##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 0-31547
 AMERICAN OIL & GAS, INC.
  Nevada
    
    
    
    88-0451554(State or jurisdiction of incorporation or organization)
    
    
    
    (I.R.S. Employer
Identification No.)1050 17th Street, Suite 1850, Denver, CO
    
    
    
    80265(Address of principal executive offices)
    
    
    
    (Zip Code)
 (303) 991-0173
  None
 $.001 Par Value Common Stock
 o
 þ o
 þ
 o o þ
 o þ
   
 *
    
    Without assuming that any of the issuers
directors or executive officers or the entity that owns 3,094,600 shares of
common stock are affiliates, the shares of which they are beneficial owners
have been deemed to be owned by affiliates solely for this calculation.




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##### 



TABLE OF CONTENTS
 Page No.PART I
    
    
    
    
    2ITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    2ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    12ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    19ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    19PART II
    
    
    
    
    19ITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    19ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    20ITEM 7.
    
    FINANCIAL STATEMENTS
    
    
    25ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    25ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    
    26ITEM 8B.
    
    OTHER INFORMATION
    
    
    26PART III
    
    
    
    
    26ITEM 9.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    26ITEM 10.
    
    EXECUTIVE
COMPENSATION ITEM 10. EXECUTIVE COMPENSATION
    
    
    29ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    32ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    34ITEM 13.
    
    EXHIBITS
    
    
    35ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    35Signatures
    
    
    
    
    36Participation AgreementConsent from Ryder Scott Petroleum ConsultantsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  1




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##### Table of Contents



PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 General Overview
  Developments Since December 31, 2004
 
    
    In April 2005, Tower Colombia Corporation (TCC) merged into American. The
stockholders of TCC received 5.8 million shares of our restricted common stock. In
conjunction with the merger, Pat OBrien continues in his role as Chief Executive
Officer and as Chairman of American. Mr. OBrien was the President of TCC. Bob
Solomon, formerly Vice President of TCC, became Vice President of American and is
responsible for oil and gas economic and financial evaluations and the acquisition and
disposition of oil and gas assets. Kendell Tholstrom, formerly Vice President of TCC,
continues his role as a Director of American, and is Vice-President of American. Mr.
Tholstrom is responsible for oil and gas operations.
    
    In April 2005, we participated with an 87.5% working interest in the drilling of one
unsuccessful well at our approximate 10,000 gross acre South Glenburn oil prospect,
located in McHenry County, North Dakota.
    
    On May 17, 2005, our common shares began trading on the American Stock Exchange
under the ticker symbol AEZ.
    
    During mid-2005, we initiated drilling at our Fetter project, located in the Powder
River Basin of Wyoming, with the Sims 16-26 well. This well temporarily produced
natural gas and liquid hydrocarbons at rates up to 12 million
cubic feet of natural gas and 500 barrels of liquid hydrocarbons, from approximately 255 feet of lateral wellbore (out of a planned 2,000 feet) that
was drilled into the Frontier formation. Wellbore and mechanical problems resulted in
the loss of the lateral section of the well and subsequent side tracking resulted in
the well being drilled vertically to total depth. This well is
currently producing nominal amounts of natural gas and liquid
hydrocarbons. We commenced drilling a second well
at the Fetter project during the third quarter 2005. The Hageman 16-34 well was
drilled and cased to 8,625 feet before drilling rig issues required temporarily
suspending drilling operations and releasing the rig. Although plans are not to
immediately re-enter the Hageman well, future plans include coming back to the Hageman
well to complete drilling operations.
    
    Throughout 2005, we participated in an active oil and gas development project that
we refer to as the Big Sky project. This project is a horizontal drilling program in
the Elm Coulee field in Richland County, Montana, that targets the Mississippian Bakken
Formation. Our interest in the Big Sky project accounted for 94% of our oil and gas
production and 95% of our oil and gas revenues in 2005. Total production from these
wells for 2005, net to our ownership interests, totaled 77,973 barrels of oil and
34,922 mcf of natural gas. Subsequent to December 31, 2005, we sold our ownership
interest in our Big Sky project for cash of $11,500,000. As a result of this sale, we
will not have any significant production revenue unless and until we are able to
establish commercial
production in connection with our new drilling activities planned for 2006 as
described in this Form 10-KSB.
 2




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
    
    In October 2005, we acquired a 75% working interest in approximately 45,000 gross
(33,000 net) acres in the Williston Basin of North Dakota. This project, called the
Goliath Project, targets the middle member of the Bakken Formation, similar to our Big
Sky project, in an emerging horizontal drilling play in the North Dakota Williston
Basin. Since closing, we have increased the acreage position at the Goliath project
and currently own a 75% working interest in approximately 65,000 gross (45,000 net)
acres.
    
    In October 2005, we sold our ownership interests in our West Rozel project, in Box
Elder County, Utah. We owned a 75% interest in the leases and ultimately received net
proceeds of approximately $695,000 after deducting costs related to the sale. We
retained an overriding royalty interest of approximately 3.13%, and will receive 57.6
cents for each barrel of hydrocarbon produced and sold from the West Rozel project.
   
    
    On July 22, 2005, we sold to accredited investors, a total of 250,000 Units for
$13,500,000, with each Unit consisting of one share of Series AA Convertible Preferred
Stock (Preferred Stock) and one warrant to purchase 2.7 shares of our $.001 par
value common stock. We will pay an
8% annual dividend on the Preferred Stock in cash or in equivalent shares of common
stock, at our discretion. Each share of Preferred Stock is convertible into nine shares of common stock for a total of 2,250,000 shares, which is a conversion rate of
$6.00 per share.
  Competition
  Proved Reserves
  3




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At December 31,2005
    
    
    2004Standardized measure of discounted future net cash flows
    
    $
    13,709,930
    
    
    $
    5,432,119Add present value of future income tax discounted at 10%
    
    
    89,000
    
    
    
    224,000Pre-tax PV10%
    
    $
    13,798,930
    
    
    $
    5,656,119
 Customers
  4




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Certain Definitions
  AMI
 Bbl
 Bbl/d
 Bc/d
 Bcf
 Bcfe
 Boe
 Btu or British thermal unit
 Capital Expenditures
 Carried Working interest.
 Completion
 Condensate.
 Developed Acreage
 Development Well
 Exploitation.
 Exploration
 5




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Exploratory Well
 Field.
 Finding and Development Costs
 Gross Acres or Gross Wells
 Lease.
 Mcf.
 Mcf/d
 Mcfe
 MMcf
 Net Acres or Net Wells.
 Operator.
 Participant Group
 PV-10 value
 Productive well
 6




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Prospect
 Proved developed reserves
 Proved reserves
 Proved undeveloped reserves (PUD
 Re-entry
 Reserves
 Reservoir.
 Royalty
 Undeveloped Acreage
 Working Interest
 Title to Properties
  7




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Forward-Looking and Cautionary Statements
  
    
    Failure to obtain, or a decline in, oil or gas production, or a decline in oil or gas prices,
    
    Inaccurate estimates of required capital expenditures,
    
    Increase in the cost of drilling, completion and gas collection or other costs of
production and operations,
    
    An inability to meet growth projections, and
    
    Other risk factors set forth under Risk Factors in this annual report. In
addition, the words believe, may, could, when, estimate, continue,
anticipate, intend, expect, and similar expressions, as they relate to the
Company, our business or our management, are intended to identify forward-looking
statements.
  RISK FACTORS
  We cannot predict the future prices of oil and natural gas.
  8




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We could be adversely impacted by changes in the oil and gas market.
  We may be unable to find additional reserves.
  We may be unable to replace reserves, production and revenues associated with our Big Sky project,
which we sold subsequent to December 31, 2005.
  Oil and gas operations are inherently risky.
  We are subject to extensive government regulations.
  
    
    the prevention of waste,
    
    the discharge of materials into the environment,
    
    the conservation of oil and natural gas,
 9




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
    
    pollution,
    
    permits for drilling operations,
    
    drilling bonds,
    
    reports concerning operations, the spacing of wells, and the unitization and
pooling of properties.
  New government regulation and environmental risks could increase our costs.
  Our prices may be impacted adversely by new taxes.
  We may have substantial funding requirements.
  ENVIRONMENTAL MATTERS
   10




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11




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EMPLOYEES
  Corporate History
  
 ITEM 2. DESCRIPTION OF PROPERTY
 OIL AND GAS ASSETS
   Big Sky Project, Richland County, Montana
  Goliath Project, Williston Basin North Dakota
  12




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Douglas Project and Fetter Prospect (Powder River Basin, Wyoming)
     13




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Krejci Oil Project (Powder River Basin, Wyoming)
    14




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Bear Creek Coal Bed Methane Prospect (Big Horn Basin, Montana)
   Amoco Production
Co. v. Southern Ute Indian Tribe)
  15




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West Rozel, Box Elder County, Utah
     OIL AND GAS DRILLING ACTIVITIES
   16




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OIL AND GAS WELLS
  Productive Wells As of December 31, 2005Gross(a)
    
    
    Net(b)Location
    
    Oil
    
    
    Gas
    
    
    Total
    
    
    Oil
    
    
    Gas
    
    
    TotalWyoming
    
    
    
    
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    1.87
    
    
    
    1.87Montana
    
    
    21
    
    
    
    
    
    
    
    21
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0Total
    
    
    21
    
    
    
    4
    
    
    
    24
    
    
    
    1.0
    
    
    
    1.87
    
    
    
    2.87
 
 (a)
    
    The number of gross wells is the total number of wells in which a working interest is
owned.(b)
    
    The number of net wells is the sum of fractional working interests owned in gross wells
expressed as whole numbers and fractions thereof. OIL AND GAS INTERESTS
  Developed
    
    
    UndevelopedState
    
    Gross Acres
    
    
    Net Acres
    
    
    Gross Acres
    
    
    Net AcresMontana
    
    
    
    
    
    
    
    
    
    
    17,555
    
    
    
    14,219North Dakota
    
    
    1,640
    
    
    
    367
    
    
    
    85,500
    
    
    
    35,205Wyoming
    
    
    1,920
    
    
    
    61
    
    
    
    198,207
    
    
    
    122,695TOTAL
    
    
    3,560
    
    
    
    428
    
    
    
    301,262
    
    
    
    172,119
   17




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Year of
    
    
    Fee
    
    
    State
    
    
    FederalExpiration
    
    
    Leases
    
    
    Leases
    
    
    Leases
    
    
    TOTALSMONTANA
    
    
    2006
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    862007
    
    
    
    4,085
    
    
    
    2,265
    
    
    
    
    
    
    
    6,3502008
    
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    1772009
    
    
    
    964
    
    
    
    
    
    
    
    3,432
    
    
    
    4,3962010
    
    
    
    84
    
    
    
    
    
    
    
    2,682
    
    
    
    2,7662011
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    1372015
    
    
    
    
    
    
    
    307
    
    
    
    
    
    
    
    307TOTAL MONTANA
    
    
    
    
    
    
    5,396
    
    
    
    2,709
    
    
    
    6,114
    
    
    
    14,219WYOMING
    
    
    2006
    
    
    
    11,954
    
    
    
    3,030
    
    
    
    120
    
    
    
    15,1042007
    
    
    
    2,938
    
    
    
    1,206
    
    
    
    5,315
    
    
    
    9,4592008
    
    
    
    3,084
    
    
    
    840
    
    
    
    
    
    
    
    3,9242009
    
    
    
    9,900
    
    
    
    784
    
    
    
    
    
    
    
    10,6842010
    
    
    
    14,234
    
    
    
    1,814
    
    
    
    660
    
    
    
    16,7082011
    
    
    
    2,687
    
    
    
    
    
    
    
    50,486
    
    
    
    53,1732012
    
    
    
    
    
    
    
    
    
    
    
    1,817
    
    
    
    1,8172013
    
    
    
    
    
    
    
    
    
    
    
    1,118
    
    
    
    1,1182014
    
    
    
    472
    
    
    
    
    
    
    
    6,279
    
    
    
    6,7512015
    
    
    
    
    
    
    
    30
    
    
    
    3,927
    
    
    
    3,957TOTAL WYOMING
    
    
    
    
    
    
    45,269
    
    
    
    7,704
    
    
    
    69,722
    
    
    
    122,695NORTH DAKOTA
    
    
    2006
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    52007
    
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    2562008
    
    
    
    11,556
    
    
    
    
    
    
    
    
    
    
    
    11,5562009
    
    
    
    12,828
    
    
    
    25
    
    
    
    
    
    
    
    12,8532010
    
    
    
    6,954
    
    
    
    3,528
    
    
    
    
    
    
    
    10,4822011
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53TOTAL NORTH DAKOTA
    
    
    
    
    
    
    31,652
    
    
    
    3,553
    
    
    
    
    
    
    
    35,205TOTALS
    
    
    
    
    
    
    82,317
    
    
    
    13,966
    
    
    
    75,836
    
    
    
    172,119
   18




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Year
    
    Rental Obligation2006
    
    $
    173,8412007
    
    
    159,0912008
    
    
    143,4492009
    
    
    131,719Thereafter
    
    
    266,711
 OFFICE FACILITIES
 th th
 Year
    
    Annual Rental Amount2006
    
    $
    115,0662007
    
    
    149,1422008
    
    
    152,5642009
    
    
    155,986Thereafter
    
    
    558,376
 
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  19




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Quarter
    
    High
    
    Low2004  First
    
    $
    1.12
    
    
    $
    0.61Second
    
    
    1.30
    
    
    
    0.76Third
    
    
    1.80
    
    
    
    1.18Fourth
    
    
    2.90
    
    
    
    1.402005  First
    
    
    3.42
    
    
    
    2.11Second
    
    
    6.40
    
    
    
    2.50Third
    
    
    8.20
    
    
    
    4.70Fourth
    
    
    7.50
    
    
    
    3.90
  Stockholders
  Dividends on the Common Stock
  
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 PLAN OF OPERATION
   20




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RESULTS OF OPERATIONS
   Oil and gas operations.
 Oil and natural gas production
 Depletion, depreciation and amortization.
 21




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General and administrative expenses.
 Income taxes.
  Preferred Dividends.
 LIQUIDITY AND CAPITAL RESOURCES
    22




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
    
    our ability to discover commercial quantities of hydrocarbons;
    
    the market price for oil and gas;
    
    our ability to continue to source and screen potential projects; and
    
    our ability to fully implement our exploration and development program with respect
to these and other matters.
  Critical Accounting Estimates
  Oil and Gas Properties.
   Oil and Gas Reserves.
 23




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Asset Retirement Obligations.
 Recent Accounting Pronouncements
    24




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Off Balance Sheet Arrangements
  
 ITEM 7. FINANCIAL STATEMENTS
  
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
   25




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ITEM 8A. CONTROLS AND PROCEDURES
  
 ITEM 8B. OTHER INFORMATION
  
 PART III
 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 Directors and Executive Officers
 Name
    
    Age
    
    Position(s) and Office(s)
    
    Director SincePatrick OBrien
    
    
    56
    
    
    CEO and Chairman
    
    February 2003Andrew P. Calerich
    
    
    41
    
    
    President, CFO and Director
    
    October 2003Alan Gelfand
    
    
    45
    
    
    Director
    
    December 2002Kendell Tholstrom
    
    
    59
    
    
    Secretary and Director
    
    February 2003M.S. (Moni) Minhas
    
    
    50
    
    
    Director
    
    February 2003Nick DeMare
    
    
    51
    
    
    Director
    
    October 2003Jon R. Whitney
    
    
    61
    
    
    Director
    
    February 2005
  26




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27




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Names of Reporting Issuers
    
    Positions Held
    
    MarketAguila American Resources, Ltd.
    
    Director
    
    TSXVAndean American Mining Corp.
    
    Director & Secretary
    
    TSXVAstrel
Mining Corp.
    
    Director
    
    TSXVCentrasia
Mining Corp.
    
    Director
    
    TSXV & OTCBBGeoPetro
Resources Company
    
    Director
    
    TSXGGL Diamond Corp.
    
    Director
    
    TSXVGold Point Exploration Ltd
    
    Director & CFO
    
    TSXVGolden Peaks Resources Ltd.
    
    Director
    
    TSXVGoldmarca Limited
    
    Director & Secretary
    
    TSXVHalo Resources Ltd.
    
    Director & CEO
    
    TSXV & OTCBBHilton Resources Ltd.
    
    Director, President & CEO
    
    TSXV & OTCBBConsolidated
Kookaburra Resources Ltd.
    
    Director
    
    TSXVLariat Energy Ltd.
    
    Director
    
    TSXVMirasol
Resources Ltd.
    
    Director
    
    TSXVTinka Resources Limited
    
    Director
    
    TSXVTumi Resources Limited
    
    Director
    
    TSXV & OTCBB
  2005 Meetings and Committees of the Board of Directors
   28




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Audit Committee Financial Expert
  Audit Committee Charter
  Code of Ethics
  Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 10. EXECUTIVE COMPENSATION
  SUMMARY COMPENSATION TABLES
 Annual CompensationOther AnnualName and Principal Position
    
    Year
    
    Salary ($)
    
    Bonus ($)
    
    Compensation ($)Patrick OBrien, CEO(1)
    
    
    2005
    
    
    
    67,292
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    Andrew Calerich, President and CFO
    
    
    2005
    
    
    
    89,243
    
    
    
    100,000
    
    
    
    947,500
    (3)2004
    
    
    
    99,021
    
    
    
    
    
    
    
    322,500
    (2)2003
    
    
    
    48,000
    
    
    
    
    
    
    
    
 29




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Long -Term CompensationRestricted
    
    SecuritiesName and Principal
    
    
    
    
    
    Stock
    
    Underlying
    
    LTIP
    
    All OtherPosition
    
    Year
    
    Awards
    
    Options/SARs(#)
    
    Payouts ($)
    
    Compensation ($)Patrick OBrien, CEO
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    250,000
    (4)
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Andrew Calerich,
President and CFO
    
    
    2005
    
    
    
    
    
    
    
    500,000
    (5)
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Mr. OBrien became CEO of the Company in February 2003 and was not paid a salary or
any other form of compensation during 2003 or 2004. None of the persons who served as CEO or
acted in a similar capacity to that of a CEO received salary or any other form of compensation
during 2004, or 2003.(2)
    
    This amount represents the market value of 250,000 shares of stock that vested on
July 1, 2004 in accordance with an employment agreement with Andrew Calerich, our President
and CFO.(3)
    
    This amount represents the market value of 125,000 shares of stock that vested on
May 1, 2005 and 125,000 shares of stock that vested on July 1, 2005, in accordance with an
employment agreement with Andrew Calerich, our President and CFO.(4)
    
    This amount represents stock options granted on July 15, 2004 with an exercise price
of $1.25 per share. 125,000 of the options vested on July 15, 2004 and expire on July 15,
2009. 125,000 of the options vested on July 15, 2005 and expire on July 15, 2010.(5)
    
    This amount represents stock options granted on April 21, 2005 with an exercise
price of $3.66 per share. One-sixth of the options vested on April 21, 2005 and one-sixth
will become exercisable on April 21 of each of 2006, 2007, 2008, 2009, and 2010. The options
expire five years after vesting. 30




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Aggregate Option Exercises in the Last Fiscal YearAnd Fiscal Year-End Warrants and Option ValuesNumber of Unexercised
    
    Value of Unexercised In-theWarrants And Options Held
    
    Money Options at Fiscalat Fiscal Year End
    
    Year EndSharesAcquiredon
    
    VakueName
    
    Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisablePatrick D. OBrien
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    

    
    
   $
    700,000
    
    
   $
    Andrew P. Calerich
    
    
    
    
    
    
    
    
    
    
    83,333
    
    
    
    416,667
    
    
    $
    32,500
    
    
    $
    162,500
 Employment Agreements
    Equity Compensation and Other Plans
  31




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##### Table of Contents



Director Compensation
  
 ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  Amount and NatureName and Address
    
    of Beneficial
    
    Percent ofTitle of Class
    
    of Beneficial Owner
    
    Ownership(1)
    
    Class(2)Common Stock
    
    Patrick OBrien(3)
    
    
    2,791,359
    
    
    
    7.56%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265Common Stock
    
    Andrew P. Calerich(4)
    
    
    1,166,616
    
    
    
    3.17%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265Common Stock
    
    Alan Gelfand
    
    
    100,238
    
    
    
    Less than 1%($0.001 par value)
    
    1050 17th St, Suite 1850Denver, CO 80265Common Stock
    
    Kendell Tholstrom
    
    
    2,541,358
    
    
    
    6.93%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265Common Stock
    
    Nick DeMare(5)
    
    
    313,300
    
    
    Less than 1%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265Common Stock
    
    Bobby G. Solomon
    
    
    2,541,358
    
    
    
    6.93%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265
 32




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##### Table of Contents



Amount and NatureName and Address
    
    of Beneficial
    
    Percent ofTitle of Class
    
    of Beneficial Owner
    
    Ownership(1)
    
    Class(2)Common Stock
    
    M.S. (Moni) Minhas
    
    
    100,238
    
    
    Less than 1%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265Common Stock
    
    Jon R. Whitney(6)
    
    
    50,000
    
    
    Less than 1%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265Common Stock
    
    Terry L. Savage(7)
    
    
    60,000
    
    
    Less than 1%($0.001 par value)
    
    1050 17th St., Suite 1850Denver, CO 80265Common Stock
    
    Directors and Executive
    
    
    9,664,467
    
    
    
    26.00%($0.001 par value)
    
    Officers as a Group(9 individuals)Common Stock
    
    Wellington Management(8)
    
    
    3,094,600
    
    
    
    8.44%($0.001 par value)
    
    Company LLP75 State StreetBoston, MA 02109
 
 (1)
    
    The number of shares and the percentage of the class beneficially owned by the
entities above is determined under rules promulgated by the SEC and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual has sole or shared voting
power or investment power and also any shares which the individual has the right to acquire
within 60 days through the exercise of any stock option or other right. The inclusion herein
of such shares, however, does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person
or entity named in the table has sole voting power and investment power (or shares such power
with his spouse) with respect to all shares of capital stock listed as beneficially owned by
such person or entity.(2)
    
    Percentages are based upon the total 36,653,264 outstanding shares of common stock
combined with the number of shares of Common Stock beneficially owned by the person or entity
with respect to whom the calculation is being made.(3)
    
    Includes options to purchase 250,000 shares at $1.25 per share that are currently
exercisable.(4)
    
    Includes options to purchase 166,666 shares at $3.66 per share that are currently
exercisable or will become exercisable within 60 days.(5)
    
    Includes 89,300 shares owned by DNG Capital Corp, which is a company wholly owned by
Nick DeMare.(6)
    
    Includes options to purchase 50,000 shares at $2.38 per share that are currently
exercisable or will become exercisable within 60 days.(7)
    
    Includes options to purchase 50,000 shares at $4.65 per share that are currently
exercisable.(8)
    
    Based upon a Schedule 13G dated February 14, 2006. According to the Schedule 13G,
Wellington Management Company, LLP has shared voting power with respect to 3,094,600 shares,
and shared power to dispose of the 3,094,600 shares. 33




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##### Table of Contents



Equity Compensation Plan Information
  (a)
    
    
    (b)
    
    
    (c)Number of Securities
    
    
    Weighted Averaged
    
    
    Number of Securitiesto Be Issued Upon
    
    
    Exercise Price of
    
    
    Remaining AvailableExercise of
    
    
    Outstanding
    
    
    for Future IssuanceOutstanding Options,
    
    
    Options, Warrants
    
    
    (Excluding SecuritiesPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    

Reflected in Column (a))Equity compensation
plans approved by
shareholders
    
    
    1,459,010
    
    
    $
    2.94
    
    
    
    1,040,990Equity compensation
plans not approved
by shareholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,459,010
    
    
    $
    2.94
    
    
    
    1,040,990
 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     34




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##### Table of Contents



ITEM 13. EXHIBITS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  35




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##### Table of Contents



Audit Committee Pre-Approval
 de minimus
 
 SIGNATURES
  American Oil & Gas, Inc./s/ Andrew P. CalerichAndrew P. CalerichPresident and CFO  Signature
    
    Title
    
    Date/s/ Patrick D. OBrien.
    
    Chief Executive Officer and Chairman
    
    April 5, 2006Patrick D. OBrien/s/ Andrew P. Calerich.
    
    President, Chief Financial Officer and Director
    
    April 5, 2006Andrew P. Calerich/s/ Alan Gelfand
    
    Director
    
    April 5, 2006Alan Gelfand/s/ Kendell Tholstrom.
    
    Secretary and Director
    
    April 5, 2006Kendell Tholstrom/s/ M.S. (Moni) Minhas
    
    Director
    
    April 5, 2006M.S. (Moni) Minhas/s/ Nick DeMare
    
    Director
    
    April 5, 2006Nick DeMare/s/ Jon R. Whitney
    
    Director
    
    April 5, 2006Jon R. Whitney
 36




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##### Table of Contents



AMERICAN OIL & GAS, INC.
INDEX TO FINANCIAL STATEMENTS
 Reports
of Independent Registered Public Accounting Firms
    
    F-2, F-3Balance Sheets
December 31, 2005 and 2004
    
    F-4Statements of Operations
Years Ended December 31, 2005 and 2004
    
    F-5Statements of Stockholders Equity
Years Ended December 31, 2005 and 2004
    
    F-6Statements of Cash Flows
Years Ended December 31, 2005 and 2004
    
    F-7 - F-8Notes to Financial Statements
    
    F-9 - F-27
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 F-2




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC AUDITING FIRM
 
    Wheeler Wasoff, P.C. 
 F-3




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##### Table of Contents



AMERICAN OIL & GAS, INC.
 
 BALANCE SHEET
DECEMBER 31, 2005 and 2004
 2005
    
    
    2004ASSETSCURRENT ASSETSCash
    
    $
    6,022,822
    
    
    $
    5,251,889Receivables
    
    
    1,481,543
    
    
    
    258,848Inventory
    
    
    40,904
    
    
    
    Advances and prepaids
    
    
    799,960
    
    
    
    54,535Total Current Assets
    
    
    8,345,229
    
    
    
    5,565,272PROPERTY AND EQUIPMENT, AT COSTOil and gas properties, full cost method (including unevaluated
costs of $14,353,614 at 12/31/05 and $2,022,367 at 12/31/04)
    
    
    22,731,887
    
    
    
    3,700,892Other property and equipment
    
    
    68,023
    
    
    
    7,221Total property and equipment
    
    
    22,799,910
    
    
    
    3,708,113Less-accumulated depreciation, depletion and amortization
    
    
    (1,596,246
    )
    
    
    (221,793
    )Net property and equipment
    
    
    21,203,664
    
    
    
    3,486,320$
    29,548,893
    
    
    $
    9,051,592LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities
    
    $
    954,544
    
    
    $
    108,611Dividends payable
    
    
    479,342
    
    
    
    18,020Total Current Liabilities
    
    
    1,433,886
    
    
    
    126,631LONG TERM LIABILITIESAsset retirement obligations
    
    
    117,011
    
    
    
    40,702Deferred income taxes
    
    
    157,000
    
    
    
    COMMITMENTS AND CONTINGENCIES (Note 4)STOCKHOLDERS EQUITYSeries A preferred stock, $.001 par value, authorized 175,000 shares
Shares issued and outstanding, -0- (2005) and 67,000 (2004)
    
    
    
    
    
    
    67Series AA preferred stock, $.001 par value, authorized 400,000
sharesShares issued and outstanding  250,000 (2005) and -0- (2004);
Stated value $13,500,000 (2005) and -0- (2004),
Redemption value $13,979,342 (2005) and -0- (2004)
    
    
    250
    
    
    
    Common stock, $.001 par value, authorized 100,000,000 sharesShares issued and outstanding 
36,476,202 (2005) and 29,153,702 (2004)
    
    
    36,476
    
    
    
    29,154Additional paid-in capital
    
    
    28,605,737
    
    
    
    10,400,629Deferred compensation
    
    
    
    
    
    
    (141,250
    )Accumulated deficit
    
    
    (801,467
    )
    
    
    (1,404,341
    )27,840,996
    
    
    
    8,884,259$
    29,548,893
    
    
    $
    9,051,592
  F-4




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##### Table of Contents



AMERICAN OIL & GAS, INC.
 
 STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004REVENUESOil and gas sales
    
    $
    4,691,381
    
    
    $
    746,242OPERATING EXPENSESLease operating
    
    
    246,134
    
    
    
    80,461General and administrative
    
    
    2,032,256
    
    
    
    945,114Depletion, depreciation and amortization
    
    
    1,378,019
    
    
    
    192,838Total operating expenses
    
    
    3,656,409
    
    
    
    1,218,413Income (loss) from operations
    
    
    1,034,972
    
    
    
    (472,171
    )OTHER INCOME (EXPENSE)Investment income
    
    
    204,244
    
    
    
    34,160Total other income (expense)
    
    
    204,244
    
    
    
    34,160INCOME (LOSS) BEFORE INCOME TAXES
    
    
    1,239,216
    
    
    
    (438,011
    )Income tax provision
    
    
    157,000
    
    
    
    NET INCOME (LOSS)
    
    
    1,082,216
    
    
    
    (438,011
    )Less: dividends on preferred stock
    
    
    479,342
    
    
    
    61,640NET INCOME (LOSS) ATTRIBUTIBLE TO COMMON
STOCKHOLDERS
    
    $
    602,874
    
    
    $
    (499,651
    )NET INCOME (LOSS) PER COMMON
SHARE  BASIC
    
    $
    0.02
    
    
    $
    (0.02
    )NET INCOME (LOSS) PER COMMON
SHARE  DILUTED
    
    $
    0.02
    
    
    $
    (0.02
    )WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING  BASIC
    
    
    34,148,065
    
    
    
    25,211,447WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING  DILUTED
    
    
    34,955,624
    
    
    
    25,211,447
  F-5




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##### Table of Contents



AMERICAN OIL & GAS, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
 AdditionalPreferred
    
    
    Stock
    
    
    Common
    
    
    Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    DeferredShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    CompensationJanuary 1, 2004
    
    
    67,000
    
    
    $
    67
    
    
    
    24,388,702
    
    
    $
    24,389
    
    
    $
    4,018,601
    
    
    $
    (966,330
    )
    
    $
    (423,750
    )Sale of common stock at $1.00 per share
    
    
    
    
    
    
    
    
    
    
    1,525,000
    
    
    
    1,525
    
    
    
    1,523,475Costs of offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,429
    )Warrant exercise at $1.00 per share
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    25
    
    
    
    24,975Warrants issued for oil project
consulting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,611Sale of common stock at $1.50 per share
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    3,000
    
    
    
    4,497,000Costs of offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133,957
    )Stock issued for private placement costs
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    30
    
    
    
    56,370Options issued for investor relations
consulting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,632Shares issued for oil prospect, valued
at $2.43 per share
    
    
    
    
    
    
    
    
    
    
    135,000
    
    
    
    135
    
    
    
    327,915Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,640
    )Deferred compensation recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282,500Shares issued to Director
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    50
    
    
    
    85,076Net (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (438,011
    )Balance December 31, 2004
    
    
    67,000
    
    
    $
    67
    
    
    
    29,153,702
    
    
    $
    29,154
    
    
    $
    10,400,629
    
    
    $
    (1,404,341
    )
    
    $
    (141,250
    )Payment of dividends on Series APreferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (844
    )Conversion of Series A Preferred Stock
    
    
    (67,000
    )
    
    
    (67
    )
    
    
    670,000
    
    
    
    670
    
    
    
    (603
    )Warrants exercised at $1.09 per share
    
    
    
    
    
    
    
    
    
    
    140,000
    
    
    
    140
    
    
    
    152,460Options issued for investor relations
consulting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,264Warrants issued for oil project
consulting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,564Deferred Compensation recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,250Stock issued for statutory merger
    
    
    
    
    
    
    
    
    
    
    5,800,000
    
    
    
    5,800
    
    
    
    651,033Sale of Series AA Preferred Stock
    
    
    250,000
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    13,499,677Costs of Preferred Stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,160,524
    )Warrants issued for placement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575,544Shares issued for oil prospect, valued
at $6.20 per share
    
    
    
    
    
    
    
    
    
    
    675,000
    
    
    
    675
    
    
    
    4,184,325Shares issued to Director
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    
    37
    
    
    
    195,212Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    602,874Balance December 31, 2005
    
    
    250,000
    
    
    $
    250
    
    
    
    36,476,202
    
    
    $
    36,476
    
    
    $
    28,605,737
    
    
    $
    (801,467
    )
    
    $
    
  F-6




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##### Table of Contents



AMERICAN OIL & GAS, INC.
 
 STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    602,874
    
    
    $
    (438,011
    )Adjustments to reconcile net (loss) to
net cash (used) by operating activities:Stock issued for services
    
    
    195,251
    
    
    
    85,126Options issued for services
    
    
    77,263
    
    
    
    38,632Deferred compensation
    
    
    141,250
    
    
    
    282,500Deferred income taxes
    
    
    157,000
    
    
    
    Accretion of asset retirement obligation
    
    
    5,609
    
    
    
    4,520Depletion, depreciation and amortization
    
    
    1,372,410
    
    
    
    188,318Changes in assets and liabilities:(Increase) in receivables
    
    
    (1,222,695
    )
    
    
    (213,106
    )(Increase in yard inventory
    
    
    (40,904
    )
    
    
    (Increase) decrease in advances and prepaids
    
    
    (745,425
    )
    
    
    12,252(Decrease) increase in accounts payable and
accrued liabilities
    
    
    845,933
    
    
    
    (365,785
    )Net cash provided (used) by operating activities
    
    
    1,388,566
    
    
    
    (405,554
    )CASH FLOWS FROM INVESTING ACTIVITIESCash paid for office equipment
    
    
    (55,913
    )
    
    
    Cash paid for oil and gas properties
    
    
    (14,091,540
    )
    
    
    (2,894,560
    )Proceeds from sale of oil and gas properties
    
    
    
    
    
    
    1,582,171Net cash (used) in investing activities
    
    
    (14,147,453
    )
    
    
    (1,312,389
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from sale of preferred stock
    
    
    13,499,927
    
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    6,025,000Cash paid for offering costs
    
    
    (584,980
    )
    
    
    (84,986
    )Proceeds from warrant exercise
    
    
    152,600
    
    
    
    25,000Preferred dividends payable
    
    
    461,322
    
    
    
    Preferred dividends paid
    
    
    (844
    )
    
    
    (61,640
    )Cash received from acquired company
    
    
    1,795
    
    
    
    Net cash provided by financing activities
    
    
    13,529,820
    
    
    
    5,903,374NET INCREASE IN CASH
    
    
    770,933
    
    
    
    4,185,431CASH, BEGINNING OF YEAR
    
    
    5,251,889
    
    
    
    1,066,458CASH, END OF YEAR
    
    $
    6,022,822
    
    
    $
    5,251,889
  F-7




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##### Table of Contents



AMERICAN OIL & GAS, INC.
STATEMENTS OF CASH FLOWS (cont)
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATIONCash paid for interest expense
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIESStock issued for services
    
    $
    195,251
    
    
    $
    85,126Stock based deferred compensation
    
    $
    141,250
    
    
    $
    282,500Stock issued for oil and gas properties
    
    $
    4,830,715
    
    
    $
    328,050Warrants issued for oil and gas property consulting
    
    $
    31,564
    
    
    $
    31,611Stock issued for financing costs
    
    $
    
    
    
    $
    56,400Warrants issued for financing costs
    
    $
    575,544
    
    
    $
    60,192
  F-8




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##### Table of Contents



AMERICAN OIL & GAS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          F-9




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
          F-10




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
       12-31-05
    
    
    12-31-04Asset retirement obligation beginning of year
    
    $
    40,702
    
    
    $
    30,688Liabilities incurred
    
    
    81,065
    
    
    
    33,102Sale of oil and gas assets
    
    
    (10,364
    )
    
    
    (27,608
    )Accretion
    
    
    5,608
    
    
    
    4,520Asset retirement obligation end of year
    
    $
    117,011
    
    
    $
    40,702
   F-11




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
    2005
    
    
    2004Net income (loss)  as reported
    
    $
    602,874
    
    
    $
    (438,011
    )Add stock based compensation included in
reported net loss
    
    
    413,765
    
    
    
    38,632Deduct stock based compensation expense
determined under the fair value method
    
    
    (841,567
    )
    
    
    (133,321
    )Pro forma
net income (loss)
    
    $
    175,072
    
    
    $
    (532,700
    )Net income (loss) per common share  Basic:As reported
    
    $
    0.02
    
    
    $
    (0.02
    )Pro forma
    
    $
    
    
    
    $
    (0.02
    )Net income (loss) per common share  Diluted:As reported
    
    $
    0.02
    
    
    $
    (0.02
    )Pro forma
    
    $
    
    
    
    $
    (0.02
    )
  2005
    
    2004Expected option life-years
    
    
    5.0
    
    
    
    5.0Risk-free interest rate
    
    2.6% to 4.5%
    
    
    3.36
    %Dividend yield
    
    
    N/A
    
    
    
    N/AVolatility
    
    47% to 78%
    
    
    71
    %
   F-12




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
   PerNet
    
    
    
    
    
    
    ShareDECEMBER 31, 2005
    
    Income
    
    
    Shares
    
    
    AmountBasic earnings per share:Net income and share amounts
    
    $
    602,874
    
    
    
    34,148,065
    
    
    $
    0.02Dilutive Securities:Stock options
    
    
    
    
    
    
    782,543Warrants
    
    
    
    
    
    
    25,016Diluted earnings per share:Net income and assumed share conversion
    
    $
    602,874
    
    
    
    34,955,624
    
    
    $
    0.02
        F-13




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
      F-14




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
          NOTE 2  PROPERTY AND EQUIPMENT
  F-15




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
       2005
    
    
    2004Oil and gas properties, full cost methodUnevaluated costs, not subject to amortization or ceiling test
    
    $
    14,353,614
    
    
    $
    2,022,367Evaluated costs
    
    
    8,274,180
    
    
    
    1,645,133Asset retirement costs
    
    
    104,093
    
    
    
    33,39222,731,887
    
    
    
    3,700,892Furniture and equipment
    
    
    68,023
    
    
    
    7,22122,799,910
    
    
    
    3,708,113Less accumulated depreciation, depletion and amortization
    
    
    (1,596,246
    )
    
    
    (221,793
    )Property and equipment
    
    $
    21,203,664
    
    
    $
    3,486,320
 Unevaluated Oil and Gas Properties
  F-16




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
  Periods ended:
    
    Net costs incurredDecember 31, 2005
    
    $
    12,331,247December 31, 2004
    
    
    1,232,348Prior
    
    
    790,019$
    14,353,614
   2005
    
    
    2004Property acquisition costs, unproved properties
    
    $
    10,300,175
    
    
    $
    1,279,364Exploration costs
    
    
    7,011,666
    
    
    
    194,413Asset retirement costs
    
    
    70,701
    
    
    
    5,494Development costs
    
    
    2,932,459
    
    
    
    1,846,494$
    20,315,001
    
    
    $
    3,325,765
    NOTE 3  STOCKHOLDERS EQUITY
 PREFERRED STOCK
  F-17




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
 Series AA Convertible Preferred Stock
    Series A Convertible Preferred Stock
   F-18




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
  th
 COMMON STOCK
        F-19




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
 WARRANTS
    Issue
    
    Shares
    
    Exercise
    
    ExpirationDate
    
    Exercisable
    
    Price
    
    DateJuly 22, 2005
    
    
    675,000
    
    
    $
    6.00
    
    
    January 21, 2007July 22, 2005
    
    
    281,250
    
    
    $
    6.00
    
    
    July 21, 2010September 15, 2003
    
    
    30,000
    
    
    $
    1.15
    
    
    September 15, 2008September 24, 2003
    
    
    66,450
    
    
    $
    0.75
    
    
    September 24, 2008May 26, 2004
    
    
    23,200
    
    
    $
    1.09
    
    
    April 2005 through
December 2005
   Issue
    
    Shares
    
    Exercise
    
    ExpirationDate
    
    Exercisable
    
    Price
    
    DateSeptember 15, 2003
    
    
    30,000
    
    
    $
    1.15
    
    
    September 15, 2008September 24, 2003
    
    
    66,450
    
    
    $
    0.75
    
    
    September 24, 2008May 26, 2004
    
    
    122,400
    
    
    $
    1.09
    
    
    April 2005 through
December 2005
  F-20




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
 NOTE 4  STOCK OPTION PLAN
   Number
    
    
    Weighted Avg.
    
    
    Weighted Avg. Fairof shares
    
    
    Exercise Price
    
    
    ValueOptions outstanding  January 1, 2004
    
    
    
    
    
    $
    
    
    
    $
    Options granted during 2004
    
    
    403,000
    
    
    $
    1.25
    
    
    $
    0.76Options outstanding  December 31,
2004
(176,000 exercisable)
    
    
    403,000
    
    
    $
    1.25
    
    
    $
    0.76Options granted during 2005
    
    
    1,056,010
    
    
    $
    3.58
    
    
    $
    1.83Options outstanding  December 31,
2005
(640,009 exercisable)
    
    
    1,459,010
    
    
    $
    2.94
    
    
    $
    1.53
   Weighted averageExercise price
    
    Number of shares
    
    Number of shares
    
    remaining contractualper share
    
    outstanding
    
    Exercisable
    
    Life (Years)$1.25
    
    
    403,000
    
    
    
    403,000
    
    
    
    4.502.38
    
    
    100,000
    
    
    
    50,000
    
    
    
    4.822.48
    
    
    90,000
    
    
    
    30,000
    
    
    
    4.673.27
    
    
    32,010
    
    
    
    32,010
    
    
    
    .383.66
    
    
    750,000
    
    
    
    124,999
    
    
    
    4.214.30
    
    
    9,000
    
    
    
    
    
    
    
    5.005.80
    
    
    75,000
    
    
    
    
    
    
    
    5.00
 F-21




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
 NOTE 5  INCOME TAXES
  2005
    
    
    2004Current taxes
    
    $
    
    
    
    $
    Deferred taxes
    
    
    157,000
    
    
    
    37,000Less: valuation allowance
    
    
    
    
    
    
    (37,000
    )Net income tax expense (benefit)
    
    $
    157,000
    
    
    $
    
  2004
    
    
    2004Federal statutory income tax rate
    
    
    35.0
    %
    
    
    34.0
    %State income taxes
    
    
    3.5
    %
    
    
    3.3
    %Permanent differences
    
    
    6.5
    %
    
    
    .5
    %Increase (decrease) in valuation allowance
    
    
    (32.0
    %)
    
    
    (37.8
    %)13
    %
    
    
    
  2005
    
    
    2004Deferred tax assets:Federal and state net operating loss carryovers
    
    $
    1,462,000
    
    
    $
    746,000Asset retirement obligation
    
    
    
    
    
    
    15,000Oil and gas property
    
    
    428,000
    
    
    
    (468,000
    )Timing differences  charitable contributions
and non qualified options issued for investor
relations
    
    
    29,000
    
    
    
    Deferred compensation
    
    
    
    
    
    
    (3,000
    )Total deferred tax assets
    
    
    1,919,000
    
    
    
    290,000Less: valuation adjustment
    
    
    
    
    
    
    Deferred tax asset
    
    $
    1,919,000
    
    
    $
    290,000Deferred tax liabilities:Intangible drilling costs and other
exploration costs capitalized for financial
reporting purposes
    
    $
    (2,076,000
    )
    
    $
    Other
    
    
    
    
    
    
    Total deferred liabilities
    
    
    (2,076,000
    )
    
    
    Net deferred tax asset
    
    
    1,919,000
    
    
    
    290,000Less valuation adjustment
    
    
    
    
    
    
    (290,000
    )Deferred tax liability
    
    $
    (157,000
    )
    
    $
    
 F-22




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
  NOTE 6  RELATED PARTY TRANSACTIONS
     F-23




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AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
 NOTE 7  COMMITMENTS AND CONTINGENCIES
    Office Lease Obligations
    
    Year
    
    Amount2006
    
    
    $
    115,0652007
    
    
    
    149,1422008
    
    
    
    152,5642009
    
    
    
    155,986Thereafter
    
    
    266,711
   NOTE 8  SUBSEQUENT EVENTS
  F-24




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
      NOTE 9
 INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)
   F-25




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
     December 31, 2005
    
    Oil (BBLS)
    
    Gas (MCF)Beginning of year
    
    
    321,710
    
    
    
    346,270Revisions of Previous quantity estimates
    
    
    1,314
    
    
    
    (149,409
    )Extensions, discoveries and improved recoveries
    
    
    310,667
    
    
    
    284,434Sales of reserves in place
    
    
    
    
    
    
    (43,585
    )Production
    
    
    (78,989
    )
    
    
    (59,497
    )End of year
    
    
    554,702
    
    
    
    378,213Proved developed reserves-end of year
    
    
    320,698
    
    
    
    307,000
 December 31, 2004
    
    Oil (BBLS)
    
    Gas (MCF)Beginning of year
    
    
    70,900
    
    
    
    1,526,800Revisions of Previous quantity estimates
    
    
    (33,513
    )
    
    
    190,853Extensions, discoveries and improved recoveries
    
    
    320,577
    
    
    
    149,248Sales of reserves in place
    
    
    (23,405
    )
    
    
    (1,471,666
    )Production
    
    
    (12,849
    )
    
    
    (48,965
    )End of year
    
    
    321,710
    
    
    
    346,270Proved developed reserves-end of year
    
    
    147,205
    
    
    
    216,867
 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
  December 31, 2005
    
    
    December 31, 2004Future cash inflows
    
    $
    35,159,955
    
    
    $
    15,565,592Future costs:Production
    
    
    (5,768,802
    )
    
    
    (2,842,441
    )Development
    
    
    (2,825,307
    )
    
    
    (1,972,604
    )Future income tax expense
    
    
    (706,000
    )
    
    
    (696,000
    )Future net cash flows
    
    
    25,859,846
    
    
    
    10,054,54710% discount factor
    
    
    (12,149,916
    )
    
    
    (4,622,428
    )Standardized measure of
discounted future net cash flows
    
    $
    13,709,930
    
    
    $
    5,432,119
 F-26




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##### Table of Contents



AMERICAN OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
   December 31, 2005
    
    
    December 31, 2004Beginning balance
    
    
    5,656,119
    
    
    $
    2,839,143Sales and transfers of oil and gas produced
    
    
    (4,466,663
    )
    
    
    (665,781
    )Net (decrease) in prices and production costs
    
    
    3,842,601
    
    
    
    (13,457
    )Sales of minerals in place
    
    
    (135,472
    )
    
    
    (2,065,395
    )Extensions and discoveries
    
    
    7,263,253
    
    
    
    4,974,807Changes in estimated future development costs
    
    
    1,633,142
    
    
    
    (93,061
    )Revisions in previous quantity estimates
    
    
    (587,460
    )
    
    
    (8,975
    )Accretion of discount
    
    
    565,612
    
    
    
    283,914Change in income taxes
    
    
    135,000
    
    
    
    (224,000
    )Change in rates of production and other
    
    
    (196,202
    )
    
    
    404,924Ending balance
    
    
    13,709,930
    
    
    $
    5,432,119
  F-27




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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Description2(1)*
    
    Agreement and Plan of Merger with Tower Colombia Corporation dated effective April
21, 2005. (Incorporated by reference from the Companys Post-Effective Amendment No.
1 to Form SB-2, filed on April 27, 2005.)3(i)*
    
    Articles of Incorporation of the Company. (Incorporated by reference from the
Companys Form 10-SB, file number 000-31547, filed on September 18, 2000.)3(ii)*
    
    Amendment to Articles of Incorporation of the Company. (Incorporated by reference
from the Companys Current Report on Form 8-K filed on February 3, 2003.)3(iii)*
    
    Certificate of Designation of Series A Preferred Stock. (Incorporated by reference
from the Companys Amendment No. 2 to Form SB-2, filed on January 31, 2005.)3(iv)*
    
    Bylaws of the Company (as revised on December 12, 2002). (Incorporated by reference
from the Companys Form 10-KSB/A, filed on November 18, 2003.)3(v)*
    
    Certificate of Designation of Series AA 8% Preferred Stock. (Incorporated by
reference from the Companys Amendment No. 1 to Form S-3, filed on March 6, 2006.)4(i)*
    
    2004 Stock Option Plan. (Incorporated by reference from the Companys Definitive
Proxy Statement, filed on June 16, 2004)4(ii)*
    
    Form of Warrant Certificate issued as part of the private placement completed on
July 22, 2005. (Incorporated by reference from the Companys Registration Statement
on Form S-3, filed on October 4, 2005.)4(iii)*
    
    Form of Placement Agent Warrant Certificate issued in connection with the private
placement completed on July 22, 2005. (Incorporated by reference from the Companys
Registration Statement on Form S-3, filed on October 4, 2005.)10(i)*
    
    January 17, 2003 Purchase and Sale Agreement by and between the Company, Tower
Colombia Corporation and North Finn, LLC. (Incorporated by reference
from the Companys Form 8-K, filed on February 3, 2003.)10(ii)*
    
    January 17, 2003 Participation Agreement by and between the Company, Tower, North
Finn, and the principals of Tower and North Finn. (Incorporated by reference from
the Companys Form 10-KSB for the calendar ending December 31, 2002, filed on March
31, 2003.)10(iii)*
    
    Model Form Operating Agreement dated February 18, 2003. (Incorporated by reference
from the Companys Form 10-KSB/A, filed on November 18, 2003.)10(iv)*
    
    Employment Agreement between the Company and Andrew P. Calerich dated effective
April 21, 2005. (Incorporated by reference from the Companys Post-Effective
Amendment No. 1 to Form SB-2, filed on April 27, 2005.)
 38




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##### Table of Contents



Exhibit No.
    
    Description10(v)*
    
    Employment Agreement between the Company and Patrick D. OBrien dated effective
April 21, 2005. (Incorporated by reference from the Companys Post-Effective
Amendment No. 1 to Form SB-2, filed on April 27, 2005.)10(vi)*
    
    Employment Agreement between the Company and Bobby G. Solomon dated effective April
21, 2005. (Incorporated by reference from the Companys Post-Effective Amendment
No. 1 to Form SB-2, filed on April 27, 2005.)10(vii)*
    
    Employment Agreement between the Company and Kendell V. Tholstrom dated effective
April 21, 2005. (Incorporated by reference from the Companys Post-Effective
Amendment No. 1 to Form SB-2, filed on April 27, 2005.)10(viii)
    
    Participation Agreement between the Company and North Finn LLC dated January 5, 2006.14(i)*
    
    Code of Ethics. (Incorporated by reference from Exhibit 14(i) to the Companys Form
10-KSB for the fiscal year ending December 31, 2003, filed on April 14, 2004).23(i)
    
    Consent from Ryder Scott Petroleum Consultants31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    Previously filed as indicated and incorporated herein by reference from the referenced
filings previously made by the Company. 39