American Energy Production (AENP) 10-Q Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission File number: 333-52812

American Energy Production, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE	74-2945581
(STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION)	(IRS EMPLOYER IDENTIFICATION NO.)

6073 Hwy 281 South, Mineral Wells, TX	76067
(BUSINESS ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)	(ZIP CODE)

P.O. Box 1406, Mineral Wells, TX	76068
(MAILING ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)	(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 410-8158

Indicate by check mark whether the registrant (1) has filed all

reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 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, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer [ ]Accelerated filer [ ]Non-Accelerated filer [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]

As of August 7, 2006, there were approximately 494,170,082 shares

of common stock, $0.001 par value, issued and outstanding.

American Energy Production, Inc.

Form 10-Q Index

June 30, 2006

-1-

 Page

Part I-Financial Information
Item 1. Financial Statements	3
Balance Sheet at June 30, 2006 (Unaudited)	4
Statement of Operations for the Six and Three Months Ended
June 30, 2006 and 2005 and the period from February 1, 2003
(inception of development stage) to June 30, 2006 (Unaudited)	6
Statement of Cash Flows for the Six Months Ended
June 30, 2006 and 2005 and for the period from February 1, 2003
(inception of development stage) to June 30, 2006 (Unaudited)	7
Schedule of Changes in Net Assets for the Six
Months ended June 30, 2006 (Unaudited)	9
Schedule of Investments at June 30, 2006 (Unaudited)	10
Notes to Financial Statements (Unaudited)	11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk	39
Item 4. Controls and Procedures	39
Part II-Other Information
Item 1. Legal Proceedings	40
Item 1A. Risk Factors	40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3. Defaults upon Senior Securities	41
Item 4. Submission of Matters to a Vote of Security Holders	41
Item 5. Other Information	41
Item 6. Exhibits	41
Signatures	42

-2-

PART I

FINANCIAL INFORMATION

Item 1-Financial Statements

-3-

American Energy Production, Inc.
(A Development Stage Company)
Balance Sheets
		June 30, 2006		December 31, 2005
		(Unaudited)
ASSETS
Current Assets
Cash	$	1,179,699	$	471,339
Total Current Assets		1,179,699		471,339
Property and equipment, net		23,115		27,029
Investments:
Investments in and advances to affiliates - majority-owned		20,064,670		18,758,170
Total Investments		20,064,670		18,758,170
Total Assets	$	21,267,484	$	19,256,539
LIABILITIES
Current Liabilities
Accounts payable	$	303,268	$	309,039
Due to related parties		88,725		102,725
Convertible debentures		57,967		57,967
Accrued interest payable		134,377		130,165
Accrued payroll taxes and penalties		65,800		62,798
Lease payable		16,131		16,131
Total Current Liabilities	$	666,268	$	678,825
Net Assets	$	20,601,216	$	18,577,714

See accompanying notes to unaudited financial statements.

-4-

American Energy Production, Inc.
(A Development Stage Company)
Balance Sheets (Continued)
		June 30, 2006			December 31, 2005
		(Unaudited)
Commitments and Contingencies (Note 7)
Stockholders' Equity
Convertible preferred stock, Series B, $0.0001 par value,
5,000,000 shares authorized, 3,500,000 issued and outstanding	$	350		$	400
Common stock, $0.0001 par value, 500,000,000 shares authorized
494,170,082 and 452,870,082 shares issued and outstanding
outstanding, respectively		49,417			45,287
Common stock issuable, $0.0001 par value, 75,000 shares		8			8
Additional paid in capital		23,998,249			21,542,084
Accumulated deficit		(9,360,491	)		(9,360,491	)
Retained earnings accumulated during development stage		6,815,683			7,159,926
		21,503,216			19,387,214
Less: Subscription Receivable		(902,000	)		(809,500	)
Total Stockholders' Equity		20,601,216			18,577,714
Total Liabilities and Stockholders' Equity	$	21,267,484		$	19,256,539
Net Asset Value Per Share	$	0.04		$	0.04

See accompanying notes to unaudited financial statements.

-5-

American Energy Production, Inc.

(A Development Stage Company)

Statements of Operations

(Unaudited)

														Period from
														February 20, 2003
	Six Months Ended						Three Months Ended							(Inception of
	June 30,							June 30,						Development Stage)
		2006			2005				2006			2005		to June 30, 2006
Investment and Pre-BDC Operating Income
Oil sales, net	$	-		$	-			$	-		$	-		$ 46,658
Investment income - portfolio investments
Interest		-			-				-			-		-
Dividends		-			-				-			-		-
Total Investment and Pre-BDC Operating Income		-			-				-			-		46,658
Operating Expenses
Compensation		60,000			60,000				30,000			30,000		842,596
Consulting		146,190			35,486				146,190			7,486		1,271,383
Depletion		-			-				-			-		3,987
Depreciation		3,914			3,914				1,968			1,968		85,874
Equipment rental		-			-				-			-		63,000
General and administrative		33,905			11,341				17,067			6,861		186,340
Production		626			-				626			-		143,349
Professional		112,394			73,653				87,928			68,507		487,093
Website		-			-				-			-		322,583
Total Operating Expenses		357,029			184,394				283,779			114,822		3,406,205
Net Investment and Pre-BDC Operating Loss		(357,029	)		(184,394	)			(283,779	)		(114,822	)	(3,359,548)
Other Income (Expense)
Gain on settlement of debt		-			-				-			-		18,364
Other income		20,000			-				-			-		44,155
Unrealized gain on investments		-			-				-			-		14,852,861
Interest expense		(4,212	)		(473,850	)			(2,163	)		(90,260		(4,552,984)
Payroll tax penalties		(3,002	)		(3,002	)			(1,501	)		(1,501		(20,165)
Loss on settlement		-			-				-			-		(167,000)
Total Other Income (Expense)		12,786			(476,852	)			3,664			(91,761	)	10,175,231
Net Decrease) in Net Assets (post BDC) and Net Income (pre BDC)	$	(344,243	)	$	(661,246	)		$	(287,443	)	$	(206,583	)	$ 6,815,683
Net Decrease in Net Assets (post BDC) and Net Income (pre BDC) Per Share-Basic and Diluted	$	(0.00	)	$	(0.00	)		$	(0.00	)	$	(0.00	)	$ 0.03
Weighted average Shares		483,873,137			306,171,168				485,967,060			306,171,168		248,560,500

See accompanying notes to unaudited financial statements

-6-

American Energy Production, Inc. (A Development Stage Company)
Statements of Cash Flows
(Unaudited)
								Period from
								February 20, 2003
	Six Months Ended							(Inception of
	June 30,							Development Stage	)
		2006			2005			to June 30, 2006
Cash Flows From Operating Activities:
Net decrease in net assets (post BDC)
and net income (pre BDC)	$	(344,243	)	$	(661,246	)	$	6,815,683
Adjustments to reconcile net decrease in net assets
(post BDC) and net income (pre BDC) to net cash used in operations:
Stock issued for debt and services		-			-			951,555
Stock issued for equipment		-			-			20,000
Stock issued for chemical		-			-			37,000
Stock issued in settlement		-			-			17,500
Unrealized gain on investments		-			-			(14,852,861	)
Gain on settlement of debt		-			-			(18,364	)
Loss on settlement		-			-			149,500
Interest expense related to convertible
debentures beneficial conversion feature		-			449,304			4,280,000
Compensation expense in excess of debt to officer		-			-			480,995
Amortization of deferred services		-			-			405,796
Depreciation		3,914			3,914			85,874
Depletion		-			-			3,987
Changes in operating assets and liabilities:
Decrease in accounts receivable - related party		-			-			3,484
Decrease in cash overdraft		-			-			(6,726	)
Decrease (increase) in accounts payable		(5,771	)		11,318			62,481
Decrease in due to related party		(14,000	)		(32,500	)		(60,776	)
Increase in accrued interest payable		4,214			24,545			220,237
Increase in accrued payroll taxes payable		3,001			3,002			20,163
Net Cash Used In Operating Activities		(352,885	)		(201,663	)		(1,384,472	)
Cash Flows From Investing Activities:
Prepaid acquisition cost disbursement		-			-			-
Purchase of equipment		-			-			(178,974	)
Advances to affiliates/investees		(1,306,500	)		(136,556	)		(4,681,842	)
Purchase of oil lease		-			-			(8,500	)
Net Cash Used In Investing Activities	$	(1,306,500	)	$	(136,556	)	$	(4,869,316	)

See accompanying notes to unaudited financial statements

-7-

American Energy Production, Inc.
(A Development Stage Company)
Statements of Cash Flows (Continued)
(Unaudited)
							Period from
							February 20, 2003
	Six Months Ended						(Inception of
	June 30,						Development Stage	)
		2006		2005			to June 30, 2006
Cash Flows From Financing Activities:
Proceeds for note payable - officer		-		-			32,070
Repayment of officer loan		-		-			(115	)
Proceeds from loan - other		-		-			54,396
Repayment of loan proceeds - other		-		(9,000	)		(105,976	)
Proceeds from issuance of convertible debentures		-		-			1,850,000
Proceeds from common stock issuable, net of
offering costs		2,335,245		185,000			4,575,878
Proceeds from repayment of subscription receivable		32,500		-			32,500
Proceeds from issuance of
common stock, net of offering costs		-		-			994,823
Repayment of lease payable		-		-			(87	)
Net Cash Provided By (Used In) Financing Activities		2,367,745		176,000			7,433,489
Net Increase (Decrease) in Cash		708,360		(162,219	)		1,179,699
Cash at Beginning of Period		471,339		268,665			-
Cash at End of Period		1,179,699		106,446			1,179,699
Cash interest paid	$	-	$	-		$	47,750
Supplemental disclosure of non-cash transactions
Asset acquisition paid with convertible note payable	$	-	$	-		$	2,000,000
Conversion of note payable to convertible debenture		-		-			2,000,000
Conversion of indebtedness to preferred stock		-		-			528,532
Conversion of preferred stock to common stock		150		-			150
Conversion of convertible debentures to common stock		-		400,000			1,850,000
Conversion of convertible debentures by advances		-		-			342,033
Asset acquisition paid with convertible debenture and stock		-		-			800,000
Asset acquisition paid with stock		-		-			72,000
Common stock issued for subscription receivable		250		25,000			809,750
Stock Subscription receivable (23,964,530 shares)		-		-			-
Transfer of assets and liabilities to affiliate:
Oil and gas properties and equipment, net		-		-			2,074,498
Convertible debenture		-		-			2,000,000
Accrued interest payable		-		-			71,014
Net receivable from transfer of assets and liabilities		-		-			3,484

See accompanying notes to unaudited financial statements

2

-8-

American Energy Production, Inc.

(A Development Stage Company)

Schedule of Changes in Net Assets

(Unaudited)

	Six
	Months Ended
		June 30, 2006
Decrease in net assets from operations:		(344,243	)
Net operating losses
Net decrease in net assets from operations		(344,243	)
Common Stock transactions		2,367,745
Total increase in Net Assets		2,023,502
Net Assets:
Beginning of Period		18,577,714
End of period		20,601,216

See accompanying notes to unaudited financial statements

-9-

American Energy Production, Inc.
(A Development Stage Company)
Schedule of Investments
June 30, 2006
(Unaudited)
				Percentage of
		Title of		Class Held on
Portfolio			Securities Held		a Fully Diluted		At June 30, 2006
Company	Industry		By The Company		Basis (2	)		Cost		Fair Value
Control Investments - Majority Owned (1)
Production Resources, Inc.	Oil and Gas Production		Common Stock		100	%	$	984,565	$	4,656,585
Oil America Group, Inc.	Oil and Gas Production		Common Stock		100	%		212,000		212,000
Bend Arch Petroleum, Inc.	Oil and Gas Production		Common Stock		100	%		3,956,688		15,137,529
AMEP Strategic Investments, Inc.	Investment		Common Stock		100	%		58,556		58,556
Total Control Investments - Majority Owned							$	5,211,809	$	20,064,670
Total Investments								5,211,809		20,064,670
Unearned Income								-		-
Total Investments, net of Unearned Income							$	5,211,809	$	20,064,670
(1) Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which we own more
than 50% of the voting securities of the company. If we own 100% of a Company, it is presented as majority owned.
(2) All common stock is in private companies, non-income producing and restricted at the relevant period end.

See accompanying notes to unaudited financial statements

-10-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

1.HISTORY AND NATURE OF BUSINESS

American Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our”) is a publicly traded business development company (“BDC”) that is engaged primarily in the investment in other companies that acquire, develop, produce, explore and sell oil and gas. The Company anticipates that its majority owned portfolio companies will be able to sell all oil that it can produce to petroleum refiners and marketers under the terms of short-term purchase contracts and at prices in accordance with arrangements that are customary in the oil industry. Our capital is generally used by our portfolio companies to finance growth and working capital.

The Company was f/k/a Communicate Now.com, Inc. and was incorporated on January 31, 2000 under the laws of the State of Delaware. On July 15, 2002, the Company changed its corporate name to American Energy Production, Inc.

On February 20, 2003, upon the acquisition of certain oil and gas assets, the Company entered into a new development stage. Activities during the development stage include acquisition of assets, obtaining geological reports, developing an implementation plan to extract oil and gas, completing initial sales of oil and seeking capital.

On January 12, 2004, the Company filed a Form N-54 with the Securities and Exchange Commission (“SEC”) to be regulated as a BDC under the Investment Company Act of 1940 the (“Act”). Accordingly, the Company is presently registered as an Investment Company under the Act. A BDC, like all mutual funds and closed-end funds, are regulated by the Investment Company Act of 1940, report to stockholders like traditional operating companies and file regular quarterly and annual reports with the SEC. A BDC is required to make available significant managerial assistance to their portfolio companies. The Company had determined that its operating model best approximated that of an investment company and intended to make investments into developing businesses in the oil and gas and other industries.

In May 2006, the Company received a letter of inquiry from the SEC, primarily related to its operations as a BDC and its compliance with the requirements thereto. In response to the SEC correspondence, the Company conducted a review of its compliance with the 1940 Act and determined that it was not in compliance with the 1940 Act. While the Company believed the BDC model was the right structure for it at the time that it elected such status, it has determined based upon its review that, going forward, it should, consistent with its current balance sheet, withdraw its election to be regulated as a BDC.

The Company is working with the SEC to resolve the issues detailed in their May 2006 correspondence and anticipates that, upon resolution of the issues, will request shareholder approval to file a Form N-54C, to withdraw its election to be regulated as a BDC under the 1940 Act. Subsequently, the Company intends to pursue a business model whereby it will be an oil and gas operating company with wholly-owned subsidiaries that are currently classified as majority owned portfolio companies as a BDC.

If shareholder approval is not obtained, management has serious doubts about the future of the Company as a going concern. In order to remain a BDC, the Company will have to expend significant resources to reach and maintain compliance with the extensive requirements of the 1940 Act, applicable to a BDC. Additionally, the Company will be required to modify its operating structure such that it will no longer own 100 percent of the outstanding assets of its portfolio companies. The impact of remaining a BDC will be more fully detailed in a forthcoming proxy statement to shareholders of the Company requesting approval to de-elect its BDC status.

The Company may face certain contingent liabilities as a result of potential actions by the SEC or others against the Company. As of the date of this report, management could not reasonably estimate such contingent liabilities, if any. The outcome of the above matter could have a significant impact on our ability to continue as a going concern.

2. GOING CONCERN

As reflected in the accompanying financial statements, the Company has a net loss of $344,243 and net cash used in operations of $352,885 for the six months ended June 30, 2006. Additionally, the Company is also in default on certain notes to banks, is in the development stage with no investment income as a BDC, and is subject to certain contingencies as discussed in Notes 1 and 7, which could have a material impact on the Company’s financial condition and operations. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise capital, generate revenues and withdraw its election to be a BDC as discussed previously. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The time required for us to become profitable is highly uncertain, and we cannot assure you that we will achieve or sustain profitability or generate sufficient cash flow from operations to meet our planned capital expenditures, working capital and debt service requirements. If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for our business. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.

We cannot assure you that we will generate sufficient cash flow from operations or obtain additional financing to meet scheduled debt payments and financial covenants. If we fail to make any required payment under the agreements and related documents governing our indebtedness or fail to comply with the financial and operating covenants contained in them, we would be in default. The financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities which may result from the inability of the Company to continue as a going concern.

-11-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Concentration

The accompanying unaudited financial statements are prepared in accordance with the guidance in the AICPA’s Audit and Accounting Guide, “Audits of Investment Companies”, Article 6 of Regulation S-X and in accordance with the 1940 Act and rules and regulations since the Company elected to be regulated as a BDC in January 2004.

The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States of America Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations.

It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments and certain non-recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.

For further information, refer to the audited financial statements and footnotes of the Company for the year ending December 31, 2005 included in the Company’s annual report on Form 10-K.

In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest.

The Company's portfolio companies have a concentration in the oil and gas business in the State of Texas, USA.

Accounting Estimates

When preparing financial statements in conformity with U.S. GAAP, our management must make estimates based on future events which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates in the accompanying financial statements includes, evaluation of a beneficial conversion feature in convertible debentures and convertible preferred stock, valuation of the fair value of financial instruments, valuation of non-cash issuances of common stock, the valuation of our investments and the valuation allowance for deferred tax assets.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with a maturity date of three months or less when purchased.

Value of Investments

Investments in securities of unaffiliated issuers represent holdings of less than 5% of the issuer’s voting common stock. Investments in and advances to affiliates are presented as (i) majority-owned, if holdings, directly or indirectly, represent over 50% of the issuer’s voting common stock, (ii) controlled companies if the holdings, directly or indirectly, represent over 25% and up to 50% of the issuer’s voting common stock and (iii) other affiliates if the holdings, directly or indirectly, represent 5% to 25% of the issuer’s voting common stock. Investments - other than securities represent all investments other than in securities of the issuer.

Investments in securities or other than securities of privately held entities are initially recorded at their original cost as of the date the Company obtained an enforceable right to demand the securities or other investment purchased and incurred an enforceable obligation to pay the investment price.

As a BDC, for financial statement purposes, investments are recorded at their value in our financial statements. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value as determined in good faith by the board of directors. Effective June 15, 2004, the Company acquired a privately held oil company; effective April 1, 2004, the Company formed a new controlled entity to transfer its assets and certain liabilities into for purposes of holding this entity as an investment and effective November 2004, the Company acquired Oil America Group (See Note 4 - Investments in and Advances to Affiliates).

Because there is typically no readily available market value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good faith by our board of directors pursuant to a valuation policy and consistent valuation process. Due to the inherent uncertainty of these valuations, the estimates may differ significantly from the values that would have been used had a ready market for the investments existed and the differences may be material. Our valuation methodology includes the examination of, among other things, the underlying portfolio company performance, financial condition and market changing events that impact valuation. Realized gains (losses) from the sale of investments and unrealized gains (losses) from the valuation of investments are reflected in operations during the period incurred.

-12-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

Beneficial Conversion Feature in Convertible Debentures

In accordance with EITF Issue 98-5, as amended by EITF 00-27, we must evaluate the potential effect of any beneficial conversion terms related to convertible instruments such as convertible debt or convertible preferred stock. The Company has issued convertible debentures. A beneficial conversion may exist if the holder, upon conversion, may receive instruments that exceed the value of the convertible instrument.

Valuation of the benefit is determined based upon various factors including the valuation of equity instruments, such as warrants, that may have been issued with the convertible instruments, conversion terms, value of the instruments to which the convertible instrument is convertible, etc. Accordingly, the ultimate value of the beneficial feature is considered an estimate due to the partially subjective nature of valuation techniques.

Fair Value of Financial Instruments

We define the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short maturity of those instruments. The estimated fair value of our other obligations is estimated based on the current rates offered to us for similar maturities. Based on prevailing interest rates and the short-term maturity of all of our indebtedness, management believes that the fair value of our obligations approximates book value at June 30, 2006.

Revenue Recognition

Prior to electing BDC status and transferring oil and gas assets to an investee, the Company previously sold crude oil under short-term agreements at prevailing market rates. Revenue from oil sales is recognized at the point of sale, that is, when oil is extracted from the tanks. Generally this is the point where the customer has taken title and has assumed the risks and rewards of ownership, the sales price is fixed or determinable and collectibility is reasonably assured.

Revenues from the current and future activities as a BDC which may include investment income such as interest income and dividends, and realized or unrealized gains and losses on investments will be recognized in accordance with the AICPA’s Audit and Accounting Guide, “Audits of Investment Companies”.

Income Taxes

Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes (“SFAS 109”).” Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.

Net Loss per Common Share

Basic earnings per share are computed only on the weighted average number of common shares outstanding during the respective periods. There were no additional items to adjust the numerator or denominator in the EPS computations.

Accumulated Other Comprehensive Income

As of the date of these Financial Statements, we had no components of other comprehensive income as defined by Statement of Financial Accounting Standards No. 130.

Recent Accounting Developments

The Financial Accounting Standards Board (“FASB”) has recently issued several new accounting pronouncements, which may apply, to the Company.

In December 2004, the FASB issued SFAS No. 153, entitled Exchanges of Non-monetary Assets -- An Amendment of APB Opinion No.29. SFAS No. 153 amends Opinion 29 to eliminate the exception for non-monetary exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of SFAS 153 did not impact the financial statements.

In May 2005, the FASB issued SFAS No. 154, entitled Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS No. 154 also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. SFAS No. 154 carries forward without change the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 also carries forward the guidance in APB Opinion No. 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective in fiscal years beginning after December 31, 2005. The Company is in the process of evaluating the impact of changing from a BDC to an operating company but anticipates that the adoption of SFAS No. 154 will not have a material effect on the Company’s financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised), entitled Share-Based Payment. This revised Statement eliminates the alternative to use APB Opinion No. 25’s intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. For public companies that file as a small business issuer, this Statement is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company’s first interim period applicable to SFAS 123 (Revised) is for the three months ended March 31, 2006. However, the adoption of SFAS 123 (Revised) does not have an impact to the financial statements since the Company, as a BDC, may no longer issue stock based compensation under the 1940 Act. However, since the Company intends to withdraw its election as a BDC, SFAS 123 (Revised) may have an impact to future financial statements of the Company.

-13-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

Reclassifications

Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 presentation.

INVESTMENTS IN AND ADVANCES TO AFFILIATES

As of June 30, 2006, investments consisted of the following:

		Cost		Fair Value
Investments in Equity Securities	$	5,211,809	$	20,064,670
Less: Unearned Income		-		-
Total	$	5,211,809	$	20,064,670

The Company’s investment portfolio is currently all in majority owned private companies that acquire, develop, produce, explore and sell oil and gas and is all held as non income producing and restricted common stock. The Company anticipates that its majority owned portfolio companies will be able to sell all the oil that they can produce to petroleum refiners and marketers under the terms of short-term purchase contracts and at prices in accordance with arrangements that are customary in the oil industry. Our capital is generally used by our portfolio companies to finance growth and working capital.

In June 2003, the Company entered into a non-binding Letter of Intent agreement to acquire substantially all of the assets and related liabilities of Production Resources, Inc. (“PRI”) with an option to acquire the outstanding voting common stock of PRI. The purchase price was $800,000 consisting of a $400,000 promissory note and $400,000 worth of Company common stock. The closing of the acquisition of PRI was scheduled to be effective on January 5, 2004, however, since several conditions precedent to closing, including the payment by the Company of the consideration, were not satisfied, the closing was delayed. The assets of PRI include over 1,500 producing acres and 193 existing oil wells fully equipped and capable of producing oil.

At June 15, 2004, the full consideration was paid by the Company and in accordance with the rules of a BDC; the $800,000 purchase price for the capital stock of PRI was recorded as an investment in affiliate - majority-owned. Additionally, the terms of the agreement exchanged the $400,000 promissory note for a $400,000 convertible debenture. As of June 15, 2004, the Company had advanced $366,598 of expenditures on behalf of PRI and effective with the acquisition, this amount was reclassed as a component of the investment in affiliate - majority-owned.

As of June 30, 2006, the total investment in and advance to affiliate for PRI reflected in the accompanying financial statements is $4,656,585, comprised of $984,565 of historical cost and an unrealized gain on investments of $3,672,020 that was included as a component of realized and unrealized gain (loss) from investments and Other Income (Expenses) in the Statement of Operations for the year ended December 31, 2005 (see detailed schedule of the investment in and advance to below).  

The $984,565 of historical cost is net of a $342,033 reduction of the $400,000 convertible debenture discussed above for advances made by the Company on behalf of PRI. The fair value of this investment was determined in good faith by the Company’s Board of Directors as of December 31, 2005 due to the inherent uncertainty of these valuations, the estimates may differ significantly from the values that would have been used had a ready market for the investments existed and that difference may be material.

As of June 30, 2006, the Company had made $3,956,688 of net advances on behalf of its majority-owned affiliate, Bend Arch Petroleum, Inc., (“Bend Arch”). As of June 30, 2006, the total investment in and advance to affiliate for Bend Arch reflected in the accompanying financial statements is $15,137,529, comprised of $3,956,688 of historical cost and an unrealized gain on investments of $11,180,841 (see detailed schedule of the investment in and advance to below). The unrealized gain on investments was included as a component of realized and unrealized gain (loss) from investments and Other Income (Expenses) in the Statement of Operations for the year ended December 31, 2005. The fair value of this investment was determined in good faith by the Company’s Board of Directors as of December 31, 2005 due to the inherent uncertainty of these valuations, the estimates may differ significantly from the values that would have been used had a ready market for the investments existed and that difference may be material.

-14-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

On February 20, 2003 (the “Acquisition Date”), the Company acquired from a certain related party assignor, who is controlled by the brother (see Note 5 - Debt and Note 8 - Related Party Transactions) of the Company’s president and a director, an interest in certain oil and gas leases, oil and gas wells located on those leases, surface and underground equipment, pipelines and other property and fixtures in or on the leases, rights of way, leases, contracts and agreements for pipeline compressor stations or boosters utilized in the operations of the facilities by the assignors. The above properties are located in Comanche and Eastland Counties, Texas, in the United States of America. The Company planned to extract and sell oil and gas from existing wells. The consideration paid was a convertible promissory note for $2,000,000 at 6% interest, maturing July 25, 2007. All the leases and wells are collateral for the promissory note.

The Company had evaluated that the convertible promissory note in accordance with EITF Issue No. 98-5 did not have any beneficial conversion feature as the exercise price of $1.00 exceeded the fair value of the Company’s common stock on the measurement date of $0.04.

On January 5, 2004, the $2,000,000 convertible promissory note (See Note 5 - Debt) was exchanged for a convertible debenture for the same amount and due January 1, 2007. The terms of the convertible debentures include an interest rate of 8% per annum and conversion at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert.

In accordance with EITF Issue 98-5, the Company has evaluated that the convertible debenture has a beneficial conversion feature as the exercise price is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by charging the statement of operations $2,000,000 for interest expense and $2,000,000 for additional paid-in capital. The conversion feature inherent in the convertible debentures was fully recognized as of June 30, 2004 since it was disposed of through assignment to Bend Arch, the Company’s investee (see below)

On June 15, 2004, the Company assigned $2,074,498 of oil and gas properties securing the $2,000,000 convertible debenture to Bend Arch. Accordingly, the Company transferred the $2,000,000 convertible debenture and $77,589 of accrued interest to Bend Arch on June 15, 2004.

On November 9, 2004, the Company signed a definitive agreement to purchase all of the outstanding shares of Oil American Group Inc. (“OAG”) in a stock for stock trade. The purchase price was 4,000,000 shares of restricted 144 Company stock and was valued at $72,000, or $0.018 per share, the fair market value on November 9, 2004. In accordance with the rules of a BDC, the $72,000 purchase price for the capital stock of OAG was recorded as an investment in affiliate - majority-owned. Additionally, the Company has made $140,000 of advances to OAG. Including the advances, the total of $212,000 has been recorded as investment in and advances to affiliates in the accompanying balance sheet (see detailed schedule of the investment in and advance to below). OAG is now a majority-owned affiliate of the Company, specializing in oil and gas acquisitions, drilling prospective properties and managing oil and gas partnerships.

As of June 30, 2006, the Company had made $58,556 of net advances on behalf of its majority-owned affiliate, AMEP Strategic Investments, Inc., (“AMEP Strategic”) and this amount has been recorded as investment in and advances to affiliates in the accompanying balance sheet (see detailed schedule of the investment in and advance to below).

In accordance with Rule 12-14 of Regulation S-X, the following information is provided for the Company’s Investments in and Advances to Affiliates balance as of June 30, 2006:

-15-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

Investments In and Advances to Affiliates
As of June 30, 2006
		Number of shares-
Name of issuer		principal
And title of		amount of bonds			Amount of
Issue or nature of		notes and other indebtedness			Equity in net profit and loss		Amount of dividends or		Value of each item at close
indebtedness		at close of period (1	)		for the period (2)		interest (3)		of period (4)
Investments in majority owned affiliates:
Production Resources, Inc.	$	184,565		$	800,000	$	-	$	984,565
Oil America Group, Inc.		140,000			72,000		-		212,000
Bend Arch Petroleum, Inc.		3,956,688			-		-		3,956,688
AMEP Strategic Investments		58,556			-		-		58,556
Total	$	4,339,809		$	872,000	$	-	$	5,211,809
(1) Represents net advances to by the Company on behalf of its majority owned affiliates.
(2) Represents historical purchase paid by the Company for the affiliate.
(3) No dividends or interest have been paid by the affiliates as of June 30, 2006.
(4) Represents the total historical cost without any unrealized gain or loss included (aggregate of (1), (2) and (3).
Advances To - January 1, 2006 to June 30, 2006
		December 31,2005			Advances		Repayments		June 30, 2006
Production Resources, Inc.	$	167,065		$	17,500	$	-	$	184,565
Oil America Group, Inc.		115,000			25,000		-		140,000
Bend Arch Petroleum, Inc.		2,675,688			1,281,000		-		3,956,688
AMEP Strategic Investments		75,556			-		17,000		58,556
Total	$	3,033,309		$	1,323,500	$	17,000	$	4,339,809

-16-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

5. DEBT

Our debt consisted of the following:

Lease Payable

	Jun. 30,2006		Dec. 31, 2005
$21,238 computer equipment lease, bearing interest at 10% per annum	$	16,131	$	18,153

On April 16, 2001, the Company leased computer equipment under a 36-month lease that was accounted for as a capital lease in the amount of $21,238 and at June 30, 2006, the balance of principal was $16,131. The amount is personally guaranteed by a former officer/director and a current officer/director of the Company. The lease was secured by all leased equipment and perfected by a financing statement; however, the Company liquidated the equipment and paid the office space lessor the $4,000 proceeds. As of June 30, 2006, the Company has recorded a total of $9,406 in accrued interest for this lease payable in the accompanying Balance Sheet.

In November 2003, an agreement was reached with the lessor to forgive the outstanding principal and accrued interest on the lease payable once the transfer of 100,000 shares of the Company’s common stock personally held by the Company’s president and director occurs. The president of the Company transferred these shares on September 15, 2003. As of June 30, 2006, the transaction has not been finalized as the lessor has not agreed to the settlement. The Company expects to fully resolve this matter in the future at which time the value of the shares exchanged and any related gain or loss will be determined and recognized - (see Note 7 - Commitments and Contingencies and Note 8 - Related Party Transactions).

Notes payable - Banks 

		Jun. 30, 2006		Dec. 31, 2005
$70,000 bank revolving line of credit, dated March 12, 2001, bearing interest at default rate of 18% per annum, due March 11, 2002. In Default at December 31, 2004.	$	-	$	17,464
$19,396 bank automobile loan, dated July 6, 2004, bearing interest at 6.99% per annum, monthly installments of principal and interest with final payment due in February 2006.		-		13,818
	$	-	$	31,282

On March 12, 2001, we obtained a revolving bank line of credit in the amount of $70,000, of which $17,464 was outstanding at June 30, 2005. The interest rate was originally at 11.5% but has converted to the default rate of 18% per annum as the line of credit was due March 11, 2002 and was in default. This line of credit was secured by all equipment, which had been repossessed as of December 31, 2001 and $23,075 was applied to the balance. In August 2005, the entire balance was paid in full resulting in zero outstanding.

On December 31, 2001, we obtained a bank line of credit for $42,000, of which $41,799 was outstanding and in default at March 31, 2004. In June 2004, the lender agreed to a settlement payment in the amount of $30,000, which the Company made and the difference of $11,799 and accrued interest of $6,565 was recorded as a gain on settlement of debt in the accompanying Statement of Operations.

In July 2004, we obtained a bank automobile loan in the amount of $19,396 (including accrued interest of 6.99% per annum). Monthly principal and interest payments of $1,077 are due with final payment in February 2006 and the loan is secured by the automobile. In August 2005, the entire balance was paid in full resulting in zero outstanding.

Loans and Note Payable Settlement with Related Party

Beginning in January of 2002 and through December 2003, the Company’s officer/director advanced the Company $52,615 for payment of corporate expenses. In August 2003, $115 was repaid leaving a balance outstanding of $52,510 at December 31, 2003. The loan was non-interest bearing, unsecured and due on demand.

On January 5, 2004, the entire $52,510 amount outstanding was exchanged for designated Series A preferred stock. (See Note Payable - Related Party below, Note 6 - Stockholders’ Equity and Note 8 - Related Party Transactions.

At December 31, 2003, $411,595 of Notes Payable to related party were outstanding and in default. The Notes Payable had been payable to a former officer/director of the Company and who is a principal stockholder and has been transferred to the current president in a private transaction.

On January 5, 2004, the Board of Directors approved the issuance of 3,500,000 designated Series A preferred stock in exchange for the conversion of the total $464,005 of indebtedness owed to the Company’s president. The $464,005 indebtedness comprised the entire $52,510 of loan payable - related party (see above) and $411,495 of Note Payable - related party. In connection with the forgiveness of the note principal, the Company’s president forgave the related accrued interest totaling $64,527 in a separate transaction on the same date. As a result, the Company has treated the $64,527 as a contribution of capital at the date of debt forgiveness by recording additional paid in capital. The Company recognized a compensation expense of $480,995 based on the estimated $945,000 value of the 3,500,000 common shares, which was based on the quoted trade price per share of $0.09 on the settlement date (See Note 6 - Stockholders Equity).

In July 2003, the Company received $35,000 from an unrelated party. As of December 31, 2003, the Company had repaid the principal portion of this loan for $35,000 and $2,000 in accrued interest.

-17-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

Convertible Debentures:

	Jun. 30, 2006		Dec. 31, 2005
$250,000 Convertible Debenture, dated May 20, 2004, bearing interest at 8% per annum and due on December 1, 2005	$	-	$	70,000
$400,000 Convertible Debentures, dated June 15, 2004, bearing interest at 8% per annum and due on December 1, 2005		57,967		400,000
$400,000 Convertible Debentures, dated August 17, 2004, bearing interest at 8% per annum and due on December 1, 2005		-		400,000
Less: Debt discount		-		(583,639	)
	$	57,967	$	286,361

In May 2004, the Company received $250,000 in gross proceeds from the issuance of a convertible debenture. The terms of the convertible debenture includes an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert and is due December 1, 2005. On May 17, 2004, the convertible debenture holder elected to convert $30,000 of the balance into common shares of the Company and as a result of the conversion, 3,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On June 10, 2004, the convertible debenture holder elected to convert $85,000 of the balance into common shares of the Company and as a result of the conversion, 8,500,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On July 19, 2004, the convertible debenture holder elected to convert $65,000 of the balance into common shares of the Company and as a result of the conversion, 6,500,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). The remaining $70,000 of the $250,000 convertible debenture was shown as outstanding even though the convertible debenture holder informed the Company that an election was made June 1, 2004 to convert the balance into common shares of the Company. Subsequently, the Company’s transfer agent determined that the conversion did occur and the common shares were issued to the convertible debenture holder even though the transfer agent report erroneously excluded the common share issuance. As of December 31, 2005, the transfer agent has corrected their report and show 7,000,000 shares of common stock issued to the convertible debenture holder at a price of $0.01 per share (50% of the closing share price on June 1, 2004, the effective conversion price.

As a result of the above conversions, all $250,000 of the convertible debenture has been converted.

In accordance with EITF Issue 98-5 as amended by EITF Issue 00-27, the Company has evaluated that the $250,000 convertible debenture discussed above has a beneficial conversion feature as the exercise price for is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by recording a debt discount as a contra account to the convertible debenture for $250,000 and $250,000 to additional paid-in capital. The entire $250,000 of debt discount has been amortized to interest expense.

Effective June 15, 2004, the Company issued a $400,000 convertible debenture to PRI in accordance with the acquisition agreement between PRI and the Company. The terms of the convertible debenture includes an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert and is due December 1, 2005. An agreement was reached whereby $342,033 of advances made by the Company to PRI during 2005, were used to reduce the convertible debenture balance to $57,967 as of June 30, 2006. The Company anticipates that an agreement will be structured whereby additional advances made by the Company will be utilized to eliminate the remaining balance. However, no agreement has been reached as of the date of these Financial Statements and the $57,967 balance is in default as the due date was December 1, 2005.

In accordance with EITF Issue 98-5, as amended by EITF Issue 00-027, the Company has evaluated that the convertible debenture discussed above has a beneficial conversion feature as the exercise price is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by recording a debt discount as a contra account to the convertible debenture for $400,000 and $400,000 to additional paid-in capital. The debt discount was amortized over the debt term of 17.5 months or through the due date of December 5, 2005. The entire $400,000 of debt discount has been amortized to interest expense.

In August 2004, the Company received $1,000,000 in gross proceeds from the issuance of a convertible debenture. The terms of the convertible debenture includes an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert and is due December 1, 2005. On September 14, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On September 22, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On October 8, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On October 12, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On November 4, 2004, the convertible debenture holder elected to convert $200,000 of the balance into common shares of the Company and as a result of the conversion, 20,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On January 18, 2005, the convertible debenture holder elected to convert $38,462 of the balance into common shares of the Company and as a result of the conversion, 2,500,000 shares of common stock were issued at $0.015386 per share. On January 31, 2005, the convertible debenture holder elected to convert $38,462 of the balance into common shares of the Company and as a result of the conversion, 2,500,000 shares of common stock were issued at $0.015386 per share. On February 2, 2005, the convertible debenture holder elected to convert $153,846 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.015386 per share. On February 14, 2005, the convertible debenture holder elected to convert $169,231 of the balance into common shares of the Company and as a result of the conversion, 11,000,000 shares of common stock were issued at $0.015386 per share.

As a result of the above conversions, all $1,000,000 of the convertible debenture has been converted.

-18-

In accordance with EITF Issue 98-5 as amended by EITF Issue 00-27, the Company has evaluated that the $1,000,000 convertible debenture discussed above has a beneficial conversion feature as the exercise price for is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by recording a debt discount as a contra account to the convertible debenture for $1,000,000 and $1,000,000 to additional paid-in capital. The entire $1,000,000 of debt discount has been amortized to interest expense.

On February 20, 2003, the Company executed a $2,000,000 convertible note payable accruing interest at 6% with a company controlled by the brother of the Company’s sole officer and director (See Note 8 - Related Party Transactions). The maturity date was July 25, 2007. The note was payable at maturity in preferred stock of the Company at $1.00 per share and. the preferred stock was convertible into common stock at $1.00 per share. Additionally, at the option of the holder, the debt may be settled for cash. The note is secured by a deed of trust and a lien against the leases and the wells and other liens against the same leases and wells of $25,000.

On January 5, 2004, the $2,000,000 convertible note payable was exchanged for a convertible debenture for the same amount and due January 1, 2007. The terms of the convertible debenture include an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert.

In accordance with EITF Issue 98-5 and 00-27, the Company has evaluated that the convertible debenture has a beneficial conversion feature as the exercise price is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by charging the statement of operations $2,000,000 for interest expense and $2,000,000 for additional paid-in capital. The conversion feature inherent in the convertible debenture was fully recognized as of June 30, 2004 since it was disposed of through assignment to Bend Arch, the Company’s investee (see below).

On June 15, 2004, the Company assigned the oil and gas properties secured by the $2,000,000 convertible debenture to its majority-owned affiliate Bend Arch. Accordingly, the $2,000,000 convertible debenture along with $77,589 of accrued interest was transferred to Bend Arch on June 15, 2004 (See Note 4 - Investments in and Advances to Affiliates).

In January 2004, the Company received $600,000 in gross proceeds from the issuance of two convertible debentures, one for $100,000 and the other for $500,000. The terms of the convertible debentures include an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert. $100,000 of the convertible debentures was due and payable on March 14, 2004 and $500,000 was due and payable on December 31, 2005.

On February 5, 2004, the $100,000 convertible debenture holder elected to convert the entire balance into common shares of the Company and as a result of the conversion, 3,333,333 shares of common stock were issued at $0.03 per share (50% of the closing share price on February 5, 2004). In March, 2004, $200,000 of the $500,000 convertible debenture was converted into 20,000,000 shares of common stock at $0.01 (50% of the closing price). In May 2004, the remaining $300,000 of convertible debenture was converted into 30,000,000 shares of common stock at $0.01 per share (50% of the closing price).

In accordance with EITF Issue 98-5 and 00-27, the Company has evaluated that the convertible debentures discussed above have a beneficial conversion feature as the exercise price is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by charging the statement of operations $600,000 for interest expense and the balance sheet $600,000 for additional paid-in capital. The conversion feature inherent in the convertible debentures was fully recognized as of June 30, 2004 since they were fully converted as of June 30, 2004.

In January 2004, the Company issued a $30,000 convertible debenture to a consultant for services related to the filing by the Company to become a BDC as mentioned previously. The terms of the convertible debenture include an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert. On February 5, 2004, the convertible holder elected to convert the entire balance into common shares of the Company and 1,000,000 shares of common stock were issued at $0.03 per share (50% of the closing share price on February 5, 2004).

In accordance with EITF Issue 98-5, the Company has evaluated that the $30,000 convertible debenture discussed above has a beneficial conversion feature as the exercise price for is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by charging the statement of operations $30,000 for interest expense and $30,000 for additional paid-in capital. The conversion feature inherent in the convertible debentures was fully recognized as of June 30, 2004 since they were fully converted as of June 30, 2004.

During 2004, 131,333,333 shares of common stock were issued from the conversion of $1,410,000 of convertible debentures discussed above.

During 2005, 33,000,000 shares of common stock were issued from the conversion of $470,000 of convertible debentures discussed above.

As of June 30, 2006, the Company has recorded $124,971 of accrued interest for the convertible debentures outstanding. As discussed previously, several convertible debenture holders have elected to convert all or a portion of the convertible debentures into common stock. However, the conversion has not included accrued interest and although the Company believes that no further common stock will be issued for these conversions, the accrued balance for these converted debentures is included in the accrued interest balance as of June 30, 2006.

-19-

6. STOCKHOLDERS’ EQUITY

Capital Structure

We are authorized to issue up to 500,000,000 shares of our common stock, $0.0001 par value per share, of which 494,170,082 were issued and outstanding as of June 30, 2006. Additionally, as of June 30, 2006, 75,000 shares were issuable as discussed below.

On December 18, 2003, the Company’s shareholders approved an increase in authorized common shares from 100,000,000 to 500,000,000 and the authorization of 5,000,000 shares of preferred stock, $0.0001 par value per share. Under the terms of the designation, these Series A shares are not entitled to dividends. The shares are convertible, at the option of the holder, at any time, into three times as many common shares as Series A, preferred that are held. There are no liquidation rights or preferences to Series A, preferred stock holders as compared to any other class of stock. These shares are non-voting, however, the holders, as a class may elect two directors. As of June 30, 2006, 3,500,000 preferred shares were issued and outstanding and held entirely by the Company’s president and a director..

Issuances (Retirements) of Preferred Stock:

On January 5, 2004, the Board of Directors approved the issuance of up to 4,000,000 shares of designated Series A preferred stock. Under the terms of the designation, these Series A shares are not entitled to dividends. The shares are convertible, at the option of the holder, into three times as many common shares as Series A, preferred that are held. There are no liquidation rights or preferences to Series A, preferred stock holders as compared to any other class of stock. These shares are non-voting, however, the holders, as a class may elect two directors.

On January 5, 2004, the Board of Directors approved the issuance of 3,500,000 of the 4,000,000 designated Series A preferred stock in exchange for the conversion of $464,005 of indebtedness owed to the President of the Company. The $464,005 indebtedness comprised the entire $52,510 of loan payable - related party and $411,495 of Note Payable - related party balances as recorded at December 31, 2003 (See Note 5 - Debt). The $411,495 note indebtedness had been acquired by the president in a private transaction from a former officer. In connection with the forgiveness of the note principal, the Company’s president forgave the related accrued interest totaling $64,527 in a separate transaction on the same date. As a result, the Company has treated this as a contribution of capital at the date of debt forgiveness by recording additional paid in capital.

In accordance with APB 26, paragraph 20 and Practice Alert Bulletin 2000-1, the Company has evaluated that the $480,995 excess of the value of the preferred stock, which was computed based on the conversion ratio and quoted trade price of the common stock on the settlement date, over the debt qualified as compensation expense and was recorded as such as of June 30, 2004 with an offset to additional paid-in capital. Due to the valuation method of the preferred stock, there was no remaining value for a beneficial conversion feature.

On January 5, 2004, the Board approved the issuance of the remaining 500,000 shares of Series A preferred stock to three consultants for services performed in relation to the filing for the Company to become a Business Development Company as discussed previously. The 500,000 shares were issued as follows: 200,000 shares to one consultant for consulting services rendered, 200,000 shares to one consultant for consulting services rendered and 100,000 shares to one attorney for legal services rendered.

In accordance with FAS 123, the Company has valued the preferred stock, based on the conversion rate and quoted trade price of the common stock on the grant date, at $135,000 which was recorded in operations for the year ended December 31, 2004 with an offset to additional paid-in capital. Due to the valuation method of the preferred stock, there was no remaining value for a beneficial conversion feature.

In February 2006, the 500,000 shares of Series A preferred stock discussed above were converted into 1,500,000 shares of common stock in accordance with the conversion rights discussed previously.

Issuances of Common Stock:

On January 24, 2003, the Company’s Board of Directors adopted a resolution to remove from registration any and all remaining shares of common stock registered under its Form S-8, which have not been issued or reserved for issuance under the Employee Benefit Plan as filed August 23, 2002.

On January 27, 2003, the Company’s Board of Directors adopted a resolution to create the 2003 Employee Benefit Plan. The Company has authorized for registration 25,000,000 shares of its common stock on Form S-8. Under the terms of this Employee Benefit Plan, the Company issued 24,750,000 shares of its common stock to various unrelated third parties for future services. The shares are valued at the Company’s quoted market trading price at each grant date since the shares are deemed fully vested at the grant date and the related expense will be recognized over the term of the respective service agreement. The following provides details of these grants:

-20-

On January 1, 2003, 4,000,000 common shares were granted for a six-month service period valued at $0.02 per share based on the closing quoted market trading price or $80,000. All shares were fully vested at the grant date. For the year ended December 31, 2003, the Company recognized $80,000 of consulting expense.

On January 29, 2003, 2,000,000 common shares were granted for a six-month service period valued at $0.02 per share based on the closing quoted market trading price or $40,000. All shares were fully vested at the grant date. For the year ended December 31, 2003, the Company recognized $40,000 of consulting expense.

In February 2003, the Company reached an oral agreement with a former consultant to issue additional common stock under the terms of the initial agreement. In May 2003, the Company issued an additional 250,000 shares of its common stock valued at $0.07 per share based on the closing quoted market trading price or $17,500. All shares were fully vested at the grant date. These shares were issued as part of a settlement with the consultant based on work performed and to be performed. The $17,500 has been recorded as Loss on Settlement in the accompanying Statement of Operations for the year ended December 31, 2003.

On February 8, 2003, 5,100,000 common shares were granted for a one-year service period valued at $0.07 per share based on the closing quoted market trading price or $357,000. All shares were fully vested at the grant date. For the year ended December 31, 2003, the Company recognized $327,750 of website expense and $29,750 was recorded as deferred services in stockholders’ deficiency at December 31, 2003.

On March 1, 2003, 10,000,000 common shares were granted for a six-month service period valued at $0.03 per share based on the closing quoted market trading price or $300,000. All shares were fully vested at the grant date. During the year ended December 31, 2003, the Company recognized $300,000 of consulting expense.

On March 28, 2003, 1,700,000 common shares were granted for a one-year service period valued at $0.038 per share based on the closing quoted market trading price or $64,600. All shares were fully vested at the grant date. During the year ended December 31, 2003, the Company recognized $48,450 of consulting expense and recorded $16,150 as deferred services in stockholders’ deficiency at December 31, 2003.

On July 11, 2003, the Company issued 1,700,000 shares of common stock for consulting services to be rendered. The term of the agreement was for six months. At the date of grant, the shares had a fair value of $0.07 per share based on the closing quoted market trading price or $119,000. All shares were fully vested at the grant date. During the year ended December 31, 2003, the Company recognized $119,000 of consulting expense.

On July 23, 2003, the Board of Directors adopted a resolution to issue up to 30,000,000 shares of common stock in connection with a Regulation “S” offering (amended, see below). On August 4, 2003, the Company issued 10,975,227 shares of common stock under this offering that were sold overseas through an unrelated third party for gross proceeds of $690,087. The unrelated party retained an offering cost equivalent to 91% of gross proceeds totaling $621,079, which was offset against additional paid in capital. The Company received net proceeds of $69,008.

On August 10, 2003, the Company issued 1,000,000 shares of common stock and at the date of grant, the shares had a fair value of $0.011 per share based on the closing quoted market trading price or $11,000. The shares were issued in exchange for $11,000 of oil chemical to be used by the Company. As the oil chemical was to be utilized for testing purposes, the Company has recorded the $11,000 as production expense in the accompanying Statement of Operations for the year ended December 31, 2003.

On August 10, 2003, the Company issued 500,000 shares of common stock and at the date of grant, the shares had a fair value of $0.011 per share based on the closing quoted market trading price or $5,500. The shares were issued for $5,500 in cash proceeds.

On August 15, 2003, the Company issued 2,100,000 shares of common stock for consulting services to be rendered. The term of the agreement was for four months. At the date of grant, the shares had a fair value of $0.024 per share based on the closing quoted market trading price or $50,400. All shares were fully vested at the grant date. During the year ended December 31, 2003, the Company recognized $50,400 of consulting expense.

On August 15, 2003, the Company issued 700,000 shares of common stock for consulting services to be rendered. The term of the agreement was for four months. At the date of grant, the shares had a fair value of $0.024 per share based on the closing quoted market trading price or $16,800. All shares were fully vested at the grant date. During the year ended December 31, 2003, the Company recognized $16,800 of consulting expense.

Under the terms of the same Regulation “S” offering discussed previously, during the year ended December 31, 2003, an additional 21,964,530 shares were sold to subscribing investors at an average of $0.055 per share (See Common Stock Issuable below). Gross proceeds were $1,218,387. The unrelated party retained an offering cost equivalent to 88% of gross proceeds totaling $1,076,272 that was offset against additional paid in capital. The Company received net proceeds of $137,065. Subsequently, the Company had offering cost transactions that adjusted the total offering costs by $702 to $1,075,570.

As a result of the Regulation “S” offering discussed above, in total, the Company issued 32,939,757 shares of common stock and recognized $211,824 of net proceeds.

On October 15, 2003, the Company’s Board of Directors adopted a resolution to increase the number of shares allowed to be sold under the terms of the Regulation “S” stock offering to 35,000,000 shares.

In January 2004, 8,500,000 of previously cancelled shares were reissued with an approved vote to increase the authorized shares (See above).

-21-

During 2004, 131,333,333 shares of common stock were issued from the conversion of $1,410,000 of convertible debentures discussed above (see Note 5 - Debt).

In March 2004, the Company determined that 1,000,000 shares had inadvertently been transferred by the Company’s sole officer and director to the former president of PRI (this transfer occurred in 2003). The Company is in the process of having this error corrected and the shares transferred will be rescinded and the 1,000,000 common shares returned to the sole officer and director of the Company.

Effective March 29, 2004, the Company received a $500,000 commitment to purchase 4,545,454 shares of common stock at $.11 per share in accordance with the terms of a $10,000,000 commitment from an unrelated third party. At March 31, 2004, $300,000 of the commitment was received as cash proceeds and the remaining $200,000 was received in April 2004. In May 2004, the 4,545,454 shares of common stock were issued to the investor.

In March 2004 the Company issued 5,000,000 shares of common stock at $0.01 per share for $50,000 of proceeds.

In April 2004, the Company issued 5,000,000 shares of common stock at $0.01 per share to an investor for $50,000 of cash proceeds.

In May 2004, the Company issued 1,200,000 shares of common stock at $0.01 per share to two investors for $12,000 of cash proceeds.

In May 2004, the Company issued 200,000 shares of common stock at $0.01 per share to an individual in exchange for a $2,000 subscription receivable.

In May 2004, the Company issued 700,000 shares of common stock at $0.01 per share to two individuals in exchange of oil chemical to be used by the Company. The stock was valued at the quoted trade price of $0.037 per share or $26,000 and charged to the Statement of Operations.

In May and June 2004, the Company issued 2,000,000 shares of common stock at $0.01 per share for services provided in relation to the Company becoming a BDC.

In June 2004, the Company issued 1,090,909 shares of common stock at $.11 per share for $120,000 in accordance with the terms of a $10,000,000 commitment from an unrelated third party.

In June 2004, the Company issued 5,000,000 shares of common stock to PRI in consideration of the $400,000 due per the acquisition agreement (see Note 4 - Investments in and Advances to Affiliates).

In August 2004, the Company issued 909,090 shares of common stock at $.11 per share for $100,000 in accordance with the terms of a $10,000,000 commitment from an unrelated third party.

In September 2004, the Company issued 6,000,000 shares of common stock at $0.01 per share to three individuals in exchange for a $60,000 subscription receivable. In October 2004, the Company received $60,000 of cash proceeds from the three individuals in payment of the subscription receivable.

In September 2004, the Company issued 2,000,000 shares of common stock at $0.01 per share to an individual for services provided. The service agreement between the Company and the individual incorrectly indicated that 200,000 shares were to be issued instead of 2,000,000 and the Company is in the process of correcting the agreement to reflect the 2,000,000 shares. The common stock was valued at the contemporaneous sales price of $0.01 per share or $20,000 and charged to consulting expense.

In September 2004, the Company issued 2,000,000 shares of common stock at $0.01 per share to an individual in exchange for assets to be used by a Company investee. Accordingly, the $20,000 was recorded as an investment.

In January and February 2005, the Company issued a total of 26,000,000 shares of common stock at $0.015386 per share from the conversion of convertible debentures.

-22-

In March 2005, the Company issued 2,500,000 shares of common stock at $0.01 per share to an entity in exchange for a $25,000 subscription receivable. The stock was valued at $0.01, the fair market value on the date of the transaction. Subsequently, the shares were issued in August 2005. As of December 31, 2005, the subscription receivable was still outstanding.

In June 2005, the Company issued 4,000,000 shares of common stock that was issuable at March 31, 2005. On November 9, 2004, the Company signed a definitive agreement to purchase all of the outstanding shares of Oil American Group Inc. (“OAG”) in a stock for stock trade. The purchase price was 4,000,000 shares of restricted 144 Company stock and was valued at $72,000, or $0.018 per share, the fair market value on November 9, 2004.

In June 2005, the Company received $185,000 of proceeds from the sale of 18,500,000 shares of common stock to two groups. The stock was valued at $0.01, the fair market value on the date of the sale. Subsequently, the shares were issued in August 2005.

In November 2005, the Company issued 909,090 shares of common stock at $0.03575 per share to an entity in exchange for a $32,500 subscription receivable. The stock was valued at $0.03575, the fair market value on the date of the transaction. Subsequently, in February 2006, $32,500 of cash proceeds was received in payment of the subscription receivable.

In December 2005, the Company’s transfer agent determined that 15,000,000 shares that were actually issued to a third party in June 2004 had been erroneously excluded by the transfer agent from the reports provided the Company. Additionally, it was determined that the shares should not have been issued at all as the Company did not give authority to the transfer agent for the issuance of the shares. The transfer agent corrected their report and now show the 15,000,000 shares of common stock issued to the third party at a price of $0.05 per share (the fair market value closing share price in December 2005). Accordingly, the Company recorded the fair value amount of $750,000 as a subscription receivable and is still outstanding as of March 31, 2006. The Company is in discussions with both the third party and the transfer agent as to the settlement of this amount. As of the date of these financial statements, no settlement has been completed.

In January 2006, the Company’s transfer agent determined that an additional 2,500,000 shares that were actually issued to a third party in January 2005 had been erroneously excluded by the transfer agent from the reports provided the Company. Additionally, it was determined that the shares should not have been issued at all as the Company did not give authority to the transfer agent for the issuance of the shares. The transfer agent corrected their report and now show the 2,500,000 shares of common stock issued to the third party at a price of $0.05 per share (the fair market value closing share price in January 2006). Accordingly, the Company recorded the fair value amount of $125,000 as a subscription receivable and is still outstanding as of June 30, 2006. The Company is in discussions with both the third party and the transfer agent as to the settlement of this amount. As of the date of these financial statements, no settlement has been completed.

In February 2006, 500,000 shares of the Company’s Series A preferred stock discussed above were converted into 1,500,000 shares of the Company, $0.001 par value common stock in accordance with the conversion rights discussed previously.

As a result of the July 2005 1-E filing discussed previously, through June 30, 2006, the Company received $4,575,878 of proceeds from the offering, net of $280,627 of expenses, through the sale of 165,230,758 shares of the Company’s $0.001 par value common stock (See Note 7 - Commitments and Contingencies). This includes net proceeds of $2,335,245 from the offering through the sale of 37,300,000 shares of the Company’s $0.001 par value common stock during the six months ended June 30, 2006.

As discussed previously, In May 2006, the Company received a letter of inquiry from the SEC, primarily related to its operations as a BDC and its compliance with the requirements thereto. In response to the SEC correspondence, the Company conducted a review of its compliance with the 1940 Act and determined that it was not in compliance with the 1940 Act. In that letter, the SEC noted the potential compliance issues with the Company’s 1-E filing. In response, the Company voluntarily suspended the offering and does not anticipate resuming the offering.

-23-

Common Stock Issuable:

On June 30, 2003, the Company cancelled 212,500 shares of its common stock previously issued to a former consultant for non-performance under the terms of the original agreement. The transaction was treated as a settlement. The shares were returned to the treasury. The transaction was treated as a recapitalization by charging the par value of the common stock and crediting additional paid in capital for $21. These shares were properly included and accounted for in the loss per share computation for the periods they were outstanding.

On August 13, 2003, the Company cancelled 2,474,400 shares of its common stock previously issued to a former attorney for non-performance under the terms of the original agreement. The transaction was treated as a settlement. The shares were returned to the treasury. The transaction was treated as a recapitalization by charging the par value of the common stock and crediting additional paid in capital for $247. These shares were properly included and accounted for in the loss per share computation for the periods they were outstanding.

On September 2, 2003, the Company cancelled 200,000 shares of its common stock previously issued to a former consultant for non-performance under the terms of the original agreement. The transaction was treated as a settlement. The shares were returned to the treasury. The transaction was treated as a recapitalization by charging the par value of the common stock and crediting additional paid in capital for $20. These shares were properly included and accounted for in the loss per share computation for the periods they were outstanding.

In December 2003, 8,500,000 of the 21,964,530 shares issued from the Regulation “S” offering were cancelled because the Company had over sold its authorized maximum of 100,000,000 common shares. As a result, the Company has reclassed these shares as issuable. On December 18, 2003, the shareholders of the Company approved an increase in the authorized shares from 100,000,000 to 500,000,000.

As of December 31, 2005, 75,000 shares remained issuable to an overseas investor who had subscribed for an amount exceeding the shares that were actually issued under the terms of the Regulation “S” offering in 2003. The investor had paid for the full subscription, and as such, no amounts are due to the Company.

In July 2004, the Company entered into a consulting agreement with a third party for services during a six-month period through December 2004. In consideration of service performed, the Company will pay the consultant $5,000 monthly, comprised of $3,000 in cash and $2,000 in common stock. As of December 31, 2004, $30,000 of consulting fees were due under the agreement but the Company had paid only $18,000 of this amount, leaving a balance due of $12,000, comprised of $12,000 in common stock due. Accordingly, the Company has recorded $12,000 as accounts payable in the accompanying Financial Statements as of December 31, 2005.

In March 2006, the Company received $193,920 from a third party as a result of the July 2005 1-E filing discussed previously. As a result of the transaction, 4,000,000 shares are issuable as of March 31, 2006 and were valued at $0.04848, 80% of the fair market value on the date of the transaction. Subsequently, in April 2006, the 4,000,000 shares were issued by the Transfer Agent and are now outstanding as of June 30, 2006.

As of June 30, 2006, the Company has 75,000 shares issuable as detailed above.

Common Stock Cancelled:

On June 30, 2003, the Company cancelled 212,500 shares of its common stock previously issued to a former consultant for non-performance under the terms of the original agreement. The transaction was treated as a settlement. The shares were returned to the treasury. The transaction was treated as a recapitalization by charging the par value of the common stock and crediting additional paid in capital for $21. These shares were properly included and accounted for in the loss per share computation for the periods they were outstanding.

On August 13, 2003, the Company cancelled 2,474,400 shares of its common stock previously issued to a former attorney for non-performance under the terms of the original agreement. The transaction was treated as a settlement. The shares were returned to the treasury. The transaction was treated as a recapitalization by charging the par value of the common stock and crediting additional paid in capital for $247. These shares were properly included and accounted for in the loss per share computation for the periods they were outstanding.

On September 2, 2003, the Company cancelled 200,000 shares of its common stock previously issued to a former consultant for non-performance under the terms of the original agreement. The transaction was treated as a settlement. The shares were returned to the treasury. The transaction was treated as a recapitalization by charging the par value of the common stock and crediting additional paid in capital for $20. These shares were properly included and accounted for in the loss per share computation for the periods they were outstanding.

In December 2003, 8,500,000 of the 21,964,530 shares issued from the Regulation “S” offering were cancelled because the Company had over sold its authorized maximum of 100,000,000 common shares. As a result, the Company has reclassed these shares as issuable. On December 18, 2003, the shareholders of the Company approved an increase in the authorized shares from 100,000,000 to 500,000,000 (See Capital Structure above).

-24-

7. COMMITMENTS AND CONTINGENCIES

From time to time we may become subject to proceedings, lawsuits and other claims in the ordinary course of business including proceedings related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.

The Company is subject to various lawsuits and unasserted claims from vendors for non-payment of accounts payable plus related legal fees. Excluding legal fees, which cannot be estimated, the Company has included all amounts in its accounts payable as of June 30, 2006.

In November 2003, a settlement was reached with a lessor to forgive the outstanding principal and interest on the related note payable resulting from leased computers once the transfer of 100,000 shares personally held by the Company’s president and previous sole director occurs (see Note 5 - Debt and Note 8 - Related Party Transactions). As of June 30, 2006 the transaction has not been finalized as the lessor has not agreed to the settlement. However, the 100,000 shares were transferred to the lessor in September 2003. The Company expects to fully resolve this matter in the future at which time the value of the shares exchanged and any related gain or loss will be determined and recognized.

The Company has included $65,800 of unpaid Federal payroll taxes and employee withholdings and related penalties and interest in its accrued expenses as of June 30, 2006. Such amounts are subject to potential federal tax liens.

We had intended to make an election to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code. In order to maintain our status as a regulated investment company, we are required to (i) distribute at least 90% of our investment company taxable income and 90% of any ordinary pre-RIC built in gains we recognize between January 1, 2004 and December 31, 2013, less any taxes due on those gains to avoid corporate level taxes on the amount distributed to stockholders (other than any built in gain recognized between January 1, 2004 and December 31, 2013) and (ii) distribute (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) to avoid an excise tax. We intended to make distributions on a quarterly basis to our stockholders of all of our income, except for certain net capital gains and adjustments for long-term incentive compensation expense. We intended to make deemed distributions to our stockholders of any retained net capital gains. However, as previously discussed, the Company is in the process of withdrawing its election to be a BDC. Accordingly, the Company will no longer be subject to the 1940 Act and will not have the option of being taxed as a regulated investment company under Subchapter M if the Internal Revenue Code.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the Investment Company Act of 1940 and due to provisions in our credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure shareholders that they will receive any distributions or distributions at a particular level.

In December 2005 and January 2006, the Company determined that certain issuances of common stock had not been properly disclosed in reports made by the Company’s transfer agent. The Company discussed these items with the transfer agent and as of June 30, 2006, the transactions have been reconciled and recorded properly in the Company records. However, the Company believes that two of these transactions, an unauthorized issuance by the transfer agent of 15,000,000 shares and an additional unauthorized issuance of 2,500,000 shares, should be reimbursed to the Company by either the third party who received the shares or the transfer agent. The Company has recorded the fair market valuation of the two transactions in the amount of $875,000 as a subscription receivable as of June 30, 2006 and is in discussions with both the third party and the transfer agent to resolve the issue. As of the date of these financial statements, no resolution of the matter has been completed.

As previously discussed, in May 2006, the Company received a letter of inquiry from the SEC, primarily related to its operations as a BDC and its compliance with the requirements thereto. In response to the SEC correspondence, the Company conducted a review of its compliance with the 1940 Act and determined that it was not in compliance with the 1940 Act. While the Company believed the BDC model was the right structure for it at the time that it elected such status, it has determined that, going forward, it should, consistent with its current balance sheet, withdraw its election to be regulated as a BDC.

The Company is working with the SEC to resolve the issues detailed in their May 2006 correspondence and anticipates that, upon resolution of the issues, will request shareholder approval to file a Form N-54C, to withdraw its election to be regulated as a BDC under the 1940 Act. Subsequently, the Company intends to pursue a business model whereby it will be an oil and gas operating company with wholly-owned subsidiaries that are currently classified as majority owned portfolio companies as a BDC.

If shareholder approval is not obtained, management has serious doubts about the future of the Company as a going concern. In order to remain a BDC, the Company will have to expend significant resources to reach and maintain compliance with the extensive requirements of the 1940 Act, applicable to a BDC.

Additionally, the Company will be required to modify its operating structure such that it will no longer own 100 percent of the outstanding assets of its portfolio companies. The impact of remaining a BDC will be more fully detailed in a forthcoming proxy statement to shareholders of the Company requesting approval to de-elect its BDC status.

The Company may face certain contingent liabilities as a result of potential actions by the SEC or others against the Company. As of the date of this report, management could not reasonably estimate such contingent liabilities, if any. The outcome of the above matter could have a significant impact on our ability to continue as a going concern.

-25-

8. RELATED PARTY AND AFFILIATE TRANSACTIONS

The following disclosures comply with generally accepted accounting principles and the disclosure requirements under the SEC Regulation SX, Article 6, with regard to affiliate investments and transactions. See Schedule of Investments for identification of Investments in Affiliates.

On February 20, 2003, the Company acquired certain oil and gas properties for $2,000,000 from a company controlled by the brother of the Company's president and previous sole director in exchange for a market rate promissory note. The promissory note was subsequently exchanged for a convertible debenture and transferred to a majority-owned affiliate (See Note 5 - Debt). The oil and gas properties were also transferred to that same majority-owned affiliate (See Note 4 - Investments).

During the year ended December 31, 2003, the Company’s president and previous sole director paid $32,297 of general and administrative fees and professional fees on behalf of the Company. Additionally, during the year ended December 31, 2003, the Company repaid $115 of previously loaned funds. As of December 31, 2003, the Company owed $52,510 for these loans and these transactions were classified as Loan Payable - Officer. (See discussion below on January 5, 2004 for conversion of Loan Payable - Officer to Preferred Stock).

During the year ended December 31, 2003, the Company’s president and previous sole director paid $8,000 in prepaid acquisition costs. The loan is non-interest bearing, unsecured and due on demand.

In November 2003, a settlement was reached with a lessor to forgive the outstanding principal and interest on the related note payable resulting from leased computers once the transfer of 100,000 shares personally held by the Company’s president and previous sole director occurs (See Note 5 - Debt and Note 7 - Commitments and Contingencies). The Company’s president and previous sole director personally guaranteed the obligation. As of June 30, 2006, the transaction has not been finalized as the lessor has not agreed to the settlement. However, the 100,000 shares were transferred to the lessor in September 2003. The Company expects to fully resolve this matter in the future at which time the value of the shares exchanged and any related gain or loss will be determined and recognized.

In December 2003, a cash settlement was reached for a lawsuit from one stockholder who invested $100,000 in the Company for 100,000 common shares during a private placement. The settlement of $149,500 was paid by the Company’s sole officer/director personally and the Company has been released from all obligations related to the lawsuit.

In December 2003, the Company recognized $6,648 of revenue from the sale of oil to a third party. Payments from oil sales are remitted by customers, to an operator, who is a company controlled by the brother of the Company’s president and previous sole director. The operator then remits these payments to the Company. At December 31, 2003, the related amount owed the Company was classified as Accounts Receivable - Related Party in the accompanying Financial Statements.

We currently do not have a lease, are not paying rent on our space and it is being provided to the Company by our president and a director free of charge.

Effective July 1, 2003, the Company entered into a salary and equipment rental agreement with its president and previous sole director. Under the terms of the agreement, the Company will pay a salary of $10,000 per month and $3,500 in equipment rental per month for the use of the Company’s president’s personal pickup truck, car, pulling unit, winch truck, backhoe and water truck used in the field operations. Additionally, the president and previous sole director has from time to time, advanced expenses of the Company from his personal funds. At December 31, 2003, the accrued balance owed to the president and previous sole director was $220,455. During the year ended December 31, 2004, the Company accrued $162,000 of expense related to the salary and rental agreement, composed of $120,000 for compensation and $42,000 for equipment rental fee. During the year ended December 31, 2005, the Company accrued 120,000 for compensation. Additionally, the president and previous sole director advanced $26,270 of funds on behalf of the Company and the Company repaid $355,000 resulting in an accrual balance of $102,725 as of December 31, 2005. During the six months ended June 30, 2006, the Company accrued $60,000 for compensation, repaid $84,000 and the president and previous sole director advanced $10,000 of funds on behalf of the Company. As a result, the accrued balance as of June 30, 2006 is $88,725 and is classified as a component of Due To Related Parties in the accompanying Financial Statements.

On January 5, 2004, the Board of Directors approved the issuance of 3,500,000 designated Series A preferred stock in exchange for the conversion of $464,005 of indebtedness owed to the Company’s president. The $464,005 indebtedness comprised the entire $52,510 of loan payable - related party and $411,495 of Note Payable - related party. The $411,495 note indebtedness had been acquired by the president in a private transaction from a former officer. In connection with the forgiveness of the note principal, the Company’s president forgave the related accrued interest totaling $64,527 in a separate transaction on the same date. As a result, the Company has treated the $64,527 as a contribution of capital at the date of debt forgiveness by charging additional paid in capital. The Company recognized $480,995 of compensation expense.

During the six months ended June 30, 2006, the Company advanced directly or indirectly, $1,306,500 of net funds to its majority owned portfolio companies. In total, the Company has advanced $4,681,842 of net funds to its majority owned portfolio companies and is included in the asset account entitled “Investment in and advances to affiliates-majority-owned.

-26-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

9. FINANCIAL INFORMATION Following is a schedule of financial highlights for the six months ended June 30, 2006:		Six Months
		Ended
		June 30, 2006
Per Share Data:
Net Asset Value at Beginning of Period (1)	$	0.04
Net Operating Loss (1)		0.00
Net increase in Stockholders Equity from Income		0.00
Net Asset Value at End of Period	$	0.04
Per Share Market Value at End of Period	$	0.07
Total Return (2)		-86	%
Common Stock Outstanding and Issuable at End of Period		494,245,082
Ratio/Supplemental Data:
Net Assets at End of Period	$	20,216,216
Ratio of Operating Expenses to Net Assets		2	%
Ratio of Net Operating Loss to Net Assets		2	%
(1) Based on Total Shares Outstanding and Issuable
(2) Total return equals the increase of the ending market value over the December 31, 2005 price of $0.05 per share, divided by the beginning price.

-27-

American Energy Production, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

(Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis of our financial condition and results of operations contained in this section should be read in conjunction with our financial statements and related notes and schedules thereto appearing elsewhere in this Quarterly Report, as well as the sections entitled "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes and schedules thereto included in our annual report on Form 10-K for the year ended December 31, 2005.

This Quarterly Report, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", and "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

•  economic downturns or recessions may impair our portfolio companies' performance;

•  a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

•  the risks associated with the possible disruption in the Company's operations due to terrorism;

• future changes in laws or regulations and conditions in our operating areas; and

•  the risks, uncertainties and other factors we identify from time to time in our filings with the Securities and Exchange Commission, including our Form 10-Ks, Form 10-Qs and Form 8-Ks.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report. We undertake no obligation to update such statements to reflect subsequent events.

OVERVIEW

American Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our”) is a publicly traded BDC that is engaged primarily in the investment in other companies that acquire, develop, produce, explore and sell oil and gas. The Company anticipates that its majority owned portfolio companies will be able to sell all oil that it can produce to petroleum refiners and marketers under the terms of short-term purchase contracts and at prices in accordance with arrangements that are customary in the oil industry. Our capital is generally used by our portfolio companies to finance growth and working capital.

Prior to becoming a BDC effective in January 2004, the Company was engaged directly in the above activities since February 20, 2003, when it acquired certain oil assets and began its new development stage - (See below). Prior to that, the Company was f/k/a Communicate Now.com, Inc. and was incorporated on January 31, 2000 under the laws of the State of Delaware. On July 15, 2002, the Company changed its corporate name to American Energy Production, Inc.

On February 20, 2003, upon the acquisition of certain oil and gas assets, the Company entered into a new development stage. Activities during the development stage include acquisition of assets, obtaining geological reports, developing an implementation plan to extract oil and gas, completing initial sales of oil and seeking capital.

On January 12, 2004, the Company filed a Form N-54 with the SEC to be regulated as a BDC under the Investment Company Act of 1940 the (“Act”). Accordingly, the Company is presently registered as an Investment Company under the Act. A BDC, like all mutual funds and closed-end funds, are regulated by the Investment Company Act of 1940, report to stockholders like traditional operating companies and file regular quarterly and annual reports with the SEC. A BDC is required to make available significant managerial assistance to their portfolio companies. The Company had determined that its operating model best approximated that of an investment company and intended to make investments into developing businesses in the oil and gas and other industries.

As reflected in the accompanying financial statements, the Company has a net loss of $344,243 and net cash used in operations of $352,885 for the six months ended June 30, 2006. Additionally, the Company is also in default on certain notes to banks and is in the development stage with no revenues as a BDC. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise capital, generate revenues and withdraw its election to be a BDC as discussed previously. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The time required for us to become profitable is highly uncertain, and we cannot assure you that we will achieve or sustain profitability or generate sufficient cash flow from operations to meet our planned capital expenditures, working capital and debt service requirements. If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for our business. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.

If we fail to make any required payment under the agreements and related documents governing our indebtedness or fail to comply with the financial and operating covenants contained in them, we would be in default. The financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities which may result from the inability of the Company to continue as a going concern.

-28-

The Company’s long-term viability as a going concern is dependent on certain key factors, as follows:

·   The Company’s ability to continue to obtain sources of outside financing to support near term operations and to allow the Company to continue to make investments.

·   The Company is working with the SEC to resolve the issues detailed in their May 2006 correspondence and anticipates that, upon resolution of the issues, will request shareholder approval to file a Form N-54C, to withdraw its election to be regulated as a BDC under the 1940 Act. Subsequently, the Company intends to pursue a business model whereby it will be an oil and gas operating company with wholly-owned subsidiaries that are currently classified as majority owned portfolio companies as a BDC.

·   If shareholder approval is not obtained, management has serious doubts about the future of the Company as a going concern. In order to remain a BDC, the Company will have to expend significant resources to reach and maintain compliance with the extensive requirements of the 1940 Act, applicable to a BDC. Additionally, the Company will be required to modify its operating structure such that it will no longer own 100 percent of the outstanding assets of its portfolio companies. The impact of remaining a BDC will be more fully detailed in a forthcoming proxy statement to shareholders of the Company requesting approval to de-elect its BDC status.

·   The Company may face certain contingent liabilities as a result of potential actions by the SEC or others against the Company. As of the date of this report, management could not reasonably estimate such contingent liabilities, if any. The outcome of the above matter could have a significant impact on our ability to continue as a going concern.

In accordance with BDC regulations, our majority-owned portfolio companies are not consolidated and accordingly, their financial information is not included in our accompanying audited Financial Statements. However, a significant portion of the proceeds received by the Company from the issuance of convertible debentures and the sale of common stock has been utilized as advances to our majority owned portfolio companies.

The following represents unaudited supplemental information for the six months ended June 30, 2006 for our majority-owned portfolio companies.

Description		Production Resources, Inc.		Bend Arch Petroleum, Inc.			Oil America Group			AMEP Strategic Investments
Revenue	$	182,109	$	611,361		$	10,344		$	-
Expenses		168,423		1,575,211			27,518			-
Operating Loss		14,387		(963,850	)		(17,174	)		-
Other Income		-		189,908			-			-
Net Loss	$	14,387	$	(733,942	)	$	(17,174	)	$	-

The above unaudited supplemental information does not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations for our majority-owned portfolio companies.

RECENT DEVELOPMENTS

In May 2006, the Company received a letter of inquiry from the SEC, primarily related to its operations as a BDC and its compliance with the requirements thereto. In response to the SEC correspondence, the Company conducted a review of its compliance with the 1940 Act and determined that it was not in compliance with the 1940 Act. While the Company believed the BDC model was the right structure for it at the time that it elected such status, it has determined that, going forward, it should, consistent with its current balance sheet, withdraw its election to be regulated as a BDC.

The Company is working with the SEC to resolve the issues detailed in their May 2006 correspondence and anticipates that, upon resolution of the issues, will request shareholder approval to file a Form N-54C, to withdraw its election to be regulated as a BDC under the 1940 Act. Subsequently, the Company intends to pursue a business model whereby it will be an oil and gas operating company with wholly-owned subsidiaries that are currently classified as majority owned portfolio companies as a BDC.

If shareholder approval is not obtained, management has serious doubts about the future of the Company as a going concern. In order to remain a BDC, the Company will have to expend significant resources to reach and maintain compliance with the extensive requirements of the 1940 Act, applicable to a BDC. Additionally, the Company will be required to modify its operating structure such that it will no longer own 100 percent of the outstanding assets of its portfolio companies. The impact of remaining a BDC will be more fully detailed in a forthcoming proxy statement to shareholders of the Company requesting approval to de-elect its BDC status.

The Company may face certain contingent liabilities as a result of potential actions by the SEC or others against the Company. As of the date of this report, management could not reasonably estimate such contingent liabilities, if any. The outcome of the above matter could have a significant impact on our ability to continue as a going concern.

-29-

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The methods, estimates and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates include going concern, the valuation of stock based compensation, the allocation of the purchase price to certain oil and gas related assets acquired, depreciable and depletable useful lives of property and equipment, the evaluation of whether our assets are impaired, the valuation of our investments, the valuation allowance for deferred tax assets and the estimate of reserves of oil and gas that are used to develop projected income whereby an appropriate discount rate has been used. We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For additional information see Note 3 “Summary of Significant Accounting Policies” in the notes to our unaudited financial statements contained in our interim report on Form 10-Q for the period ended June 30, 2006. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates.

GOING CONCERN

The independent registered public accounting firms’ reports to our financial statements at December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003, include an explanatory paragraph in addition to their audit opinion stating that our recurring losses from operations, net cash used in operations, stockholders’ (deficiency) equity, working capital deficiency, being in default on certain notes payable to banks and being in the development stage with no revenues as a business development company raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.

VALUATION OF NON-CASH ISSUANCES OF COMMON STOCK

The Company issued common stock to several parties in non-cash transactions during 2005. For the majority of these issuances, valuation was determined based upon the stock closing price on the date of grant.

ALLOCATION OF THE PURCHASE PRICE TO CERTAIN OIL AND GAS RELATED ASSETS ACQUIRED

On February 20, 2003 (the “Acquisition Date”), the Company acquired from a certain related party assignor, who is the brother of the Company’s president and the previous sole director, an interest in certain oil and gas leases, oil and gas wells located on those leases, surface and underground equipment, pipelines and other property and fixtures in or on the leases, rights of way, leases, contracts and agreements for pipeline compressor stations or boosters utilized in the operations of the facilities by the assignors. The Company accounted for the purchase as an asset acquisition at its fair market value of $2,000,000 under the purchase method of accounting pursuant to Statement of Financial Accounting Standards No. 141 “Business Combinations.” Accordingly, the purchase price was allocated to the various assets and the results of any operations relating to the acquired assets are included in the Company’s financial statements from the Acquisition Date.

DEPRECIABLE AND DEPLETABLE USEFUL LIVES OF PROPERTY AND EQUIPMENT

Prior to electing BDC status and transferring oil and gas assets to investees, the Company used the successful efforts method of accounting for acquisition, exploration, development and production of oil and gas properties, whereby only the direct costs of acquiring or drilling successful (proved reserves) were capitalized. Costs of acquisition, development, and exploration activities that are not known to have resulted in the discovery of reserves (unproved) were charged to operations. All capitalized costs of oil and gas properties were depleted using the units-of-production method based on total proved reserves. The capitalized cost of support equipment and fixtures were depreciated over their estimated useful life once they were placed into service.

EVALUATION OF ASSET IMPAIRMENT

We account for the impairment of long-lived assets including proved properties in accordance with Financial Accounting Standards, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to the undiscounted cash flow that the asset or asset group is expected to generate. If such assets or asset groups are considered to be impaired, the loss recognized is the amount by which the carrying amount of the property, if any, exceeds its fair market value. Based on our impairment analysis, no impairment charge has been recorded for the six months ended June 30, 2006.

-30-

VALUATION OF INVESTMENTS

Investments in securities of unaffiliated issuers represent holdings of less than 5% of the issuer’s voting common stock. Investments in and advances to affiliates are presented as (i) majority-owned, if holdings, directly or indirectly, represent over 50% of the issuer’s voting common stock, (ii) controlled companies if the holdings, directly or indirectly, represent over 25% and up to 50% of the issuer’s voting common stock and (iii) other affiliates if the holdings, directly or indirectly, represent 5% to 25% of the issuer’s voting common stock. Investments - other than securities represent all investments other than in securities of the issuer.

Investments in securities or other than securities of privately held entities are initially recorded at their original cost as of the date the Company obtained an enforceable right to demand the securities or other investment purchased and incurred an enforceable obligation to pay the investment price.

As a BDC, for financial statement purposes, investments are recorded at their value in our financial statements. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value as determined in good faith by the board of directors. Effective June 15, 2004, the Company acquired a privately held oil company; effective April 1, 2004, the Company formed a new controlled entity to transfer its assets and certain liabilities into for purposes of holding this entity as an investment and effective November 2004, the Company acquired Oil America Group.

Because there is typically no readily available market value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good faith by our board of directors pursuant to a valuation policy and consistent valuation process. Due to the inherent uncertainty of these valuations, the estimates may differ significantly from the values that would have been used had a ready market for the investments existed and the differences may be material. Our valuation methodology includes the examination of, among other things, the underlying portfolio company performance, financial condition and market changing events that impact valuation. Realized gains (losses) from the sale of investments and unrealized gains (losses) from the valuation of investments are reflected in operations during the period incurred.

VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS

In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The valuation allowance at December 31, 2005 was $2,074,898. Net operating loss carry-forwards aggregate approximately $6,102,639 and expire in the years through 2025.

As discussed previously, on February 20, 2003, upon the acquisition of certain oil and gas assets, the Company entered a new development stage. As a result of this change, and IRS Section 382 rules, the net operating loss carry-forwards from previous years to February 20, 2003 will not be allowable and are not included in the above disclosures.

ESTIMATE OF RESERVES OF OIL AND GAS

Prior to electing BDC status and transferring oil and gas assets to investees, the Company used the successful efforts method of accounting for acquisition, exploration, development and production of oil and gas properties, whereby only the direct costs of acquiring or drilling successful (proved reserves) are capitalized. Costs of acquisition, development, and exploration activities that are not known to have resulted in the discovery of reserves (unproved) are charged to operations. All capitalized costs of oil and gas properties were depleted using the units-of-production method based on total proved reserves.

On June 15, 2004, the Company assigned $2,074,498, or 100% of its oil and gas properties securing a $2,000,000 convertible debenture to a majority owned investee.

-31-

RESULTS OF OPERATIONS

Six Months and Three Months ended June 30, 2006 compared to June 30, 2005.

	Six Months Ended						Three Months Ended
	June 30,						June 30,
		2006			2005			2006			2005
Investment and Pre-BDC Operating Income
Oil sales, net	$	-		$	-		$	-		$	-
Investment income - portfolio investments
Interest		-			-			-			-
Dividends		-			-			-			-
Total Investment and Pre-BDC Operating Income		-			-			-			-
Operating Expenses
Compensation		60,000			60,000			30,000			30,000
Consulting		146,190			35,486			146,190			7,486
Depletion		-			-			-			-
Depreciation		3,914			3,914			1,968			1,968
Equipment rental		-			-			-			-
General and administrative		33,905			11,341			17,067			6,861
Production		626			-			626			-
Professional		112,394			73,653			87,928			68,507
Website		-			-			-			-
Total Operating Expenses		357,029			184,394			283,779			114,822
Net Investment and Pre-BDC Operating Loss		(357,029	)		(184,394	)		(283,779	)		(114,822	)
Other Income (Expense)
Gain on settlement of debt		-			-			-			-
Other income		20,000			-			-			-
Interest expense		(4,212	)		(473,850	)		(2,163	)		(90,260	)
Payroll tax penalties		(3,002	)		(3,002	)		(1,501	)		(1,501	)
Loss on settlement		-			-			-			-
Total Other Income (Expense)		12,786			(476,852	)		3,664			(91,761	)
Net Increase (Decrease) in Net Assets (post BDC) and Net Income (pre BDC)	$	(344,243	)	$	(661,246	)	$	(287,443	)	$	(206,583	)

-32-

Six Months Ended June 30, 2006 compared to June 30, 2005

Investment and Pre-BDC Operating Income:

There was no investment and pre-BDC operating income for the six months ended June 30, 2006 or June 30, 2005, respectively.

Operating Expenses:

Operating expenses increased $172,635, or 94%, to $357,029 for 2006 from $184,394 for 2005. The increase was primarily the result of an $110,704 increase in consulting, a $38,741 increase in professional and a $22,563 increase in general and administrative. The increase in professional and general and administrative is directly related to the increased costs the Company has incurred as the result of being a BDC. The increase in consulting was primarily for financial advising services by a third party. 

Other Income (Expense):

Other income (expense) decreased $489,638 of expense, or 103% to $12,786 of income for 2006 from $476,852 of expense for 2005. The decrease was primarily from a $469,638 decrease in interest expense in 2006 as compared to 2005 due to a convertible debenture beneficial conversion feature recorded in 2005, offset by $20,000 of other income in 2006 related to a reimbursement credit for consulting services paid for in 2005 but not completed in entirety.

Three Months Ended June 30, 2006 compared to June 30, 2005

Investment and Pre-BDC Operating Income:

There was no investment and pre-BDC operating income for the three months ended June 30, 2006 or June 30, 2005, respectively.

Operating Expenses:

Operating expenses increased $168,957, or 147%, to $283,779 for 2006 from $114,822 for 2005. The increase was primarily the result of a $138,704 increase in consulting, a $19,421 increase in professional and a $10,206 increase in general and administrative. The increase in professional and general and administrative is directly related to the increased costs the Company has incurred as the result of being a BDC. The increase in consulting was primarily for financial advising services by a third party. 

Other Income (Expense):

Other income (expense) decreased $88,097 of expense, or 98% to $3,664 of expense for 2006 from $91,761 of expense for 2005. The decrease was primarily from an $88,097 decrease in interest expense in 2006 as compared to 2005 due to a convertible debenture beneficial conversion feature recorded in 2005.

Liquidity and Capital Resources

Cash and cash equivalents were $1,179,699 at June 30, 2006 as compared to $471,339 at December 31, 2005, and working capital surplus was $513,431 at June 30, 2006 as compared to a working capital deficit of $207,486 at December 31, 2005. The increase in cash was primarily from $2,335,435 of cash proceeds from financing activities, offset by $1,306,500 of net advances to the Company’s majority-owned affiliates.

Operating Activities

Cash used in operating activities was $352,885 for the six months ended June 30, 2006 compared to cash used of $201,663 for the six months ended June 30, 2005. The increase in cash used in operations for 2006 was primarily from a $449,304 decrease in interest expense related to a beneficial conversion feature in 2005, offset by a $317,003 decrease in the net loss for 2006 as compared to 2005.

-33-

Investing Activities

Cash used in investing activities was $1,306,500 for the six months ended June 30, 2006 compared to $136,556 for the six months ended June 30, 2005. The increase in cash used resulted entirely from an increase in advances made by the Company for its majority-owned investees.

Financing Activities

Cash provided by financing activities was $2,367,745 for the six months ended June 30, 2006 compared to cash provided of $176,000 for the six months ended June 30, 2005. The increase in cash provided resulted primarily from $2,335,245 of net proceeds from the issuance of common stock and $32,500 of cash proceeds from the repayment of a subscription receivable.

Our principal uses of cash to date have been for operating activities and we have funded our operations previously primarily by incurring indebtedness in the form of convertible debentures and issuing common stock.

We have substantial debt obligations. These debt obligations pose a significant liquidity risk to our business and stockholders by requiring us to dedicate a substantial portion of our cash flow to principal and interest payments on our debt obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements. Additionally, these debt obligations may impede us from obtaining additional financing in the future for working capital, capital expenditures and other corporate requirements and may make us more vulnerable to a downturn in our business and limit our flexibility to plan for, or react to, changes in our business.

The following summarizes our debt obligations at June 30, 2006:

DEBT

Our debt consisted of the following:

Lease Payable

	Jun. 30,2006		Dec. 31, 2005
$21,238 computer equipment lease, bearing interest at 10% per annum	$	16,131	$	18,153

On April 16, 2001, the Company leased computer equipment under a 36-month lease that was accounted for as a capital lease in the amount of $21,238 and at June 30, 2006, the balance of principal was $16,131. The amount is personally guaranteed by a former officer/director and a current officer/director of the Company. The lease was secured by all leased equipment and perfected by a financing statement; however, the Company liquidated the equipment and paid the office space lessor the $4,000 proceeds. As of June 30, 2006, the Company has recorded a total of $9,406 in accrued interest for this lease payable in the accompanying Balance Sheet.

In November 2003, an agreement was reached with the lessor to forgive the outstanding principal and accrued interest on the lease payable once the transfer of 100,000 shares of the Company’s common stock personally held by the Company’s president and director occurs. The president of the Company transferred these shares on September 15, 2003. As of June 30, 2006, the transaction has not been finalized as the lessor has not agreed to the settlement. The Company expects to fully resolve this matter in the future at which time the value of the shares exchanged and any related gain or loss will be determined and recognized.

Notes payable - Banks 

	Jun. 30,2006		Dec. 31, 2005
$70,000 bank revolving line of credit, dated March 12, 2001, bearing interest at default rate of 18% per annum, due March 11, 2002. In Default at December 31, 2004.	$	-	$	17,464
$19,396 bank automobile loan, dated July 6, 2004, bearing interest at 6.99% per annum, monthly installments of principal and interest with final payment due in February 2006.		-		13,818
	$	-	$	31,282

On March 12, 2001, we obtained a revolving bank line of credit in the amount of $70,000, of which $17,464 was outstanding at June 30, 2005. The interest rate was originally at 11.5% but has converted to the default rate of 18% per annum as the line of credit was due March 11, 2002 and was in default. This line of credit was secured by all equipment, which had been repossessed as of December 31, 2001 and $23,075 was applied to the balance. In August 2005, the entire balance was paid in full resulting in zero outstanding.

On December 31, 2001, we obtained a bank line of credit for $42,000, of which $41,799 was outstanding and in default at March 31, 2004. In June 2004, the lender agreed to a settlement payment in the amount of $30,000, which the Company made and the difference of $11,799 and accrued interest of $6,565 was recorded as a gain on settlement of debt in the accompanying Statement of Operations.

In July 2004, we obtained a bank automobile loan in the amount of $19,396 (including accrued interest of 6.99% per annum). Monthly principal and interest payments of $1,077 are due with final payment in February 2006 and the loan is secured by the automobile. In August 2005, the entire balance was paid in full resulting in zero outstanding.

-34-

Loans and Note Payable Settlement with Related Party

Beginning in January of 2002 and through December 2003, the Company’s officer/director advanced the Company $52,615 for payment of corporate expenses. In August 2003, $115 was repaid leaving a balance outstanding of $52,510 at December 31, 2003. The loan was non-interest bearing, unsecured and due on demand.

On January 5, 2004, the entire $52,510 amount outstanding was exchanged for designated Series A preferred stock.

At December 31, 2003, $411,595 of Notes Payable to related party were outstanding and in default. The Notes Payable had been payable to a former officer/director of the Company and who is a principal stockholder and has been transferred to the current president in a private transaction.

On January 5, 2004, the Board of Directors approved the issuance of 3,500,000 designated Series A preferred stock in exchange for the conversion of the total $464,005 of indebtedness owed to the Company’s president. The $464,005 indebtedness comprised the entire $52,510 of loan payable - related party (see above) and $411,495 of Note Payable - related party. In connection with the forgiveness of the note principal, the Company’s president forgave the related accrued interest totaling $64,527 in a separate transaction on the same date. As a result, the Company has treated the $64,527 as a contribution of capital at the date of debt forgiveness by recording additional paid in capital. The Company recognized a compensation expense of $480,995 based on the estimated $945,000 value of the 3,500,000 common shares, which was based on the quoted trade price per share of $0.09 on the settlement date.

In July 2003, the Company received $35,000 from an unrelated party. As of December 31, 2003, the Company had repaid the principal portion of this loan for $35,000 and $2,000 in accrued interest.

Convertible Debentures:

	Jun. 30, 2006		Dec. 31, 2005
$250,000 Convertible Debenture, dated May 20, 2004, bearing interest at 8% per annum and due on December 1, 2005	$	-	$	70,000
$400,000 Convertible Debentures, dated June 15, 2004, bearing interest at 8% per annum and due on December 1, 2005		57,967		400,000
$400,000 Convertible Debentures, dated August 17, 2004, bearing interest at 8% per annum and due on December 1, 2005		-		400,000
Less: Debt discount		-		(583,639	)
	$	57,967	$	286,361

In May 2004, the Company received $250,000 in gross proceeds from the issuance of a convertible debenture. The terms of the convertible debenture includes an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert and is due December 1, 2005. On May 17, 2004, the convertible debenture holder elected to convert $30,000 of the balance into common shares of the Company and as a result of the conversion, 3,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On June 10, 2004, the convertible debenture holder elected to convert $85,000 of the balance into common shares of the Company and as a result of the conversion, 8,500,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On July 19, 2004, the convertible debenture holder elected to convert $65,000 of the balance into common shares of the Company and as a result of the conversion, 6,500,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). The remaining $70,000 of the $250,000 convertible debenture was shown as outstanding even though the convertible debenture holder informed the Company that an election was made June 1, 2004 to convert the balance into common shares of the Company. Subsequently, the Company’s transfer agent determined that the conversion did occur and the common shares were issued to the convertible debenture holder even though the transfer agent report erroneously excluded the common share issuance. As of December 31, 2005, the transfer agent corrected their report and the 7,000,000 shares of common stock were issued to the convertible debenture holder at a price of $0.01 per share (50% of the closing share price on June 1, 2004, the effective conversion price.

As a result of the above conversions, all $250,000 of the convertible debenture has been converted.

-35-

In accordance with EITF Issue 98-5 as amended by EITF Issue 00-27, the Company has evaluated that the $250,000 convertible debenture discussed above has a beneficial conversion feature as the exercise price for is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by recording a debt discount as a contra account to the convertible debenture for $250,000 and $250,000 to additional paid-in capital. As of December 31, 2005, all $250,000 of the debt discount has been amortized to interest expense.

Effective June 15, 2004, the Company issued a $400,000 convertible debenture to PRI in accordance with the acquisition agreement between PRI and the Company. The terms of the convertible debenture includes an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert and is due December 1, 2005. An agreement was reached whereby $342,033 of advances made by the Company to PRI during 2005, were used to reduce the convertible debenture balance to $57,967 and this is the balance as of June 30, 2006. The Company anticipates that an agreement will be structured whereby additional advances made by the Company will be utilized to eliminate the remaining balance. However, no agreement has been reached as of the date of these Financial Statements and the $57,967 balance is in default as the due date was December 1, 2005.

In accordance with EITF Issue 98-5, as amended by EITF Issue 00-027, the Company has evaluated that the convertible debenture discussed above has a beneficial conversion feature as the exercise price is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by recording a debt discount as a contra account to the convertible debenture for $400,000 and $400,000 to additional paid-in capital. The debt discount was amortized over the debt term of 17.5 months or through the due date of December 5, 2005. The entire $400,000 of debt discount has been amortized to interest expense.

In August 2004, the Company received $1,000,000 in gross proceeds from the issuance of a convertible debenture. The terms of the convertible debenture includes an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert and is due December 1, 2005. On September 14, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On September 22, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On October 8, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On October 12, 2004, the convertible debenture holder elected to convert $100,000 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On November 4, 2004, the convertible debenture holder elected to convert $200,000 of the balance into common shares of the Company and as a result of the conversion, 20,000,000 shares of common stock were issued at $0.01 per share (50% of the closing share price). On January 18, 2005, the convertible debenture holder elected to convert $38,462 of the balance into common shares of the Company and as a result of the conversion, 2,500,000 shares of common stock were issued at $0.015386 per share. On January 31, 2005, the convertible debenture holder elected to convert $38,462 of the balance into common shares of the Company and as a result of the conversion, 2,500,000 shares of common stock were issued at $0.015386 per share. On February 2, 2005, the convertible debenture holder elected to convert $153,846 of the balance into common shares of the Company and as a result of the conversion, 10,000,000 shares of common stock were issued at $0.015386 per share. On February 14, 2005, the convertible debenture holder elected to convert $169,231 of the balance into common shares of the Company and as a result of the conversion, 11,000,000 shares of common stock were issued at $0.015386 per share.

As a result of the above conversions, all $1,000,000 of the convertible debenture has been converted.

In accordance with EITF Issue 98-5 as amended by EITF Issue 00-27, the Company has evaluated that the $1,000,000 convertible debenture discussed above has a beneficial conversion feature as the exercise price for is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by recording a debt discount as a contra account to the convertible debenture for $1,000,000 and $1,000,000 to additional paid-in capital. The entire $1,000,000 debt discount has been amortized to interest expense.

-36-

On February 20, 2003, the Company executed a $2,000,000 convertible note payable accruing interest at 6% with a company controlled by the brother of the Company’s president and a director. The maturity date was July 25, 2007. The note was payable at maturity in preferred stock of the Company at $1.00 per share and. the preferred stock was convertible into common stock at $1.00 per share. Additionally, at the option of the holder, the debt may be settled for cash. The note was secured by a deed of trust and a lien against the leases and the wells and other liens against the same leases and wells of $25,000.

On January 5, 2004, the $2,000,000 convertible note payable was exchanged for a convertible debenture for the same amount and due January 1, 2007. The terms of the convertible debenture include an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert.

In accordance with EITF Issue 98-5 and 00-27, the Company has evaluated that the convertible debenture has a beneficial conversion feature as the exercise price is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by charging the statement of operations $2,000,000 for interest expense and $2,000,000 for additional paid-in capital. The conversion feature inherent in the convertible debenture was fully recognized as of June 30, 2004 since it was disposed of through assignment to Bend Arch, the Company’s majority owned affiliate (see below).

On June 15, 2004, the Company assigned the oil and gas properties secured by the $2,000,000 convertible debenture to its majority-owned affiliate Bend Arch. Accordingly, the $2,000,000 convertible debenture along with $77,589 of accrued interest was transferred to Bend Arch on June 15, 2004.

In January 2004, the Company received $600,000 in gross proceeds from the issuance of two convertible debentures, one for $100,000 and the other for $500,000. The terms of the convertible debentures include an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert. $100,000 of the convertible debentures was due and payable on March 14, 2004 and $500,000 was due and payable on December 31, 2005.

On February 5, 2004, the $100,000 convertible debenture holder elected to convert the entire balance into common shares of the Company and as a result of the conversion, 3,333,333 shares of common stock were issued at $0.03 per share (50% of the closing share price on February 5, 2004). In March, 2004, $200,000 of the $500,000 convertible debenture was converted into 20,000,000 shares of common stock at $0.01 (50% of the closing price). In May 2004, the remaining $300,000 of convertible debenture was converted into 30,000,000 shares of common stock at $0.01 per share (50% of the closing price).

In accordance with EITF Issue 98-5 and 00-27, the Company has evaluated that the convertible debentures discussed above have a beneficial conversion feature as the exercise price is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by charging the statement of operations $600,000 for interest expense and the balance sheet $600,000 for additional paid-in capital. The conversion feature inherent in the convertible debentures was fully recognized as of June 30, 2004 since they were fully converted as of June 30, 2004.

In January 2004, the Company issued a $30,000 convertible debenture to a consultant for services related to the filing by the Company to become a BDC as mentioned previously. The terms of the convertible debenture include an interest rate of 8% per annum and convertible at any time at the option of the holder or the Company into common shares of the Company at a price equal to fifty percent (50%) of the closing bid price of the common stock on the date written notice is received by the Company of the election to convert. On February 5, 2004, the convertible holder elected to convert the entire balance into common shares of the Company and 1,000,000 shares of common stock were issued at $0.03 per share (50% of the closing share price on February 5, 2004).

In accordance with EITF Issue 98-5, the Company has evaluated that the $30,000 convertible debenture discussed above has a beneficial conversion feature as the exercise price for is less than the fair value of the Company’s common stock on the measurement date. Accordingly, the Company has recognized this beneficial conversion feature by charging the statement of operations $30,000 for interest expense and $30,000 for additional paid-in capital. The conversion feature inherent in the convertible debentures was fully recognized as of June 30, 2004 since they were fully converted as of June 30, 2004.

During 2004, 131,333,333 shares of common stock were issued from the conversion of $1,410,000 of convertible debentures discussed above.

During 2005, 33,000,000 shares of common stock were issued from the conversion of $470,000 of convertible debentures discussed above.

As of June 30, 2006, the Company has recorded $124,971 of accrued interest for the convertible debentures outstanding. As discussed previously, several convertible debenture holders have elected to convert all or a portion of the convertible debentures into common stock. However, the conversion has not included accrued interest and although the Company believes that no further common stock will be issued for these conversions, the accrued balance for these converted debentures is included in the accrued interest balance as of June 30, 2006.

-37-

Equity Financing

For the six months ended June 30, 2006 and 2005 the Company received $2,335,245 and $185,000 of proceeds, net of offering costs, from the issuance of common stock, respectively.

Liquidity

To continue with our business plan, we will require additional working capital as we have not been generating sufficient cash from operations as a BDC to fund our operating activities through the end of fiscal 2006. Presently, as a BDC, our only source of revenues is through distributions from our majority-owned Portfolio companies. We cannot assure you that we will receive distributions from our majority-owned Portfolio companies, if any, and that borrowings under any interim financing we are able to secure will be sufficient to meet our projected cash flow needs.

Our ability to obtain additional financing depends on many factors beyond our control, including the state of the capital markets, the market price of our common stock, the prospects for our business as a BDC and the success of our majority-owned Protfolio companies. Additionally, any necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock. Failure to obtain commitments for interim financing and subsequent project financing, would have a material adverse effect on our business, results of operations and financial condition. If the financing we require to sustain our working capital needs is unavailable or insufficient or we do not receive the necessary financing, we may be unable to continue as a going concern.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations and Commercial Commitments

The following table highlights, as of June 30, 2006, our contractual obligations and commitments by type and period:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Debt:
Lease Payable	$	16,131	$	16,131	$	-	$	-	$	-
Convertible Debentures		57,967		57,967		-		-		-
Accrued Interest Payable		134,377		134,377		-		-		-
Total Debt	$	208,475	$	208,475	$	-	$	-	$	-

2006 OUTLOOK

The ability to invest further will be heavily dependent on securing additional capital from investors or debt. Additionally, the Company as a BDC is highly dependent on the success of its majority-owned portfolio companies. There is no assurance that additional equity or debt financing will be available on terms acceptable to Management or that the Company’s majority-owned portfolio companies will be successful.

The Company is working with the SEC to resolve the issues detailed in their May 2006 correspondence and anticipates that, upon resolution of the issues, will request shareholder approval to file a Form N-54C, to withdraw its election to be regulated as a BDC under the 1940 Act. Subsequently, the Company intends to pursue a business model whereby it will be an oil and gas operating company with wholly-owned subsidiaries that are currently classified as majority owned portfolio companies as a BDC.

If shareholder approval is not obtained, management has serious doubts about the future of the Company as a going concern. In order to remain a BDC, the Company will have to expend significant resources to reach and maintain compliance with the extensive requirements of the 1940 Act, applicable to a BDC. Additionally, the Company will be required to modify its operating structure such that it will no longer own 100 percent of the outstanding assets of its portfolio companies. The impact of remaining a BDC will be more fully detailed in a forthcoming proxy statement to shareholders of the Company requesting approval to de-elect its BDC status.

The Company may face certain contingent liabilities as a result of potential actions by the SEC or others against the Company. As of the date of this report, management could not reasonably estimate such contingent liabilities, if any. The outcome of the above matter could have a significant impact on our ability to continue as a going concern.

-38-

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks related to changes in interest rates. Our debt is at fixed rates of interest from 8% to a default 18% per annum rate as the result of being in default of certain debt as of June 30, 2006. There is a risk that additional debt may be declared in default in the future and the higher default rate of 18% may have a negative affect on our operations.

We have accrued payroll taxes and penalties related to prior operations and are estimating and accruing penalties and interest. However, there is a risk that the actual penalties and interest to be paid, if any, could be significantly higher and have a negative affect on our operations.

Currently, we consider our principal market risk to be the fluctuations of the valuations of the investment portfolio.

Our investments are carried at fair value, as determined by the Board of Directors. We expect to value publicly traded shares at the closing price on the valuation date. We expect to value debt and equity securities that are not publicly traded, or that we are restricted from trading, at fair value as determined in good faith by our Board of Directors. In making such determination, we expect that the Board of Directors will value non-convertible debt securities at cost plus amortized original issue discount, if any, unless adverse factors lead to a determination of a lesser valuation. In valuing convertible debt, equity, or other securities, we expect that the Board of Directors will determine the fair value based on the collateral, the issuer's ability to make payments, the current and forecasted earnings of the issuer, sales to third parties of similar securities, the comparison to publicly traded securities, and other pertinent factors. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations assigned at other times.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

(a) At the end of the period covered by the report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective to allow timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Act of 1934.

(b) On May 25, 2006, the Company received a letter of inquiry from the SEC related to, among other things, the Company’s disclosure controls and procedures. In that letter, the SEC noted the Company’s repeated requests for extensions of time to file its required reports. Subsequently, the Company has conducted a review of its disclosure controls and procedures designed to ensure that all future filings and submissions to the SEC are consistent with the requirements of federal securities laws are not otherwise misleading. The review resulted in the implementation of additional controls to ensure that future filings are complete, accurate and made on a timely basis. The Company has engaged corporate and BDC counsel to assist the Company in its discussions with the SEC and with the filing process. Additionally, the Company has engaged an accounting consultant to ensure that its financial records are maintained and recorded in a timely manner. Finally, the Company has adopted an audit committee and identified and appointed - subject to shareholder election - new members to the Board of Directors, such that the Company’s management has significant experience relating to its primary business. The implementation of these additional controls and procedures allowed the Company’s Chief Executive Officer and Chief Financial Officer to conclude that the current disclosure controls and procedures are effective, as required.

-39-

PART II - Other Information

Item 1. Legal Proceedings

The Company is subject to various lawsuits and unasserted claims from vendors for non-payment of accounts payable plus related legal fees. Excluding legal fees, which cannot be estimated, the Company has included all amounts in its accounts payable as of June 30, 2006.

In November 2003, an agreement was reached with a lessor to forgive the outstanding principal and interest on the related note payable resulting from leased computers once the transfer of 100,000 shares personally held by the Company’s president and previous sole director. As of June 30, 2006 the transaction has not been finalized as the lessor has not agreed to the settlement. However, the 100,000 shares were transferred to the lessor in September 2003. The Company expects to fully resolve this matter in the future at which time the value of the shares exchanged and any related gain or loss will be determined and recognized.

The Company has included $65,800 of unpaid Federal payroll taxes and employee withholdings and related penalties and interest in its accrued expenses as of June 30, 2006. Such amounts are subject to potential federal tax liens.

Item 1A. Risk Factors

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, see the discussions in “Risk Factors, “ “Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Financial Statements” in our Form 10-K for December 31, 2005 and in this Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuances of Preferred Stock:

None

Retirement of Preferred Stock

In February 2006, 500,000 shares of Series A preferred stock previously issued for consulting services were converted into 1,500,000 shares of common stock in accordance with the conversion rights associated with the preferred stock.

As a result of the conversion, the Company has 3,500,000 shares of preferred stock outstanding as of June 30, 2006.

Issuances of Common Stock:

In January 2006, the Company’s transfer agent determined that 2,500,000 shares that were actually issued to a third party in January 2005 had been erroneously excluded by the transfer agent from the reports provided the Company. Additionally, it was determined that the shares should not have been issued at all as the Company did not give authority to the transfer agent for the issuance of the shares. The transfer agent corrected their report and now show the 2,500,000 shares of common stock issued to the third party at a price of $0.05 per share (the fair market value closing share price in January 2006). Accordingly, the Company recorded the fair value amount of $125,000 as a subscription receivable and is still outstanding as of June 30, 2006. The Company is in discussions with both the third party and the transfer agent as to the settlement of this amount. As of the date of these financial statements, no settlement has been completed.

In February 2006, 500,000 shares of the Company's Series A preferred stock were converted into 1,500,000 shares of the Company's $0.001 par value common stock in accordance with the conversion rights discussed previously.

As a result of the July 2005 1-E filing discussed previously, through June 30, 2006, the Company received $4,575,878 of proceeds from the offering, net of $280,627 of expenses, through the sale of 165,230,758 shares of the Company’s $0.001 par value common stock. This included net proceeds of $2,335,245 from the offering through the sale of 37,300,000 shares of the Company's $0.001 par value common stock during the six months ended June 30, 2006.

As discussed previously, In May 2006, the Company received a letter of inquiry from the SEC, primarily related to its operations as a BDC and its compliance with the requirements thereto. In response to the SEC correspondence, the Company conducted a review of its compliance with the 1940 Act and determined that it was not in compliance with the 1940 Act. In that letter, the SEC noted the potential compliance issues with the Company’s 1-E filing. In response, the Company voluntarily suspended the offering and does not anticipate resuming the offering.

-40-

Common Stock Issuable:

As of June 30, 2006, 75,000 shares remained issuable to an overseas investor who had subscribed for an amount exceeding the shares that were actually issued under the terms of the offering conducted pursuant to Regulation S in 2003. The investor had paid for the full subscription, and as such, no amounts are due to the Company.

On June 24, 2005, the Company filed a Form 1-E pursuant to the Securities Act of 1933 notifying the SEC of the Company’s intent to sell up to $5,000,000 of the Company’s common stock at prices between $0.015 and $0.10 per share, or 50,000,000 and 333,333,333 shares, respectively.

As a result of the June 2005 1-E filing discussed above, through June 30, 2006, the Company has received $2,434,553 of proceeds from the offering, net of $193,967 of expenses, through the sale of 131,930,758 shares of the Company’s $0.001 par value common stock. Of the 131,930,758 shares, 4,000,000 of the shares were sold in January 2006 at $0.04848 per share and the Company received $193,920 of proceeds. The 4,000,000 shares had not been issued as of March 31, 2006 and are recorded as Common Stock Issuable in the accompanying financial statements. Subsequently, the shares were issued and are no longer issuable as of June 30, 2006.

As discussed previously, In May 2006, the Company received a letter of inquiry from the SEC, primarily related to its operations as a BDC and its compliance with the requirements thereto. In response to the SEC correspondence, the Company conducted a review of its compliance with the 1940 Act and determined that it was not in compliance with the 1940 Act. In that letter, the SEC noted the potential compliance issues with the Company’s 1-E filing. In response, the Company voluntarily suspended the offering and does not anticipate resuming the offering.

At June 30, 2006, the Company has 75,000 shares issuable as discussed above.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of matters to a Vote of Securities Holders

None

Item 5. Other Information

None

Item 6. Exhibits

The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934.

Exhibit No.	Description of Exhibit
31.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.*

* Filed herewith

-41-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AMERICAN ENERGY PRODUCTION, INC.
Date: August 14, 2006	By:	/s/ Charles Bitters
		Charles Bitters
		Chief Executive Officer and Chief Financial Officer

-42-