UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549











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


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE FISCAL YEAR ENDED December
      31, 2006





OR





[
      ] 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: 0-50436





__________





**AMERICAN
      ENERGY PRODUCTION, INC.**


(Exact
      name of registrant as specified in its charter)


**Delaware**
              **74-2945581**(State
                  of Incorporation)
              (I.R.S.
                  Employer IdentificationNumber)**6073
                  Hwy 281 South,****Mineral
                  Wells, TX**
              **76067**(Address
                  of principal executive offices)
              (Zip
                  Code)


Registrant's
      telephone number, including area code: **(210)
      410-8158**




Securities
      registered pursuant to Section 12(b) of the Act: None




Securities
      registered pursuant to Section 12(g) of the Act:





Title
      of each class





Common
      Stock, par value $0.0001 per share


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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.   [X]





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2) Yes
      [ ] No [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]





Revenues
      for year ended December 31, 2006: Zero.





The
      aggregate market value of the voting common stock held by non- affiliates of
      the
      Registrant on March 1, 2007, was $39,306,096 (494,170,082 shares at $0.08,
      based
      on the closing sales price on that date of $0.08, as reported on the OTC
      Bulletin Board.) For the purposes of calculating this amount only, all directors
      and executive officers of the Registrant have been treated as affiliates. (See
      definition of affiliate in Rule 12b-2 of the Exchange Act.)





Number
      of
      shares of the registrant's common stock outstanding as of March 1, 2007 was
      494,170,082.





Documents
      Incorporated by Reference:


·
            Form
                2-E Notification under Regulation E filed June 27,
                2006


·
            Form
                2-E Notification under Regulation E filed December 11,
                2006


·
            Definitive
                Proxy Statement Pursuant to Section 14(a) of the Securities Act of
                1934
                filed February 8, 2007





Transitional
      Small Business Disclosure Format (Check one).  Yes
      [ ]
      No [X]


-1-





**AMERICAN
      ENERGY PRODUCTION, INC.**


**FORM
      10-K**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**


**TABLE
      OF CONTENTS**





**PART
                I**
            
            **Page**Item
                1.
            Business
            4Item
                1A
            Risk
                Factors
            14Item
                2
            Properties
            19Item
                3
            Legal
                Proceedings
            20Item
                4
            Submission
                of Matters to a Vote of Security Holders
            20**PART
                II**Item
                5
            Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            21Item
                6.
            Selected
                Financial Data
            22Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of Operations
            23Item
                7A
            Quantitative
                and Qualitative Disclosures about Market Risk
            39Item
                8.
            Financial
                Statements and Supplementary Data
            40Item
                9
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            40Item
                9B
            Controls
                and Procedures
            40Item
                9B.
            Other
                Information
            40**PART
                III**Item
                10.
            Directors,
                Executive Officers and corporate Governance
            41Item
                11.
            Executive
                Compensation
            43Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            44Item
                13.
            Certain
                Relationships, Related Transactions and Director
                independence
            45Item
                14.
            Principal
                Accountant Fees and Services
            46**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            47Signatures
            48




-2-


**Special
      Note Regarding Forward-Looking Statements**





The
      Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
      forward-looking statements. Certain of the statements contained herein, which
      are not historical facts, are forward-looking statements with respect to events,
      the occurrence of which involve risks and uncertainties. These forward- looking
      statements may be impacted, either positively or negatively, by various factors.
      Information concerning potential factors that could affect our company is
      detailed from time to time in our company's reports filed with the Commission.
      This Report contains "forward looking statements" relating to our company's
      current expectations and beliefs. These include statements concerning
      operations, performance, financial condition, anticipated acquisitions and
      anticipated growth. For this purpose, any statements contained in this Report
      or
      the Form 10-K, Forms 10-Q, Forms 8-K, and any other reports or forms referred
      to
      herein that are not statements of historical fact are forward-looking
      statements. Without limiting the generality of the foregoing, words such as
      "may", "will", "would", "expect", "believe", "anticipate", "intend", "could",
      "estimate", or "continue", or the negative or other variation thereof or
      comparable terminology are intended to identify forward-looking statements.
      These statements by their nature involve substantial risks and uncertainties,
      which are beyond our company's control. Should one or more of these risks or
      uncertainties materialize or should our company's underlying assumptions prove
      incorrect, actual outcomes and results could differ materially from those
      indicated in the forward-looking statements.





The
      information in this Report is qualified in its entirety by reference to the
      entire Report; consequently, this Report must be read in its entirety.
      Information may not be considered or quoted out of context or without
      referencing other information contained in this Report necessary to make the
      information considered, not misleading.





**PART
      I**


**ITEM
      1.BUSINESS**




**GENERAL
      INFORMATION ABOUT AMERICAN ENERGY PRODUCTION, INC.**




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 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.





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.





-3-


On
      January 12, 2004, the Company filed a Form N-54A with the Securities and
      Exchange Commission (“SEC”) to be regulated as a BDC under the Investment
      Company Act of 1940, as amended (“Act”). Accordingly, the Company is presently
      regulated as a BDC under the Act. BDC’s 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 its
      portfolio companies. At the time of its election, the Company had determined
      that its operating model best approximated that of a BDC and intended to make
      investments into developing businesses in the oil and gas and other industries.




At
      the
      time it became a BDC, in January 2004, the Company determined that it was
      necessary to raise additional capital to carry out the Company’s business plan.
      Accordingly, the Company filed a Form 1-E with the SEC, notifying it of the
      Company’s intent to sell up to $4,000,000 of the Company’s common stock at
      prices between $0.01 and $0.10 per share, or 400,000,000 and 40,000,000 shares,
      respectively. On February 22, 2005, the Board determined that it was in the
      best
      interests of the Company to discontinue the offering and to investigate other
      financing alternatives. Accordingly, the Company filed a Form 2-E notifying
      the
      SEC of the Company’s termination of the offering. However, the Form 2-E filing
      was not received by the SEC and the Company re-filed the Form 2-E with the
      SEC,
      effective June 30, 2005. As disclosed in the Form 2-E, the Company received
      $1,820,000 of proceeds from the offering, net of $30,000 of expenses, through
      the sale of 171,000,000 shares of the Company’s $0.001 par value common stock.




On
      July
      24, 2005, the Company filed a second Form 1-E with the SEC 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 333,333,333 and 50,000,000 shares,
      respectively (the “July 2005 Offering”). As a result of the July 2005 Offering,
      through March 31, 2006, the Company 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.




The
      July
      2005 Offering, however, was reviewed by the SEC Staff, which issued a comment
      letter to the Company (the “Comment Letter”) raising a number of questions
      relating to the offering. In response to the Comment Letter, the Company
      voluntarily suspended the July 2005 Offering and undertook a review of its
      compliance with the 1940 Act. The Company subsequently determined that it was
      not in compliance with several important provisions of the 1940 Act.




Specifically,
      the Company determined that it had, among other things: failed to adequately
      disclose the process of valuing its portfolio securities; issued convertible
      debentures, potentially violating Section 61 of the 1940 Act; issued shares
      for
      services to be provided to the Company, potentially violating Section 23 of
      the
      1940 Act; failed to properly constitute the Board through a shareholder vote,
      pursuant to Section 16 of the 1940 Act; failed to have a majority of directors
      that were not interested persons of the Company, pursuant to Section 56(a)
      of
      the 1940 Act; failed to obtain a fidelity bond, potentially violating Section
      17
      of the 1940 Act; issued preferred stock, which did not have voting rights equal
      to that of the common stock, potentially violating Section 18(i) of the 1940
      Act; and neglected to adopt compliance policies and procedures. In addition,
      the
      Company has never appointed a Chief Compliance Officer. In the absence of an
      active Chief Compliance Officer and complete diligence on the part of the
      Company, there can be no assurance that there are no additional compliance
      issues.




The
      Board
      reviewed the facts surrounding these compliance failures and their implications
      for the Company. Ultimately, the Board caused the Company to take certain steps
      to remediate the compliance failures, including issuing a proxy statement to
      properly elect two of the Directors, contacting the holders of the shares issued
      for services to request that the Company repurchase those shares, and retaining
      experienced BDC counsel. The Company’s violations of the 1940 Act may cause the
      Company to incur certain liabilities. Such liabilities cannot be estimated
      by
      management as of this time, but may include regulatory enforcement actions.
      However, such liabilities, if incurred, could have a significant impact on
      the
      Company’s ability to continue as a going concern.




-4-


The
      Company has informed the SEC Staff of these steps. However, these efforts will
      not fully cure all of the 1940 Act compliance deficiencies currently affecting
      the Company and it is unclear how those deficiencies will impact the Company
      in
      the future. The Company’s significant compliance and remediation costs, in terms
      of both time and dollars, have operated as an encumbrance on the Company’s
      resources.




The
      Company has determined, based on the nature of its investments that the Company
      is not currently required to be regulated as a BDC because it does not meet
      the
      definition of an “investment company” in the 1940 Act. This is due to the fact
      that its non-cash assets consist almost entirely of investment in companies
      that
      it wholly-owns. Thus, it is operating, and intends to operate, as a holding
      company rather than an investment company.




Accordingly,
      and after careful consideration of the 1940 Act requirements applicable to
      BDCs,
      its holding company operations, an evaluation of the Company’s ability to
      operate as a going concern in an investment company regulatory environment,
      the
      cost of 1940 Act compliance needs and a thorough assessment of the Company’s
      current business model, the Board determined that continuation as a BDC is
      not
      in the best interests of the Company and its shareholders at the present time.
      Further, were the Company to remain a BDC, the Company would be required to
      substantially change its business model to meet the definition of an “investment
      company.”




In
      making
      the determination that continuation as a BDC is not in the best interests of
      the
      Company and its shareholders, the Board considered the viable alternatives
      available to the Company at this time. The Board considered that the Company
      could remain an investment company and restructure its portfolio investments
      to
      reduce its ownership of investee companies to non-majority ownership positions,
      while attempting to cure the significant compliance failures that it has
      incurred. However, the Board determined that the Company’s business model
      required majority ownership of its portfolio companies and that the significant
      expense associated with that alternative would make it unlikely that the Company
      would be able to continue operations.




On
      March
      13, 2007, at a Special Meeting of Shareholders, the Shareholders approved and
      authorized the Board to withdraw the Company’s election to be treated as a BDC
      under the 1940 Act and the election of three directors to the Board. Going
      forward, the Company will no longer be a BDC with unconsolidated majority-owned
      portfolio companies but rather be an oil and gas operating company with
      consolidated subsidiaries.





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 any such actions could have a significant impact on our ability
      to continue as a going concern.





The
      Company has subsequently filed a Form N-54C to withdraw its election to be
      regulated as a BDC. However, we are currently still a BDC and as such, subject
      to the following regulations.





Business
      Development Company.




A
      BDC is defined and regulated by the 1940 Act. A BDC must be organized in the
      United States for the purpose of investing in or lending to primarily private
      companies and making managerial assistance available to them. A BDC may use
      capital provided by public stockholders and from other sources to invest in
      long-term, private investments in businesses.




-5-


As
      a BDC, we may not acquire any asset other than “qualifying assets”, unless at
      the time we make the acquisition, the value of our qualifying assets represent
      at least 70% of the value of our total assets. The principal categories of
      qualifying assets relevant to our business are:




·Securities
                purchased in transactions not involving any public offering, the
                issuer of
                which is an eligible portfolio company;·Securities
                received in exchange for or distributed with respect to securities
                described in the bullet above or pursuant to the exercise of options,
                warrants or rights relating to such securities; and·Cash,
                cash items, government securities or high quality debt securities
                (within
                the meaning of the 1940 Act), maturing in one year or less from the
                time
                of investment.




In
      general, as a BDC, we must have at least 70% of our assets in “eligible
      portfolio companies” and certain other assets. Pursuant to section 2 (a) (46) of
      the 1940 Act “eligible portfolio company” means any issuer which:




(A)  Is
      organized under the laws of, and has its principle business in, any state or
      states:




(B)  Is
      neither an investment company as defined in section 3 of the 1940 Act (other
      than a Small Business Investment Company which is licensed by the Small Business
      Administration to operate under the Small Business Investment Act of 1958 and
      which is a wholly owned subsidiary of the business development company) nor
      a
      company which would be an investment company except for the exclusion from
      the
      definition of investment company in section 3 (c) of the 1940 Act,
      and




(C)  Satisfies
      one the following:




(i)
      It
      does not have any class of securities with respect to which a member of a
      national securities exchange, broker, or dealer may extend or maintain credit
      to
      or for a customer pursuant to rules or regulations adopted by the Board of
      Governors of the Federal Reserve System under section 7 of the Securities
      Exchange Act of 1934;




(ii)
      It
      is controlled by a business development company, either alone or as part of
      a
      group acting together, and such business development company in fact exercises
      a
      controlling influence over the management or policies of such Eligible Portfolio
      Company and, as a result of such control, has an affiliated person who is a
      director of such Eligible Portfolio Company;




(iii)
      It
      has total assets of not more than $4,000,000, and capital and surplus
      (shareholders’ equity less retained earnings) of not less than $2,000,000,
      except that the SEC may adjust such amounts by rule, regulation, or order to
      reflect changes in one or more generally accepted indices or other indicators
      for small businesses; or factors:




(iv)
      It
      meets such other criteria as the SEC may, by rule, establish as consistent
      with
      the public interest, the protection of investors, and the purpose fairly
      intended by the policy and provisions of this title.




-6-


As
      a BDC, we are entitled to issue senior securities in the form of stock or senior
      securities representing indebtedness, including debt securities and preferred
      stock, as long as each class of senior security has an asset coverage of at
      least 200% immediately after each such issuance. In addition, while any senior
      securities remain outstanding, we must make provisions to prohibit any
      distribution to our stockholders unless we meet the applicable asset coverage
      ratio at the time of the distribution. See “Risk Factors.”




As
      a BDC, we may also be prohibited under the 1940 Act from knowingly participating
      in certain transactions with our affiliates without the prior approval of our
      Board of Directors who are not interested persons and, in some cases, prior
      approval by the SEC.




As
      with other companies regulated by the 1940 Act, a business development company
      must adhere to certain substantive regulatory requirements. A majority of our
      directors must be persons who are not interested persons, as that term is
      defined in the 1940 Act. Additionally, we are required to provide and maintain
      a
      bond issued by a reputable fidelity insurance company to protect us against
      larceny and embezzlement. Furthermore, as a business development company, we
      are
      prohibited from protecting any director or officer against any liability to
      us
      or our stockholders arising from willful misfeasance, bad faith, gross
      negligence or reckless disregard of the duties involved in the conduct of such
      person’s office.




We
      may
      not change the nature of our business so as to cease to be, or withdraw our
      election as, a business development company unless authorized by vote of a
      “majority of the outstanding voting securities,” as defined in the 1940 Act. A
      majority of the outstanding voting securities of a company is defined under
      the
      1940 Act as the lesser of: (i) 67% or more of such company’s shares present
      at a meeting if more than 50% of the outstanding shares of such company are
      present and represented by proxy or (ii) more than 50% of the outstanding
      shares of such company.




As
      discussed previously, on March 13, 2007, a Special Meeting of Shareholders
      of
      the Company was held to authorize the Board of Directors of the Company to
      withdraw the Company’s election to be treated as a BDC under the 1940 Act and to
      elect to the Board Mr. John D. Powell, Mr. Larry P. Horner and Mr. Charles
      Bitters. As a result of the Special Meeting, the Shareholders approved both
      items and the Company has been authorized to file a Form N-54C with the SEC
      to
      effect the BDC withdrawal as soon as practicable. 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 under the current BDC structure.





Regulated
      Investment Company Status.




We
      had
      intended to make an election to be taxed as a regulated investment company
      under
      Subchapter M of the Internal Revenue Code. Had we so elected, we would have
      been
      required to (i) distribute at least 90% of our investment company taxable income
      and 90% of any ordinary pre-RIC built in gains we recognized 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.




-7-


Operating
      and Regulatory Structure




Our
      investment activities are managed by our executive officers and supervised
      by
      our board of directors, a majority of whom are independent directors. As a
      BDC,
      we are required to comply with certain regulatory requirements. For example,
      we
      generally cannot privately co-invest in any portfolio company with any of our
      affiliates without an exemptive order from the Securities and Exchange
      Commission, or the “SEC.” Also, while we are permitted to finance investments
      using debt, our ability to use debt is limited in certain significant respects.
      We are not currently in compliance with all of the rules and regulations related
      to operating as a BDC and intend to withdraw our election to be regulated as
      a
      BDC going forward.




Investment
      Objectives and Policies




Our
      business model is to achieve current income and capital gains. In order to
      achieve this model, we currently intend to invest in oil and gas production
      companies, primarily in the State of Texas, USA.




Changes
      to Investment Objectives and Policies




The
      Company’s investment objectives and policies are subject to change by a majority
      affirmative of the Company’s Board of Directors.




Investment
      Strategy




As
      a BDC,
      the Company favors companies that it believes present opportunities for superior
      performance through internal growth, product, or geographic expansion, the
      completion of complementary add-on acquisitions, or industry consolidations.




The
      Company would prefer to be a majority investor, without a fixed time horizon
      for
      the investments. This should allow for long-term commitments. The Company can
      continue to provide capital for add-on acquisitions that help build value after
      the initial closing.




The
      Company’s investment portfolio is currently all in 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
      these
      companies will be able to sell all 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.
      The capital invested by the Company is generally used by the portfolio companies
      to finance growth and working capital. The Company has subsequently withdrawn
      its election to be regulated as a BDC and its investment portfolio companies
      will be wholly-owned subsidiaries.




-8-


Managerial
      Assistance




As
      a BDC,
      we are generally required to make managerial assistance available to our
      portfolio companies. Additionally, we may provide advisory services for
      management buyouts, recapitalizations, and the growth and capital needs of
      emerging growth companies. The Company will provide fee-based business expertise
      through in-house and contract consultants.




The
      Company has relationships with potential service providers in this process
      that
      include, legal, accounting, public relations, market makers, investment banking
      firms and investors.




Although
      management has limited experience in mergers and acquisitions, it plans to
      work
      with service providers to accomplish the following steps:




(A)  Develop
      detailed understanding of management’s expected outcomes;




(B)  Develop
      a
      timetable for transaction;




(C)  Validate
      proposed transaction terms with select buyers or sellers;




(D)  Perform
      due diligence;




(E)  Prepare
      executive summary and presentation materials - including financial model;




(F)  Pre-screen
      and contact potential buyers or sellers;




(G)  Coordinate
      principal meetings;




(H)  Coach
      management on how to communicate and negotiate with buyers and sellers and
      generally facilitate the interactions between management and buyers or sellers;




(I)  Assist
      with the preparation of responses to due diligence requests;




(J)  Assist
      with the negotiation of term sheets with interested parties; and




-9-


(K)  Work
      with
      management and the investor or lender to complete due diligence process and
      negotiate final closing documents.




The
      Company follows a disciplined approach to procuring debt or equity capital
      for
      its clients. The following is an outline of its expected approach:




(A)  Develop
      detailed understanding of management’s expected outcomes;




(B)  Develop
      a
      timetable for transaction;




(C)  Validate
      proposed transaction terms with select institutional investors or lenders;




(D)  Finalize
      financing strategy and market positioning;




(E)  Perform
      due diligence;




(F)  Prepare
      executive summary and presentation materials - including financial model;




(G)  Pre-screen
      and contact investors;




(H)  Coordinate
      investor meetings;




(I)  Coach
      management on how to communicate and negotiate with institutional investors
      and
      generally facilitate the interactions between management and prospective
      investors and lenders;




(J)  Assist
      with the preparation of responses to investor due diligence
      requests;




(K)  Assist
      with the negotiation of term sheets with interested parties; and




(L)  Work
      with
      management and the investor or lender to complete due diligence process and
      negotiate final closing documents.




-10-


Due
      Diligence




We
      believe that our management has the ability and knowledge to conduct appropriate
      and extensive due diligence investigations prior to our investing in a
      prospective client. In conducting our due diligence, we use publicly available
      information, as well as information derived from former and current management
      teams, consultants, competitors and investment bankers and the direct experience
      of our management and consultants.




Our
      due diligence will typically include:




•
            
            review
                of historical and prospective financial information;•
            
            on-site
                visits;•
            
            interviews
                with management, employees, customers and vendors of the potential
                portfolio company;•
            
            review
                of senior loan documents;•
            
            background
                checks; and•
            
            research
                relating to the company’s management, industry, markets, products and
                services, and competitors.


Upon
      the completion of due diligence and a decision to proceed with an investment
      in
      a company, our management presents the opportunity to our board of directors,
      which determines whether to pursue the potential investment. Additional due
      diligence with respect to any investment may be conducted on our behalf by
      attorneys and independent accountants prior to the closing of the investment,
      as
      well as other outside advisers, as appropriate.




-11-


Valuation
      Policies




*Valuation
      of Portfolio Investments*




As
      a
      business development company, the Company’s business plan calls for it to invest
      primarily in illiquid securities issued by private companies (“Private
      Investments”). These Private Investments are generally subject to restrictions
      on resale and generally have no established trading market. The Company values
      its Private Investments at fair value as determined in good faith by the
      Company’s board-of directors in accordance with the Company’s valuation policy.
      The Company determines fair value to be the amount for which an investment
      could
      be sold in an orderly disposition over a reasonable period of time between
      willing parties other than in a forced or liquidation sale. The Company’s
      valuation policy is intended to provide a consistent basis for establishing
      the
      fair value of the portfolio. The Company will record unrealized depreciation
      on
      investments when it believes that an asset has been impaired and full collection
      for the loan or realization of an equity security is doubtful. Conversely,
      the
      Company will record unrealized appreciation if it has a clear indication that
      the underlying portfolio company appreciates in value and, therefore, the
      Company’s security has also appreciated in value. Under this valuation policy,
      the Company does not consider temporary changes in the capital markets, such
      as
      interest rate movements or changes in the public equity markets, in order to
      determine whether an investment in a private company has been impaired or
      whether a private investment has increased in value. The value of investments
      in
      public securities is determined using quoted market prices discounted for
      restrictions on resale.




*Equity
      Securities*




Equity
      interests in portfolio companies for which there is no liquid public market
      are
      valued based on the enterprise value of the portfolio company, which is
      determined using various factors, including cash flow from operations of the
      portfolio company and other pertinent factors such as recent offers to purchase
      a portfolio company’s securities or other liquidation events. The determined
      fair values are generally discounted to account for restrictions on resale
      and
      minority control positions.




The
      value
      of the Company’s equity interests in public companies for which market
      quotations are readily available is based upon the closing public market price
      for the last day up to and including the balance sheet date. Securities that
      carry certain restrictions on sale are typically valued at a discount from
      the
      public market value of the security.




Dividend
      income, if any, is recorded on cumulative preferred equity securities on an
      accrual basis to the extent that such amounts are expected to be collected
      and
      on common equity securities on the record date for private companies or on
      the
      ex-dividend date for publicly traded companies.




*Loans
      and Debt Securities*




For
      loans
      and debt securities, to the extent that we invest in them, fair value generally
      approximates cost unless the borrower’s condition or external factors lead to a
      determination of fair value at a lower amount. When the Company receives nominal
      cost warrants or free equity securities (“nominal cost equity”), the Company
      allocates its cost basis in its investment between its debt securities and
      its
      nominal cost equity at the time of origination. At that time, the original
      issue
      discount basis of the nominal cost equity is recorded by increasing the cost
      basis in the equity and decreasing the cost basis in the related debt
      securities.




-12-


Interest
      income is recorded on an accrual basis to the extent that such amounts are
      expected to be collected. For loans and debt securities with contractual
      payment-in-kind interest, which represents contractual interest accrued and
      added to the loan balance that generally becomes due at maturity, the Company
      will not accrue payment-in-kind interest if the portfolio company valuation
      indicates that the payment-in-kind interest is not collectible. Loans classified
      as Grade 4 or Grade 5 assets do not accrue interest. Loan origination fees,
      original issue discount, and market discount are capitalized and then amortized
      into interest income using the effective interest method.




The
      weighted average yield on loans and debt securities is computed as the (a)
      annual stated interest rate earned plus the annual amortization of loan
      origination fees, original issue discount and market discount earned on accruing
      loans and debt securities, divided by (b) total loans and debt securities at
      value. The weighted average yield is computed as of the balance sheet date.
      Prepayment premiums are recorded on loans when received.




*Portfolio
      Valuation Process*




As
      a BDC,
      our methodology for valuing the portfolio includes the examination of, among
      other things, the underlying investment performance, financial condition, and
      market-changing events that impact valuation. Because of the type of investments
      that we make and the nature of our business, this valuation process requires
      an
      analysis of various factors.




In
      our
      valuation process, we use the AICPA’s definition of “current sale,” which means
      an “orderly disposition over a reasonable period of time between willing parties
      other than in a forced or liquidation sale.”




Our
      process for determining the fair value for a private finance investment is
      applied consistently across our portfolio. The process is as follows. First,
      we
      determine the portfolio company’s enterprise value as if we were to sell it in a
“current sale.” We then evaluate the amount of our debt and the position of our
      debt in the portfolio company’s capital structure. If the enterprise value of
      the portfolio company is in excess of the amount of our last dollar of
      investment capital given our priority in the capital structure, the fair value
      of our investment will be considered to be our cost or perhaps, given the
      structure of our particular security, greater than cost if we are to share
      in
      equity appreciation. If the enterprise value of the portfolio company is less
      than our last dollar of investment capital in the capital structure, then our
      investment has declined in value and we need to reduce the fair value of our
      investment and incur a charge to our earnings by recognizing unrealized
      depreciation.




Determining
      the enterprise value of a portfolio company, as if that portfolio company were
      to be sold in a “current sale,” is a very complex process, where we must analyze
      the historical and projected financial results of the portfolio company and
      analyze the public trading market and private M&A market to determine
      appropriate purchase price multiples. In addition, a reasonable discount to
      the
      value of our securities must also be reflected when we may have restrictions
      such as vesting periods for warrants or other factors. We also take into account
      the collectibility of non-cash interest to determine if we will continue to
      accrue such interest.




*Specific
      Considerations*




The
      valuation of illiquid private securities is inherently subjective, and as a
      result, we must exercise good judgment in our valuation process. We exercise
      great care to assure that we have considered the position of the portfolio
      company today and the position of our security today given the data we have
      available. We also take care that the process is not too mechanical; however,
      there are some specific considerations that should be addressed in our valuation
      process as follows. The ultimate goal is a reasonable estimate of fair value
      determined in good faith.




-13-


Methodologies
      to determine enterprise value: There is no one methodology to determine
      enterprise value. Typically in the private equity business, companies are bought
      and sold based upon multiples of EBITDA, cash flow, revenues and in limited
      instances book value. In determining a multiple to use for valuation purposes,
      we look to private M&A statistics, counted public trading multiples or
      industry practices. In determining the right multiple, one needs to consider
      not
      only the fact that our company may be private relative to a peer group, but
      one
      must consider the size and scope of our company and its specific strengths
      and
      weaknesses. In some cases, when a company is at EBITDA breakeven or slightly
      below but has excellent future prospects, the best valuation methodology may
      be
      a discounted cash flow analysis based upon future projections. If a company
      is
      distressed, a liquidation analysis may provide the best indication of enterprise
      value.




Discounts
      on common equity securities: When determining the value of common equity
      securities or warrants to purchase such securities, we need to consider what
      type of discount to apply to the value of the security if we are in a minority
      position, have restrictions on resale, have specific concerns about the
      receptivity of the M&A market to a specific company at a certain time or
      other factors. Generally, we find that we apply larger discounts when we are
      new
      to an investment, and therefore, a sponsor-controlled exit strategy has not
      yet
      been developed. As an investment in the portfolio matures, we generally need
      to
      consider whether or not we should begin to reduce discounts, especially if
      we
      are generally aware that the sponsor or controlling shareholder group has begun
      to develop an exit strategy.




When
      we
      are the controlling shareholder, the discount imposed should generally be less
      than in the case of a minority position. We may still contemplate the need
      to
      discount for the current state of the M&A market or restrictions we may have
      imposed on us due to our relationship with management or other capital
      providers.




*Competition*




Virtually
      all of our existing and potential competitors are substantially larger and
      have
      considerably greater financial, technical, and marketing resources than we
      do
      and, due to our current limited capital, it may be difficult for us to compete
      successfully with these other companies. For example, some competitors may
      have
      a lower cost of funds and access to funding sources that are not available
      to
      us. In addition, some of our competitors may have higher risk tolerances or
      different risk assessments, which could allow them to consider a wider variety
      of investments and establish more relationships than us. Furthermore, many
      of
      our competitors are not subject to the regulatory restrictions that the 1940
      Act
      imposes on us as a business development company.




-14-


**ITEM
      1A. RISK FACTORS**




An
      investment in the securities of the Company involves risks and the possibility
      of the loss of a shareholder's entire investment. A prospective investor should
      evaluate all information discussed in this Report and the risk factors discussed
      below in relation to his financial circumstances before investing in any
      securities of the Company.




1.
            Going
                Concern Risk




We
      have
      previously had and could have future losses, deficits and deficiencies in
      liquidity, which could impair our ability to continue as a going concern. Our
      independent registered public accounting firm has indicated that certain factors
      raise substantial doubt about our ability to continue as a going concern and
      these factors are discussed in Note 2 to our audited financial statements.
      Since
      its inception, the Company has suffered recurring losses from operations and
      has
      been dependent on existing stockholders and new investors to provide the cash
      resources to sustain its operations.




We
      have
      incurred net losses in prior years and this resulted in a significant
      accumulated deficit. As reflected in the accompanying financial statements,
      although the Company had a net increase in net assets (post-BDC) of $34,298
      for
      the year ended December 31, 2006, $592,942 of this amount was from a non-cash
      unrealized gain on investments to reflect the fair market value of the Company’s
      investments as of December 31, 2006. Accordingly, without the unrealized gain,
      the Company would have had a net decrease in net assets (post-BDC) for the
      year
      ended December 31, 2006. Additionally, the Company had net cash used in
      operations of $522,305 for the year ended December 31, 2006 and a working
      capital deficiency of $704,991 at December 31, 2006. The Company is also in
      default on certain notes to banks and is in the development stage with minimal
      revenues. 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,
      and generate revenues. 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
      have
      substantial current obligations and at December 31, 2006, we had $707,271 of
      total liabilities. The Company does not have sufficient cash resources or
      current assets to pay these obligations.





Our
      substantial debt obligations pose risks to our business and stockholders
      by:




·
            making
                it more difficult for us to satisfy our
                obligations;




-15-


·
            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;




·
            impeding
                us from obtaining additional financing in the future for working
                capital,
                capital expenditures and general corporate purposes;
                and




·
            making
                us more vulnerable to a downturn in our business and limit our flexibility
                to plan for, or react to, changes in our
                business.




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.


2.
              No
                  Current Relevant Operating History.
                  The Company has no current relevant operating history, and is a
                  development stage company with minimal revenues. The Company faces
                  all of
                  the risks of a new business and those risks specifically inherent
                  in the
                  investigation, acquisition, or involvement in a new business opportunity.
                  Purchase of any securities of the Company must be regarded as placing
                  funds at a high risk in a new or "start-up" venture with all of
                  the
                  unforeseen costs, expenses, problems, and difficulties to which
                  such
                  ventures are subject.


3.  No
      Assurance of Success or Profitability .
      There
      is no assurance that the Company will acquire a favorable business opportunity.
      In addition, even if the Company becomes involved in a business opportunity,
      there is no assurance that it will generate revenues or profits, or that the
      market price of the Company's Common Stock will be increased thereby.




4.  Type
      of Business Acquired .
      The
      type of business to be acquired (if any) may be one that desires to avoid
      effecting a public offering and the accompanying expense, delays, and federal
      and state requirements which purport to protect investors. Because of the
      Company's limited capital, it is more likely than not that any acquisition
      by
      the Company will involve other parties whose primary interest is the acquisition
      of a publicly traded company. Moreover, any business opportunity acquired may
      be
      currently unprofitable or present other negative factors.




5.  Lack
      of Diversification .
      Because
      of the limited financial resources of the Company, it is unlikely that the
      Company will be able to diversify its acquisitions or operations. The Company's
      probable inability to diversify its activities into more than one area will
      subject the Company to economic fluctuations within a particular business or
      industry and therefore increase the risks associated with the Company's
      operations.




6.  Regulations. An
      acquisition made by the Company may be of a business that is subject to
      regulation or licensing by federal, state, or local authorities. Compliance
      with
      such regulations and licensing may be a time-consuming, expensive process and
      may limit other investment opportunities of the Company.




7.  Conflicts
      of Interest .
      Certain
      conflicts of interest exist between the Company and its executive officers
      and
      directors. Each of them has other business interests to which they devote their
      primary attention, and they may be expected to continue to do so. As a result,
      conflicts of interest may arise that can be resolved only through their exercise
      of such judgment as is consistent with their fiduciary duties to the Company.




-16-


8.  Indemnification
      of Officers and Directors. The
      Company's Articles of Incorporation provide for the indemnification of its
      directors, officers, employees, and agents, under certain circumstances, against
      attorney's fees and other expenses incurred by them in any litigation to which
      they become a party arising from their association with or activities on behalf
      of the Company. The Company may also bear the expenses of such litigation for
      any of its directors, officers, employees, or agents, upon such person's promise
      to repay the Company therefore if it is ultimately determined that any such
      person shall not have been entitled to indemnification. This indemnification
      policy could result in substantial expenditures by the Company, which it will
      be
      unable to recoup.




9.  Dependence
      upon Outside Advisors .
      To
      supplement the business experience of management, the Company may be required
      to
      employ accountants, technical experts, appraisers, attorneys, or other
      consultants or advisors. The selection of any such advisors will be made by
      management without any input from Shareholders. Furthermore, it is anticipated
      that such persons may be engaged on an "as needed" basis without a continuing
      fiduciary or other obligation to the Company.




10.  Need
      for Additional Financing. The
      Company's funds may not be adequate to take advantage of available business
      opportunities. Even if the Company were to obtain sufficient funds to acquire
      an
      interest in a business opportunity, it may not have sufficient capital to
      exploit the opportunity. The ultimate success of the Company will depend upon
      its ability to raise additional capital. The Company has not investigated the
      availability, source, or terms that might govern the acquisition of additional
      capital and will not do so until it evaluates its needs for additional
      financing. When additional capital is needed, there is no assurance that funds
      will be available from any source or, if available, that they can be obtained
      on
      terms acceptable to the Company. If not available, the Company's operations
      will
      be limited to those that can be financed with its modest capital.




11.  Competition .
      The
      search for potentially profitable business opportunities is intensely
      competitive. The Company expects to be at a disadvantage when competing with
      many firms that have substantially greater financial and management resources
      and capabilities than the Company. These competitive conditions will exist
      in
      any industry in which the Company may become interested.




12.  No
      Foreseeable Dividends. The
      Company has not paid dividends on its Common Stock and does not anticipate
      paying such dividends in the foreseeable future.




13.  Loss
      of Control by Present Management and Shareholders .
      The
      Company may consider an acquisition in which the Company would issue as
      consideration for the business opportunity to be acquired an amount of the
      Company's authorized but unissued Common Stock that could, upon issuance,
      constitute as much as 95% of the voting power and equity of the Company. The
      result of such an acquisition would be that the acquired company's stockholders
      and management would control the Company, and the Company's management could
      be
      replaced by persons unknown at this time. Such a merger could leave investors
      in
      the securities of the Company with a greatly reduced percentage of ownership
      of
      the Company. Management could sell its control block of stock at a premium
      price
      to the acquired company's stockholders, although management has no plans to
      do
      so.




14.Dilutive
      Effects of Issuing Additional Common Stock.The
      majority of the Company's authorized but unissued Common Stock remains unissued.
      The board of directors of the Company has authority to issue such unissued
      shares without the consent or vote of the shareholders of the Company. The
      issuance of these shares may further dilute the interests of investors in the
      securities of the Company and will reduce their proportionate ownership and
      voting power in the Company.






-17-






15.Thinly-traded
      Public Market.
      There
      currently is only a thinly traded or virtually inactive public market for the
      securities of the Company and no assurance can be given that a more active
      market will develop or that an investor will be able to liquidate his investment
      without considerable delay, if at all. If a more active market should develop,
      the price may be highly volatile. Factors such as those discussed in this "Risk
      Factors" section may have a significant impact upon the market price of the
      securities of the Company. Owing to what may be expected to be the low price
      of
      the securities, many brokerage firms may not be willing to effect transactions
      in the securities. Even if an investor finds a broker willing to effect a
      transaction in these securities, the combination of brokerage commissions,
      state
      transfer taxes, if any, and any other selling costs may exceed the selling
      price. Further, many lending institutions will not permit the use of such
      securities as collateral for any loans.




16.  Company
      resources utilized to be a BDC. The
      Company’s significant compliance costs as a BDC, in terms of both time and
      dollars, have operated as an encumbrance on the Company’s resources and in many
      respects have diverted the effective utilization of capital previously raised
      by
      the Company to effectuate its overall investment business plan.




17.  Non-Compliance
      with the requirements of the 1940 Act or as a BDC .
      The
      Board reviewed the Company’s compliance with the 1940 Act and subsequently
      determined that it was not in compliance with several important provisions
      of
      that Act. Specifically, the Company determined that it had, among other things:
      failed to adequately disclose the process of valuing its portfolio securities;
      issued convertible debentures, potentially violating Section 61 of the 1940
      Act;
      issued shares for services to be provided to the Company, potentially violating
      Section 23 of the 1940 Act; failed to properly constitute the Board through
      a
      shareholder vote, pursuant to Section 16 of the 1940 Act; failed to have a
      majority of directors that were not interested persons of the Company, pursuant
      to Section 56(a) of the 1940 Act; failed to obtain a fidelity bond, potentially
      violating Section 17 of the 1940 Act; issued preferred stock, which did not
      have
      voting rights equal to that of the common stock, potentially violating Section
      18(i) of the 1940 Act; and neglected to adopt compliance policies and
      procedures. In addition, the Company has never appointed a Chief Compliance
      Officer. In the absence of an active Chief Compliance Officer and complete
      diligence on the part of the Company, there can be no assurance that there
      are
      no additional compliance issues. Ultimately, the Board caused the Company to
      take certain steps to remediate the compliance failures, including recently
      holding a Special Meeting of the Shareholders to properly elect two of the
      Directors and authorize the Company to withdraw its election to be a BDC under
      the 1940 Act, contacting the holders of the shares issued for services to
      request that the Company repurchase those shares, and retaining experienced
      BDC
      counsel.




Although
      the Shareholders of the Company approved the Company’s request to withdraw its
      election as a BDC under the 1940 Act, violations of the 1940 Act may cause
      the
      Company to incur certain liabilities. Such liabilities can not be estimated
      by
      management as of this time, but may include regulatory enforcement actions.
      Such
      liabilities, if incurred, could have a significant impact on the Company’s
      ability to continue as a going concern.




18.  Withdrawal
      of Election to be Regulated as a BDC .
      When
      the Company ceases to be a BDC, the shareholders will lose certain protections,
      including the following:


·
              The
                    Company will no longer be subject to the requirement that it
                    maintain a
                    ratio of assets to senior securities of at least
                    200%;
  ·
            The
                Company will no longer be prohibited from protecting any director
                or
                officer against any liability to the Company or the Company’s shareholders
                arising from willful malfeasance, bad faith, gross negligence, or
                reckless
                disregard of the duties involved in the conduct of that person’s
                office;


-18-
 ·
              The
                    Company will no longer be subject to the requirement that it
                    maintain a
                    ratio of assets to senior securities of at least
                    200%;




·
            The
                Company will no longer be required to ensure that a majority of the
                directors are persons who are not “interested persons,” as that term is
                defined in section 56 of the 1940 Act, and certain persons that would
                be
                prevented from serving on the Company’s board if it were a BDC (such as
                investment bankers) will be able to serve on the Company’s
                board;




·
            The
                Company will no longer be subject to provisions of the 1940 Act regulating
                transactions between BDCs and certain affiliates and restricting
                the
                Company’s ability to issue warrants and
                options;




·
            The
                Company will be able to change the nature of its business and fundamental
                investment policies without having to obtain the approval of its
                shareholders;




·
            The
                Company will no longer be subject to provisions of the 1940 Act
                prohibiting the issuance of securities at below net asset
                value;




·
            The
                Company will no longer be subject to the other provisions and protections
                set forth in Sections 55 through 64 of the 1940 Act and the rules
                and
                regulations promulgated thereunder.




However,
      the Board will still be subject to customary principles of fiduciary duty with
      respect to the Company and its shareholders.




In
      addition, withdrawal of the Company’s election to be treated as a BDC will not
      affect the Company’s registration under Section 12(b) of the Securities Exchange
      Act of 1934, as amended (the “Exchange Act”). Under the Exchange Act, the
      Company is required to file periodic reports on Form 10-K, Form 10-Q, Form
      8-K,
      proxy statements and other reports required under the Exchange Act.




19.  Change
      in Accounting .
      With
      the withdrawal of the Company’s election to be regulated as a BDC under the 1940
      Act, this will significantly change the Company's required method of accounting.
      BDC financial statement presentation and accounting utilizes the value method
      of
      accounting used by investment companies, which allows BDCs to recognize income
      and value their investments at market value as opposed to historical cost.
      In
      addition, majority-owned subsidiaries are not consolidated; rather, investments
      in those subsidiaries are reflected on the balance sheet as an investment in
      a
      majority-owned portfolio company at fair value.




In
      accordance with BDC accounting requirements, the Company has recorded a
      significant unrealized gain on its investments. As an operating company, the
      required financial statement presentation and accounting for securities held
      will be either the fair value or historical cost method of accounting, depending
      on how the Company’s investments are classified and how long the Company intends
      to hold the investment. Since the Company’s only investments have been in its
      wholly-owned portfolio companies, all of the previously recorded unrealized
      gain
      on investments will be no longer be reflected in the Company’s financial
      statements. Thus, though there is no reason to believe that the worth of the
      investments would be different, the method of accounting will change.




-19-


Changing
      the Company’s method of accounting could reduce the market value of its
      investments in privately held companies by eliminating the Company’s ability to
      report an increase in value of its holdings as they occur. As an operating
      company, the Company will be required to consolidate its financial statements
      with subsidiaries, thus eliminating the portfolio company reporting benefits
      available to BDCs. Also, as an operating company, the Company will no longer
      present a Net Asset Value (“NAV”) in its financial statements or supplemental
      NAV financial information in the footnotes to the Company’s consolidated
      financial statements.




Because
      the Company will be considered an “oil and gas operating company”, the Company
      will use 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) will
      be
      charged to operations. All capitalized costs of oil and gas properties will
      be
      depleted using the units-of-production method based on total proved reserves.




The
      change in accounting due to the conversion to an operating company from a BDC
      is
      considered a change in accounting principle. As a result, in accordance with
      Statement of Financial Accounting Standard 154, "Accounting for Changes and
      Error Corrections," which requires that a change in accounting principle be
      retrospectively applied to all prior periods presented, the Company’s financial
      statements will be presented on an operating and consolidated basis for all
      current and prior periods presented on a retrospective basis without regard
      to
      the BDC method of accounting. The change in presentation may have an impact
      on
      the market’s response to the Company, the nature and extent of which cannot be
      predicted.




The
      Company does not believe that withdrawing its election to be regulated as a
      BDC
      will have any impact on its federal income tax status, because the Company
      never
      elected to be treated as a regulated investment company under Subchapter M
      of
      the Internal Revenue Code. Instead, the Company has always been subject to
      corporate level federal income tax on its income (without regard to any
      distributions it makes to its shareholders) as a “regular” corporation under
      Subchapter C of the Internal Revenue Code.




*EMPLOYEES*





As
      of
      March 1, 2007, American Energy has 1 full-time employee, including executive
      officers, non- executive officers, secretarial and clerical personnel and field
      personnel.




**ITEM
      2. DESCRIPTION OF PROPERTY**




As
      of March 1, 2007, the address for the corporate offices is at 6073 Hwy 281
      South, Mineral Wells, TX 76067.





We
      currently do not have a lease and we are not paying rent on this space. It
      is
      being provided to the Company by our President, Charles Bitters free of charge.
      We expect we will have to lease more substantial office in the near future
      and
      that the cost of the space may be material to our operations.





-20-




**ITEM
      3. LEGAL PROCEEDINGS**




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 December 31, 2006.





In
      November 2003, a settlement was negotiated 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. As of December 31, 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 negotiated in a lawsuit initiated by a
      Shareholder who invested $100,000 in the Company receiving 100,000 common shares
      during a private placement. The settlement of $149,500 was paid by the Company’s
      President, Charles Bitters personally and the Company has been released from
      all
      obligations related to the lawsuit. The $149,500 was recorded as a Loss on
      Settlement in the accompanying Statement of Operations for the twelve months
      ended December 31, 2003 and as Due to Related Party in the related Balance
      Sheet
      at that time.





The
      Company has included $68,802 of unpaid Federal payroll taxes and related
      penalties and interest in its accrued expenses as of December 31, 2006. Such
      amounts are subject to potential federal tax liens.





**ITEM
      4. SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**





There
      were no matters submitted to a vote of security holders for the year ended
      December 31, 2006. However, on March 13, 2007, a Special Meeting of Shareholders
      of the Company was held to authorize the Board of Directors of the Company
      to
      withdraw the Company’s election to be treated as a BDC under the 1940 Act and to
      elect to the Board, Mr. John D. Powell, Mr. Larry P. Horner and Mr. Charles
      Bitters. As a result of the Special Meeting, the Shareholders approved both
      items and the Board has been authorized to file a Form N-54C with the SEC to
      effect the BDC withdrawal as soon as practicable. 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 under the current BDC structure.


-21-


**PART
      II**




**ITEM
      5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES**





As
      of
      March 1, 2007, the Company had 494,170,082 shares of common stock issued and
      outstanding and had approximately 449 certificate stockholders of record.
      Additionally, the Company had 75,000 shares issuable.





The
      Company’s common stock, par value $0.0001 per share (the "Common Stock"), is
      traded on the Over the Counter Bulletin Board ("OTCBB") under the symbol
      "AMEP".





The
      following table sets forth certain information as to the high and low bid
      quotations quoted on the OTCBB for our 2005 and 2004 fiscal years. Information
      with respect to over-the-counter bid quotations represents prices between
      dealers, does not include retail mark-ups, markdowns or commissions, and may
      not
      necessarily represent actual transactions.


Period
              High
              LowFirst
                  Quarter
              2006
              0.07
              0.05Second
                  Quarter
              
              0.12
              0.06Third
                  Quarter
              
              0.07
              0.04Fourth
                  Quarter
              
              0.06
              0.03First
                  Quarter
              2005
              0.03
              0.01Second
                  Quarter
              
              0.02
              0.01Third
                  Quarter
              
              0.10
              0.01Fourth
                  Quarter
              
              0.09
              0.05




The
      bid price of our common stock was $0.08 per share on March 1, 2007.





**RECENT
      FINANCING AND SALE OF UNREGISTERED SECURITIES**





In
      January 2004, the Board of Directors determined that it was necessary to raise
      additional capital to carry out the company’s business plan and the Company
      filed a Form 1-E pursuant to the Securities Act notifying the SEC of the
      Company’s intent to sell up to $4,000,000 of the Company’s common stock at
      prices between $0.01 and $0.10 per share, or 40,000,000 and 400,000,000 shares,
      respectively. On January 29, 2004, the 1-E filing notification with the SEC
      became effective.





-22-


On
      February 22, 2005, the Company’s Board of Directors determined that it was in
      the best interest of the Company to discontinue the offering discussed above
      and
      to investigate other financing alternatives. Accordingly, the Company filed
      a
      Form 2-E notifying the SEC of the Company’s termination of the offering.
      However, the filing was not received by the SEC and the Company re-filed the
      Form 2-E with the SEC, effective June 30, 2005. As disclosed in the Form 2-E,
      the Company received $1,820,000 of proceeds from the offering, net of $30,000
      of
      expenses, through the sale of 171,000,000 shares of the Company’s $0.001 par
      value common stock.




On
      July
      24, 2005, the Company filed a Form 1-E pursuant to the Securities Act 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. In December 2006, the Company’s Board of
      Directors determined that it was in the best interest of the Company to
      discontinue the offering discussed above. Accordingly, the Company filed a
      Form
      2-E notifying the SEC of the Company’s termination of the offering. As disclosed
      in the Form 2-E, the Company received $4,575,879 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 includes net proceeds of
      $2,335,246 from the offering through the sale of 37,300,000 shares of the
      Company’s $0.001 par value common stock during the year ended December 31, 2006.




**SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31,
      2006**





There
      are
      no equity compensation plans authorized for the Company.




**OUR
      TRANSFER AGENT IS:**




Transfer
      Online, Inc.


227
      SW
      Pine Street, Suite 300


Portland,
      OR 97204


Telephone:
      (503) 227-2950


Fax:
      (503) 227-6874





**DIVIDENDS**





We
      presently intend to retain future earnings to support our growth. The Company
      has not paid cash dividends on its common stock and does not intend to pay
      any
      cash dividend in the foreseeable future. Any payment of cash dividends in the
      future will be dependent upon: the amount of funds legally available, our
      earnings; financial condition; capital requirements; and other factors which
      our
      Board of Directors deems relevant.





-23-


**Item
      6. Selected Financial Data**





The
      Statement of Operations, Per Share, and Balance Sheet data for the periods
      ended
      December 31, 2006, 2005 and 2004, are derived from our financial statements
      that
      have been audited by Salberg & Company, PA, our independent registered
      public accounting firm. Information in response to this Item is incorporated
      herein by reference to the tables in Note 12 of the accompanying Financial
      Statements. This selected financial data should be read in conjunction with
      our
      financial statements and related notes thereto and "Management's Discussion
      and
      Analysis of Financial Condition and Results of Operations" included elsewhere
      in
      this Annual Report.


**ITEM
      7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONSAND RESULTS OF OPERATIONS**




**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




The
      following is a discussion of our financial condition, results of operations,
      liquidity and capital resources. This discussion should be read in conjunction
      with our audited financial statements and the notes thereto included elsewhere
      in this Form 10-K.




Some
      of
      the statements under "Description of Business," "Risk Factors," "Management's
      Discussion and Analysis or Plan of Operation," and elsewhere in this Report
      and
      in the Company's periodic filings with the Securities and Exchange Commission
      constitute forward-looking statements. These statements involve known and
      unknown risks, significant uncertainties and other factors what may cause actual
      results, levels of activity, performance or achievements to be materially
      different from any future results, levels of activity, performance or
      achievements expressed or implied by such forward- looking statements. Such
      factors include, among other things, those listed under "Risk Factors" and
      elsewhere in this Report.





In
      some
      cases, you can identify forward-looking statements by terminology such as "may,"
      "will," "should," "could," "intends," "expects," "plans," "anticipates,"
      "believes," "estimates," "predicts," "potential" or "continue" or the negative
      of such terms or other comparable terminology.





The
      forward-looking statements herein are based on current expectations that involve
      a number of risks and uncertainties. Such forward-looking statements are based
      on assumptions that the Company will obtain or have access to adequate financing
      for each successive phase of its growth, that there will be no material adverse
      competitive or technological change in condition of the Company's business,
      that
      the Company's President and other significant employees will remain employed
      as
      such by the Company, and that there will be no material adverse change in the
      Company's operations, business or governmental regulation affecting the Company.
      The foregoing assumptions are based on judgments with respect to, among other
      things, further economic, competitive and market conditions, and future business
      decisions, all of which are difficult or impossible to predict accurately and
      many of which are beyond the Company's control.





Although
      management believes that the expectations reflected in the forward-looking
      statements are reasonable, management cannot guarantee future results, levels
      of
      activity, performance or achievements. Moreover, neither management nor any
      other persons assumes responsibility for the accuracy and completeness of such
      statements.





-24-


**GENERAL**





American
      Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our”) is
      a publicly traded business development company (see below) that is engaged
      primarily in 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 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.




Prior
      to
      becoming a BDC 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. Prior to that, the Company was known as
      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-54A with the SEC to be regulated
      as
      a BDC pursuant to the provisions of Section 54(a) of the 1940 Act (“Act”), to be
      subject to the provisions of Section 55 through 65 of the Act. The Company
      had
      determined that its operating model best approximate that of an investment
      company and intended to make investments into developing businesses in the
      oil
      and gas and other industries.




In
      January 2004, the Company determined that it was necessary to raise additional
      capital to carry out the Company’s business plan. Accordingly, the Company filed
      a Form 1-E with the SEC, notifying it of the Company’s intent to sell up to
      $4,000,000 of the Company’s common stock at prices between $0.01 and $0.10 per
      share, or 400,000,000 and 40,000,000 shares, respectively. On February 22,
      2005,
      the Board determined that it was in the best interest of the Company to
      discontinue the offering and to investigate other financing alternatives.
      Accordingly, the Company filed a Form 2-E notifying the SEC of the Company’s
      termination of the offering. However, the filing was not received by the SEC
      and
      the Company re-filed the Form 2-E with the SEC, effective June 30, 2005. As
      disclosed in the Form 2-E, the Company received $1,820,000 of proceeds from
      the
      offering, net of $30,000 of expenses, through the sale of 171,000,000 shares
      of
      the Company’s $0.001 par value common stock.




On
      July
      24, 2005, the Company filed a Form 1-E pursuant to the Securities Act 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 (the “July 2005 Offering”). In December 2006,
      the Company’s Board of Directors determined that it was in the best interest of
      the Company to discontinue the offering discussed above. Accordingly, the
      Company filed a Form 2-E notifying the SEC of the Company’s termination of the
      offering. As disclosed in the Form 2-E, the Company received $4,575,879 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 includes
      net proceeds of $2,335,246 from the offering through the sale of 37,300,000
      shares of the Company’s $0.001 par value common stock during the year ended
      December 31, 2006.




-25-


The
      July
      2005 Offering, however, was reviewed by the SEC Staff, which issued a comment
      letter to the Company (the “Comment Letter”) raising a number of questions
      relating to the offering. In response to the Comment Letter, the Company
      voluntarily suspended the July 2005 Offering and undertook a review of its
      compliance with the 1940 Act. The Company subsequently determined that it was
      not in compliance with several important provisions of that Act.




Specifically,
      the Company determined that it had, among other things: failed to adequately
      disclose the process of valuing its portfolio securities; issued convertible
      debentures, potentially violating Section 61 of the 1940 Act; issued shares
      for
      services to be provided to the Company, potentially violating Section 23 of
      the
      1940 Act; failed to properly constitute the Board through a shareholder vote,
      pursuant to Section 16 of the 1940 Act; failed to have a majority of directors
      that were not interested persons of the Company, pursuant to Section 56(a)
      of
      the 1940 Act; failed to obtain a fidelity bond, potentially violating Section
      17
      of the 1940 Act; issued preferred stock, which did not have voting rights equal
      to that of the common stock, potentially violating Section 18(i) of the 1940
      Act; and neglected to adopt compliance policies and procedures. In addition,
      the
      Company has never appointed a Chief Compliance Officer. In the absence of an
      active Chief Compliance Officer and complete diligence on the part of the
      Company, there can be no assurance that there are no additional compliance
      issues.




The
      Board
      reviewed the facts surrounding these compliance failures and their implications
      for the Company. Ultimately, the Board caused the Company to take certain steps
      to remediate the compliance failures, including issuing a proxy statement to
      properly elect two of the Directors, contacting the holders of the shares issued
      for services to request that the Company repurchase those shares, and retaining
      experienced BDC counsel. The Company’s violations of the 1940 Act may cause the
      Company to incur certain liabilities. Such liabilities can not be estimated
      by
      management as of this time, but may include regulatory enforcement actions.
      However, such liabilities, if incurred, could have a significant impact on
      the
      Company’s ability to continue as a going concern.




The
      Company has informed the SEC Staff of these steps. However, these efforts will
      not fully cure all of the 1940 Act compliance deficiencies currently affecting
      the Company and it is unclear how those deficiencies will impact the Company
      in
      the future. The Company’s significant compliance and remediation costs, in terms
      of both time and dollars, have operated as an encumbrance on the Company’s
      resources.




The
      Company has determined, based on the nature of its investments, that the Company
      is not currently required to be regulated as a BDC because it does not meet
      the
      definition of an “investment company” in the 1940 Act. This is due to the fact
      that its non-cash assets consist almost entirely of investment in companies
      that
      it wholly-owns. Thus, it is operating, and intends to operate, as a holding
      company rather than an investment company.




Accordingly,
      and after careful consideration of the 1940 Act requirements applicable to
      BDCs,
      its holding company operations, an evaluation of the Company’s ability to
      operate as a going concern in an investment company regulatory environment,
      the
      cost of 1940 Act compliance needs and a thorough assessment of the Company’s
      current business model, the Board has determined that continuation as a BDC
      is
      not in the best interests of the Company and its shareholders at the present
      time. Further, were the Company to remain a BDC, the Company would be required
      to substantially change its business model to meet the definition of an
“investment company.”




In
      making
      the determination that continuation as a BDC is not in the best interests of
      the
      Company and its shareholders, the Board considered the viable alternatives
      available to the Company. The Board considered that the Company could remain
      an
      investment company and restructure its portfolio investments to reduce its
      ownership of investee companies to non-majority ownership positions, while
      attempting to cure the significant compliance failures that it has incurred.
      However, the Board determined that the Company’s business model required
      majority ownership of its portfolio companies and that the significant expense
      associated with that alternative would make it unlikely that the Company would
      be able to continue operations.




-26-


Thus,
      on
      March 13, 2007, a Special Meeting of Shareholders of the Company was held to
      authorize the Board of Directors of the Company to withdraw the Company’s
      election to be treated as a BDC under the 1940 Act and to elect to the Board,
      Mr. John D. Powell, Mr. Larry P. Horner and Mr. Charles Bitters. As a result
      of
      the Special Meeting, the Shareholders approved both items and the Company has
      been authorized to file a Form N-54C with the SEC to effect the BDC withdrawal
      as soon as practicable.





**OVERVIEW
      OF COMPANY.**




Since
      its
      inception, the Company has suffered recurring losses from operations and has
      been dependent on existing stockholders and new investors to provide the cash
      resources necessary to sustain its operations. As reflected in the accompanying
      financial statements, although the Company had a net increase in net assets
      of
      $34,298 for the year ended December 31, 2006, $592,942 of this amount was from
      a
      non-cash unrealized gain on investments to reflect the fair market value of
      the
      Company’s investments as of December 31, 2006. Accordingly, without the
      unrealized gain, the Company would have had a net decrease in net assets for
      the
      year ended December 31, 2006. Additionally, the Company had net cash used in
      operations of $522,305 for the year ended December 31, 2006 and a working
      capital deficiency of $704,991 at December 31, 2006. 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, and generate revenues. The financial statements do not include any
      adjustments that might be necessary if the Company is unable to continue as
      a
      going concern.





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’s
                      ability to increase profitability and sustain a cash flow level
                      that will
                      ensure support for continuing
                      operations.


As
      discussed previously, in March 2007, the Shareholders of the Company authorized
      the Board to withdraw the Company’s election to be treated as a BDC under the
      1940 Act. As a result, Company has been authorized to file a Form N-54C with
      the
      SEC to effect the BDC withdrawal as soon as practicable. As a result of the
      change, the Company will be considered an “oil and gas operating company”
instead of a BDC. Although the Company believes that the change is in the best
      interests of the Shareholders, it cannot give assurance that it will generate
      sufficient cash flow from operations or obtain additional financing to meet
      scheduled debt payments and financial covenants. 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. 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.





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 for our investees. The
      following represents unaudited supplemental information for the year ended December 31, 2006 for our
      majority-owned portfolio companies.


-27-





Description
            
            **Production**
              **Resources,
                Inc.**
            ****
            **Bend
                Arch Petroleum, Inc.**
            ****
            **Oil
                America Group**
            ****
            **AMEP
                Strategic Investments**Revenue
            
            $
            385,709
            
            $
            1,119,133
            
            $
            11,095
            
            $
            -Expenses
            
            
            338,393
            
            
            3,279,206
            
            
            56,447
            
            
            -Operating
                Income (Loss)
            
            
            47,316
            
            
            (2,160,074
            )
            
            (45,352
            )
            
            -Other
                Income (Expense)
            
            
            -
            
            
            189,908
            
            
            (140
            )
            
            -Net
                Income (Loss)
            
            $
            47,316
            
            $
            (1,970,166
            )
            $
            (45,493
            )
            $
            -





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**




On
      March
      13, 2007, at a Special Meeting of Shareholders, the Shareholders approved and
      authorized the Board to withdraw the Company’s election to be treated as a BDC
      under the 1940 Act. As a result, the Company will no longer be a BDC with
      unconsolidated portfolio companies but rather be an oil and gas operating
      company with consolidated subsidiaries.





**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
      audited financial statements contained in our annual report on Form 10-K for
      the
      fiscal year ended December 31, 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.




-28-


**GOING
      CONCERN**




The
      independent registered public accounting firms’ reports to our financial
      statements at December 31, 2006 and 2005 and for the years ended December 31,
      2006, 2005 and 2004, 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 from
      February 20, 2003 (Inception of Development) to December 31, 2006. 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, 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.




-29-


**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
      of oil and gas leases and property and equipment, no impairment charge has
      been
      recorded for the year ended December 31, 2006.





**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 and increased by $189,786 in 2006 to $2,264,684 at December 31,
      2006.
      Net operating loss carry-forwards aggregate approximately $6,660,833 and expire
      in the years through 2026.





-30-


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.





**RESULTS
      OF OPERATIONS**




Results
      of Operations




Fiscal
      year ended December 31, 2006 compared to fiscal year ended December 31, 2005
      and
      compared to fiscal year ended December 31, 2004.




-31-







**Year
                Ended December
                31,****2006**
            
            **2005**
            
            **2004****Investments
                and Pre-BDC Operating Income**Oil
                sales, net - Pre-BDC
            
            $
            -
            
            $
            -
            
            $
            40,010Investment
                income - portfolio investmentsDividends
            
            
            -
            
            
            -
            
            
            -Interest
            
            
            -
            
            
            -
            
            
            -**Total
                Investments and Pre-BDC Operating Income**
            
            
            **-**
            
            
            **-**
            
            
            **40,010****Expenses**Compensation
            
            
            120,000
            
            
            120,000
            
            
            600,995Consulting
            
            
            149,139
            
            
            38,259
            
            
            256,934Depletion
            
            
            -
            
            
            -
            
            
            3,690Depreciation
            
            
            7,894
            
            
            7,894
            
            
            45,820Equipment
                rental
            
            
            -
            
            
            -
            
            
            42,000General
                and administrative
            
            
            50,589
            
            
            42,098
            
            
            61,682Production
            
            
            626
            
            
            -
            
            
            91,363Professional
            
            
            235,524
            
            
            140,595
            
            
            157,229Website
            
            
            -
            
            
            -
            
            
            28,550**Total
                Expenses**
            
            
            **563,772**
            
            
            **348,846**
            
            
            **1,288,263****Net
                Investment Operating Loss**
            
            
            **(563,772**
            **)**
            
            **(348,846**
            **)**
            
            **(1,248,252**
            **)****Realized
                and Unrealized Gain (Loss) from Investments and Other Income
                (Expenses)**Gain
                on settlement of debt
            
            
            -
            
            
            -
            
            
            18,364Other
                income
            
            
            20,000
            
            
            17,429
            
            
            6,726Unrealized
                gain on investments
            
            
            592,942
            
            
            14,852,861
            
            
            -Interest
                expense
            
            
            (8,868
            )
            
            (595,125
            )
            
            (3,820,828
            )Payroll
                tax expense and penalties
            
            
            (6,004
            )
            
            (6,004
            )
            
            (6,004
            )**Total
                Realized and Unrealized Gain (Loss) from Investments and Other Income
                (Expenses)**
            
            
            **598,070**
            
            
            **14,269,161**
            
            
            **(3,801,742**
            **)****Net
                Increase in Net Assets**
            
            **$**
            **34,298**
            
            **$**
            **13,920,315**
            
            **$**
            **(5,049,995**
            **)**





-32-





For
      the year ended December 31, 2006





*Investment
      Income* *:*





There
      was
      no investment income for either 2006 or 2005, respectively.




*Operating
      Expenses* *:*





Operating
      expenses increased $214,926, or 62%, to $563,772 for 2006 from $348,846 for
      2005. The increase was primarily the result of a $110,880 increase in consulting
      and a $94,929 increase in professional. The increase in professional 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 $13,671,091 of income, or 96% to $598,070 of income
      for 2006 from $14,269,161 of income for 2005. The decrease was primarily that
      the unrealized gain on investments to reflect the fair value of the Company’s
      portfolio investments as of December 31, 2005 was $14,852,861 compared to
      $592,942 for 2006. This decrease was offset by a $586,257 decrease in interest
      expense in 2006 as compared to 2005 due to a convertible debenture beneficial
      conversion feature in the prior year 2005.





For
      the year ended December 31, 2005





*Investment
      and Pre-BDC Operating Income* *:*





Investment
      and pre-BDC operating income decreased $40,010, or 100%, to zero for 2005 from
      $40,010 for 2004. Prior to electing BDC status and transferring oil and gas
      assets to a majority-owned investee, the Company previously sold crude oil
      under
      short-term agreements at prevailing market rates.




-33-


*Operating
      Expenses* *:*





Operating
      expenses decreased $939,417, or 73%, to $348,846 for 2005 from $1,288,263 for
      2004. The decrease was primarily the result of a $480,995 decrease in
      compensation, a $218,675 decrease in consulting, a $91,363 decrease in
      production and a $42,000 decrease in equipment rental. The decrease in
      compensation and consulting was primarily from a decrease in stock issued for
      these services in 2004 as compared to none in 2005. The decrease in production
      and equipment rental was related to oil and gas expenses in 2004 when the
      Company was not a BDC.





*Other
      Income (Expense)* *:*





Other
      income (expense) increased $18,070,093 of income, or 475% to $14,269,161 of
      income for 2005 from $3,801,742 of expense for 2004. The increase was primarily
      from a $14,852,861 increase for an unrealized gain on investments to reflect
      the
      fair value of the Company’s portfolio investments as of December 31, 2005. This
      increase was offset by a $3,225,703 decrease in interest expense in 2005 as
      compared to 2004 due to a convertible debenture beneficial conversion
      feature.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $2,280 at December 31, 2006 as compared to $471,339 at
      December 31, 2005, and working capital deficit was $704,991 at December 31,
      2006. The decrease in cash was primarily from $522,305 of cash used in operating
      activities. The Company received $2,335,246 of net proceeds from the issuance
      of
      common stock but this was offset by $2,314,500 of net advances to the Company’s
      majority-owned portfolio companies.





*Operating
      Activities*





Cash
      used
      in operating activities was $522,305 for 2006 compared to cash provided by
      of
      $14,447,908 for 2005. The decrease in cash used in operations for 2006 was
      primarily that in 2005, the net increase in net assets included a $14,852,861
      unrealized gain on investments.





*Investing
      Activities*





Cash
      used
      in investing activities was $2,314,500 for 2006 compared to $912,056 for 2005.
      The increase in cash used resulted entirely from an increase in advances made
      by
      the Company for its majority-owned portfolio companies.





*Financing
      Activities*





Cash
      provided by financing activities was $2,367,746 for 2006 compared to cash
      provided of $2,207,329 for 2005. The increase in cash provided resulted
      primarily from $2,335,246 of net proceeds from the issuance of common stock
      in
      2006 as compared to $2,240,663 in 2005.


-34-




Our
      principal uses of cash to date have been for operating activities and we have
      funded our operations during fiscal years 2006, 2005 and 2004 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.





***Equity
      Financing***





For
      the
      years ended December 31, 2006, 2005 and 2004 the Company received $2,335,246,
      $2,240,633 and $777,500 of proceeds, net of offering costs, from the issuance
      of
      common stock, respectively.





***Liquidity***





To
      continue with our business plan, we will require additional short-term working
      capital and we have not generated sufficient cash from operations 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 and the prospects for our business. 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.




***Debt***





*Our
      debt at December 31, 2006 and 2005 consisted of the following:*





***Lease
                Payable***
            
            **2006**
            
            **2005**$21,238
                computer equipment lease, bearing interest at 10% per
                annum
            
            $
            16,131
            
            $
            16,131





-35-


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 December 31,
      2005, 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 December 31, 2006, the Company has
      recorded a total of $11,724 in accrued interest for this lease payable in the
      accompanying Balance Sheet.





In
      November 2003, a settlement was negotiated 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. The President of the Company transferred these shares on
      September 15, 2003. As of December 31, 2005, 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***




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 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.





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





-36-


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:***




**2006**
            
            **2005**$400,000
                Convertible Debentures, dated June 15, 2004, bearing interest at
                8% per
                annum and due on December 1, 2005
            
            $
            57,967
            
            $
            57,967$
            57,967
            
            $
            57,967





In
      May
      2004, the Company received $250,000 in gross proceeds from the issuance of
      a
      convertible debenture. The terms of the convertible debenture include an
      interest rate of 8% per annum, 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.




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. During 2004 and 2005, the entire
      $250,000 of debt discount was amortized to interest expense relating to the
      $250,000 convertible debenture that was fully converted as of December 31,
      2005.




-37-


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 December 31, 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. During 2004 and
      2005, the entire $400,000 of debt discount was amortized to interest expense
      related to the $400,000 convertible debenture being fully converted as of
      December 31, 2005.




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. During 2004 and 2005, the entire
      $1,000,000 of debt discount was amortized to interest expense related to the
      $1,000,000 convertible debenture being fully converted as of December 31,
      2005.




-38-


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 majority owned
      portfolio company (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 Majority-Owned Portfolio Companies).




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. In 2004, the Company recognized a 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 related to the
      $600,000 convertible debenture issued and subsequently converted in
      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).





-39-


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. In 2004, the Company recognized a beneficial conversion
      feature by charging the statement of operations $30,000 for interest expense
      and
      $30,000 for additional paid-in capital related to the $30,000 convertible
      debenture that was issued and subsequently converted during 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 December 31, 2006, the Company has recorded $127,309 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 December 31, 2006.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Contractual
      Obligations and Commercial Commitments**





The
      following table highlights, as of December 31, 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
            
            
            139,033
            
            
            139,033
            
            
            -
            
            
            -
            
            
            -Total
                Debt
            
            $
            213,131
            
            $
            213,131
            
            $
            -
            
            $
            -
            
            $
            -





-40-


**200** **7
      OUTLOOK**




The
      ability to invest further will be heavily dependent on securing additional
      capital from investors or debt. Additionally, as authorized by the Shareholders
      on March 13, 2007, the Company will file a Form N-54C to withdraw its election
      to be a BDC and going forward will be classified as an oil and gas operating
      company. The Company will be highly dependent on the success of its wholly-owned
      subsidiaries and there is no assurance that additional equity or debt financing
      will be available on terms acceptable to the Company’s Management or that the
      Company’s wholly-owned subsidiaries will be successful.




We
      have
      previously had and could have future losses, deficits and deficiencies in
      liquidity, which could impair our ability to continue as a going concern. Our
      independent registered public accounting firm has indicated that certain factors
      raise substantial doubt about our ability to continue as a going concern and
      these factors are discussed in Note 2 to our audited financial statements.
      Since
      its inception, the Company has suffered recurring losses from operations and
      has
      been dependent on existing stockholders and new investors to provide the cash
      resources to sustain its operations.




We
      have
      incurred net losses in prior years and this resulted in a significant
      accumulated deficit. As reflected in the accompanying financial statements,
      although the Company had a net increase in net assets of $34,298 for the year
      ended December 31, 2006, $592,942 of this amount was from a non-cash unrealized
      gain on investments to reflect the fair market value of the Company’s
      investments as of December 31, 2006. Accordingly, without the unrealized gain,
      the Company would have had a net decrease in net assets for the year ended
      December 31, 2006. Additionally, the Company had net cash used in operations
      of
      $522,305 for the year ended December 31, 2006 and a working capital deficiency
      of $704,991 at December 31, 2006. The Company is also in default on certain
      notes to banks and is in the development stage with minimal revenues. 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, and
      generate revenues. 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
      have
      substantial current obligations and at December 31, 2006, we had $678,982 of
      total liabilities. The Company does not have sufficient cash resources or
      current assets to pay these obligations.





Our
      substantial debt obligations pose risks to our business and stockholders
      by:


·
            making
                it more difficult for us to satisfy our
                obligations;




·
            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;




·
            impeding
                us from obtaining additional financing in the future for working
                capital,
                capital expenditures and general corporate purposes;
                and




·
            making
                us more vulnerable to a downturn in our business and limit our flexibility
                to plan for, or react to, changes in our
                business.




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.




-41-


**ITEM
      7A. QUANITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK**





Because
      we currently have no long-term debt and do not expect that, in the next 12
      months, we will incur any (although there can be no assurance that the funds
      that we will require to operate our business during that period will be
      available to us through sales of our equity or through short-term borrowings),
      we do not consider a principal risk to be interest rate fluctuations. If, in
      the
      future, we incur, or consider incurring, a material amount of long-term debt,
      the occurrence of such event could result in interest rate fluctuations becoming
      a principal risk. 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 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
      8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY
      DATA**





The
      Company’s Financial Statements and Notes thereto are filed together with this
      report starting at Page F-1.





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE**





None





**ITEM** **9A.
      CONTROLS AND PROCEDURES.**




As
      of the
      date this report is filed, an evaluation was performed under the supervision
      and
      with the participation of the Company's principal executive officers and
      financial officers of the effectiveness of the design and operation of the
      Company’s disclosure controls and procedures (as such term is defined in Rules
      13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
      covered by this report.





As
      of the
      date this report is filed, our Company's principal executive officer and
      financial officer have made significant changes in the Company's internal
      controls and in other factors that could significantly affect internal controls
      subsequent to the date of the above-described evaluation period. In particular,
      the Company has adopted an audit committee, hired qualified members of the
      Board
      of Directors with significant experience related to the Company’s primary
      business plan and committed significant funds for legal and accounting work
      and
      the preparation of financial statements and audits. All of the above enables
      our
      Company's principal executive officer and financial officer to maintain our
      Company as current pursuant to its Exchange Act reporting obligations and
      provide our Company with an effective design and operation of disclosure
      controls and procedures.




**ITEM
      9B. OTHER INFORMATION.**




None


-42-


**PART
      III**


**ITEM** **10.
      DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE
      GOVERNANCE**




The
      directors and officers of the Company, as of December 31, 2006, are set forth
      below. The directors hold office for their respective term and until there
      successors are duly elected and qualified. The officers serve at the will of
      the
      Board of Directors.




**Directors
      and Executive Officers**




Set
      forth
      below are the names, ages, years of service and positions of the executive
      officers and directors of the Company as of December 31, 2006.


Name
              Age
              Position
              Years
                  of ServiceCharles
                  Bitters
              61
              President,
                  CEO and
              Since
                  2002DirectorLarry
                  P. Horner
              52
              Director
              Since
                  March 2006John
                  D. Powell
              63
              Director
              Since
                  March 2006




The
      Directors serve until their successors are elected by the shareholders.
      Vacancies on the Board of Directors may be filled by appointment of the majority
      of the continuing directors. The executive officers serve at the discretion
      of
      the Board of Directors. Directors will be elected for one-year terms at each
      annual shareholder's meeting.





On
      March
      13, 2007, the Shareholders of the Company elected Charles Bitters, Larry P.
      Horner and John D. Powell to serve as Directors until the next annual meeting
      of
      the Shareholders of the Company or until their successors have been duly elected
      and qualified. There are no agreements with respect to the election of
      Directors. We have not previously compensated our Directors for service on
      our
      Board of Directors, any committee thereof, or reimbursed for expenses incurred
      for attendance at meetings of our Board of Directors and/or any committee of
      our
      Board of Directors. Officers are appointed annually by our Board of Directors
      and each Executive Officer serves at the discretion of our Board of Directors.
      The Company does not have a standing nominating committee. Previously, the
      Board
      has consisted of a sole member, Mr. Bitters, which made such a committee
      impracticable. Mr. Bitters has been the sole director participating in the
      consideration of director nominees. The Board has not established a separately
      designated audit committee; rather, the entire Board acts as the Company’s audit
      committee. The Company knows of no understanding or arrangement between any
      director, nominee for director, Officer or any other person pursuant to which
      he
      was or is to be selected as a director or nominee for director or an Officer
      of
      the Company.





-43-


Effective
      January 1, 2006, each member of the Board of Directors will be compensated
      at
      rate of $1,000 per month and will be reimbursed for expenses related to their
      activities.





Except
      as
      noted below, none of our officers and/or directors signing this annual report
      have ever filed any bankruptcy petition, been convicted of or been the subject
      of any criminal proceedings or the subject of any order, judgment or decree
      involving the violation of any state or federal securities laws.





In
      1990,
      Mr. Horner filed for personal protection under Chapter 7 of the United States
      Bankruptcy Code.





**BOARD
      OF DIRECTORS/EXECUTIVE OFFICERS**





*Charles
      Bitters* has been
      CEO and director of the Company since 2002 and President since 2001. Mr. Bitters
      has over 25 years experience in all phases of the petroleum industry including
      drilling of oil and gas wells and the stimulation, production and operation
      of
      oil and gas wells. From 1997 to 2000, he was the Managing Member of Trinity
      Group, LLC, an oil and gas lease production company. Mr. Bitters holds a
      Bachelor of Science degree from Tarleton State University.





*John
      Powell* has been
      a director of the Company since November 2005. Mr. Powell is seasoned business
      professional with an extensive career in real estate including significant
      experience in development, construction and mortgage lending, structured sale
      events, federal housing and community development programs, asset management
      and
      disposition, appraisal and brokerage. Currently, Mr. Powell is a principal
      of J
      Powell Group LLC (a management consultant firm) since 2004; Client Relationship
      Manager and Special Projects Manager at E3 Group, Inc. (a professional employer
      organization) from 1998 to 2003; Principal and Senior Vice President of Exchange
      Partners, Inc./ MR&P International, Inc. from 1995 to 1998 ; Director of
      Real Estate Operations at Grubb & Ellis Asset Services Corporation from 1994
      to 1995; Principal and Executive Vice President of JANROSE Group, Inc. from
      1990
      to 1994; Real Estate Development and Construction Lending Manager of the
      Metropolitan Financial Savings and Loan Association from 1985 to 1990;
      Independent Commercial Real Estate Consultant from 1982 to 1984. Mr. Powell
      has
      served as a director since March 2006. He has received compensation of $1,000
      per month since January 2006. Mr. Powell owns no equity in the Company.





*Larry
      Horner* has been
      a director of the Company since March 2006. Mr. Horner is a licensed Certified
      Public Accountant in the State of Texas. Currently, Mr. Horner is President
      of
      Coaster Management, Inc. (a privately held holding company); President of Retail
      Operations and Special Project Consultant for U.S. Companies, Inc. (a privately
      held holding company) from 2001 to the present; Chief Financial Officer and
      Senior Vice President of The Image Bank (a wholly-owned subsidiary of Kodak)
      from 1993 to 2000; Chief Financial Officer and Vice President of U.S. Companies,
      Inc. from 1980 to 1993; Senior Accountant for Ernst and Young from 1977 to
      1980.
      Mr. Horner has served as a director since March 27, 2006. He has received
      compensation of $1,000 per month since his appointment to the Board. Mr. Horner
      owns no equity in the Company.





**FAMILY
      RELATIONSHIPS**





Charles
      Bitters is the father of Amanda Bitters, sole director and officer of Daambr
      Production Corporation, which owns 3,436,000 shares or approximately 0.7% of
      our
      stock as of March 1, 2007.





-44-


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
      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. The oil and gas properties were also transferred
      to
      that same majority-owned affiliate.





**CERTAIN
      LEGAL PROCEEDINGS**





No
      director, nominee for director or executive officer of the Company has appeared
      as a party in any legal proceeding material to an evaluation of his ability
      or
      integrity during the past five years.





**SECTION
      16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Section
      16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
      requires the Company's officers, directors and persons who own more than 10%
      of
      the Company's Common Stock to file reports of ownership and changes in ownership
      with the SEC and the National Association of Securities Dealers, Inc. Officers,
      directors and greater than 10% stockholders are required by regulation to
      furnish the Company with copies of all forms they file pursuant to Section
      16(a)
      of the Exchange Act. We believe all filings as required under Section 16(a)
      of
      the Exchange Act were properly made.





**SIGNIFICANT
      EMPLOYEES**





We
      have
      one employee, Charles Bitters, President and CEO.





**AUDIT
      COMMITTEE FINANCIAL EXPERT**





The
      SEC
      has adopted rules to implement certain requirements of the Sarbanes-Oxley Act
      of
      2002 pertaining to public company audit committees. One of the rules adopted
      by
      the SEC requires a company to disclose whether it has an “audit committee
      financial expert” serving on its audit committee. Our board of directors has not
      yet established an audit committee. In March 2006, the Company appointed Mr.
      Larry Horner as an independent member of the Board of Directors. Mr. Horner
      is a Certified Public Accountant and we believe he will meet the requirement
      of
      the audit committee financial expert when and if the Company formalizes an
      audit
      committee.





**CODE
      OF ETHICS**





We
      have
      not yet adopted a code of ethics policy but the Board of Directors intends
      to
      adopt a code of ethics policy in the future.





-45-


**ITEM
      11. EXECUTIVE COMPENSATION**





**COMPENSATION
      DISCUSSION & ANALYSIS**





The
      Company only has one employee, Charles Bitters, the President and CEO. As a
      result, the Company does not have a standing compensation committee and the
      entire Board of Directors is actively involved in the compensation plan for
      Mr.
      Bitters. The salary compensation plan for Mr. Bitters has been the same for
      the
      prior three years ended December 31, 2006, 2005 and 2004, a monthly salary
      of
      $10,000 or $120,000 annually. Additionally, Mr. Bitters was compensated $3,500
      per month or $42,000 annually for the year ended December 31, 2005 for an
      equipment rental agreement for the use of the President’s personal pickup truck,
      car, pulling unit, winch truck, backhoe and water truck used in the field
      operations. Effective January 1, 2005, the equipment rental agreement was
      terminated There were no grants of stock awards, option awards or any other
      form
      of incentive plan compensation issued
      or
      granted to Mr. Bitters during the calendar fiscal years ended December 31,
      2006,
      2005 or 2004, or the period ending on the date of this annual
      report.





The
      following table shows for the fiscal years ending December 31, 2006, 2005 and
      2004, the compensation awarded or paid by American Energy Production, Inc.
      to
      its Chief Executive Officer and any of the executive officers of American Energy
      whose total salary and bonus exceeded $100,000 US during such year (The "Named
      Executive Officers"):





**SUMMARY
      COMPENSATION TABLE**





Name
                and Principal Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)
            Non-Equity
              Incentive
                Plan Compensation
              ($)
            Change
                in Pension value and Nonqualified Deferred Compensation Earnings
              ($)
            All
              Other
                Compensation
              ($)
            Total
              ($)Charles
                Bitters, CEO and President2006
            120,000
            -
            -
            -
            -
            -
            -
            120,0002005
            120,000
            -
            -
            -
            -
            -
            -
            120,0002004
            120,000
            -
            -
            -
            -
            -
            42,000
            162,000





-46-


**EMPLOYMENT
      AGREEMENTS**





On
      July
      1, 2003, the Company entered into a salary and equipment rental agreement with
      its President. Under the terms of the agreement, the Company will compensate
      the
      President with a salary of $10,000 per month and $3,500 in equipment rental
      per
      month for the use of the President’s personal pickup truck, car, pulling unit,
      winch truck, backhoe and water truck used in the field operations. Additionally,
      the President 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
      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. Effective
      January 1, 2005, the $3,500 per month equipment rental agreement with the
      President was terminated. During the year ended December 31, 2005, the Company
      accrued $120,000 for compensation. Additionally, the President 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 year ended
      December 31, 2006, the Company accrued $120,000 for compensation, repaid
      $137,500 and the President advanced $10,000 of funds on behalf of the Company.
      As a result, the accrued balance as of December 31, 2006 is $98,225 and is
      classified as a component of Due To Related Parties in the accompanying
      Financial Statements.




**ITEM
      1** **2.
      SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS**




Based
      upon information received from the persons concerned, each person known to
      us to
      be the beneficial owner of more than five percent of the outstanding shares
      of
      our Common Stock, each director, each of our executive officers and all of
      our
      directors and executive officers as a group, owned beneficially as of March
      1,
      2007, the number and percentage of outstanding shares of our Common Stock
      indicated in the following table:


**Shares
                  Beneficially****Name
                  and Address**
              **Owned
                  Outstanding**
              **Percentage
                  of Shares**Charles
                  Bitters (3)
              2,843,846
              Less
                  than 1%President,
                  CEO and Chairman353
                  South Hackberry AveNew
                  Braunfels, TX 78130Larry
                  P. Horner
              -0-
              -0-Director17210
                  Campbell Rd #180Dallas,
                  Texas 75252John
                  D. Powell
              -0-
              -0-Director1917
                  Vista Oaks DriveCarrollton,
                  TX 75007Total
                  ownership by our
              2,843,846
              Less
                  than 1%officers
                  and directors(three
                  individuals)




(1)
      Unless otherwise indicated, all shares are held directly with sole voting and
      investment power.





(2)
      Based
      on 494,170,082 shares of our Common Stock issued and outstanding as of March
      1,
      2007.





(3)
      Includes 137,846 held directly in the name of Charles Bitters and 2,706,000
      held
      in street name. The ownership amounts were obtained from Section 16 reports
      filed with the SEC.




-47-


**ITEM
      13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**




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 Majority-owned Portfolio
      Companies.




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
      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. The oil and gas properties were also transferred
      to
      that same majority-owned affiliate.





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





In
      November 2003, a settlement was negotiated 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 occurs. The Company’s President has personally guaranteed
      the obligation. As of June 30, 2005, 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 during 2005 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 receiving 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.
      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 and we are not paying rent on our space. It is
      being provided to the Company by our President free of charge .





-48-


Effective
      July 1, 2003, the Company entered into a salary and equipment rental agreement
      with its President. Under the terms of the agreement, the Company would 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 of the Company 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 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.
      Effective January 1, 2005, the $3,500 per month equipment rental agreement
      with
      the President was terminated. During the year ended December 31, 2005, the
      Company accrued $120,000 for compensation. Additionally, the President 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
      year ended December 31, 2006, the Company accrued $120,000 for compensation,
      repaid $137,500 and the President advanced $10,000 of funds on behalf of the
      Company. As a result, the accrued balance as of December 31, 2006 is $98,225
      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 year ended December 31, 2006, the Company advanced directly or indirectly,
      $2,386,500 of funds to its majority-owned portfolio companies and was repaid
      $72,000 (net advances of $2,314,500). In total, the Company has advanced
      $5,761,842 of funds to its majority-owned portfolio companies and was repaid
      $72,000 (net advances of $5,689,842) and is included in the asset account
      entitled “Investment in and advances to majority-owned portfolio
      companies.





**ITEM
      14. PRINCIPAL ACCOUNTANTFEES AND SERVICES**




*Audit
      Fees*




The
      aggregate fees billed for the years ended December 31, 2006 and 2005 for
      professional services rendered by Salberg & Company, P.A. ("Salberg") for
      the audit of the Company's annual financial statements and review of financial
      statements included in the Company's Form 10-Q or services that are normally
      provided by the accountant in connection with statutory and regulatory filings
      or engagements for the years ended December 31, 2006 and 2005 was $32,000 and
      $30,000, respectively.




*Audit-Related
      Fees.*




The
      aggregate fees billed for the years ended December 31, 2006 and 2005 for
      assurance and related services by Salberg that are reasonably related to the
      performance of the audit or review of the Company's financial statements and
      are
      not reported under the category Audit Fees described above was $4,600 and zero,
      respectively.




-49-


*Tax
      Fees*




No
      fees
      were billed for the years ended December 31, 2006 and 2005 for tax compliance,
      tax advice, or tax planning services by Salberg that are reasonably related
      to
      the performance of the audit or review of the Company's financial statements
      and
      are not reported under the category Audit Fees described above.




*All
      Other Fees*




No
      fees
      were billed for the years ended December 31, 2006 and 2005 for products and
      services provided by Salberg, other than the services reported in the Audit
      Fees, Audit-Related Fees, and Tax Fees categories above.




*Audit
      Committee Pre-Approval Policies*




The
      Company does not have a standing audit committee, rather the entire Board acts
      as the Company’s audit committee. The Board does not have any pre-approval
      policies or procedures concerning services performed by Salberg. All the
      services performed by Salberg that are described above were pre-approved by
      the
      Company's Board. None of the hours expended on Salberg's engagement to audit
      the
      Company's financial statements for the year ended December 31, 2006 were
      attributed to work performed by persons other than Salberg’s full-time,
      permanent employees.




**ITEM
      1** **5.
      EXHIBITS, FINANCIAL STATEMENT SCHEDULES**




(a)
      The
      following exhibits are filed as a part of, or incorporated by reference into,
      this Annual Report on Form 10- K:




**Exhibit**
            **Title**
            **Location**3.1
            Form
                2-E Notification under Regulation E dated June 27, 2006
            Incorporated
                by Reference3.2
            Form
                2-E Notification under Regulation E dated December 11,
                2006
            Incorporated
                by Reference3.3
            Definitive
                Proxy Statement Pursuant to Section 14(a) of the Securities Act of
                1934
                filed February 8, 2-007
            Incorporated
                by Reference31.1
            Certification
                by Principal Executive and Financial
                Officer
            Attached32
            Certifications
                of Principal Executive and Financial
                Officer Pursuant to 906
            Attached





-50-


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, as amended, the registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized.


**AMERICAN
              ENERGY PRODUCTION, INC.**Date:March
              30, 2007
            By:
            /s/ Charles
              BittersCharles
              BittersPresident,
              Chief
              Executive Officer and Director




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed by the following persons on behalf of the registrant
      and
      in the capacities and on the dates indicated:








/s/
                Charles Bitters
              Charles
                Bitters
            President,
                Chief Executive Officer and Director (Principal Executive, Financial
                and
                Accounting Officer)
            March
                30, 2007/s/
                Larry P. Horner
              Larry
                P. Horner
            Director
            March
                30, 2007/s/
                John D. Powell
              John
                D. Powell
            Director
            March
                30, 2007





-51-





**American
      Energy Production, Inc.**


**(A
      Development Stage Company)**







Page No.Report
                of Independent Registered Public Accounting Firm
            F-2Balance
                Sheets at December 31, 2006 and 2005
            F-3Statements
                of Operations for the years ended December 31, 2006, 2005 and
                2004
            F-5Statements
                of Changes in Stockholders’ Equity (Deficiency) for the years ended
                December 31, 2006, 2005, and for the period from February 20, 2003
                (inception of development stage) to December 31, 2006
            F-6Statement
                of Changes in Net Assets for the years ended December 31, 2006 and
                2005
            F10Statement
                of Cash Flows for the years ended December 31, 2006, 2005 and 2004
            F-11Schedule
                of Investments at December 31, 2006
            F-13Notes
                to Financial Statements
            F-14




F-1-


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.





To
      the
      Board of Directors and Shareholders of:


American
      Energy Production, Inc. (a development stage company)





We
      have
      audited the accompanying balance sheet of American Energy Production, Inc.
      (a
      development stage company) including the schedule of investments as of December
      31, 2006 and 2005, and the related statements of operations, changes in
      stockholders’ equity (deficiency), and cash flows for the years ended December
      31, 2006, 2005 and 2004 and for the period from February 20, 2003 (inception
      of
      development stage) to December 31, 2006 and the statement of changes in net
      assets for the years ended December 31, 2006, 2005 and 2004. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.




As
      more
      fully discussed in Note 4 to the financial statements, securities amounting
      to
      $21,665,612 (99.9% of total assets and 103% of net assets) have been valued
      at
      fair value as determined by the Board of Directors. We have reviewed the
      procedures applied by the directors in valuing such securities and have
      inspected underlying documentation; while in the circumstances the procedures
      appear to be reasonable and the documentation appropriate, determination of
      fair
      values involves subjective judgment which is not susceptible to substantiation
      by auditing procedures.




In
      our
      opinion, subject to the effect on the financial statements of the valuation
      of
      securities determined by the Board of Directors as described in the preceding
      paragraph, the financial statements referred to above present fairly, in all
      material respects, the financial position of American Energy Production, Inc.
      (a
      development stage company) at December 31, 2006 and 2005, and the results of
      its
      operations and its cash flows for the years ended December 31, 2006, 2005 and
      2004 and for the period from February 20, 2003 (inception of development stage)
      to December 31, 2006, and the statement of changes in net assets for the years
      ended December 31, 2006, 2005 and 2004 in conformity with accounting principles
      generally accepted in the United States of America.




The
      accompanying financial statements have been prepared assuming the Company will
      continue as a going concern. As discussed in Note 2 to the financial statements,
      although the Company had a net increase in net assets of $34,298 for the year
      ended December 31, 2006, $592,942 of this amount was from a non-cash unrealized
      gain on investments to reflect the fair market value of the Company’s
      investments as of December 31, 2006. Accordingly, without the unrealized gain,
      the Company would have had a net decrease in net assets for the year ended
      December 31, 2006. Additionally, the Company had net cash used in operations
      of
      $522,305 for the year ended December 31, 2006 and a working capital deficiency
      of $704,991 at December 31, 2006. The Company is also in default on certain
      notes to banks and is in the development stage with no revenues. These items
      raise substantial doubt about its ability to continue as a going concern.
      Management’s plans as to these matters are also described in Note 2. The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.




/s/
      SALBERG & COMPANY, P.A.


Boca
      Raton, Florida


March
      29,
      2007





F-2-


**American
                Energy Production, Inc.**
              **(A
                Development Stage Company)**
              **Balance
                Sheets****ASSETS****12/31/2006**
            
            **12/31/2005****Current
                Assets**Cash
            
            $
            2,280
            
            $
            471,339**Total
                Current Assets**
            
            
            **2,280**
            
            
            **471,339****Property
                and equipment, net**
            
            
            **19,135**
            
            
            **27,030****Investments:**Investments
                in and advances to majority-owned
              portfolio
                companies
            
            
            21,665,612
            
            
            **18,758,170****Total
                Investments**
            
            
            **21,665,612**
            
            
            **18,758,170****Total
                Assets**
            
            **$**
            **21,687,027**
            
            **$**
            **19,256,539****LIABILITIES****Current
                Liabilities**Accounts
                payable
            
            $
            327,113
            
            $
            309,040Due
                to related parties
            
            
            98,225
            
            
            102,725Convertible
                debentures
            
            
            57,967
            
            
            57,966Accrued
                interest payable
            
            
            139,033
            
            
            130,165Accrued
                payroll taxes and penalties
            
            
            68,802
            
            
            62,798Lease
                payable
            
            
            16,131
            
            
            16,131**Total
                Current Liabilities**
            
            **$**
            **707,271**
            
            **$**
            **678,825****Net
                Assets**
            
            **$**
            **20,979,756**
            
            **$**
            **18,577,714**








See
      accompanying notes to financial statements.


F-3-


**American
                Energy Production, Inc.**
              **(A
                Development Stage Company)**
              **Balance
                Sheets*****(Continued)*****Commitments
                and Contingencies (Note 8)****Stockholders'
                Equity****12/31/2006**
            
            **12/31/2005**Convertible
                preferred stock, Series A $0.0001 par value, 5,000,000 shares authorized,
                3,500,000 and 4,000,000 issued and outstanding at December 31, 2006
                and
                2005, respectively
            
            $
            350
            
            $
            400Common
                stock, $0.00001 par value,
              500,000,000
                shares authorized, 494,170,082 and 452,870,082 shares issued and
                outstanding at December 31, 2006 and 2005, respectively
            
            
            49,417
            
            
            45,287Common
                stock issuable, $0.0001 par value, 75,000 shares
            
            
            8
            
            
            8Additional
                paid in capital
            
            
            23,998,250
            
            
            21,542,084Accumulated
                deficit
            
            
            (9,360,491
            )
            
            (9,360,491
            )Retained
                earnings during development stage
            
            
            7,194,224
            
            
            7,159,92621,881,756
            
            
            19,387,214Less:
                Subscription Receivable
            
            
            (902,000
            )
            
            (809,500
            )**Total
                Stockholders' Equity**
            
            
            **20,979,756**
            
            
            **18,577,714****Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **21,687,027**
            
            **$**
            **19,256,539****Net
                Asset Value Per Share**
            
            **$**
            **0.04**
            
            **$**
            **0.04**








See
      accompanying notes to financial statements.





F-4-


**American
                Energy Production, Inc.****(A
                Development Stage Company)****Statements
                of Operations**




**2006**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
            
            **2004**
            
            **Period
                from**
              **February
                20, 2003**
              **(Inception
                of**
              **Development
                Stage)**
              **to
                December 31, 2006****Investment
                and Pre-BDC Operating Income**Oil
                sales, net - Pre-BDC
            
            $
            -
            
            $
            -
            
            $
            40,010
            
            $
            46,658Investment
                income - portfolio investmentsDividends
            
            
            -
            
            
            -
            
            
            -
            
            
            -Interest
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Total
                Investment and Pre-BDC Operating Income**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **46,658****Expenses**Compensation
            
            
            120,000
            
            
            120,000
            
            
            600,995
            
            
            902,596Consulting
            
            
            149,139
            
            
            38,259
            
            
            256,934
            
            
            1,274,332Depletion
            
            
            -
            
            
            -
            
            
            3,690
            
            
            3,987Depreciation
            
            
            7,894
            
            
            7,894
            
            
            45,820
            
            
            89,894Equipment
                rental
            
            
            -
            
            
            -
            
            
            42,000
            
            
            63,000General
                and administrative
            
            
            50,589
            
            
            42,098
            
            
            61,682
            
            
            203,026Production
            
            
            626
            
            
            -
            
            
            91,363
            
            
            143,349Professional
            
            
            235,524
            
            
            140,995
            
            
            157,229
            
            
            610,222Website
            
            
            -
            
            
            -
            
            
            28,550
            
            
            322,583**Total
                Expenses**
            
            
            **563,772**
            
            
            **348,846**
            
            
            **1,288,263**
            
            
            **3,612,949****Net
                investment and pre-BDC**
              **Operating
                Loss**
            
            
            **(563,772**
            **)**
            
            **(348,846**
            **)**
            
            **(1,248,253**
            **)**
            
            **(3,566,291**
            **)****Realized
                and Unrealized Gain (Loss) from Investments and Other Income
                (Expenses)**Gain
                on settlement of debt
            
            
            -
            
            
            -
            
            
            18,364
            
            
            18,364Unrealized
                gain on investments
            
            
            592,492
            
            
            14,852,861
            
            
            -
            
            
            15,445,403Other
                income
            
            
            20,000
            
            
            17,429
            
            
            6,726
            
            
            44,155Interest
                expense
            
            
            (8,868
            )
            
            (595,125
            )
            
            (3,820,828
            )
            
            (4,557,640
            )Payroll
                tax expense and penalties
            
            
            (6,004
            )
            
            (6,004
            )
            
            (6,004
            )
            
            (23,168
            )Loss
                on settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            (167,000
            )**Total
                Realized and Unrealized Gain (Loss) from Investments and Other Income
                (Expenses)**
            
            
            **598,070**
            
            
            **14,269,161**
            
            
            **(3,801,742**
            **)**
            
            **10,760,515****Net
                increase (decrease) in Net Assets (post-BDC) and Net Income (Loss)
                (pre-BDC)**
            
            **$**
            **34,298**
            
            **$**
            **13,920,315**
            
            **$**
            **(5,049,995**
            **)**
            **$**
            **7,194,224****Net
                increase (decrease) in Net Assets (post-BDC) and Net Income (Loss)
                Per
                Share-**
              **Basic
                and Diluted**
            
            **$**
            **0.00**
            
            **$**
            **0.04**
            
            **$**
            **(0.03**
            **)**
            **$**
            **0.03****Weighted
                average shares - outstanding**
            
            
            **482,931,931**
            
            
            **349,106,911**
            
            
            **184,212,699**
            
            
            **280,621,466**





See
      accompanying notes to financial statements





F-5-


**American
      Energy Production, Inc.**


**(A
      Development Stage Company)**


**Statements
      of Changes in Stockholders’ Equity (Deficiency)**


**Years
      Ended December 31, 2006, 2005, 2004 and**


**Period
      from February 20, 2003 (Inception of Development Stage) to December 31,** **2006**








Deficit
            
            
            
            TotalPreferred
                Stock
            
            Preferred
                Stock
            
            Common
                Stock
            
            Common
                Stock
            
            Issuable
            
            Issuable
            
            Subscription
            
            Additional
                Paid In
            
            Accumulated
            
            Accumulated
                Development
            
            Deferred
            
            Stockholders’
                EquityShares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Receivable
            
            Capital
            
            Deficit
            
            Stage
            
            Services
            
            (Deficiency)**BALANCE
                AT DECEMBER 31, 2002**
            
            
            **-**
            
            **$**
            **-**
            
            
            **42,448,592**
            
            **$**
            **4,245**
            
            
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **8,639,750**
            
            **$**
            **(9,131,850**
            **)**
            **$**
            **-**
            
            **$**
            **(359,896**
            **)**
            **$**
            **(847,751**
            **)**Common
                stock issued for services
            
            
            -
            
            
            -
            
            
            27,300,000
            
            
            2,730
            
            
            -
            
            
            -
            
            
            -
            
            
            1,025,070
            
            
            -
            
            
            -
            
            
            (45,900
            )
            
            981,900Common
                stock issued for settlement
            
            
            -
            
            
            -
            
            
            250,000
            
            
            25
            
            
            -
            
            
            -
            
            
            -
            
            
            17,475
            
            
            -
            
            
            -
            
            
            -
            
            
            17,500Common
                stock issued and issuable for cash, net of offering costs
                $1,696,648
            
            
            -
            
            
            -
            
            
            24,939,757
            
            
            2,494
            
            
            8,575,000
            
            
            858
            
            
            -
            
            
            213,972
            
            
            -
            
            
            -
            
            
            -
            
            
            217,323Common
                stock issued in exchange for chemical
            
            
            -
            
            
            -
            
            
            1,000,000
            
            
            100
            
            
            -
            
            
            -
            
            
            -
            
            
            10,900
            
            
            -
            
            
            -
            
            
            -
            
            
            11,000Common
                stock cancelled
            
            
            -
            
            
            -
            
            
            (2,886,900
            )
            
            (289
            )
            
            -
            
            
            -
            
            
            -
            
            
            289
            
            
            -
            
            
            -
            
            
            -
            
            
            -Amortization
                of deferred services
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            359,896
            
            
            359,896Net
                loss, year ended December 31, 2003
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (228,641
            )
            
            (1,710,394
            )
            
            -
            
            
            (1,939,035
            )**BALANCE
                AT DECEMBER 31, 2003**
            
            
            **-**
            
            **$**
            **-**
            
            
            **93,051,449**
            
            **$**
            **9,305**
            
            
            **8,575,000**
            
            **$**
            **858**
            
            **$**
            **-**
            
            **$**
            **9,907,456**
            
            **$**
            **(9,360,491**
            **)**
            **$**
            **(1,710,394**
            **)**
            **$**
            **(45,900**
            **)**
            **$**
            **1,199,167**
            **)**








See
      accompanying notes to financial statements


F-6-


**American
      Energy Production, Inc.**


**(A
      Development Stage Company)**


**Statements
      of Changes in Stockholders’ Equity (Deficiency)**


**Years
      Ended December 31, 2006, 2005, 2004 and**


**Period
      from February 20, 2003 (Inception of Development Stage) to December 31,
      2006**




Deficit
            
            
            
            TotalPreferred
                Stock
            
            Preferred
                Stock
            
            Common
                Stock
            
            Common
                Stock
            
            Issuable
            
            Issuable
            
            Subscription
            
            Additional
                Paid In
            
            Accumulated
            
            Accumulated
                Development
            
            Deferred
            
            Stockholders’
                EquityShares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Receivable
            
            Capital
            
            Deficit
            
            Stage
            
            Services
            
            (Deficiency)Common
                stock issued for conversion ofconvertible
                debentures
            
            
            -
            
            
            -
            
            
            131,333,333
            
            
            13,133
            
            
            -
            
            
            -
            
            
            -
            
            
            1,366,867
            
            
            -
            
            
            -
            
            
            -
            
            
            1,380,000Common
                stock issued for subscription receivable
            
            
            -
            
            
            -
            
            
            6,200,000
            
            
            620
            
            
            -
            
            
            -
            
            
            (2,000
            )
            
            61,380
            
            
            -
            
            
            -
            
            
            -
            
            
            60,000Convertible
                debentures beneficial conversionfeature
                value
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,280,000
            
            
            -
            
            
            -
            
            
            -
            
            
            4,280,000Common
                stock issued for cash,
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -net
                of offering costs of $134,500
            
            
            -
            
            
            -
            
            
            19,745,452
            
            
            1,975
            
            
            -
            
            
            -
            
            
            -
            
            
            715,525
            
            
            -
            
            
            -
            
            
            -
            
            
            717,500Common
                stock that was issuable at 12-31-03
            
            
            -
            
            
            -
            
            
            8,500,000
            
            
            850
            
            
            (8,500,000
            )
            
            (850
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Common
                stock issued upon conversionof
                debentures for services
            
            
            -
            
            
            -
            
            
            1,000,000
            
            
            100
            
            
            -
            
            
            -
            
            
            -
            
            
            29,900
            
            
            -
            
            
            -
            
            
            -
            
            
            30,000Common
                stock issued in exchange for chemical
            
            
            -
            
            
            -
            
            
            700,000
            
            
            70
            
            
            -
            
            
            -
            
            
            -
            
            
            25,930
            
            
            -
            
            
            -
            
            
            -
            
            
            26,000Common
                stock issued for acquisition
            
            
            -
            
            
            -
            
            
            5,000,000
            
            
            500
            
            
            4,000,000
            
            
            400
            
            
            -
            
            
            471,100
            
            
            -
            
            
            -
            
            
            -
            
            
            472,000Preferred
                stock issued for conversion of debt
            
            
            3,500,000
            
            
            350
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            528,182
            
            
            -
            
            
            -
            
            
            -
            
            
            528,532Compensation
                expense in excess of debt to officer
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            480,995
            
            
            -
            
            
            -
            
            
            -
            
            
            480,995Preferred
                stock issued for services
            
            
            500,000
            
            
            50
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            134,950
            
            
            -
            
            
            -
            
            
            -
            
            
            135,000Common
                stock issued for services
            
            
            -
            
            
            -
            
            
            2,000,000
            
            
            200
            
            
            -
            
            
            -
            
            
            -
            
            
            19,800
            
            
            -
            
            
            -
            
            
            -
            
            
            20,000Common
                stock issued in exchange for equipment
            
            
            -
            
            
            -
            
            
            2,000,000
            
            
            200
            
            
            -
            
            
            -
            
            
            -
            
            
            19,800
            
            
            -
            
            
            -
            
            
            -
            
            
            20,000Amortization
                of deferred services
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            45,900
            
            
            45,900Net
                loss, year ended December 31, 2004
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,049,995
            )
            
            -
            
            
            (5,049,995
            )**BALANCE
                AT DECEMBER 31, 2004**
            
            
            **4,000,000**
            
            **$**
            **400**
            
            
            **269,530,234**
            
            **$**
            **26,953**
            
            
            **4,075,000**
            
            **$**
            **408**
            
            **$**
            **(2,000**
            **)**
            **$**
            **18,041,885**
            
            **$**
            **(9,360,491**
            **)**
            **$**
            **(6,760,389**
            **)**
            **$**
            **-**
            
            **$**
            **1,946,766**





See
      accompanying notes to financial statements


F-7-


**American
      Energy Production, Inc.**


**(A
      Development Stage Company)**


**Statements
      of Changes in Stockholders’ Equity (Deficiency)**


**Years
      Ended December 31, 2006, 2005, 2004 and**


**Period
      from February 20, 2003 (Inception of Development Stage) to December 31,
      2006**




Deficit
            
            
            
            TotalPreferred
                Stock
            
            Preferred
                Stock
            
            Common
                Stock
            
            Common
                Stock
            
            Issuable
            
            Issuable
            
            Subscription
            
            Additional
                Paid In
            
            Accumulated
            
            Accumulated
                Development
            
            Deferred
            
            Stockholders’
                EquityShares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Receivable
            
            Capital
            
            Deficit
            
            Stage
            
            Services
            
            (Deficiency)Common
                stock issued for conversion ofconvertible
                debentures
            
            
            -
            
            
            -
            
            
            33,000,000
            
            
            3,300
            
            
            -
            
            
            -
            
            
            -
            
            
            466,700
            
            
            -
            
            
            -
            
            
            -
            
            
            470,000Common
                stock issued for subscription receivable
            
            
            -
            
            
            -
            
            
            18,409,090
            
            
            1,841
            
            
            -
            
            
            -
            
            
            (807,500
            )
            
            805,679
            
            
            -
            
            
            -
            
            
            -
            
            
            -Common
                stock issued for cash,net
                of offering costs of $193,967
            
            
            -
            
            
            -
            
            
            127,930,758
            
            
            12,793
            
            
            -
            
            
            -
            
            
            -
            
            
            2,227,840
            
            
            -
            
            
            -
            
            
            -
            
            
            2,240,633Common
                stock issued for issuable shares
            
            
            -
            
            
            -
            
            
            4,000,000
            
            
            400
            
            
            (4,000,000
            )
            
            (
                400
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income, year ended December 31, 2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            13,920,315
            
            
            -
            
            
            13,920,315**BALANCE
                AT DECEMBER 31, 2005**
            
            
            **4,000,000**
            
            **$**
            **400**
            
            
            **452,870,082**
            
            **$**
            **45,287**
            
            
            **75,000**
            
            **$**
            **8**
            
            **$**
            **(809,500**
            **)**
            **$**
            **21,542,085**
            
            **$**
            **(9,360,491**
            **)**
            **$**
            **7,159,926**
            
            **$**
            **-**
            
            **$**
            **18,577,714**





See
      accompanying notes to financial statements


F-8-


**American
      Energy Production, Inc.**


**(A
      Development Stage Company)**


**Statements
      of Changes in Stockholders’ Equity (Deficiency)**


**Years
      Ended December 31, 2006, 2005, 2004 and**


**Period
      from February 20, 2003 (Inception of Development Stage) to December 31,
      2006**




RetainedEarningsCommon
                Stock
            
            
            
            Additional
            
            
            
            During
            
            TotalPreferred
                Stock
            
            Common
                Stock
            
            Issuable
            
            Subscription
            
            Paid-In
            
            Accumulated
            
            Development
            
            Stockholders'Shares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Receivable
            
            Capital
            
            Deficit
            
            Stage
            
            EquityCommon
                stock issued for subscription receivable
            
            
            -
            
            
            -
            
            
            2,500,000
            
            
            250
            
            
            -
            
            
            -
            
            
            (125,000
            )
            
            124,750
            
            
            -
            
            
            -
            
            
            -Proceeds
                from payment of subscription receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            32,500
            
            
            -
            
            
            -
            
            
            -
            
            
            32,500Common
                stock issuable for cash, net of offering costs
            
            
            -
            
            
            -
            
            
            37,300,000
            
            
            3,730
            
            
            -
            
            
            -
            
            
            -
            
            
            2,331,516
            
            
            -
            
            
            -
            
            
            2,335,246Common
                stock issued for conversion of preferred stock
            
            
            (500,000
            )
            
            (50
            )
            
            1,500,000
            
            
            150
            
            
            -
            
            
            -
            
            
            -
            
            
            (100
            )
            
            -
            
            
            -
            
            
            -Net
                increase in net assets, year ended December 31, 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            34,298
            
            
            34,298**BALANCE
                at December 31, 2006**
            
            
            3,500,000
            
            $
            350
            
            
            494,170,082
            
            $
            49,417
            
            
            75,000
            
            $
            8
            
            $
            (902,000
            )
            $
            23,998,250
            
            $
            (9,360,491
            )
            $
            7,194,224
            
            $
            20,979,756










See
      accompanying notes to financial statements


F-9-


**American
                  Energy Production, Inc.****(A
                  Development Stage Company)****Statement
                  of Changes in Net
                  Assets**




**Year
                Ended****December
                31,****2006**
            
            **2005**
            
            **2004**Increase
                in net assets from operations:Net
                operating loss
            
            $
            (558,194
            )
            $
            (932,546
            )
            $
            (5,049,995
            )Unrealized
                gain on investments
            
            
            592,492
            
            
            14,852,861
            
            
            -Net
                increase in net assets from operations
            
            
            34,298
            
            
            13,920,315
            
            
            5,049,995Common
                Stock transactions
            
            
            2,367,744
            
            
            2,710,633
            
            
            8,195,927Total
                increase in Net Assets
            
            
            2,402,042
            
            
            16,630,948
            
            
            3,145,932Net
                Assets:Beginning
                of Period
            
            
            18,577,714
            
            
            1,946,766
            
            
            (1,199,166
            )End
                of period
            
            $
            20,979,756
            
            $
            18,577,714
            
            $
            1,946,766







See
      accompanying notes to financial statements


F-10-





**American
                Energy Production, Inc.****(A
                Development Stage Company)****Statements
                of Cash Flows**





**Period
                    from****February
                    20, 2003****(Inception
                    of****Year
                    Ended**
                
                **Development****December
                    31,**
                
                **Stage)****2006**
                
                **2005**
                
                **2004**
                
                **to
                    Dec 31, 2006****Cash
                    Flows From Operating Activities:**Net
                    Increase in Net Assets (post-BDC)
                
                $
                34,298
                
                $
                13,920,315
                
                $
                (5,049,995
                )
                $
                7,194,224and
                    Net Income (pre-BDC)Adjustments
                    to reconcile net increase in Net Assets(post-BDC)
                    and Net Income (pre-BDC) to Net Cashprovided
                    by (used in) operations:Stock
                    issued for debt and services
                
                
                -
                
                
                -
                
                
                185,000
                
                
                951,555Stock
                    issued for equipment
                
                
                -
                
                
                -
                
                
                20,000
                
                
                20,000Stock
                    issued for chemical
                
                
                -
                
                
                -
                
                
                26,000
                
                
                37,000Stock
                    issued in settlement
                
                
                -
                
                
                -
                
                
                -
                
                
                17,500Unrealized
                    gain on investments
                
                
                (592,942
                )
                
                (14,852,861
                )
                
                -
                
                
                (15,445,803
                )Gain
                    on settlement of debt
                
                
                -
                
                
                -
                
                
                (18,364
                )
                
                (18,364
                )Loss
                    on settlement
                
                
                -
                
                
                -
                
                
                -
                
                
                149,500Interest
                    expense related to convertibledebentures
                    beneficial conversion feature
                
                
                -
                
                
                583,639
                
                
                3,696,361
                
                
                4,280,000Compensation
                    expense in excess of debt to officer
                
                
                -
                
                
                -
                
                
                480,995
                
                
                480,995Amortization
                    of deferred services
                
                
                -
                
                
                -
                
                
                45,900
                
                
                405,796Depreciation
                
                
                7,894
                
                
                7,894
                
                
                45,820
                
                
                89,854Depletion
                
                
                -
                
                
                -
                
                
                3,690
                
                
                3,987Changes
                    in operating assets and liabilities:Decrease
                    in accounts receivable - related party
                
                
                -
                
                
                -
                
                
                10,132
                
                
                3,484Decrease
                    in cash overdraft
                
                
                -
                
                
                -
                
                
                (6,726
                )
                
                (6,726
                )Increase
                    in accounts payable
                
                
                18,073
                
                
                44,685
                
                
                14,679
                
                
                86,325Decrease
                    in due to related party
                
                
                (4,500
                )
                
                (22,500
                )
                
                (95,230
                )
                
                (51,276
                )Increase
                    in accrued interest payable
                
                
                8,870
                
                
                (41,275
                )
                
                124,467
                
                
                224,892Increase
                    in accrued payroll taxes payable
                
                
                6,002
                
                
                6,004
                
                
                6,005
                
                
                23,164**Net
                    Cash Provided by (Used In) Operating Activities**
                
                
                (522,305
                )
                
                (354,099
                )
                
                (511,266
                )
                
                (1,553,893
                )**Cash
                    Flows From Investing Activities:**Prepaid
                    acquisition cost disbursement
                
                
                -
                
                
                -
                
                
                38,041
                
                
                -Purchase
                    of equipment
                
                
                -
                
                
                -
                
                
                (145,074
                )
                
                (178,975
                )Advances
                    to majority-owned portfolio companies
                
                
                (2,386,500
                )
                
                (1,650,556
                )
                
                (1,724,786
                )
                
                (5,761,842
                )Repayments
                    from majority-owned portfolio companies
                
                
                72,000
                
                
                -
                
                
                -
                
                
                72,000Purchase
                    of oil lease
                
                
                -
                
                
                -
                
                
                -
                
                
                (8,500
                )**Net
                    Cash Used In Investing Activities**
                
                $
                (2,314,500
                )
                $
                (1,650,556
                )
                $
                (1,831,819
                )
                $
                (5,877,317
                )







See
      accompanying notes to financial statements





F-11-


**American
                Energy Production, Inc.****(A
                Development Stage Company)****Statements
                of Cash Flows*****(Continued)***





**Period
                from****February
                20, 2003****(Inception
                of****Year Ended**
            
            **Development****December
                31,**
            
            **Stage)****2006**
            
            **2005**
            
            **2004**
            
            **to
                Dec 31, 2006****Cash
                Flows From Financing Activities:**Proceeds
                for note payable - officer
            
            **$**
            -
            
            **$**
            -
            
            **$**
            -
            
            **$**
            32,070Repayment
                of officer loan
            
            
            -
            
            
            -
            
            
            -
            
            
            (115
            )Proceeds
                from loan - other
            
            
            -
            
            
            -
            
            
            19,396
            
            
            54,396Repayment
                of loan proceeds - other
            
            
            -
            
            
            (33,304
            )
            
            (35,578
            )
            
            (105,976
            )Proceeds
                from issuance of convertible debentures
            
            
            -
            
            
            -
            
            
            1,850,000
            
            
            1,850,000Proceeds
                from common stock issuable, net ofoffering
                costs of $86,660 and $0
            
            
            2,335,246
            
            
            2,240,633
            
            
            777,500
            
            
            5,570,702Proceeds
                from repayment of subscription receivable
            
            
            32,500
            
            
            -
            
            
            -
            
            
            32,500Repayment
                of lease payable
            
            
            -
            
            
            -
            
            
            -
            
            
            (87
            )**Net
                Cash Provided By Financing Activities**
            
            
            2,367,746
            
            
            2,207,329
            
            
            2,611,318
            
            
            7,433,490**Net
                Increase (Decrease) in Cash**
            
            
            **(469,059**
            **)**
            
            **202,674**
            
            
            **268,233**
            
            
            **2,280**Cash
                at Beginning of Period
            
            
            471,339
            
            
            268,665
            
            
            432
            
            
            -**Cash
                at End of Period**
            
            **$**
            **2,280**
            
            **$**
            **471,339**
            
            **$**
            **268,665**
            
            **$**
            **2,280**Cash
                interest paid
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **47,750****Supplemental
                disclosure of non-cash transactions**Asset
                acquisition paid with convertible note payable
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            2,000,000Conversion
                of note payable to convertible debenture
            
            -
            
            
            2,000,000
            
            
            2,000,000Conversion
                of indebtedness to preferred stock
            
            
            -
            
            
            -
            
            
            528,532
            
            
            528,532Conversion
                of preferred stock to common stock
            
            
            150
            
            
            -
            
            
            -
            
            
            150Conversion
                of convertible debentures to common stock
            
            
            -
            
            
            470,000
            
            
            1,380,000
            
            
            1,850,000Conversion
                of convertible debentures by advances
            
            
            -
            
            
            342,033
            
            
            -
            
            
            342,033Asset
                acquisition paid with convertible debenture and stock
            
            
            -
            
            
            -
            
            
            800,000
            
            
            800,000Asset
                acquisition paid with stock
            
            
            -
            
            
            -
            
            
            72,000
            
            
            72,000Common
                stock issued for subscription receivable
            
            
            250
            
            
            807,500
            
            
            2,000
            
            
            809,750Transfer
                of assets and liabilities to affiliate:Oil
                and gas properties and equipment, net
            
            
            -
            
            
            -
            
            
            2,074,498
            
            
            2,074,498Convertible
                debenture
            
            
            -
            
            
            -
            
            
            2,000,000
            
            
            2,000,000Accrued
                interest payable
            
            
            -
            
            
            -
            
            
            71,014
            
            
            71,014Net
                receivable from transfer of assets and liabilities
            
            
            -
            
            
            -
            
            
            3,484
            
            
            3,484





See
      accompanying notes to financial statements


F-12-


**American
                Energy Production, Inc.****(A
                Development Stage Company)****Schedule
                of Investments****December
                31, 2006****Percentage
                of****Title
                of**
            **Class
                Held on****Portfolio**
            
            **Securities
                Held**
            **a
                Fully Diluted**
            **At
                December 31, 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
            $
                4,735,505Oil
                America Group, Inc.
            Oil
                and Gas Production
            Common
                Stock
            100%
            252,000
            252,000Bend
                Arch Petroleum, Inc.
            Oil
                and Gas Production
            Common
                Stock
            100%
            4,979,688
            16,674,551AMEP
                Strategic Investments
            Investment
            Common
                Stock
            100%
            3,556
            3,556**Total
                Control Investments - Majority Owned**
            
            
            
            $
                6,219,809
            $
                21,665,612**Total
                Investments**
            
            
            
            **6,219,809**
            **21,665,612****Unearned
                Income**
            
            
            
            **-**
            **-****Total
                Investments, net of Unearned Income**
            
            
            
            **$ 
                6,219,809**
            **$
                21,665,612**(1)
                Majority owned investments are generally defined under the Investment
                Company Act of 1940 as companies in which we own morethan
                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 financial statements


F-13-


**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 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 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.




As
      noted
      above, on January 12, 2004, the Company filed an election to become a BDC.
      The
      Company elected BDC status intending to make investments into developing
      businesses, primarily in the oil and gas industry. The Company generally
      expected that they would provide managerial assistance to such companies. At
      the
      time of its election, the Company believed that its operating model was best
      effected through the BDC structure.




In
      January 2004, the Company determined that it was necessary to raise additional
      capital to carry out the Company’s business plan. Accordingly, the Company filed
      a Form 1-E with Securities and Exchange Commission (the “SEC”), notifying it of
      the Company’s intent to sell up to $4,000,000 of the Company’s common stock at
      prices between $0.01 and $0.10 per share, or 400,000,000 and 40,000,000 shares,
      respectively. On February 22, 2005, the Board determined that it was in the
      best
      interest of the Company to discontinue the offering and to investigate other
      financing alternatives. Accordingly, the Company filed a Form 2-E notifying
      the
      SEC of the Company’s termination of the offering. However, the filing was not
      received by the SEC and the Company re-filed the Form 2-E with the SEC,
      effective June 30, 2005. As disclosed in the Form 2-E, the Company received
      $1,820,000 of proceeds from the offering, net of $30,000 of expenses, through
      the sale of 171,000,000 shares of the Company’s $0.001 par value common stock.




On
      July
      24, 2005, the Company filed a Form 1-E pursuant to the Securities Act 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 (“July 2005 Offering”). In December 2006, the
      Company’s Board of Directors determined that it was in the best interest of the
      Company to discontinue the offering discussed above. Accordingly, the Company
      filed a Form 2-E notifying the SEC of the Company’s termination of the offering.
      As disclosed in the Form 2-E, the Company received $4,575,879 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 includes net
      proceeds of $2,335,246 from the offering through the sale of 37,300,000 shares
      of the Company’s $0.001 par value common stock during the year ended December
      31, 2006.




The
      July
      2005 Offering, however, was reviewed by the SEC Staff, which issued a comment
      letter to the Company (the “Comment Letter”) raising a number of questions
      relating to the offering. In response to the Comment Letter, the Company
      voluntarily suspended the July 2005 Offering and undertook a review of its
      compliance with the 1940 Act. The Company subsequently determined that it was
      not in compliance with several important provisions of the 1940 Act.




F-14-


Specifically,
      the Company determined that it had, among other things: failed to adequately
      disclose the process of valuing its portfolio securities; issued convertible
      debentures, potentially violating Section 61 of the 1940 Act; issued shares
      for
      services to be provided to the Company, potentially violating Section 23 of
      the
      1940 Act; failed to properly constitute the Board through a shareholder vote,
      pursuant to Section 16 of the 1940 Act; failed to have a majority of directors
      that were not interested persons of the Company, pursuant to Section 56(a)
      of
      the 1940 Act; failed to obtain a fidelity bond, potentially violating Section
      17
      of the 1940 Act; issued preferred stock, which did not have voting rights equal
      to that of the common stock, potentially violating Section 18(i) of the 1940
      Act; and neglected to adopt compliance policies and procedures. In addition,
      the
      Company has never appointed a Chief Compliance Officer. In the absence of an
      active Chief Compliance Officer and complete diligence on the part of the
      Company, there can be no assurance that there are no additional compliance
      issues.




The
      Board
      reviewed the facts surrounding these compliance failures and their implications
      for the Company. Ultimately, the Board caused the Company to take certain steps
      to remediate the compliance failures, including issuing this proxy statement
      to
      properly elect two of the Directors, contacting the holders of the shares issued
      for services to request that the Company repurchase those shares, and retaining
      experienced BDC counsel. The Company’s violations of the 1940 Act may cause the
      Company to incur certain liabilities. Such liabilities can not be estimated
      by
      management as of this time, but may include regulatory enforcement actions.
      However, such liabilities, if incurred, could have a significant impact on
      the
      Company’s ability to continue as a going concern.




The
      Company has informed the SEC Staff of these steps. However, these efforts will
      not fully cure all of the 1940 Act compliance deficiencies currently affecting
      the Company and it is unclear how those deficiencies will impact the Company
      in
      the future. The Company’s significant compliance and remediation costs, in terms
      of both time and dollars, have operated as an encumbrance on the Company’s
      resources.




The
      Company has determined, based on the nature of its investments, the Company
      is
      not currently required to be regulated as a BDC because it does not meet the
      definition of an “investment company” in the 1940 Act. This is due to the fact
      that its non-cash assets consist almost entirely of investment in companies
      that
      it wholly-owns. Thus, it is operating, and intends to operate, as a holding
      company rather than an investment company.




Accordingly,
      and after careful consideration of the 1940 Act requirements applicable to
      BDCs,
      its holding company operations, an evaluation of the Company’s ability to
      operate as a going concern in an investment company regulatory environment,
      the
      cost of 1940 Act compliance needs and a thorough assessment of the Company’s
      current business model, the Board has determined that continuation as a BDC
      is
      not in the best interests of the Company and its shareholders at the present
      time. Further, were the Company to remain a BDC, the Company would be required
      to substantially change its business model to meet the definition of an
“investment company.”




In
      making
      the determination that continuation as a BDC is not in the best interests of
      the
      Company and its shareholders, the Board considered the viable alternatives
      available to the Company at this time. The Board considered that the Company
      could remain an investment company and restructure its portfolio investments
      to
      reduce its ownership of investee companies to non-majority ownership positions,
      while attempting to cure the significant compliance failures that it has
      incurred. However, the Board determined that the Company’s business model
      required majority ownership of its portfolio companies and that the significant
      expense associated with that alternative would make it unlikely that the Company
      would be able to continue operations.




Additionally,
      when the Company filed an election to become subject to the 1940 Act, such
      that
      it could commence conducting business as a BDC, Mr. Charles Bitters was the
      only
      director, with two vacancies on the Board. Pursuant to Section 223 of the
      General Corporation Law of the State of Delaware (“DGCL”), Mr. Bitters appointed
      Mr. Thomas Baker to the Board on February 10, 2004 and Mr. Shane Traveller
      on
      October 5, 2004. Mr. Baker resigned on October 24, 2004 and Mr. Traveller
      resigned on December 21, 2004. The resignations occurred before the Company
      held
      a meeting of Shareholders to elect Mr. Baker and Mr. Traveller to the Board
      as
      mandated by Section 16 of the 1940 Act.




F-15-


The
      Board
      believes that any and all Board actions taken have been appropriate and valid
      for state law purposes. However, since electing to become a BDC, the Company
      has
      not had a properly constituted Board of Directors for purposes of Section 16
      of
      the 1940 Act, which requires that a candidate for director be elected by
      Shareholders (and not merely appointed by the Board) where at least two-thirds
      of the directors then holding office were not elected by Shareholders of the
      Company. Consequently, actions required to have been taken by the Board pursuant
      to the 1940 Act could be deemed to have not been appropriately approved. In
      addition, from December 21, 2004 until November 19, 2005 the Company had a
      single Director, who was an interested person of the Company ( *i.e.* ,
      not
      independent) for purposes of the 1940 Act, by virtue of his role as an officer
      of the Company. Thus, the Company was in violation of Section 56(a) of the
      1940
      Act, which requires that a majority of a BDC’s directors be persons who are not
      interested persons of such company.




On
      November 19, 2005, Mr. Bitters, as the sole director of the Company, appointed
      John D. Powell to the Board. On March 27, 2006, Mr. Bitters appointed Larry
      P.
      Horner to the Board. Mr. Bitters is being put up for election because the Board
      believes that he should be included in the slate of directors as the Company
      has
      not had an Annual Meeting for a number of years.




On
      March
      13, 2007, a Special Meeting of Shareholders (the “Special Meeting”) of the
      Company was held to authorize the Board of Directors of the Company (the
“Board”) to withdraw the Company’s election to be treated as a BDC under the
      1940 Act and to elect to the Board, Mr. John D. Powell, Mr. Larry P. Horner
      and
      Mr. Charles Bitters. As a result of the Special Meeting, the Shareholders
      approved both items and the Company has been authorized to file a Form N-54C
      with the SEC to effect the BDC withdrawal as soon as practicable.





**2.**  **GOING
      CONCERN**




As
      reflected in the accompanying financial statements, although the Company had
      a
      net increase in net assets of $34,298 for the year ended December 31, 2006,
      $592,942 of this amount was from a non-cash unrealized gain on investments
      to
      reflect the fair market value of the Company’s investments as of December 31,
      2006. Accordingly, without the unrealized gain, the Company would have had
      a net
      decrease in net assets for the year ended December 31, 2006. Additionally,
      the
      Company had net cash used in operations of $522,305 for the year ended December
      31, 2006 and a working capital deficiency of $704,991 at December 31, 2006.
      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, and generate revenues. The financial statements
      do
      not include any adjustments that might be necessary if the Company is unable
      to
      continue as a going concern.





As
      discussed previously, in March 2007, the Shareholders of the Company authorized
      the Board to withdraw the Company’s election to be treated as a BDC under the
      1940 Act. As a result, the Board has been authorized to file a Form N-54C with
      the SEC to effect the BDC withdrawal as soon as practicable. As a result of
      the
      change, the Company will be considered an “oil and gas operating company”
instead of a BDC. Although the Company believes that the change is in the best
      interests of the Shareholders, it cannot give assurance that it will generate
      sufficient cash flow from operations or obtain additional financing to meet
      scheduled debt payments and financial covenants. 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. 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.




F-16-


**3.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation and Concentration**





The
      accompanying financial statements are prepared in accordance with the guidance
      in the AICPA’s Audit and Accounting Guide, “Audits of Investment Companies”
since the Company elected to be regulated as a Business Development Company
      effective January 29, 2004.





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 investees 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 the 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.





**Oil
      and Gas Properties**




Prior
      to
      electing BDC status and transferring oil and gas assets to portfolio companies,
      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.





F-17-


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 (See Note 4 - Investments).





**Property
      and Equipment**





Property
      and equipment is recorded at cost and depreciated over its estimated useful
      life, which range, from three to five years, using the straight line method.





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, 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 plans
      to
      extract and sell oil and gas from existing wells. The consideration paid was
      a
      convertible note payable for $2,000,000 at 6% interest, maturing July 25, 2007.
      All the leases and wells are collateral for the note payable. 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 discussed in Statement of
      Financial Accounting Standards No. 141 “Business Combinations”. The purchase
      price was allocated to the various assets as discussed below. The results of
      any
      operations relating to the acquired assets are included in the Company’s
      financial statements from the Acquisition Date.





The
      Company has evaluated that the convertible note payable in accordance with
      EITF
      Issue No. 98-5 does 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.




**Accounting
      for the Impairment of Long-Lived Assets**





We
      account for the impairment of long-lived assets 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 upon our evaluation,
      no
      impairment was determined for the years ended December 31, 2006, 2005 and 2004.





**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.





F-18-


**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 December 31,
      2006.





**Stock-Based
      Compensation**





Effective
      January 1, 2006, the Company adopted SFAS No. 123 (Revised), entitled
      Share-Based Payment. This revised Statement eliminates the alternative to use
      APB 25’s intrinsic value method of accounting that was provided in SFAS No. 123
      as originally issued. Under APB 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.
      SFAS 123 (Revised) may have an impact and will require further evaluation by
      the
      Company.




Prior
      to
      2006, the Company accounted for stock options issued to employees in accordance
      with the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. As
      such, compensation cost is measured on the date of grant as the excess of the
      current market price of the underlying stock over the exercise price. Such
      compensation amounts are amortized over the respective vesting periods of the
      option grant. The Company adopted the disclosure provisions of SFAS No. 123
      “Accounting for Stock-Based Compensation,” and SFAS No. 148 “Accounting for
      Stock Based Compensation - Transition and Disclosure,” which permits entities to
      provide pro forma net income (loss) and pro forma earnings (loss) per share
      disclosures for employee stock option grants as if the fair-valued based method
      defined in SFAS No. 123 had been applied.





Prior
      to
      2006, the Company accounted for stock options or warrants issued to
      non-employees for goods or services in accordance with the fair value method
      of
      SFAS 123. Under this method, the Company recorded an expense equal to the fair
      value of the options or warrants issued. The fair value is computed using an
      options pricing model.





**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.







F-19-


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.





**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 Business Development Company 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”.




**Concentration
      of Risk**




One
      purchaser accounted for 100% of the Company's oil sales in 2004 and from
      February 20, 2003 (Inception of Development) to December 31, 2003. Previously,
      the Company sold crude oil to customers in the United States and performed
      ongoing credit evaluations of its customers’ financial condition and generally
      requires no collateral.




Our
      financial instruments that are potentially exposed to credit risk consist
      primarily of cash, accounts payable and notes payable, for which the carrying
      amounts approximate fair value. At certain times during the year, our demand
      deposits held in banks exceeded the federally insured limit of $100,000. As
      of
      December 31, 2006, the Company’s cash position was under the FDIC limit of
      $100,000. However, as of December 31, 2005, the Company’s cash position exceeded
      FDIC limits by $376,336.


F-20-





**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 in 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.





F-21-


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.





**Reclassifications**





Certain
      amounts in the 2005 and 2004 financial statements have been reclassified to
      conform to the 2006 presentation.




**4.**  **INVESTMENTS
      IN AND ADVANCES TO MAJORITY-OWNED PORTFOLIO COMPANIES**





As
      of December 31, 2006, investments consisted of the following:


**Cost**
            
            **Fair
                Value**Investments
                in Equity Securities
            
            $
            6,219,809
            
            $
            21,665,612Less:
                Unearned Income
            
            
            -
            
            
            -Total
            
            $
            6,219,809
            
            $
            21,665,612




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
      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.


F-22-





At
      June
      15, 2004, the full consideration was paid by the Company and in accordance
      with
      the rules of being 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 majority-owned portfolio
      company.





As
      of
      December 31, 2006, the total investment and advance to majority-owned portfolio
      company for PRI reflected in the accompanying financial statements is
      $4,735,505, comprised of $984,565 of historical cost and a cumulative unrealized
      gain on investments of $3,750,940. The
      current year unrealized gain on investments of $78,920 is included as a
      component of Other Income (Expenses) in the accompanying Statement of Operations
      for the year ended December 31, 2006 (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 and 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
      December 31, 2006, the Company had made $4,979,688 of net advances on behalf
      of
      its majority-owned portfolio company, Bend Arch Petroleum, Inc., (“Bend Arch”).
      As of December 31, 2006, the total investment in and advance to majority-owned
      portfolio company for Bend Arch reflected in the accompanying financial
      statements is $16,674,551, comprised of $4,979,688 of historical cost and a
      cumulative unrealized gain on investments of $11,694,863. The current year
      unrealized gain on investments of $514,022 is included as a component of Other
      Income (Expenses) in the accompanying Statement of Operations for the year
      ended
      December 31, 2006 (see detailed schedule of the investment in and advance to
      below.) The fair value of this investment was determined in good faith by the
      Company’s Board of Directors and 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.





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 9 - Related Party Transactions) of the Company’s President, 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.




F-23-


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
      majority-owned portfolio company. Additionally, the Company has made $180,000
      of
      advances to OAG and including the advances, the total of $252,000 has been
      recorded as investment in and advances to majority-owned portfolio companies
      in
      the accompanying balance sheet as of December 31, 2006 (see detailed schedule
      of
      the investment in and advance to below.) OAG is now a majority-owned portfolio
      company of the Company, specializing in oil and gas acquisitions, drilling
      prospective properties and managing oil and gas partnerships.





As
      of
      December 31, 2006, the Company had made $3,556 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
      majority-owned portfolio company in the accompanying balance sheet (see detailed
      schedule of the investment in and advance to below.)





F-24-


In
      accordance with Rule 12-14 of Regulation S-X, the following information is
      provided for the Company’s Investments in and Advances to Majority-Owned
      Portfolio Companies balance as of December 31, 2006:





**Investments
                In and Advances to Majority-Owned Portfolio
                Companies**
              **As
                of December 31, 2006****Number
                of shares -****Name
                of issuer**
            
            **principal****And
                title of**
            
            **amount
                of bonds**
            
            **Amount
                of**
            
            
            
            **Historical
                cost****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
                portfolio companies:**Production
                Resources, Inc.
            
            $
            184,565
            
            $
            800,000
            
            $
            -
            
            $
            984,565Oil
                America Group, Inc.
            
            
            180,000
            
            
            72,000
            
            
            -
            
            
            252,000Bend
                Arch Petroleum, Inc.
            
            
            4,979,688
            
            
            -
            
            
            -
            
            
            4,979,688AMEP
                Strategic Investments
            
            
            3,556
            
            
            -
            
            
            -
            
            
            3,556Total
            
            $
            5,347,809
            
            $
            872,000
            
            $
            -
            
            $
            6,219,809(1)
                Represents net advances by the Company on behalf of its majority
                owned
                portfolio companies.(2)
                Represents historical purchase paid by the Company.(3)
                No dividends or interest were paid by the majority-owned portfolio
                companies as of December 31, 2006.(4)
                Represents total historical cost without unrealized gain or loss
                included
                (aggregate of (1), (2) and (3).)**Advances
                To - January 1, 2006 to December 31, 2006****Dec.
              31, 2005**
            
            
            **Advances**
            
            
            **Repayments**
            
            
            **Dec.
                31, 2006**Production
                Resources, Inc.
            
            $
            167,065
            
            $
            17,500
            
            $
            -
            
            $
            184,565Oil
                America Group, Inc.
            
            
            115,000
            
            
            65,000
            
            
            -
            
            
            180,000Bend
                Arch Petroleum, Inc.
            
            
            2,675,688
            
            
            2,304,000
            
            
            -
            
            
            4,979,688AMEP
                Strategic Investments
            
            
            75,556
            
            
            -
            
            
            72,000
            
            
            3,556Total
            
            $
            3,033,309
            
            $
            2,386,500
            
            $
            72,000
            
            $
            6,219,809




F-25-


**5.
      DEBT**




*Our
      debt at December 31, 2006 and 2005 consisted of the following:*




***Lease
      Payable***


****  ****





**2005**
            
            **2006**$21,238
                computer equipment lease, bearing interest at 10% per
                annum
            
            $
            16,131
            
            $
            16,131




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 December 31,
      2005, the balance of principal was $16,131. The amount is personally guaranteed
      by a former 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 December 31, 2006, the Company has recorded a total of $11,724 in accrued
      interest for this lease payable in the accompanying Balance Sheet.




In
      November 2003, a settlement was negotiated 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 December 31, 2005, 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 8 - Commitments and Contingencies
      and
      Note 9 - Related Party Transactions).




***Notes
      payable - Banks***





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 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
      paymen ts
      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.




F-26-


***Loans
      and Note Payable Settlement with Related Party***




Beginning
      in January of 2002 and through December 2003, the Company’s President 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 9 - 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.




***Convertible
      Debentures:***





**2005**
            
            
            **2006**$400,000
                Convertible Debentures, dated June 15, 2004, bearing interest at
                8% per
                annum and due on December 1, 2005
            
            $
            57,967
            
            $
            57,967$
            57,967
            
            $
            57,967





F-27-


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.
  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. During 2004 and 2005, the entire
        $250,000 of debt discount was amortized to interest expense relating to the
        $250,000 convertible debenture that was fully converted as of December 31,
        2005.
  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 December 31,
        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. During 2004 and
        2005, the entire $400,000 of debt discount was amortized to interest expense
        related to the $400,000 convertible debenture being fully converted as of
        December 31, 2005.
  F-28-
 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. During 2004 and 2005, the entire
        $1,000,000 of debt discount was amortized to interest expense related to
        the
        $1,000,000 convertible debenture being fully converted as of December 31,
        2005.
  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.
   F-29-
 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
        portfolio company (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 Majority-Owned Portfolio Companies).
  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. In 2004, the Company recognized a 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 related to
        the
        $600,000 convertible debenture issued and subsequently converted in
        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. In
        2004, the Company recognized a beneficial conversion feature by charging
        the
        statement of operations $30,000 for interest expense and $30,000 for additional
        paid-in capital related to the $30,000 convertible debenture that was issued
        and
        subsequently converted during 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.
 F-30-
 As
        of December
        31, 2006, the Company has recorded $127,309 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 December 31, 2006.
  **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 December
        31, 2006. Additionally, as of December 31, 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 December 31, 2006, 3,500,000 preferred
        shares were issued and outstanding.
  ***Issuances
        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. In February 2004, the Company announced the addition
        of two
        new outside directors to the Board of Directors as previously
        authorized.
  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. 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.
 F-31-
 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:
  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.
  F-32-
 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).
  F-33-
  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 President 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.
 F-34-
  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.
  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 which is still outstanding as of December 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 which is still outstanding as of December 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
        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.
 F-35-
 On
        July
        24, 2005, the Company filed a Form 1-E pursuant to the Securities Act 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. Through September 30, 2006, the Company
        received $4,575,879 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 $2,335,246 from the offering through the sale of 37,300,000 shares of
        the
        Company’s $0.001 par value common stock during the year
        ended December 31, 2006.
  ***Common
        Stock Issuable:***
  As
        of
        December 31, 2006 and 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,
        2006.
  ***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).
  F-36-
 **7.**  **INCOME
        TAXES**
 
 There
        was
        no income tax during 200 6,
        2005
        and 2004 due to the Company’s net loss.
 
 The
        Company’s tax expense differs from the “expected” tax expense for the period
        ended December 31, (computed by applying the Federal Corporate tax rate of
        34%
        to loss before taxes), as follows:
 
 **2006**
              
              **2005**
              
              **2004**Computed
                  “expected” tax expense (benefit)
              
              $
              11,661
              
              $
              4,732,907
              
              $
              (1,716,998
              )Stock
                  based issuances
              
              
              -
              
              
              -
              
              
              78,540Unrealized
                  gain on investments
              
              
              (201,447
              )
              
              (5,049,973
              )
              
              -Change
                  in valuation allowance
              
              
              189,786
              
              
              317,066
              
              
              1,638,458$
              -
              
              $
              -
              
              $
              -
 
 The
        tax
        effects of temporary differences that gave rise to significant portions of
        deferred tax assets and liabilities as of December 31 are as
        follows:
 **2006**
              
              ******2005**Deferred
                  tax assetsNet
                  operating loss
              
              $
              2,264,684
              
              $
              2,074,898Total
                  deferred tax assets
              
              
              2,264,684
              
              
              2,074,898Valuation
                  allowance
              
              
              (2,264,684
              )
              
              (2,074,898
              )Net
                  deferred tax asset
              
              $
              -
              
              $
              -
 
 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 and increased by $189,786 in 2006 to $2,264,684 at December 31,
        2006.
        The net operating loss carry-forwards aggregate approximately $6,660,833
        and
        expire in years through 2026. 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.
  F-37-
 **8.
        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 December 31, 2006.
  In
        November 2003, a settlement was negotiated 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 occurs (see Note 5 - Debt and Note 8 - Related Party
        Transactions). As of December 31, 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 $68,802 of unpaid federal payroll taxes and employee
        withholdings and related penalties and interest in its accrued expenses as
        of
        December 31, 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. Had we so elected, we would have
        been
        required to (i) distribute at least 90% of our investment company taxable
        income
        and 90% of any ordinary pre-RIC built in gains we recognized 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.
  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
        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
        December 31, 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 and structure, withdraw its election to be regulated as a BDC.
  F-38-
 On
        March
        13, 2007, a Special Meeting of Shareholders (the “Special Meeting”) of the
        Company was held to authorize the Board of Directors of the Company (the
        “Board”) to withdraw the Company’s election to be treated as a BDC under the
        1940 Act and to elect to the Board, Mr. John D. Powell, Mr. Larry P. Horner
        and
        Mr. Charles Bitters. As a result of the Special Meeting, the Shareholders
        approved both items and the Company has been authorized to file a Form N-54C
        with the SEC to effect the BDC withdrawal as soon as practicable. 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 under the current BDC structure.
  The
        withdrawal of the Company’s election to be regulated as a BDC under the 1940 Act
        will result in a significant change in the Company's required method of
        accounting. BDC financial statement presentation and accounting utilizes
        the
        value method of accounting used by investment companies, which allows BDCs
        to
        recognize income and value their investments at market value as opposed to
        historical cost. In addition, majority-owned subsidiaries are not consolidated;
        rather, investments in those subsidiaries are reflected on the balance sheet
        as
        an investment in a majority-owned portfolio company at fair value.
  In
        accordance with BDC accounting requirements, the Company has recorded a
        significant unrealized gain on its investments. As an operating company,
        the
        required financial statement presentation and accounting for securities held
        will be either the fair value or historical cost method of accounting, depending
        on how the Company’s investments are classified and how long the Company intends
        to hold the investment. Since the Company’s only investments have been in its
        wholly-owned portfolio companies, all of the previously recorded unrealized
        gain
        on investments will be no longer be reflected in the Company’s financial
        statements. Thus, though there is no reason to believe that the worth of
        the
        investments would be different, the method of accounting will change.
  Changing
        the Company’s method of accounting could reduce the market value of its
        investments in privately held companies by eliminating the Company’s ability to
        report an increase in value of its holdings as they occur. As an operating
        company, the Company will be required to consolidate its financial statements
        with subsidiaries, thus eliminating the portfolio company reporting benefits
        available to BDCs. Also, as an operating company, the Company will no longer
        present a Net Asset Value (“NAV”) in its financial statements or supplemental
        NAV financial information in the footnotes to the Company’s consolidated
        financial statements.
  Please
        see Note 12 - Unaudited Supplemental Information for unaudited pro forma
        comparisons of the Company’s balance sheet and statement of operations, showing
        the difference between the BDC presentation and the presentation that will
        be
        made going forward after the de-election.
  Because
        the Company will be considered an “oil and gas operating company”, the Company
        will use 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) will
        be
        charged to operations. All capitalized costs of oil and gas properties will
        be
        depleted using the units-of-production method based on total proved reserves.
  The
        change in accounting due to the conversion to an operating company from a
        BDC is
        considered a change in accounting principle. As a result, in accordance with
        Statement of Financial Accounting Standard 154, "Accounting for Changes and
        Error Corrections," which requires that a change in accounting principle
        be
        retrospectively applied to all prior periods presented, the Company’s financial
        statements will be presented on an operating and consolidated basis for all
        current and prior periods presented on a retrospective basis without regard
        to
        the BDC method of accounting. The change in presentation may have an impact
        on
        the market’s response to the Company, the nature and extent of which cannot be
        predicted.
  F-39-
 The
        Company does not believe that withdrawing its election to be regulated as
        a BDC
        will have any impact on its federal income tax status, because the Company
        never
        elected to be treated as a regulated investment company under Subchapter
        M of
        the Internal Revenue Code. Instead, the Company has always been subject to
        corporate level federal income tax on its income (without regard to any
        distributions it makes to its shareholders) as a “regular” corporation under
        Subchapter C of the Internal Revenue Code.
  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.
  **9.
        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
        in exchange for a market rate promissory note. The promissory note was
        subsequently exchanged for a convertible debenture and transferred to a
        majority-owned portfolio company (See Note 5 - Debt). The oil and gas properties
        were also transferred to that same majority-owned portfolio company (See
        Note 4
        - Investments).
  During
        the year ended December 31, 2003, the Company’s President
        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 paid $8,000 in prepaid
        acquisition costs. The loan is non-interest bearing, unsecured and due on
        demand.
 
 In
        November 2003, a settlement was negotiated 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 occurs (See Note 5 - Debt and Note 8 - Commitments and
        Contingencies). The Company’s President has personally guaranteed the
        obligation. As of June 30, 2005, 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 during 2005 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 negotiated for a lawsuit from one
        stockholder who invested $100,000 in the Company receiving 100,000 common
        shares
        during a private placement. The settlement of $149,500 was paid by the Company’s
        President personally and the Company has been released from all obligations
        related to the lawsuit.
 
 F-40-
 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.
        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 and we are not paying rent on our space. It
        is
        being provided to the Company by our President free of charge .
 
 Effective
        July 1, 2003, the Company entered into a salary and equipment rental agreement
        with its President. Under the terms of the agreement, the Company would 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 of the Company 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 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.
        As
        of January 1, 2005, the $3,500 per month equipment rental agreement with
        the
        President was terminated. During the year ended December 31, 2005, the Company
        accrued $120,000 for compensation. Additionally, the President 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 year ended
        December 31, 2006, the Company accrued $120,000 for compensation, repaid
        $137,500 and the President advanced $10,000 of funds on behalf of the Company.
        As a result, the accrued balance as of December 31, 2006 is $98,225 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 year ended December 31, 2006, the Company advanced directly or indirectly,
        $2,386,500 of funds to its majority-owned portfolio companies and was repaid
        $72,000 (net advances of $2,314,500). In total, the Company has advanced
        $5,761,842 of funds to its majority-owned portfolio companies which is included
        in the asset account entitled “Investment in and advances to majority-owned
        portfolio companies.
  F-41-
 **10****.
                    FINANCIAL INFORMATION**
                  
                  Following
                    is a schedule of financial highlights for theyear
                    ended December 31, 2006 and 2005:
  **Year
                    Ended****December
                    31,****2006**
                
                **2005**Per
                    Share Data:Net
                    Asset Value at Beginning of Period (1)
                
                $
                0.04
                
                $
                0.01Unrealized
                    Gain On Investments (1)
                
                
                0.00
                
                
                0.03Net
                    Operating Income (1)
                
                
                0.00
                
                
                0.00Net
                    increase in Stockholders Equity from Income
                
                
                0.00
                
                
                0.03Net
                    Asset Value at End of Period
                
                $
                0.04
                
                $
                0.04Per
                    Share Market Value at End of Period
                
                $
                0.06
                
                $
                0.05Total
                    Return (2) and (3)
                
                
                -88
                %
                
                -90
                %Common
                    Stock Outstanding and Issuable at End of Period
                
                
                494,245,082
                
                
                452,945,082Ratio/Supplemental
                    Data:Net
                    Assets at End of Period
                
                $
                20,979,756
                
                $
                18,577,714Ratio
                    of Operating Expenses to Net Assets
                
                
                3
                %
                
                2
                %Ratio
                    of Net Operating Loss to Net Assets
                
                
                -3
                %
                
                -2
                %(1)
                    Based on Total Shares Outstanding and Issuable(2)
                    2006 total return equals the increase of the ending market value
                    over the
                    December 31, 2006 price of $0.05 per share, divided by the beginning
                    price.(3)
                    2005 total return equals the increase of the ending market value
                    over the
                    December 31, 2005 price of $0.01 per share, divided by the beginning
                    price.
  F-42-
 **11.
        SUBSEQUENT EVENTS**
  On
        March
        13, 2007, a Special Meeting of Shareholders (the “Special Meeting”) of the
        Company was held to authorize the Board of Directors of the Company (the
        “Board”) to withdraw the Company’s election to be treated as a BDC under the
        1940 Act and to elect to the Board, Mr. John D. Powell, Mr. Larry P. Horner
        and
        Mr. Charles Bitters. As a result of the Special Meeting, the Shareholders
        approved both items and the Company has been authorized to file a Form N-54C
        with the SEC to effect the BDC withdrawal as soon as practicable.
  **12.
        UNAUDITED SUPPLEMENTAL INFORMATION**
  The
        following represents unaudited pro forma comparisons of the Company’s balance
        sheet and statement of operations, showing the difference between the BDC
        presentation and the presentation that will be made going forward after the
        Company’s election to withdraw being regulated as a BDC.
  **American
                  Energy Production, Inc.****(A
                  Development Stage Company)****December
                  31, 2006****Proforma
                  Balance Sheet****(Unaudited)**
  **ASSETS*****As
                  Presented***
              
              ***Pro-Forma*****12/31/2006**
              
              **12/31/2006****Current
                  Assets**Cash
              
              $
              2,280
              
              $
              73,043Accounts
                  receivable
              
              
              -
              
              
              1,205Due
                  from related parties
              
              
              -
              
              
              8,876Other
                  current assets
              
              
              -
              
              
              119,327**Total
                  Current Assets**
              
              
              **2,280**
              
              
              **202,451****Property
                  and equipment, net**
              
              
              **19,135**
              
              
              **4,339,671****Investments:**Investment
                  in subsidiary
              
              
              -
              
              
              -Investments
              
              
              -
              
              
              2,837Investments
                  in and advances to affiliates - majority-owned
              
              
              21,665,612
              
              
              -**Total
                  Investments**
              
              
              **21,665,612**
              
              
              **2,837****Other
                  Assets**Development
                  programs - related party
              
              
              -
              
              
              69,124Other
              
              
              -
              
              
              4,770Total
                  Other Assets
              
              
              -
              
              
              73,894**Total
                  Assets**
              
              $
              **21,687,027**
              
              $
              **4,618,853****LIABILITIES****Current
                  Liabilities**Accounts
                  payable
              
              $
              327,113
              
              $
              330,190Other
                  current liabilities
              
              
              -
              
              
              185Advances
                  from AMEP
              
              
              -
              
              
              -Due
                  to related parties
              
              
              98,225
              
              
              179,447Convertible
                  debentures
              
              
              57,967
              
              
              0Note
                  payable
              
              
              -
              
              
              2,019,535Accrued
                  interest payable
              
              
              139,033
              
              
              216,622Accrued
                  payroll taxes and penalties
              
              
              68,802
              
              
              68,802Lease
                  payable
              
              
              16,131
              
              
              16,131**Total
                  Current Liabilities**
              
              **$**
              **707,271**
              
              $
              **2,830,912**
 F-43-
  
 **American
                  Energy Production, Inc.****(A
                  Development Stage Company)****December
                  31, 2006****Balance
                  Sheets*****(Continued)*****(Unaudited)**
  **Commitments
                  and Contingencies (Note 7)****Stockholders'
                  Equity*****As
                  Presented***
              
              ***Pro-Forma*****12/31/2006**
              
              **9/30/2006**Convertible
                  preferred stock, Series A, $0.0001 par value,5,000,000
                  shares authorized, 3,500,000 issued and outstanding
              
              $
              350
              
              $
              350Common
                  stock, $0.0001 par value, 500,000,000 shares authorized494,170,082
                  shares issued and outstanding
              
              
              49,417
              
              
              49,417Common
                  stock issuable, $0.0001 par value, 75,000 shares
              
              
              8
              
              
              8Additional
                  paid in capital
              
              
              23,998,250
              
              
              23,511,249Accumulated
                  deficit
              
              
              (9,360,491
              )
              
              (9,360,491
              )Retained
                  earnings during development stage
              
              
              7,194,224
              
              
              (11,510,590
              )21,881,756
              
              
              2,689,941Less:
                  Subscription Receivable
              
              
              (902,000
              )
              
              (902,000
              )**Total
                  Stockholders' Equity**
              
              
              **20,979,756**
              
              
              **1,787,941****Total
                  Liabilities and Stockholders' Equity**
              
              **$**
              **21,687,027**
              
              **$**
              **4,618,853**
 
 F-44-
 **American
                  Energy Production, Inc.****(A
                  Development Stage Company)****Proforma
                  Statement of Operations****(Unaudited)**
  ***(As
                  Reported)***
              
              
              
              ***(Proforma)*****Period
                  from**
              
              
              
              **Period
                  from****February
                  20, 2003**
              
              
              
              **February
                  20,, 2003****(Inception
                  of**
              
              
              
              **(Inception
                  of****Development
                  Stage)**
              
              
              
              **Development
                  Stage)****to
                  Dec. 31, 2006**
              
              
              
              **to
                  Dec. 31, 2006****Revenues**Oil
                  and Gas sales, net
              
              $
              46,658
              
              
              
              
              $
              3,993,349Management
                  fees, netRoyalties,
                  net
              
              
              
              
              
              
              
              
              4,285**Total
                  Revenues**
              
              
              **46,658**
              
              
              
              
              
              **4,013,464****Operating
                  Expenses**Compensation
              
              
              902,596
              
              
              
              
              
              1,089,275Consulting
              
              
              1,274,332
              
              
              
              
              
              1,274,332Depletion
              
              
              3,987
              
              
              
              
              
              3,987Depreciation
              
              
              89,894
              
              
              
              
              
              178,943Rent
              
              
              63,000
              
              
              
              
              
              172,839General
                  and administrative
              
              
              203,026
              
              
              
              
              
              631,285Production
              
              
              143,349
              
              
              
              
              
              6,825,290Professional
              
              
              610,222
              
              
              
              
              
              625,292Taxes
              
              
              -
              
              
              
              
              
              11,219Website
              
              
              322,583
              
              
              
              
              
              322,583**Total
                  Operating Expenses**
              
              
              **3,612,949**
              
              
              
              
              
              **11,135,045****Operating
                  Loss**
              
              
              **(3,566,291**
              **)**
              
              
              
              
              **(7,121,581**
              **)****Other
                  Income (Expense)**Gain
                  on settlement of debt
              
              
              18,364
              
              
              
              
              
              18,364Other
                  income
              
              
              44,155
              
              
              
              
              
              347,010Unrealized
                  gain on investments
              
              
              15,445,803
              
              
              
              
              
              -Interest
                  expense
              
              
              (4,557,640
              )
              
              
              
              
              (4,564,215
              )Payroll
                  tax penalties
              
              
              (23,168
              )
              
              
              
              
              (23,168
              )Loss
                  on settlement
              
              
              (167,000
              )
              
              
              
              
              (167,000
              )**Total
                  Other Income (Expense)**
              
              
              10,760,515
              
              
              
              
              
              (4,389,009
              )**Net
                  Income (Loss)**
              
              **$**
              **7,194,224**
              
              
              
              
              **$**
              **(11,510,590**
              **)****Net
                  Income (Loss) Per Share - Basic and Diluted**
              
              **$**
              **0.03**
              
              
              
              
              **$**
              **(0.04**
              **)****Weighted
                  average Shares**
              
              
              **280,621,466**
              
              
              
              
              
              **280,621,466**
  
 F-45-