10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

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

For the quarterly period ended June 30, 2011

¨ 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:  000-50906

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 27th Street, Suite 21G, Billings, Montana	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 ¨

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 ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

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

Yes ¨ No x

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

43,374,158 shares of common stock issued and outstanding at August 15, 2011.

Explanatory Note

The purpose of this Amendment No. 1 to American Eagle Energy Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, filed with the Securities and Exchange Commission on August 18, 2011 (the “Form 10-Q”), is solely to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T.  Exhibit 101 to this Report provides the consolidated financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language).

No other changes have been made to the Form 10-Q.  This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

ITEM 6. EXHIBITS.

Exhibit	Description of Exhibit
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy  Extension Schema document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy  Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy  Extension Presentation Linkbase Document

* Filed herewith.

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)
August 25, 2011	/s/ Richard Findley
	Richard Findley
	President and Chairman (Principal Executive, Financial and Accounting Officer)

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Richard Findley, certify that:

1 I have reviewed this Form 10-Q/A of American Eagle Energy Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15f) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:  August 25, 2011

/s/ Richard Findley

Richard Findley

President and Chairman

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of American Eagle Energy Inc. on Form 10-Q/A for the period ending June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof, I, Richard Findley, President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

August 25, 2011

/s/ Richard Findley

Richard Findley

President and Chairman

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Oil and gas properties - subject to amortization, accumulated depletion	$ 142,079	$ 113,596
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	150,000,000	150,000,000
Common stock, shares outstanding	43,374,158	37,540,000
Short-term Debt | Convertible Debenture
Discount	496,601
Long-term Debt | Convertible Debenture
Discount		926,333
Long-term asset retirement obligation
Discount	$ 44,090	$ 23,647

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Condensed Consolidated Statements of Operations (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Oil and gas revenues	$ 10,437		$ 46,477
Gain on sale of oil and gas properties - not subject to amortization, net of costs	2,085,627		2,085,627
Total revenue	2,096,064		2,132,104
Operating expenses:
Oil and gas operating expenses	71,042		117,676
General and administrative	167,722	34,708	275,072	40,048
Depreciation, amortization, and depletion expense	14,278		28,482
Impairment of oil and gas prospects		5,937		5,937
Total operating costs	439,402	106,533	871,606	180,387
Total operating income (loss)	1,656,662	(106,533)	1,260,498	(180,387)
Interest expense	(20,000)	(16,667)	(40,000)	(16,667)
Accretion of debenture discount	(198,231)	(11,688)	(429,733)	(11,688)
Accretion of discount on asset retirement obligation	(358)		(707)
Income (loss before taxes	1,438,073	(134,888)	790,058	(208,742)
Provision for income taxes
Net income (loss)	1,438,073	(134,888)	790,058	(208,742)
Net income (loss) per common share:
Basic	$ 0.03	$ 0.00	$ 0.02	$ 0.00
Diluted	$ 0.03	$ 0.00	$ 0.02	$ 0.00
Weighted average number of shares outstanding -
Basic	43,231,357	44,913,334	41,299,259	44,376,889
Diluted	44,575,384	44,913,334	42,675,072	44,376,889
AllOther
Operating expenses:
Professional fees	148,360	35,888	382,376	59,402
Related party
Operating expenses:
Professional fees	$ 38,000	$ 30,000	$ 68,000	$ 75,000

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Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 15, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Trading Symbol	AMZG
Entity Registrant Name	AMERICAN EAGLE ENERGY INC.
Entity Central Index Key	0001401983
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		43,374,158

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Convertible Debenture

6 Months Ended

Jun. 30, 2011

Convertible Debenture

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 related to the Debenture totaled $20,000 and $40,000 for the three-month and six-month periods ended June 30, 2011, respectively.  Accrued interest payable as of June 30, 2011 and December 31, 2010 totaled $40,000 and $40,000, respectively.  The Debenture’s original maturity date was April 15, 2011.  On February 24, 2011, the lender extended the maturity date to April 15, 2012.  Accordingly, the Convertible Debenture is presented as a current and non-current liability on the Company’s balance sheets as of June 30, 2011 and December 31, 2010, respectively.  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 $1.125 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. The initial conversion price was 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 was also subject to reduction in the event that the Company pays dividends, declares a stock split, or engages into a merger transaction.

Attached to the convertible debentures were 416,667 warrants to purchase shares of the Company’s common stock at an initial exercise price of $1.20 per share (Note 9).  The initial exercise price was reduced from $1.20 per share to $0.60 per share as a result of a private placement commitment that was received in December 2010, which also increased the number of exercisable warrants from 416,667 to 833,333.

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.

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 were not deemed to contain a beneficial conversion feature at the time the Debentures were initially sold.

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. Accordingly, the Company recorded an initial debt discount in the amount of $280,511.  The initial debt discount is being accreted using the straight line method over the original life of the Debenture.  The Company recognized amortization expense of $35,065 and $105,194 during the three-month and six-month periods ended June 30, 2011 related to the additional debt discount.  Debt discount accretion for the three-month and six-month periods ended June 30, 2010 was $11,688.

In December 2010, the Company received an irrevocable commitment to purchase 5,833,333 shares of its common stock at a price of $0.60 per share (see Note 9).  Also in December 2010, the Company granted 2,141,842 options to purchase shares of the Company’s common stock to certain consultants and members of the Company’s management, in exchange for the contribution of certain exploratory concepts.  The terms of the option agreements stipulate an exercise price of $0.60 per share.  At that time, the initial conversion price associated with the debenture was reduced.  The adjusted conversion price of the Debenture is $0.60 per share as of June 30, 2011.

These two events triggered the reduction of the initial conversion price of the Debentures from $1.125 per share to $0.60 per share.  As a result, it was determined that the Debentures included a beneficial conversion feature as of December 31, 2010 and, accordingly, the Company recorded an additional debt discount related to the Debentures in the amount of $875,000.  The Company recognized debt discount accretion expense of $163,166 and $324,539 during the three-month and six-month periods ended June 30, 2011 related to the additional debt discount.

Because the adjusted conversion price is less than the trading value of the Company’s stock as of June 30, 2011, the amount by which the Debenture’s “if converted value” exceeded its principal amount was $1,250,000 as of June 30, 2011.

As of June 30, 2011 and December 31, 2010, the Company has reserved 1,666,667 shares of its common stock in the event that the Debenture is converted.

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Related Party Transactions

6 Months Ended

Jun. 30, 2011

Related Party Transactions

10.  Related Party Transactions

In January 2010, the Company engaged Synergy Resources LLC (“Synergy”) to provide geological and engineering consulting services.  The Company’s President and sole Director is also a member of Synergy’s management team.  Geological and engineering consulting service fees provided by Synergy for the three-month and six-month periods ended June 30, 2011 and 2010 totaled $38,000, $68,000, $30,000 and $75,000, respectively.

As discussed in Note 9, in January 2010, the Company issued an aggregate of 6,666,667 restricted shares of its common stock at a price of $0.0015 to four individuals in a private transaction.  Of the 6,666,667 shares issued, 4,222,222 shares were purchased by two of the individuals who are our sole officers at June 30, 2011.  The proceeds received from the sale of the stock totaled $10,000.  Proceeds from the two related parties totaled $6,333.

As discussed in Note 3, at Passport's December 2010 Annual General Meeting, Passport increased their number of directors to eight, one of whom is the Company's Vice President of Operations.  As a result, the Company’s investment in Passport’s common stock is classified as a related party asset.  As of June 30, 2011 and December 31, 2010, the fair market value of the Company’s investment in Passport was $127,426 and $197,453, respectively.

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Description of Business

6 Months Ended

Jun. 30, 2011

Description of Business

1. Description of Business

American Eagle Energy, Inc. (the “Company”) was incorporated in the state of Nevada in March 2007 for the purpose of identifying and pursuing exploratory oil and gas opportunities.  As of June 30, 2011, the Company had acquired working interests in oil and gas prospects located in Montana, North Dakota, Texas, and southeastern Saskatchewan, Canada.

In December 2010, the Company changed its fiscal year end from April 30 to December 31.  The 2010 figures presented herein are presented for comparative purposes and are based on different fiscal quarters than what was presented in the Company’s previously filed Quarterly Reports on Form 10-Q.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies

7.  Commitments and Contingencies

Drilling Commitments

As of June 30, 2011, the Company owned a 50% working interest in the Hardy Property.  Accordingly, the Company may elect to participate in the drilling of exploratory wells on the property.  As discussed in Note 4, the Company and its working interest partner, Eternal Energy, entered into a farm-out agreement with Passport whereby Passport agreed to fund 38.5% of the drilling, completion and abandonment costs of up to two future wells to be located within the Hardy Property, in exchange for a 25% working interest in the completed wells.  The remaining working interest in the wells will be shared equally by the Company and Eternal Energy.  The first well to be drilled under the Participation Agreement was the Hardy 4-16 well.  Plans are in place to commence drilling of the second well within the Hardy Prospect.  The current estimate of drilling and completion costs of the second well is $3,200,000, of which the Company, through its participation election, would be obligated to pay approximately $984,000 should it elect to participate in such well.

Stock Issuances

As discussed in Note 5, the Company has reserved 1,666,667 shares of its common stock in the event that the Debenture is converted.

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Subsequent Events

6 Months Ended

Jun. 30, 2011

Subsequent Events

12.  Subsequent Events

In July 2011, the Company, along with its working interest partners, completed the fracture stimulation of the Hardy 4-16 well at an estimated aggregate cost of $725,000.  The Company’s share of these costs is approximately $223,000.  Management is currently evaluating the results of the fracture stimulation project.

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Earnings (Loss) Per Share

6 Months Ended

Jun. 30, 2011

Earnings (Loss) Per Share

8.  Earnings (Loss) Per Share

The following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2011 and 2010:

	For the Three-Month					For the Six-Month
	Period Ended June 30,					Period Ended June 30,
	2011		2010			2011		2010
Net income (loss)	$	1,438,073	$	(134,888	)	$	790,058	$	(208,742	)
Weighted-average number of common shares outstanding		43,231,357		44,913,334			41,299,259		44,376,889
Incremental shares from the assumed exercise of dilutive stock options (a)		1,344,027		-			1,375,813		-
Diluted common shares outstanding		44,575,384		44,913,334			42,675,072		44,376,889
Basic earnings (loss) per share	$	0.03	$	(0.00	)	$	0.02	$	(0.00	)
Diluted earnings (loss) per share	$	0.03	$	(0.00	)	$	0.02	$	(0.00	)

(a)  In periods where the Company incurs a loss, potentially dilutive securities are not included in the computation of diluted net loss per share as their effect would have been anti-dilutive.  The following securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive:

	June 30,
	2010
Stock options		-
Convertible debentures		-

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Asset Retirement Obligations

6 Months Ended

Jun. 30, 2011

Asset Retirement Obligations

6.  Asset Retirement Obligations

The Company has recorded estimated asset retirement obligations for the future plugging and abandonment of the Hardy 7-9 and Hardy 4-16 wells.  As of June 30, 2011, the discounted value of the Hardy asset retirement obligations is $16,473.  The Company recognized accretion expense of $358 and $707 for the three-month and six-month periods ended June 30, 2011 associated with the Hardy asset retirement obligations.  No accretion expense was recognized during the three-month and six-month periods ended June 30, 2010 as the Company had not yet restored the Hardy 7-9 well to production nor recorded an asset retirement obligation associated with the well.  The projected plugging dates for the Hardy 7-9 and Hardy 4-16 wells are December 2020 and June 2036, respectively.

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Condensed Consolidated Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows provided by (used for) operating activities:
Net income (loss)	$ 790,058	$ (208,742)
Non cash transactions:
Depletion	28,482
Accretion of discount on debenture	429,733	11,688
Accretion of discount on asset retirement obligations	707
Gain on sale of oil and gas properties	(2,085,627)
Changes in operating assets and liabilities:
Increase in prepaid expense	(12,864)
Increase in amounts due from working interest partners	(1,127,387)
Increase in amounts due to Eternal Energy Corp.	387,957
Increase in accounts payable and accrued liabilities	644,206	878,101
Increase (decrease) in amounts due to related parties	(6,000)	30,000
Net cash provided by (used for) operating activities	(950,735)	711,047
Cash flows provided by (used for) investing activities:
Proceeds from the sale of oil and gas properties	3,914,811
Additions to oil and gas properties	(3,385,303)	(1,666,633)
Purchase of marketable securities	(911)	(24,635)
Net cash provided by (used for) investing activities	528,597	(1,691,268)
Cash flows provided by (used for) financing activities:
Proceeds from sale of Debenture		1,000,000
Proceeds from the issuance of stock		805,000
Collection of stock subscriptions receivable	3,500,000
Net cash provided by financing activities	3,500,000	1,805,000
Net increase in cash	3,077,862	824,779
Cash - beginning of period	79,768	2,239
Cash - end of period	3,157,630	827,018
Cash paid during the period for:
Interest	40,000
Income taxes
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Change in value of marketable securities	70,938
Issuance of stock upon collection of stock subscription	5,834
Recording of asset retirement obligation, net of discount of $21,150	1,913
Warrants issued with convertible debt, recorded as a discount on the debt		$ 280.511

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Summary of Significant Accounting Policies

2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned, Canadian subsidiary, AEE Canada Inc.  The subsidiary was created to house the Company’s Canadian oil and gas property holdings and to conduct business activities within Canada.  All material intercompany accounts, transactions, and profits have been eliminated.

These condensed consolidated 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 eight-month period ended December 31, 2010 and for the year ended April 30, 2010.  The condensed consolidated 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 condensed results for the interim periods.  Operating results for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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.  Working interest, royalty, and net profit interests are recognized as revenue when oil and gas is sold and persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

Concentration of Credit Risk

At June 30, 2011, the Company had $2,974,526 on deposit that that exceeded the United States (FDIC) federal insurance limit of $250,000 per bank.  The Company believes that this credit risk is mitigated by the financial strength of the financial institution with which the funds are held.

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.

Cash and Cash Equivalents

Cash equivalents consist of time deposits and liquid debt investments with original maturities of three months or less at the time of purchase.  The Company does not have any cash equivalents at June 30, 2011 or December 31, 2010.

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 stockholders’ 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.

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.

Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized.  The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and gas reserves.  Excluded from amounts subject to depletion are costs associated with unevaluated properties.

Asset Retirement Obligations

The Company records asset retirement obligations in the period in which the obligation is incurred and when a reasonable estimate of fair value can be determined.  The initial recording of an asset retirement obligation results in an increase in the carrying amount of the related long-lived asset and the creation of a liability.  The portion of the asset retirement obligation expected to be realized during the next 12-month period is classified as a current liability, while the portion of the asset retirement obligation expected to be realized during subsequent periods is discounted and recorded at its net present value.  The discount factor used to determine the net present value of the Company’s asset retirement obligation is 10%, which is consistent with the discount factor that is applied to oil and gas reserves when performing the periodic ceiling tests.

Changes in the noncurrent portion of the asset retirement obligation due to the passage of time are measured by applying an interest method of allocation.  The amount of change is recognized as an increase in the liability and an accretion expense in the statement of operations.  Changes in either the current or noncurrent portion of the Company’s asset retirement obligation resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease to the carrying amount of the liability and the related long-lived asset

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Hierarchy Levels 1, 2 or 3 are terms for the priority of inputs to valuation techniques used to measure fair value.  Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Hierarchy Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability.  Hierarchy Level 3 inputs are inputs that are not observable in the market.  The fair value measurements of the Company’s financial instruments at June 30, 2011 and December 31, 2010 were as follows:

	Level 1		Level 2		Level 3		Total
June 30, 2011
Cash	$	3,157,630	$	-	$	-	$	3,157,630
Marketable securities – related party		-		127,426		-		127,426
	$	3,157,630	$	127,426	$	-	$	3,285,056
December 31, 2010
Recurring:
Cash	$	79,768	$	-	$	-	$	79,768
Marketable securities – related party		-		197,453		-		197,453
	$	79,768	$	197,453	$	-	$	277,221
Nonrecurring:
Stock options granted in exchange for intellectual property	$	-	$	1,247,195	$	-	$	1,247,195

The Company uses level 2 inputs to determine the fair value of its marketable securities - related party, which consists of common stock and warrants in an entity which is traded on the Canadian National Stock Exchange.  The warrants are valued using the Black-Scholes Option Pricing Model which includes a calculation of historical volatility of the stock.  Level 2 inputs were also used to determine the fair value of the Company's stock options which were granted to related parties for intangible oil and gas intellectual property.  Recent market transactions were used to determine the market price of the stock and a comparable company was used to calculate volatility.

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 as well as a beneficial conversion feature that was triggered when the trading value of the Company’s stock first exceeded its conversion price per share.  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 Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders 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 June 30, 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 8 for the calculation of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2011 and 2010.

Income Taxes

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.  Net operating loss carry forwards and other deferred tax assets are reviewed annually for recoverability, and if necessary, are recorded net of a valuation allowance.

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 deferred income tax asset valuation allowance, the valuation of oil and gas reserves to which the Company owns rights, estimates related to the Company’s asset retirement obligations, the valuation of the warrants held by the Company as investments and the estimates used to determine the Black-Scholes fair value of the stock options issued as consideration for oil and gas intangible assets.  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 December 2010, the FASB issued Accounting Standards Update 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations.  The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.

The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.

The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis.

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  Many of the amendments in this update change the wording used in the existing guidance to better align U.S. generally accepted accounting principles with International Financial Reporting Standards and to clarify the FASB’s intent on various aspects of the fair value guidance.  This update also requires increased disclosure of quantitative information about unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.  This update is effective for financial statements for reporting periods beginning after December 15, 2011 and should be applied retrospectively.  Other than requiring additional disclosures, the adoption of this new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220).  This new guidance requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements.  This new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance.  The Company has adopted the new guidance in its financial statements as of and for the three-month and six-month periods ended June 30, 2011.

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Marketable Securities

6 Months Ended

Jun. 30, 2011

Marketable Securities

3.  Marketable Securities

As of June 30, 2011 and December 31, 2010, the Company held the following marketable securities that were classified as available for sale:

			Gains in
			Accumulated
	Fair		Other
	Value		Comprehensive
June 30, 2011	Measurement		Income
Noncurrent assets:
Common stock and warrants – related party	$	127,426	$	101,880
Total available-for-sale marketable securities	$	127,426	$	101,880
December 31, 2010
Noncurrent assets:
Common stock and warrants – related party	$	197,453	$	172,818
Total available-for-sale marketable securities	$	197,453	$	172,818

In June 2010, the Company purchased 500,000 units of Passport Energy Inc. (formerly Covenant Resources Inc.) (“Passport”), 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 Passport’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 (CDN$25,000).  During 2011, the Company subsequently paid an additional $911 to Passport in connection with the shares.  Management considers the investment in Passport 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 noncurrent assets.  The Passport warrants to purchase common stock are calculated using the Black-Scholes Option Pricing Model, with the following assumptions at June 30, 2011;

Risk free interest rate		0.23	%
Expected volatility of common stock		111	%
Dividend yield	$	0.00
Expected life of warrants	0.92 years

A marketability discount was applied to the Passport shares and warrants.

At Passport's December 2010 Annual General Meeting, Passport increased its number of directors to eight, one of whom is the Company's President and another of whom is the Company’s Vice President of Operations.  As a result, the investment in Passport is classified as a related party asset.  Passport's name change occurred in December 2010.

There were no sales of marketable securities during the six-month period ended June 30, 2011.

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Proposed Merger

6 Months Ended

Jun. 30, 2011

Proposed Merger

11.  Proposed Merger

On April 8, 2011, the Company entered into a definitive agreement (the “Merger Agreement”) with Eternal Energy to merge the two companies.  Pursuant to the terms of the Merger Agreement, Eternal Energy formed a wholly owned subsidiary which will be merged into the Company, with the Company being the survivor as a wholly-owned subsidiary of Eternal Energy.  The ratio of stockholdings between the two companies at the time of closing is expected to be 80% for American Eagle’s legacy stockholders and 20% for Eternal Energy’s stockholders (exclusive of outstanding options to purchase shares of the Company’s common stock and shares of the Eternal Energy’s common stock).  Despite the fact the Company’s shareholders will hold shares of the combined company’s common stock that will represent approximately 80% of the then-outstanding shares and the stockholders of Eternal Energy will hold shares of the combined company’s common stock that will represent approximately 20% of the then-outstanding shares (in each case without taking into account any outstanding options to purchase shares of either company’s common stock), other factors present in the structure of the proposed business combination result in Eternal Energy being considered the accounting acquirer in the transaction.

The corresponding purchase price allocation and pro forma financial statements that reflect the proposed merger can be found in the footnotes to the condensed consolidated financial statements of Eternal Energy, as presented in Eternal Energy’s Quarterly Report on Form 10-Q, filed with the Securities Exchange Commission on August 18, 2011.

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Oil and Gas Properties

6 Months Ended

Jun. 30, 2011

Oil and Gas Properties

4.  Oil and Gas Properties

As of June 30, 2011 and December 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 proven reserves have been identified, and one pool that is not subject to amortization because no proven reserves have been assigned to the 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 June 30, 2011 and December 31, 2010, the net costs included in the Company’s cost centers were as follows:

	June 30, 2011				December 31, 2010
	Amortizable		Non-Amortizable		Amortizable		Non-Amortizable
United States	$	-	$	3,337,761	$	-	$	2,820,301
Canada		1,977,937		-		965,848		-
Total	$	1,977,937	$	3,337,761	$	965,848	$	2,820,301

The Company has entered into participation agreements in a number 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.

Glacier Prospect

In January 2011, the Company acquired an undivided 66.67% working interest in approximately 47,392 net acres located in Toole Country, Montana (the “Glacier Prospect”) for cash consideration of $1,195,624.  Subsequently, the Company sold one-half of its working interest to FX Energy, Inc. (“FX Energy”) for $597,812, which represents 50% of the original purchase price.  The Company has recorded a receivable from FX for this amount as of June 30, 2011.

As of June 30, 2011, the Company owns a 33% undivided working interest in approximately 63,630 gross acres (21,210 net acres) that is held by approximately 400 leases, with expiration dates ranging from May 2012 to June 2015, ratably.

Because no proven reserves have yet been identified, the Glacier 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 Glacier 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 Glacier Prospect.  The Glacier Prospect is evaluated for impairment during each reporting period.  There were no impairments evident as of June 30, 2011.

Spyglass Prospect

During the period from February 1, 2010 through June 18, 2010, the Company acquired oil and gas leases covering approximately 6,239 net acres located in Divide County, North Dakota (the “Spyglass Prospect”).  On June 18, 2010, the Company sold 50% of its interest in these oil and gas leases to Eternal Energy Corp. (“Eternal Energy”) and received, in exchange, a 50% working interest in approximately 4,480 acres located in southeastern Saskatchewan, Canada (the “Hardy Property”).  The Company reclassified 50% of the then carrying value of its investment in the Spyglass Prospect to the Hardy Prospect at the time of the exchange.  During the period from June 19, 2010 through May 27, 2011, the Company, along with its working interest partner, Eternal Energy, continued to acquire additional oil and gas leases within the Spyglass Prospect.

On May 27, 2011, the Company sold half of its working interest in the Spyglass Prospect to a third party.  Because the Company’s interest in the Spyglass Prospect represented a significant portion of the full cost pool, not subject to amortization, the Company has allocated the total cost of the full cost pool, not subject to amortization, among the individual prospects included within the pool, based on their estimated relative fair market values as of the date that the sale occurred.  Net cash consideration received from the sale totaled $3,777,793.  The allocated basis attributed to the portion of the Spyglass Prospect that was sold was $1,692,166, resulting in a gain of $2,085,627 on the transaction.

As of June 30, 2011, the Company still owns an undivided 25% working interest in approximately 68,962 gross acres (8,948 net acres) which is held by approximately 783 leases, with expiration dates ranging from February 2013 to August 2016, ratably.

Because no proven reserves have yet 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.  The Spyglass Prospect is evaluated for impairment during each reporting period.  There were no impairments evident as of June 30, 2011.

West Spyglass Prospect

In June, 2011, the Company began acquiring interests in oil and gas leases located in an area adjacent to the existing Spyglass Prospect.  The Company’s management refers to the adjacent acreage as the West Spyglass Prospect.  As of June 30, 2011, the Company owns a 100% working interest in approximately 7,467 gross acres (1,120 net acres) located within the West Spyglass Prospect.  The net acres are held by 21 leases, with expiration dates ranging from April 2014 to April 2016.  The Company’s management is currently evaluating this prospect.  No formal determination of the ultimate viability of this prospect is expected during the next twelve months.  Management has reviewed the carrying value of this property and determined that no impairment exists as of June 30, 2011.

Musta Prospect

During 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 May 27, 2011, the Company has not yet entered into any oil and gas leases within the Musta Prospect.  As part of the reallocation of total costs included in the full cost pool, not subject to amortization, associated with the partial sale of the Company’s interest in the Spyglass Prospect, the estimated fair market value assigned to the Musta Prospect was zero.  Management considers the Musta Prospect to be fully impaired as of June 30, 2011.

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.

To date, no drilling activities have occurred within the Texas Prospect nor are any drilling plans being considered in the near future.  As part of the reallocation of total costs included in the full cost pool, not subject to amortization, associated with the partial sale of the Company’s interest in the Spyglass Prospect, the estimated fair market value assigned to the Texas Prospect was zero.  Management considers the Texas Prospect to be fully impaired as of June 30, 2011.

Sidney North Prospect

In 2010, the Company acquired oil and gas leases on approximately 2,621 gross (624 net acres located in Richland County, Montana (the “Sidney North Prospect”) at an aggregate cost of $215,041. The acreage is held by approximately 24 leases, with expiration dates ranging from July 2013 to October 2015, ratably. The Company’s management is currently evaluating this prospect. No formal determination of the ultimate viability of this prospect is expected during the next twelve months. Management has reviewed the carrying value of this property and determined that no impairment exists as of June 30, 2011.

Hardy Property

As noted above, on June 18, 2010, the Company sold 50% of its working interest in the Spyglass Prospect to Eternal Energy 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. At the time, the Hardy Property contained one existing oil well (the Hardy 7-9 well) that, at acquisition, was shut in due to mechanical issues. As a result, the Company reclassified $766,620 (half of the carrying value of its Spyglass Prospect at that time) to the newly acquired Hardy Property, which is part of the full cost pool that is subject to amortization. The Company and Eternal Energy have agreed that Eternal Energy 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 for wells in which it elects to participate.

During August and September 2010, Eternal Energy performed a workover and recompletion of the Hardy 7-9 well at an aggregate cost of $475,274. The Company’s portion of the recompletion cost was $237,637. The well was returned to production in September 2010. In January 2011, the Hardy 7-9 well was taken off of production due to a parted rod string. The well was returned to production in March 2011, after repairs were made to replace the parted rod string. However, the well was again shut in during May and June 2011 due to weather conditions in the area. The Company’s share of the oil and gas sales generated by the Hardy 7-9 well during the three-month and six-month periods ended June 30, 2011 totaled $10,437 and $46,477, respectively.

On May 2, 2011, the Company and its working interest partner, Eternal Energy, entered into a farm-out agreement with Passport Energy, whereby Passport agreed to fund 38.5% of the drilling, completion and equipping costs of up to two future wells located within the Hardy Property in exchange for a 25% working interest in the each well. The remaining working interest will be shared equally between the Company and Eternal Energy.

During May and June 2011, the Company, along with its working interest partners, drilled and completed an offset well within the Hardy Property (the “Hardy 4-16” well) at an aggregate cost of approximately $1,538,125. The Company’s share of this cost is $472,973. The well was fracture stimulated in July 2011. The Company is currently evaluating the results of the fracture stimulation.

The net capitalized cost of the Hardy Property as of June 30, 2011 and December 31, 2010 is summarized below:

	June 30,			December 31,
	2011			2010
Acquisition costs	$	785,652		$	785,652
Development costs		1,334,364			293,492
		2,120,016			1,079,444
Cumulative depletion		(142,079	)		(113,596	)
Net capitalized cost	$	1,977,937		$	965,848

Using the units-of-production method to calculate depletion expense associated with its producing properties, the Company recognized depletion expense totaling $14,278 and $28,482 for the three-month and six-month periods ended June 30, 2011.  The Company did not recognize any depletion expense during the comparable periods in 2010 because it had no producing wells at the time.

As of June 30, 2011, the Company owns a 50% working interest in approximately 4,680 gross acres (4,280 net acres) held by leases.  The acreage is secured by 6 leases, each of which is scheduled to expire on April 1, 2014.  The Hardy Property represents the only property that is included in the portion of the Company’s full cost pool that is subject to amortization.

Well Summary

The following table summarizes the Company’s wells and drilling activity for the three-month periods ended June 30, 2011 and 2010:

	2011				2010
Exploratory wells:	U.S.		Canada		U.S.		Canada
Beginning of period		-		-		-		-
Purchased / acquired		-		-		-		-
Drilled		-		-		-		-
Abandoned		-		-		-		-
End of period		-		-		-		-

	2011				2010
Development wells:	U.S.		Canada		U.S.		Canada
Beginning of period		-		1		-		-
Purchased / acquired		-		-		-		1
Drilled		-		1		-		-
Abandoned		-		-		-		-
End of period		-		2		-		1

The following table summarizes the Company’s wells and drilling activity for the six-month periods ended June 30, 2011 and 2010:

	2011				2010
Exploratory wells:	U.S.		Canada		U.S.		Canada
Beginning of period		-		-		-		-
Purchased / acquired		-		-		-		-
Drilled		-		-		-		-
Abandoned		-		-		-		-
End of period		-		-		-		-

	2011				2010
Development wells:	U.S.		Canada		U.S.		Canada
Beginning of period		-		1		-		-
Purchased / acquired		-		-		-		1
Drilled		-		1		-		-
Abandoned		-		-		-		-
End of period		-		2		-		1

The Company did not drill any dry exploratory or developmental wells during the three-month and six-month periods ended June 30, 2011 and 2010.

Oil and Gas Concepts Purchased with Stock Options

On December 30, 2010, the Company granted options to purchase 2,141,842 shares of its common stock to four individuals, two of which are the Company’s officers, in connection with their contribution of certain intellectual property related to exploratory opportunities and transactions to the Company.  The intellectual property was initially assigned a value of $1,247,195, which equaled the value of the options granted as calculated using the Black-Scholes model.  The value of the contributed oil and gas concepts has subsequently been reassessed in connection with the reallocation of total costs included in the full cost pool, not subject to amortization, associated with the partial sale of the Company’s interest in the Spyglass Prospect

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Condensed Consolidated Statements of Comprehensive Income (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Net income (loss)	$ 1,438,073	$ (134,888)	$ 790,058	$ (208,742)
Other comprehensive losses, before tax:
Unrealized losses on securities	(44,404)		(70,938)
Total other comprehensive losses, before tax	(44,404)		(70,938)
Comprehensive income (loss)	$ 1,393,669	$ (134,888)	$ 719,120	$ (208,742)

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Condensed Consolidated Statements of Cash Flows (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2011
Recording of asset retirement obligation, discount	$ 21,150

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Equity Transactions

6 Months Ended

Jun. 30, 2011

Equity Transactions

9. Equity Transactions

Stock Splits

On January 12, 2011, the Company’s board of directors approved a reverse split of the Company’s common stock on a 1 new share for 1.5 old share basis.  As a result, the Company’s authorized common shares decreased from 150,000,000 to 100,000,000.  Par value remained unchanged.

Private Placements

In January 2010, the Company issued an aggregate of 6,666,667 restricted shares of its common stock at a price of $0.0015 to four individuals in a private transaction.  Two of the individuals are our sole officers at June 30, 2011.  Proceeds received from the sale of the stock totaled $10,000.

Also in January 2010, the Company issued 706,667 restricted shares of the Company’s common stock at a price of $1.125 per share in a private transaction.  Proceeds received from the sale of the stock totaled $795,000.

On December 14, 2010, the Company received an irrevocable commitment from a third party to purchase 5,833,333 shares of the Company’s common stock at a price of $0.60 per share, resulting in aggregate funds to be received of $3,500,000.  The Company collected $3,166,667 of subscriptions receivable during February and March 2011 and, as a result, issued 5,277,778 shares of its common stock.  As discussed in Note 10, the Company collected the remaining $333,333 of stock subscriptions receivable in April 2011.  As a result, the Company has presented stock subscriptions receivable of $2,666,667 as a current asset on its December 31, 2010 balance sheet, and $833,333 as a reduction of stockholder’s equity in its December 31, 2010 balance sheet.

Issuance of Warrants

In connection with the sale of the Convertible Debenture (Note 5), the Company granted to the purchaser of the Debenture warrants to purchase up to 416,667 shares of the Company’s common stock at an initial exercise price of $1.20 per share.  The warrants had an expiration date of April 15, 2012.

The initial exercise price of the warrants was subject to reduction in the event that the Company subsequently sold, or granted 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 was also subject to a reduction in the event that the Company should issue dividends, declare a stock split, or engage in a merger transaction.

As discussed in Note 5, the number of warrants outstanding was increased from 416,667 to 833,333 in December 2010 as a result of the reduction of the initial exercise price of $1.20 per share to an adjusted exercise price of $0.60 per share.  On December 15, 2010, the holder of the warrants fully exercised the warrants and received 833,333 shares of the Company’s common stock.  The Company received gross proceeds of $500,000 from the exercise of the warrants.

A summary of warrant activity for the six-month period ended June 30, 2011 and the eight-month period ended December 31, 2010 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contract		Intrinsic
	Warrants			Price		Term		Value
Outstanding at April 30, 2010		-			-		-		-
Issued		416,667		$	1.20	2 years			-
Increase due to reduction in exercise price		416,666		$	0.60		-		-
Exercised		(833,333	)	$	0.60		-		-
Outstanding at December 31, 2010		-			-		-		-
Issued		-		$	-		-		-
Exercised		-		$	-		-		-
Outstanding at June 30, 2011		-		$	-		-	$	-

The assumptions used in the Black-Scholes Option Pricing Model for the warrants granted during the year ended December 31, 2010 were as follows:

Risk-free interest rate		1.04	%
Expected volatility of common stock		250	%
Dividend yield	$	0.00
Expected life of warrants	2 years
Weighted average fair market value of warrants granted	$	0.62

Issuance of Stock Options

On December 30, 2010, the Company granted options to purchase 2,141,842 shares of its common stock to four individuals in connection with their contribution of certain intellectual property related to exploratory opportunities and transactions to the Company.  The options have a five-year life, vested immediately and have an exercise price of $0.60 per share.  The options expire on December 30, 2015.  The intellectual property was valued at $1,247,195, which equals the value of the options granted as calculated using the Black-Scholes Option Pricing Model.

A summary of stock option activity for the six-month period ended June 30, 2011 and the eight-month period ended December 31, 2010 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Stock		Exercise		Contract		Intrinsic
	Options		Price		Term		Value
Outstanding at April 30, 2010		-		-		-		-
Granted		2,141,842	$	0.60	5.0 years			-
Exercised		-		-		-		-
Forfeited		-		-		-		-
Cancelled		-		-		-		-
Outstanding at December 31, 2010		2,141,842	$	0.60	5.0 years			-
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited		-		-		-		-
Cancelled		-		-		-		-
Outstanding and Exercisable at June 30, 2011		2,141,842	$	0.60	4.5 years		$

The options outstanding as of June 30, 2011 and December 31, 2010 have an intrinsic value of $0.75 and $0.12 per share and an aggregate intrinsic value of $1,606,382 and $257,021, respectively.

The assumptions used in the Black-Scholes Option Pricing Model for the options granted during the eight-month period ended December 31, 2010 were as follows:

Market value of the Company's Common Stock	$	0.60
Risk free interest rate		2.06	%
Expected volatility of common stock		193	%
Dividend yield	$	0.00
Expected life of warrants	5 years

Shares Reserved for Future Issuance

As of June 30, 2011 and December 31, 2010, the Company has reserved 3,808,509 shares of its common stock in the event that the Debenture is converted prior to maturity and the outstanding options are exercised prior to their expiration.

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Condensed Consolidated Balance Sheets (USD $)	Jun. 30, 2011	Dec. 31, 2010
Current assets:
Cash	$ 3,157,630	$ 79,768
Stock subscription receivable		2,666,667
Receivables from working interest partners	1,127,387
Prepaid expenses	12,864
Total current assets	4,297,881	2,746,435
Oil and gas properties - subject to amortization, net of accumulated depletion of $142,079 and $113,596, respectively	1,977,937	965,848
Oil and gas properties - not subject to amortization	3,337,761	2,820,301
Total assets	9,741,005	6,730,037
Current liabilities:
Accounts payable and accrued liabilities	1,402,239	758,032
Amounts due to Eternal Energy Corp.	667,333	279,376
Due to related parties	14,000	20,000
Convertible debenture, net of discount of $496,601	503,399
Total current liabilities	2,586,971	1,057,408
Convertible debenture, net of discount of $926,333		73,667
Long-term asset retirement obligation, net of discount of $44,090 and $23,647, respectively	16,473	13,853
Total liabilities	2,603,444	1,144,928
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 150,000,000 shares authorized, 43,374,158 and 37,540,000 shares outstanding	43,374	37,540
Additional paid-in capital	7,224,331	7,230,166
Stock subscriptions receivable		(833,333)
Accumulated unrealized gains on marketable securities	101,880	172,818
Accumulated deficit	(232,024)	(1,022,082)
Total stockholders' equity	7,137,561	5,585,109
Total liabilities and stockholders' equity	9,741,005	6,730,037
Related party
Stockholders' equity:
Marketable securities	$ 127,426	$ 197,453