Summary of AMERICAN OIL & GAS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our estimates and assumptions. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations.
Our critical accounting policies (the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments) are outlined in our notes to financial statements.
This quarterly report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements relate to future events or to our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. There are a number of risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, but are not limited to those described in this report, in Part II, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, and those described from time to time in our future reports filed with the SEC.

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Overview
We are an independent oil and gas exploration and production company, engaged in the exploration, development and acquisition of crude oil and natural gas reserves and production in the western United States. Our current operations are focused primarily in three main project areas that we call Douglas, Krejci and Goliath. Our Douglas project area includes our Fetter and West Douglas projects. We are also in the early stages of working in additional project areas where we are currently leasing additional acreage and performing geological evaluations. The following project updates should be read in conjunction with our Annual Report on Form 10-K for our fiscal year ended December 31, 2007. Fetter Project (Powder River Basin, Wyoming) Our Fetter project currently encompasses approximately 56,000 gross acres. We are essentially finished with drilling and completing initial wells pursuant to a participation agreement with Red Technology Alliance, LLC ("RTA") whereby RTA has agreed to pay 100% of the costs to drill and complete two horizontal wells and one vertical well in the Fetter project area. We have been carried through the tanks in this phase of the drilling program and own a 23.125% working interest in each of the three wellbores. RTA has earned a 25% working interest in the undrilled acreage, and our ownership at Fetter has decreased from a 92.5% working interest in approximately 48,000 net lease acres to a 69.375% working interest, giving us approximately 33,000 net acres at Fetter. North Finn LLC retains the remaining 5.625% working interest. The drilling and completion operations are project managed by Halliburton Energy Services, Inc. We are continuing the drilling program at Fetter and have drilled and completed the Hageman 11-22 and Hageman 11-22UK wells. Both of these wells were drilled in section 22 of T33N-R71W, Converse County, WY. In the Hageman 11-22 well, completion attempts have been made in each of the Dakota, Muddy, Mowry and Frontier formations, and the well is currently producing exclusively from the Frontier formation. The Hageman 11-22UK well has been completed in the Teapot formation at approximately 7,700 feet, and the well has not shown commercial success.
We expect near term future operations at Fetter will focus on completions in the Frontier and possibly the Niobrara formations, and we expect to drill both vertical and horizontal wells while we continue to evaluate the optimum drilling and completion approach. Although we have been able to establish compelling reserve potential in the Dakota and Mowry formations, completion efforts remain challenging, and we expect to focus on those formations again at a later date. By focusing on the Frontier and Niobrara formations, we anticipate being able to better build reserves and cash flow.

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Douglas Project Area - West Douglas Project (Powder River Basin, Wyoming) Subsequent to September 30, 2008, we sold our interest in the West Douglas and greater Douglas project areas and received approximately $26.4 million in sales proceeds.
Goliath Bakken Project (Williston Basin, North Dakota) Our Goliath project is located primarily in Williams and Dunn Counties, North Dakota in an area where we are primarily targeting the middle member of the Bakken formation in an emerging horizontal drilling play in the North Dakota Williston Basin. Our Goliath project area currently encompasses approximately 80,000 gross acres, and we own a 50% working interest in approximately 65,000 lease net acres.
During the third quarter we and other working owners signed a participation agreement with Red Technology Alliance LLC ("RTA"), which gives RTA the option to fund 100% of the drilling, completion and equipping of up to four horizontal Bakken wells at Goliath. RTA has committed to commence drilling the first Bakken well under this agreement within 90 days of our spudding the Viall 30-1 well that will target the Red River formation. Upon completion of the first Bakken well drilled pursuant to this participation agreement with RTA, RTA will own a 50% working interest in the well and the expected 1,280 acre spacing unit. Within 90 days of the completion of the first well, RTA has the option to commence a second Bakken well. Upon completion of the second well, RTA will own a 50% working interest in this well and spacing unit and will earn a 40% working interest in approximately 30,000 net undeveloped acres. Within 90 days of completion of the second well, RTA may elect to drill a third Bakken well in which it will own a 50% working interest (and in the spacing unit) and will earn a 40% working interest in an additional approximate 15,000 net undeveloped acres. Again, within 90 days of completion of the third well, RTA may elect to drill a fourth Bakken well in which it will own a 50% working interest (and in the spacing unit) and will earn a 40% working interest in the remaining approximate 15,000 net undeveloped acres. RTA will earn its proportionate rights to all formations in the Goliath project area with the exception of formations below the Three Forks Formation (which includes the Red River Formation) in a 40 square mile area surrounding the recently completed 10.5 square mile 3D seismic program that covers acreage on trend to our successful Solberg 32-2 well. We will be carried for a 25% working interest in all costs related to drilling, completing and equipping the four wells under this agreement. Should RTA elect to drill all four wells, we will retain 30% working interest in the Goliath project. Halliburton Energy Services Inc. will serve as project manager in the drilling and completion of these initial four wells.
We and the other working interest owners at Goliath (which does not include RTA) plan to drill the 14,400' deep Viall 30-1 well (formerly called the Machette 1-30 well) that will target the Stonewall, Red River and Winnipeg formations on a prospect identified by a recent 3D seismic program at Goliath. The Viall 30-1 will be located approximately 2.5 miles NW of the Solberg 32-2 well. Subject to rig availability, the well is planned to commence before year end 2008. Recent advancements in drilling and completion techniques, that have resulted in successful Bakken wells by other operators west of the Nesson Anticline, will be incorporated into our upcoming program. While these four wells will target completion in the Bakken formation, the Goliath drilling program will be designed to provide important reservoir and geological data from other prospective formations in the project area including the Three Forks/Sannish, Madison, Nisku, Duperow, Interlake, Stonewall, Red River and Winnipeg.

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Krejci Oil Project (Powder River Basin, Wyoming) Within our Krejci project, we are evaluating the productive potential of the Mowry formation at an approximate depth of 7,500 feet. We are focusing our efforts in and around the Krejci Field in Niobrara County, Wyoming. Our Krejci project area currently encompasses approximately 131,000 gross (approximately 49,000 net) acres.
We have participated in the drilling and completion of five wells so far in the Krejci project. Three of the wells drilled are producing and two wells are shut-in while we evaluate additional stimulation techniques. Although we currently have production from three of the five wells, we do not consider those wells to be commercially successful. Other companies are either drilling or planning to drill wells targeting the Mowry formation in the southern Powder River Basin, and we will be watching the level of success these other companies have with their drilling, stimulation and completion operations. Accordingly, we do not expect to continue drilling new wells at Krejci in the near term. Bigfoot Project
We currently control approximately 150,000 net acres in a project that we call Bigfoot. This is a shallow natural gas project located in the Rocky Mountain region. This project remains in the lease acquisition stage. Results of Operations
The following discussion should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. It also should be read in conjunction with the financial statements and notes thereto included in this report.
The Quarter Ended September 30, 2008 Compared with the Quarter Ended September 30, 2007
For the quarter ended September 30, 2008, we recorded a net loss attributable to common stockholders of $12,780,287 ($0.27 loss per common share, basic and diluted), as compared to a net loss attributable to common stockholders of $417,400 ($0.01 loss per common share, basic and diluted) for the quarter ended September 30, 2007. The $12.4 million increase in loss is primarily due to the current quarter's $18 million impairment ($11,430,000 net of related deferred tax benefit) and the $791,000 increase in oil & gas amortization expense computed on capitalized costs before recognition of the impairment. The $18 million impairment is primarily due to a $10 million decline in the present value of discounted future cash flows resulting from the decline in oil and gas prices at September 30, 2008 from prices at June 30, 2008, as discussed in Note 3 to the financial statements contained in this Form 10-Q.
The loss in the quarter ended September 30, 2008 is not indicative of results for the subsequent three months. Management anticipates reporting net income for the quarter ending December 31, 2008, due to recognition in that quarter of a $16.5 million gain on the sale of certain unproved properties discussed in Note 13 to the financial statements contained in this Form 10-Q.

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For the quarter ended September 30, 2008, we recorded total oil and gas revenues of $1,159,621 compared with $780,963 for the quarter ended September 30, 2007. The $378,658 increase from the 2007 quarter is attributable to higher oil and gas prices as shown in the table below:

                                                          Three months ended
                                                            September 30,
                                                         2008             2007
     Oil sold (barrels)                                      5,609          7,222
     Average oil price                               $      108.83     $    67.18

     Oil revenue                                     $     610,437     $  485,185


     Gas sold (mcf)                                         53,783         51,345
     Average gas price                               $       10.21     $     5.76

     Gas revenue                                     $     549,184     $  295,778


     Total oil and gas revenues                      $   1,159,621     $  780,963
     Less lease operating expenses                        (475,382 )     (213,708 )
     Less oil & gas amortization expense                (1,177,000 )     (386,000 )
     Less impairment                                   (18,000,000 )            -
     Less accretion of asset retirement obligation          (8,427 )       (6,537 )

     Producing revenues less direct expenses           (18,501,188 )      174,718
     Less depreciation of office facilities                (19,021 )      (16,381 )
     Less amortization of other intangible asset           (45,000 )      (45,000 )
     Less general and administrative expenses             (768,780 )     (969,845 )
     Add other revenue                                           -              -

     Loss from operations                            $ (19,333,989 )   $ (856,508 )


     Total barrels of oil equivalent ("boe") sold           14,573         15,780
     Revenue per boe sold                            $       79.57     $    49.49
     Lease operating expense per boe sold            $       32.62     $    13.54
     Amortization expense per boe sold               $       80.77     $    24.46

General and administrative expenses for the quarter ended September 30, 2008 decreased by $201,065 (21%) over the quarter ended September 30, 2007. The major changes in general and administrative costs were (1) a $180,000 reduction for identified internal employee costs that are capitalized as direct costs for the acquisition and maintenance of oil and gas property, (2) approximately $100,000 decrease in share based compensation arising from an increase in expected forfeitures of unvested stock options and (3) expense increases relating to new employees since September 30, 2007.
The Nine-month Period ended September 30, 2008 Compared with the Nine-month Period ended September 30, 2007
We recorded net loss attributable to common stockholders of $15,045,806 ($0.32 per common share, basic and diluted) for the nine-month period ended September 30, 2008, as compared to net loss attributable to common stockholders of $1,977,842 ($0.05 per common share, basic and diluted) for the nine-month period ended September 30, 2007. The approximately $13,100,000 increase in loss is primarily attributable to the third quarter's $18 million impairment ($11,430,000 net of related deferred tax benefit) and the third quarter's $791,000 increase in oil & gas amortization expense computed on capitalized costs before recognition of the impairment.

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For the nine months ended September 30, 2008, we recorded total oil and gas revenues of $2,604,786 compared with $1,580,553 for the nine months ended September 30, 2007. The $1,024,233 increase from the nine months ended September 30, 2007, is largely attributable to higher oil and gas prices as shown in the table below:

                                                   Nine months ended September 30,
                                                       2008                  2007
 Oil sold (barrels)                                         13,503             16,057
 Average oil price                               $          104.97       $      60.74

 Oil revenue                                     $       1,417,403       $    975,279


 Gas sold (mcf)                                            117,711            102,060
 Average gas price                               $           10.09       $       5.93

 Gas revenue                                     $       1,187,383       $    605,274


 Total oil and gas revenues                      $       2,604,786       $  1,580,553
 Less lease operating expenses                          (1,025,987 )         (466,444 )
 Less oil & gas amortization expense                    (1,887,000 )         (786,818 )
 Less impairment                                       (18,000,000 )                -
 Less accretion of asset retirement obligation             (24,759 )          (18,142 )

 Producing revenues less direct expenses               (18,332,960 )          309,149
 Less depreciation of office facilities                    (56,612 )          (47,631 )
 Less amortization of other intangible asset              (135,000 )         (135,000 )
 Less general and administrative expenses               (3,260,093 )       (3,271,647 )
 Add other revenue                                               -             12,000

 Income (loss) from operations                         (21,784,665 )       (3,133,129 )

 Total barrels of oil equivalent ("boe") sold               33,122             33,067
 Revenue per boe sold                            $           78.64       $      47.80
 Lease operating expense per boe sold            $           30.98       $      14.11
 Amortization expense per boe sold               $           56.97       $      23.79

We did not incur federal or state income tax liabilities for 2007 and through the first nine months of 2008. We expect to incur approximately $400,000 in income tax liabilities for the remainder of 2008 as discussed further in Note 7 to the financial statements contained in this Form 10-Q.
Dividends on preferred stock for the 2008 period declined $125,608 from the 2007 period due to conversion of a small number of preferred shares into common stock in early 2008 followed by conversion of all remaining preferred shares into common shares on July 22, 2008.
Liquidity and Capital Resources
At September 30, 2008, we had $5.3 million in cash and cash equivalents and $7.8 million in working capital. Working capital includes investments in Auction Rate Preferred Shares (ARPS), which had a fair value of $5,684,000 at September 30, 2008. Liquidity of the ARPS is discussed more fully in Notes 4 and 5 to the financial statements contained in this Form 10-Q.
In the first nine months of 2008, we incurred nearly $17 million of capital expenditures, as further explained in Note 3 to the financial statements contained in this Form 10-Q. We currently anticipate capital expenditures for the last three months of 2008 to be approximately $9 million. We intend to fund these capital expenditures, other commitments and working capital requirements from cash on hand at September 30, 2008 and with the $26.4 million in cash proceeds from the October 27, 2008 property sale discussed in Note 13 to the financial statements contained in this Form 10-Q.

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For the nine-month periods ended September 30, 2008 and September 30, 2007, our sources and uses of cash were as follows:
Net Cash Used By Operating Activities - Our net cash used by operating activities increased by $19,902 (from $1,098,375 for the nine months ended September 30, 2007, to $1,118,277 for the nine months ended September 30, 2008). The 2% net increase arises from several offsetting factors such as increased revenues partially offset by increased expenses and partially offset by delays in receiving payment of revenues on new wells' production until royalty ownerships are confirmed.
Net Cash Provided (Used) By Investing Activities - During the nine months ended September 30, 2008, we provided a net $1.6 million in cash from investing activities as compared with $10.5 million used in the nine months ended September 30, 2007. The $12.1 million change is primarily due to $12.1 million in redemptions and sales of short-term investments in equity securities during the nine months ended September 30, 2008.
Net Cash Provided By Financing Activities - In the nine months ended September 30, 2008, our only financing activities were to (i) borrow $8,600,000 in March and $2,325,000 in September, secured by our ARPS investments, and
(ii) repay the $8,600,000 by late June using proceeds from redemptions of some ARPS. During the nine months ended September 30, 2007, we received $26.9 million in cash provided from the sale of common stock in a public offering and from exercise of warrants and stock options.