational activities for both the Spyglass Prospect and the Hardy
Property.
  As of
October 31, 2010, we own a 50% working interest in oil and gas leases covering
approximately 6,960 net acres within the Spyglass Prospect at an aggregate cost
of $1,011,641. In addition, we own a 50% working interest in one well and
approximately 4,320 net acres within the Hardy Property at an aggregate cost of
$1,009,997.
  Results
of Operations for the Three-Month Periods Ended October 31, 2010 vs. October 31,
2009
  We are an
exploration stage company and, only in the current quarter, have begun to
generate revenues. Prior to January 2010, our operations consisted solely of
administrative activities required to maintain our corporate existence. In
January 2010, we began acquiring oil and gas properties for the purpose of
exploration and development.
  Our net
losses for the three-month periods ended October 31, 2010 and 2009 were $226,442
and $9,555, respectively. The increase in our net loss from 2009 to 2010 is due
to the transition from administrative activities required to maintain our
corporate existence to those of pursuing our general business purpose, that of
oil exploration and development. A discussion of the major cost components
related to our operations is provided below.
  General
and administrative expenses increased from $1,290 to $46,900 for the three-month
periods ended October 31, 2009 and 2010, respectively. The increase consists
primarily of additional payroll costs associated with the hiring of our new Vice
President of Operations in June 2010, totaling $37,500, as well as filing fees
of $4,550 and other miscellaneous expenses.
  General
and administrative expenses to a related party increased from $4,569 to $65,000
for the three-month periods ended October 31, 2009 and 2010, respectively. The
increase consists primarily of related party geological and engineering
consulting services.
  In
January 2010, we engaged non-related party consultants to provide geological and
geophysical consulting services for us related to the Spyglass Prospect. The
cost of these services totaled $53,778 for the three-month period ending October
31, 2010. In addition, we incurred legal fees totaling $29,193 during the
current quarter relating to general corporate matters and accounting fees
totaling $2,250 related to the review of our first quarter financial statements.
The company has also identified $65,000 in consulting fees as related party
expenses during the quarter which have been shown separately on the income
statement. As a result of these transactions, professional fees increased from
$3,696 for the three-month period ended October 31, 2009 to $20,220 for the
three-month period ended October 31, 2010.
  On April
15, 2010, we borrowed $1,000,000 through the sale of an 8% Secured, Convertible
Debenture. Interest expense related to the Debenture totaled $20,000 for the
three-month period ending October 31, 2010. Attached to the Debenture is a
common stock purchase warrant for the purchase of up to 625,000 shares of our
common stock at an initial exercise price of $0.80 per share. A portion of the
net proceeds from the issuance of the Debenture was allocated to the warrants
and recorded as an increase to additional paid in capital, resulting in a “debt
discount”. We recognized $70,128 of expense during the three-month period ended
October 31, 2010 related to the amortization of the discount on the Debenture.
The debt discount is being amortized over the life of the
Debenture.
  Results
of Operations for the Six-Month Periods Ended October 31, 2010 vs. October 31,
2009
  We are an
exploration stage company and, only in the current six-month period, have begun
to generate revenues. Prior to January 2010, our operations consisted solely of
administrative activities required to maintain our corporate existence. In
January 2010, we began acquiring oil and gas properties for the purpose of
exploration and development.
  6
  Our net
losses for the six-month periods ended October 31, 2010 and 2009 were $452,816
and $18,023, respectively. The increase in our net loss from 2009 to 2010 is due
to the transition from administrative activities required to maintain our
corporate existence to those of pursuing our general business purpose, that of
oil exploration and development. A discussion of the major cost components
related to our operations is provided below.
  General
and administrative expenses increased from $1,689 to $91,616 for the six-month
periods ended October 31, 2009 and 2010, respectively. The increase consists
primarily of additional payroll costs associated with the hiring of our new Vice
President of Operations in June 2010, totaling $60,385, travel related expenses
totaling $14,045, filing fees of $4,988, and miscellaneous expenses of
$9,949.
  General
and administrative expenses to a related party increased from $9,138 to $65,000
for the six-month periods ended October 31, 2009 and 2010, respectively. The
increase consists of related party geological and engineering related consulting
services.
  In
January 2010, we engaged non-related party consultants to provide geological and
geophysical consulting services for us related to the Spyglass Prospect. The
cost of these services totaled $97,672 for the six-month period ending October
31, 2010. In addition, we incurred legal fees totaling $57,767 during the
current six-month period relating to general corporate matters and accounting
fees totaling $15,375 related to the audit of our year-end financial statements
and first quarter review. The company has also identified $65,000 in consulting
fees as related party expenses during the second quarter which have been shown
separately on the income statement. As a result of these transactions,
professional fees increased from $7,196 for the six-month period ended October
31, 2009 to $105,814 for the six-month period ended October 31,
2010.
  On April
15, 2010, we borrowed $1,000,000 through the sale of an 8% Secured, Convertible
Debenture. Interest expense related to the Debenture totaled $20,000 for the
three-month period ending October 31, 2010. Attached to the Debenture is a
common stock purchase warrant for the purchase of up to 625,000 shares of our
common stock at an initial exercise price of $0.80 per share. A portion of the
net proceeds from the issuance of the Debenture was allocated to the warrants
and recorded as an increase to additional paid in capital, resulting in a “debt
discount”. We recognized $140,256 of expense during the six-month period ended
October 31, 2010 related to the amortization of the discount on the Debenture.
The debt discount is being amortized over the life of the
Debenture.
  In June
2010, we purchased 500,000 units of securities from Passport Energy Ltd.,
then-known as Covenant Resources Inc., a Canadian resources company, at a
purchase price of CDN$0.05 per unit. Each unit consisted of one share of common
stock and a warrant to purchase an additional share of its common stock at a
purchase price of CDN$0.05 per share. The warrants have a two-year life and
expire on June 23, 2012. Total consideration paid to acquire the common shares
and warrants was US$24,635 (CDN$25,000). We were restricted from selling those
shares or exercising the associated warrants until October 2010. Management
considers the investment inn those securities as “available for sale” but has no
intention of liquidating the investments during the upcoming twelve-month
period. Accordingly, we classified the marketable securities as non-current
assets.
  Liquidity
and Capital Resources
  In order
to address our working capital needs, on April 15, 2010, we executed a
Securities Purchase Agreement, pursuant to which we sold a $1,000,000 Secured,
Convertible Debenture to a third-party investor. The Debenture is due April 15,
2011, and bears interest at a rate of 8% per annum. Interest is payable on a
quarterly basis, either in cash or through the issuance of additional shares of
our common stock or a combination thereof at the initial conversion price of
$0.75 per share. The Debenture is secured by all of our assets.
  In
connection with the sale of the Debenture, we also granted the purchaser a
Common Stock Purchase Warrant for the purchase of up to 625,000 shares of our
common stock. The Warrant expires April 15, 2012, and may be exercised at any
time prior to expiration at an initial exercise price of $0.80 per share.
Additional details regarding the sale of the Debenture can be found in our
Current Report on Form 8-K, filed April 15, 2010. Proceeds from the sale of the
Debenture have been used to fund general corporate purposes, as well as to
further our leasing efforts in various resource opportunities.
  Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations, and otherwise operate on an ongoing basis.
At October 31, 2010, we had cash totaling $14,176 and current liabilities
totaling $1,883,608, resulting in a working capital deficit of
$1,869,432.
  7
  Because
we do not currently have sufficient working capital to satisfy our obligations,
it will be necessary for us to seek additional funding, either through the
capital markets, some form of debt financing or through the sale of certain
assets. We own interests in oil and gas properties valued at$2,322,035 as of
October 31, 2010, the partial or complete liquidation of which would most likely
generate proceeds in excess of our working capital deficit. Our management team
is currently evaluating the available funding options and developing an ongoing
funding strategy for meeting our future working capital needs.
  Going
Concern
  Our
independent registered public accounting firm’s report on our financial
statements as of April 30, 2010, included a “going concern” explanatory
paragraph that describes substantial doubt about our ability to continue as a
going concern. Management’s plans in regard to the factors prompting the
explanatory paragraph are discussed in Note 2 to the financial
statements.
  Off-Balance
Sheet Arrangements
  We have
no off-balance sheet arrangements.
  8




ITEM 4T. CONTROLS AND PROCEDURES.





The
Company, under the supervision and with the participation of its management,
including the Chief Executive Officer, evaluated the effectiveness of the design
and operation of the Company’s “disclosure controls and procedures” (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of
the end of the period covered by this report.  Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of October 31, 2010.  There has been no change in the Company’s
internal control over financial reporting during the quarter ended October 31,
2010, that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.


9


Part
II - OTHER INFORMATION





ITEM
6. EXHIBITS.





Exhibit
              
              Description of Exhibit3.1
              
              Articles
      of Incorporation, as filed with the Secretary of State of the State of
      Nevada, effective March 14, 2007 (incorporated by reference to Exhibit 3.1
      of the Company’s Registration Statement on Form SB-2, filed June 8,
      2007).3.2
              
              Bylaws
      (incorporated by reference to Exhibit 3.2 of the Company’s Registration
      Statement on Form SB-2, filed June 8, 2007).3.3
              
              Articles
      of Merger, as filed with the Secretary of State of the State of Nevada,
      effective October 5, 2009 (incorporated by reference to Exhibit 3.01 of
      the Company’s Current Report on Form 8-K, filed October 5,
      2009).3.4
              
              Certificate
      of Change, as filed with the Secretary of State of the State of Nevada,
      effective October 15, 2009 (incorporated by reference to Exhibit 3.01 of
      the Company’s Current Report on Form 8-K, filed October 14,
      2009).10.1
              
              Form
      of Private Placement Subscription Agreement for an aggregate amount of
      10,000,000 shares, dated December 21, 2009 (Incorporated by reference to
      Exhibit 10.1 of the Company’s Annual Report on Form 10-K filed August 12,
      2010).10.2
              
              Escrow
      Agreement among American Eagle Energy Inc, Golden Vista Energy, LLC,
      Thomas G. Lantz, Steven Swanson and Baker & Hostetler, LLP dated
      December 21, 2009 (Incorporated by reference to Exhibit 10.2 of the
      Company’s Annual Report on Form 10-K filed August 12,
    2010).10.3
              
              Assignment
      Agreement between the Company and Murrayfield Limited, effective January
      15, 2010 (Incorporated by reference to Exhibit 10.1 of the Company’s
      Current Report on Form 8-K, filed January 20, 2010).10.4
              
              Assignment
      Agreement between the Company and Murrayfield Limited, effective January
      21, 2010 (Incorporated by reference to Exhibit 10.1 of the Company’s
      Current Report on Form 8-K, filed January 22, 2010).10.5
              
              Termination
      Agreement (of the US Pebble Acquisition Agreement) among Eternal Energy
      Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum
      Inc., and Rover Resources Inc., dated April 29, 2010 (Incorporated by
      reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K,
      filed May 19, 2010).10.6
              
              Termination
      Agreement (of the Canadian Pebble Acquisition Agreement) among Eternal
      Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., and Pebble
      Petroleum Inc., dated April 29, 2010 (Incorporated by reference to Exhibit
      10.5 of the Company’s Current Report on Form 8-K, filed May 19,
      2010).10.7
              
              Termination
      Agreement (of the US Prospect Acquisition Agreement) among Eternal Energy
      Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble Petroleum
      Inc., Rover Resources Inc., Steven Swanson, Richard L. Findley, Thomas G.
      Lantz, and Ryland Oil Corporation, dated May 11, 2010 (Incorporated by
      reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K,
      filed May 19, 2010).10.8
              
              Termination
      Agreement (of the Canadian Prospect Acquisition Agreement) among Eternal
      Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble
      Petroleum Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz, and
      Ryland Oil Corporation, dated May 11, 2010 (Incorporated by reference to
      Exhibit 10.7 of the Company’s Current Report on Form 8-K, filed May 19,
      2010).10.9
              
              Securities
      Purchase Agreement between the Company and Cat Brokerage AG, dated April
      15, 2010 (Incorporated by reference to Exhibit 10.9 of the Company’s
      Annual Report on Form 10-K filed August 12, 2010).10.10
              
              Debenture
      of American Eagle Energy Corp. in favor of Cat Brokerage AG, Dated April
      15, 2010 (Incorporated by reference to Exhibit 10.10 of the Company’s
      Annual Report on Form 10-K filed August 12, 2010).10.11
              
              Security
      Agreement between the Company and Cat Brokerage AG, dated April 15, 2010
      (Incorporated by reference to Exhibit 10.11 of the Company’s Annual Report
      on Form 10-K filed August 12, 2010).10.12
              
              Common
      Stock Purchase Warrant agreement between the Company and Cat Brokerage AG,
      dated April 15, 2010 (Incorporated by reference to Exhibit 10.12 of the
      Company’s Annual Report on Form 10-K filed August 12,
    2010).10.13
              
              Registration
      Rights Agreement between the Company and Cat Brokerage AG, dated April 15,
      2010 (Incorporated by reference to Exhibit 10.13 of the Company’s Annual
      Report on Form 10-K filed August 12,
2010).


10





10.14
            
            Assignment
      Settlement Agreement between the Company and Lexaria Corp., dated June 16,
      2010 (Incorporated by reference to Exhibit 10.14 of the Company’s Annual
      Report on Form 10-K filed August 12, 2010).10.15
            
            Letter
      Agreement between the Company and Eternal Energy Corp., dated June 18,
      2010 (Incorporated by reference to Exhibit 10.15 of the Company’s Annual
      Report on Form 10-K filed August 12, 2010).10.16
            
            Form
      of Private Placement Subscription Agreement between American Eagle Energy
      Inc. and Finter Bank Zurich, dated December 16, 2009 (Incorporated by
      reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K
      filed August 12, 2010).31.1*
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act.32.1*
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley
  Act.










*       Filed
herewith.


11


SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.





AMERICAN
      EAGLE ENERGY INC.(Registrant)December
      13, 2010
              /s/
      Richard FindleyRichard
      FindleyPresident,
      Secretary, Treasurer and Director
                (Chief
      Executive Officer, Chief Financial Officer and
                Chief
      Accounting Officer)




12