DOMESTIC U.S. OPPORTUNITIES

In 1997, American Energy purchased the interests of Luck Petroleum Corporation from Luck’s bankruptcy trustee in two oil and gas leases in Galveston County, Texas. The leases are situated in an area which is productive in multiple zones or horizons and the leases themselves have produced commercial quantities of oil and gas from both shallow and mid-range zones. In 1986, Luck Petroleum Corporation assigned these mid-range zones to Smith Energy, reserving for itself an “after-payout” 15% back-in working interest. Luck Petroleum Corporation also limited the depths assigned to Smith Energy, thereby resulting in depths generally greater than 10,000 feet being reserved to Luck Petroleum Corporation. The Company succeeded to the interests of Luck Petroleum Corporation as a result of the 1997 purchase from the bankruptcy trustee. With regard to the mid-range zones, once “payout” has occurred, as defined in the 1986 conveyance by Luck Petroleum Corporation to Smith Energy, the Company is entitled to receive 15% of the monthly working interest production from the existing Smith Energy wells on the leases. The Company has initiated a lawsuit against Smith Energy to establish these rights based upon the belief that payout has occurred.

The Smith Energy lawsuit does not pertain to the deep zones under the leases which were acquired from Luck Petroleum Corporation. Based upon Company research, these zones have development potential. Company management is exploring the various opportunities to realize value from these deep rights, including potential sale. The best course for these assets has not been determined, but the leases are held in force by third party production and, therefore, do not require development of these rights by a certain date. Management believes that both research and future negotiations will proceed toward a development path which best suits Company goals and cash flow positions.