**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2005**





*Commission
      File #333-52812*





**AMERICAN
      ENERGY PRODUCTION, INC.**


(Exact
      name of small business issuer as specified in its charter)





**DELAWARE**


(State
      or
      other jurisdiction of incorporation or organization)





74-2945581


(IRS
      Employer Identification Number)





6073
      Hwy 281 South, Mineral Wells, TX 76067


(Address
      of principal executive offices)(Zip Code)





(210)
      410-8158


(Registrant's
      telephone no., including area code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the 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 [ ]




The
      number of shares outstanding of the Company's common stock outstanding on August
      10, 2005: 302,030,234.


-1-


**AMERICAN
      ENERGY PRODUCTION, INC.**


**FORM
      10-Q**


Table
                of Contents
              
              PART
                I - FINANCIAL INFORMATION
              
              Item
                1 - Financial Statements
              
              Item
                2 - Management's Discussion and Analysis of Financial
                Condition and Results of Operations
              
              Item
                3 - Controls and Procedures
              
              
              PART
                II - OTHER INFORMATION
              
              Item
                1 - Legal Proceedings
              
              Item
                2 - Changes in Securities
              
              Item
                3 - Defaults upon Senior Securities
              
              Item
                4 - Submission of Matters to a Vote of Security Holders
              
              Item
                5 - Other Information
              
              Item
                6 - Exhibits and Reports on Form 8-K
              
              SIGNATURES







-2-


**PART
      I - FINANCIAL
      INFORMATION**





Item
      1.
      Financial Statements





Filed
      herewith are our following unaudited financial statements:





Balance
      Sheet (Unaudited) at June 30, 2005





Statements
      of Operations (Unaudited) for the three and six
      months ended June 30, 2005 and 2004





Statements
      of Cash Flows (Unaudited) for the six months
      ended June 30, 2005 and 2004





Statement
      of Net Assets (Unaudited) at June 30, 2005





Schedule
      of Investments (Unaudited) at June 30, 2005





Notes
      to Financial Statements (Unaudited)





-3-


**American
                Energy Production, Inc.****(A
                Development Stage Company)****Balance
                Sheet****June
                30, 2005****(Unaudited)****ASSETS****Current
                Assets**Cash
            
            $
            106,446Total
                Current Assets
            
            
            106,446**Property
                and equipment, net**
            
            
            **31,010****Investments:**Investments
                in and advances to affiliates - majority-owned
            
            
            2,733,342Total
                Investments
            
            
            **2,733,342****Total
                Assets**
            
            **$**
            **2,870,798****LIABILITIES****Current
                Liabilities**Accounts
                payable
            
            $
            275,672Due
                to related parties
            
            
            92,725Convertible
                debentures, net of discount
            
            
            335,665Accrued
                interest payable
            
            
            195,985Accrued
                payroll taxes and penalties
            
            
            59,796Lease
                payable
            
            
            18,153Notes
                payable - banks
            
            
            22,282**Total
                Current Liabilities**
            
            
            **1,000,278****Net
                Assets**
            
            **$**
            **1,870,520**





See
      accompanying notes to unaudited financial statements.





-4-


**American
                Energy Production, Inc.****(A
                Development Stage Company)****Balance
                Sheet*****(Continued)*****June
                30, 2005****(Unaudited)****Commitments
                and Contingencies (Note 7)****Stockholders'
                Equity**Convertible
                preferred stock, Series B, $0.0001 par value,5,000,000
                shares authorized, 4,000,000 issued and outstanding
            
            $
                400Common
                stock, $0.0001 par value, 500,000,000 shares authorized302,030,234
                shares issued and outstanding
            
            30,203Common
                stock issuable, $0.0001 par value, 18,575,000 shares
            
            1,858Additional
                paid in capital
            
            18,647,185Accumulated
                deficit
            
            (9,360,491)Deficit
                accumulated during development stage
            
            (7,421,635)1,897,520Less:
                Subscription Receivable
            
            (27,000)**Total
                Stockholders' Equity**
            
            **1,870,520****Total
                Liabilities and Stockholders' Equity**
            
            **$
                2,870,798****Net
                Asset Value Per Share**
            
            **$
                0.01**





See
      accompanying notes to unaudited financial statements.


-5-


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





**Period
                from****February
                20, 2003****Three
                months ended**
            
            **Six
                Months Ended**
            
            **(Inception
                of****June
                30,**
            
            **June
                30,**
            
            **Development
                Stage)****2005**
            
            **2004**
            
            **2005**
            
            **2004**
            
            **to
                June 30, 2005****Operating
                Income**Oil
                sales, net
            
            $
            -
            
            $
            17,548
            
            $
            -
            
            $
            40,010
            
            $
            46,658**Total
                Operating Income**
            
            
            **-**
            
            
            **17,548**
            
            
            **-**
            
            
            **40,010**
            
            
            **46,658****Operating
                Expenses**Compensation
            
            
            30,000
            
            
            510,995
            
            
            60,000
            
            
            540,995
            
            
            722,596Consulting
            
            
            7,486
            
            
            101,784
            
            
            35,486
            
            
            205,934
            
            
            1,122,420Depletion
            
            
            -
            
            
            1,764
            
            
            -
            
            
            3,690
            
            
            3,987Depreciation
            
            
            1,968
            
            
            22,180
            
            
            3,914
            
            
            42,103
            
            
            77,981Equipment
                rental
            
            
            -
            
            
            10,500
            
            
            -
            
            
            21,000
            
            
            63,000General
                and administrative
            
            
            6,861
            
            
            (7,793
            )
            
            11,341
            
            
            39,314
            
            
            121,679Production
            
            
            -
            
            
            38,891
            
            
            -
            
            
            91,363
            
            
            142,723Professional
            
            
            68,507
            
            
            42,500
            
            
            73,653
            
            
            103,562
            
            
            307,756Website
            
            
            -
            
            
            (1,200
            )
            
            -
            
            
            28,550
            
            
            322,583**Total
                Operating Expenses**
            
            
            **114,822**
            
            
            **719,620**
            
            
            **184,394**
            
            
            **1,076,510**
            
            
            **2,884,725****Loss
                from Operations**
            
            
            **(114,822**
            **)**
            
            **(702,071**
            **)**
            
            **(184,394**
            **)**
            
            **(1,036,500**
            **)**
            
            **(2,838,067**
            **)****Other
                Expense**Gain
                on settlement of debt
            
            
            -
            
            
            11,799
            
            
            -
            
            
            11,799
            
            
            18,364Other
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,726Interest
                expense
            
            
            (90,260
            )
            
            (300,058
            )
            
            (473,850
            )
            
            (2,975,808
            )
            
            (4,427,496
            )Payroll
                tax expense and penalties
            
            
            (1,501
            )
            
            (1,501
            )
            
            (3,002
            )
            
            (3,002
            )
            
            (14,161
            )Loss
                on settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (167,000
            )**Total
                Other Expense**
            
            
            (91,761
            )
            
            (289,760
            )
            
            (476,852
            )
            
            (2,967,011
            )
            
            (4,583,567
            )**Net
                Loss**
            
            **$**
            **(206,583**
            **)**
            **$**
            **(991,831**
            **)**
            **$**
            **(661,246**
            **)**
            **$**
            **(4,003,511**
            **)**
            **$**
            **(7,421,635**
            **)****Net
                Loss Per Share-Basic and Diluted**
            
            **$**
            **(0.00**
            **)**
            **$**
            **(0.01**
            **)**
            **$**
            **(0.00**
            **)**
            **$**
            **(0.03**
            **)**
            **$**
            **(0.04**
            **)****Weighted
                average Shares**
            
            
            **306,171,168**
            
            
            **163,864,102**
            
            
            **306,171,168**
            
            
            **137,033,688**
            
            
            **167,372,982**


See
      accompanying notes to unaudited financial statements





-6-


**American
                Energy Production, Inc.**
              **(A
                Development Stage Company)****Statements
                of Cash Flows****(Unaudited)****Period
                from****February
                20, 2003****Six
                Months Ended**
            
            **(Inception
                of****June
                30,**
            
            **Development
                Stage)****2005**
            
            **2004**
            
            **to
                June 30, 2005****Cash
                Flows From Operating Activities:**Net
                loss
            
            $
            (661,246
            )
            $
            (4,003,511
            )
            $
                (7,421,635)Adjustments
                to reconcile net loss to net cashused
                in operations:Stock
                issued for debt and services
            
            
            -
            
            
            165,000
            
            951,555Stock
                issued for equipment
            
            
            -
            
            
            -
            
            20,000Stock
                issued for chemical
            
            
            -
            
            
            26,000
            
            37,000Stock
                issued in settlement
            
            
            -
            
            
            -
            
            17,500Gain
                on settlement of debt
            
            
            -
            
            
            (11,799
            )
            (18,364)Loss
                on settlement
            
            
            -
            
            
            -
            
            149,500Interest
                expense related to convertibledebentures
                beneficial conversion feature
            
            
            449,304
            
            
            2,891,429
            
            4,145,665Compensation
                expense in excess of debt to officer
            
            
            -
            
            
            480,995
            
            480,995Amortization
                of deferred services
            
            
            -
            
            
            45,900
            
            405,796Depreciation
            
            
            3,914
            
            
            42,103
            
            77,981Depletion
            
            
            -
            
            
            3,690
            
            3,987Changes
                in operating assets and liabilities:Decrease
                in accounts receivable - related party
            
            
            -
            
            
            6,648
            
            3,484Decrease
                in cash overdraft
            
            
            -
            
            
            -
            
            (6,726)Increase
                in accounts payable
            
            
            11,318
            
            
            2,679
            
            34,884Decrease
                (increase) in due to related party
            
            
            (32,500
            )
            
            2,342
            
            (56,776)Increase
                in accrued interest payable
            
            
            24,545
            
            
            84,379
            
            281,842Increase
                in accrued payroll taxes payable
            
            
            3,002
            
            
            3,003
            
            14,159**Net
                Cash Used In Operating Activities**
            
            
            (201,663
            )
            
            (261,143
            )
            (879,152)**Cash
                Flows From Investing Activities:**Prepaid
                acquisition cost disbursement
            
            
            -
            
            
            38,041
            
            (0)Purchase
                of equipment
            
            
            (0
            )
            
            (106,435
            )
            (178,974)Advances
                to affiliates/investees
            
            
            (136,556
            )
            
            (975,722
            )
            (1,861,342)Purchase
                of oil lease
            
            
            -
            
            
            -
            
            (8,500)**Net
                Cash Used In Investing Activities**
            
            $
            (136,556
            )
            $
            (1,044,115
            )
            $
                (2,048,816)


See
      accompanying notes to unaudited financial statements


-7-




**American
                Energy Production, Inc.****(A
                Development Stage Company)****Statements
                of Cash Flows*****(Continued)*****(Unaudited)****Period
                from****February
                20, 2003****Six
                Months Ended**
            
            **(Inception
                of****June
                30,**
            
            **Development
                Stage)****2005**
            
            **2004**
            
            **to
                June 30, 2005****Cash
                Flows From Financing Activities:**Proceeds
                for note payable - officer
            
            
            -
            
            
            -
            
            32,070Repayment
                of officer loan
            
            
            -
            
            
            -
            
            (115)Proceeds
                from loan - other
            
            
            -
            
            
            -
            
            54,396Repayment
                of loan proceeds - other
            
            
            (9,000
            )
            
            (30,000
            )
            (81,672)Proceeds
                from issuance of convertible debentures
            
            
            -
            
            
            850,000
            
            1,850,000Proceeds
                from common stock issuable
            
            
            185,000
            
            
            -
            
            185,000Proceeds
                from issuance ofcommon
                stock, net of offering costs of $0 and $134,500
            
            
            -
            
            
            689,500
            
            994,823Repayment
                of lease payable
            
            
            -
            
            
            -
            
            (87)**Net
                Cash Provided By Financing Activities**
            
            
            176,000
            
            
            1,509,500
            
            3,034,415**Net
                (Decrease) Increase in Cash**
            
            
            **(162,219**
            **)**
            
            **204,242**
            
            **106,446**Cash
                at Beginning of Period
            
            
            268,665
            
            
            432
            
            -**Cash
                at End of Period**
            
            
            **106,446**
            
            
            **204,674**
            
            **106,446**Cash
                interest paid
            
            **$**
            **-**
            
            **$**
            **84,379**
            
            **$
                47,750****Supplemental
                disclosure of non-cash transactions**Asset
                acquisition paid with convertible note payable
            
            $
            -
            
            $
            2,000,000
            
            $
                2,000,000Conversion
                of note payable to convertible debenture
            
            
            
            
            
            2,000,000
            
            2,400,000Conversion
                of indebtedness to preferred stock
            
            
            -
            
            
            528,532
            
            528,532Conversion
                of convertible debentures to common stock
            
            
            400,000
            
            
            715,000
            
            1,780,000Asset
                acquisition paid with convertible debenture and stock
            
            
            -
            
            
            800,000
            
            800,000Asset
                acquisition paid with stock
            
            
            -
            
            
            -
            
            72,000Common
                stock issued for subscription receivable
            
            
            25,000
            
            
            2,000
            
            27,000Stock
                Subscription receivable (23,964,530 shares)
            
            
            -
            
            
            -
            
            -Transfer
                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 unaudited financial statements


-8-


**American
                Energy Production, Inc.**
              **(A
                Development Stage Company)****Schedule
                of Net AssetsJune
                30,2005****(Unaudited)**


**Six****Months
                Ended****June
                30, 2005**Decrease
                in net assets from operations:Net
                operating losses
            
            
            (661,246
            )Net
                decrease in net assets from operations
            
            
            (661,246
            )Common
                Stock transactions
            
            
            585,000Total
                increase in Net Assets
            
            
            (76,246
            )Net
                Assets:Beginning
                of Period
            
            
            1,946,766End
                of period
            
            $
            1,870,520





See
      accompanying notes to unaudited financial statements




-9-


**American
                Energy Production, Inc.****(A
                Development Stage Company)****Schedule
                of Investments****June
                30, 2005****(Unaudited)****Percentage
                of****Title
                of**
            **Class
                Held on****Portfolio**
            
            **Securities
                Held**
            **a
                Fully Diluted**
            **At
                March 31, 2005****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%
            $
                1,284,598
            $
                1,284,598Oil
                America Group, Inc.
            Oil
                and Gas Production
            Common
                Stock
            100%
            117,000
            117,000Bend
                Arch Petroleum, Inc.
            Oil
                and Gas Production
            Common
                Stock
            100%
            1,256,188
            1,256,188AMEP
                Strategic Investments, Inc.
            Investment
            Common
                Stock
            100%
            75,556
            75,556**Total
                Control Investments - Majority Owned**
            
            
            
            $
                2,733,342
            $
                2,733,342**Total
                Investments**
            
            
            
            **2,733,342**
            **2,733,342****Unearned
                Income**
            
            
            
            **-**
            **-****Total
                Investments, net of Unearned Income**
            
            
            
            **$
                2,733,342**
            **$
                2,733,342**(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 unaudited financial statements


-10-


**1.****HISTORY
      AND NATURE OF BUSINESS**




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





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





On
      January 12, 2004, the Company filed a Form N-54 with the Securities and Exchange
      Commission (“SEC”) to be regulated as a Business Development Company (“BDC”)
      pursuant to the provisions of section 54(a) of the Investment Company Act of
      1940 (“the 1940 Act”), to be subject to the provisions of section 55 through 65
      of the 1940 Act. The Company has determined that its operating model best
      approximates that of an investment company and intends to make investments
      into
      developing businesses in the oil and gas and other industries. Additionally,
      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 of 1933 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.
      The
      Company is presently registered as an Investment Company under the 1940 Act
      and
      as such, is authorized to issue up to $4,000,000 in “free-trading” stock at
      prices ranging from $0.01 to $0.10 per share.





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 pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. However, the filing was not acknowledged
      by the SEC and the Company re-filed the Form with the SEC, with an effective
      date of June 30, 2005. The Form 2-E filing discloses that 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
      (See Note 7 - Commitments and Contingencies).


-11-


As
      a BDC,
      the Company will be structured in a manner more consistent with its current
      business strategy. As a result, the Company is positioned to raise capital
      in a
      more efficient manner and to develop and expand its business interests. The
      Company believes that potential acquisitions, in total, will enhance value
      to
      stockholders through capital appreciation and payments of dividends to the
      Company by its investee companies.




BDC
      regulation was created in 1980 by Congress to encourage the flow of public
      equity capital to small businesses in the United States. BDC’s, like all mutual
      funds and closed-end funds, are regulated by the 1940 Act. BDC’s report to
      stockholders like traditional operating companies and file regular quarterly
      and
      annual reports with the Securities and Exchange Commission. BDC’s are required
      to make available significant managerial assistance to their portfolio
      companies.




**2.
      GOING CONCERN**





As
      reflected in the accompanying financial statements, the Company has a net loss
      of $661,246 and net cash used in operations of $201,663 for the six months
      ended
      June 30, 2005 and a deficit accumulated during the development stage of
      $7,421,635 at June 30, 2005. The Company is also in default on certain notes
      to
      banks and is in the development stage with no revenues. The ability of the
      Company to continue as a going concern is dependent on its ability to
      successfully implement its business plan as a BDC, 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
      cannot
      assure you that we will generate sufficient cash flow from operations or obtain
      additional financing to meet scheduled debt payments and financial covenants.
      If
      we fail to make any required payment under the agreements and related documents
      governing our indebtedness or fail to comply with the financial and operating
      covenants contained in them, we would be in default. The financial statements
      do
      not include any adjustments to reflect the possible effects on recoverability
      and classification of assets or the amounts and classification of liabilities,
      which may result from the inability of the Company to continue as a going
      concern.





We
      expect
      that future revenues in the near term will consist of any potential unrealized
      gains on our investment properties and in the long term any potential interest
      or dividends if the Companies we invest in become profitable. Accordingly,
      the
      Company determined that it would be necessary to raise additional capital to
      carry out the company’s business plan and in January 2004, filed a Form 1-E
      pursuant to the Securities Act of 1933 notifying the SEC of the Company’s intent
      to sell up to $4,000,000 of the Company’s common stock.





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 pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. The Form 2-E filing discloses that 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.


The
      Company is in the process of exploring financing sources but has not obtained
      any definitive commitments as of the date of these financial statements. As
      a
      result, we cannot provide assurance that we will have sufficient resources
      to
      cover our working capital requirements for the next twelve
      months.


-12-


**3.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation and Concentration**





The
      accompanying unaudited financial statements are prepared in accordance with
      the
      guidance in the AICPA’s Audit and Accounting Guide, “Audits of Investment
      Companies” and in accordance with the 1940 Act rules and regulations thereunder
      since the Company elected to be regulated as a Business Development Company
      effective January 29, 2004.





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





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





For
      further information, refer to the audited financial statements and footnotes
      of
      the Company for the year ending December 31, 2004 included in the Company’s Form
      10-K.




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




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





**Accounting
      Estimates**





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





**Cash
      and Cash Equivalents**





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








-13-


**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.





For
      financial statement purposes, investments are recorded at their fair value.
      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, effective November 2004, the Company acquired Oil America Group
      and in January 2005, the Company formed a new controlled entity for purposes
      of
      holding this entity as an investment (See Note 4 - Investments in and Advances
      to Affiliates). Currently, readily determinable fair values do not exist for
      these transactions and the investment in the privately held company and the
      newly formed controlled entity are recorded at cost, which approximates
      estimated fair value as of June 30, 2005. The fair value of these investments
      is
      determined in good faith by the Company’s 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. There were no realized or unrealized gains or losses for the six
      months ended June 30, 2005.





**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.





-14-


**Fair
      Value of Financial Instruments**





We
      define
      the fair value of a financial instrument as the amount at which the instrument
      could be exchanged in a current transaction between willing parties. The
      carrying value of accounts receivable, accounts payable and accrued liabilities
      approximates fair value because of the short maturity of those instruments.
      The
      estimated fair value of our other obligations is estimated based on the current
      rates offered to us for similar maturities. Based on prevailing interest rates
      and the short-term maturity of all of our indebtedness, management believes
      that
      the fair value of our obligations approximates book value at June 30,
      2005.





**Revenue
      Recognition**




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


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





**Income
      Taxes**





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





-15-


**Recent
      Accounting Developments**





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





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





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





**Reclassifications**





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




**4.**
            **INVESTMENTS
                IN AND ADVANCES TO
                AFFILIATES**





As
      of June 30, 2005, investments consisted of the following:


**Cost**
            
            **Fair
                Value**Investments
                in Equity Securities
            
            $
            2,733,342
            
            $
            2,733,342Less:
                Unearned Income
            
            
            -
            
            
            -Total
            
            $
            2,733,342
            
            $
            2,733,342









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
      its
      investees 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.




-16-


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







At
      June
      15, 2004, the full consideration was paid by the Company and in accordance
      with
      the rules of a Business Development Company, the $800,000 purchase price for
      the
      capital stock of PRI has been recorded as an investment in affiliate -
      majority-owned. As of June 15, 2004, the Company had advanced $366,598 of
      expenditures on behalf of PRI and effective with the acquisition, this amount
      has been reclassed as a component of the investment in affiliate -
      majority-owned.





At
      June
      30, 2005, the total investment and advance in affiliate for PRI reflected in
      the
      accompanying financial statements is $1,284,598. This amount is the historical
      cost for the Company and a readily determinable fair value does not exist for
      the underlying common stock of PRI. The fair value of this investment is
      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
      June 30, 2005, the Company had made $1,256,188 of net advances on behalf of
      its
      majority-owned affiliate, Bend Arch Petroleum, Inc., (“Bend Arch”) and this
      amount has been recorded as investment in and advances to affiliates in the
      accompanying balance sheet.





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





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




-17-


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




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




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





On
      November 9, 2004, the Company signed a definitive agreement to purchase all
      of
      the outstanding shares of Oil American Group Inc. (“OAG”) in a stock for stock
      trade. The purchase price was 4,000,000 shares of restricted 144 Company stock
      and was valued at $72,000, or $0.018 per share, the fair market value on
      November 9, 2004. Additionally, the Company has made
      $45,000 of advances on behalf of its OAG. Including the advances, the total
      of
      $117,000 has been recorded as investment in and advances to affiliates in the
      accompanying balance sheet.





OAG
      is now a majority-owned investee of the Company, specializing in oil and gas
      acquisitions, drilling prospective properties and managing oil and gas
      partnerships.





As
      of
      June 30, 2005, the Company had made $75,556 of net advances on behalf of its
      majority-owned affiliate, AMEP Strategic Investments, Inc., (“AMEP Strategic”)
      and this amount has been recorded as investment in and advances to affiliates
      in
      the accompanying balance sheet.




**5.
      DEBT**





*Our
      debt at June 30, 2005 consisted of the following:*





***Lease
      Payable*** ****


$21,238
                computer equipment lease, bearing interest at 10% per
                annum
            
            $
            18,153





-18-


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,
      2004, the balance of principal was $18,153. The amount is personally guaranteed
      by a former officer/director and a current officer/director of the Company.
      The
      lease was secured by all leased equipment and perfected by a financing
      statement; however, the Company liquidated the equipment and paid the office
      space lessor the $4,000 proceeds. As of June 30, 2005, the Company has recorded
      a total of $6,586 in accrued interest for this lease payable in the accompanying
      Balance Sheet.





In
      November 2003, a settlement was reached with the lessor to forgive the
      outstanding principal and accrued interest on the lease payable once the
      transfer of 100,000 shares of the Company’s common stock personally held by the
      Company’s president and director occurs. The president of the Company
      transferred these shares on September 15, 2003. As of March 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 during 2005 at
      which time the value of the shares exchanged and any related gain or loss will
      be determined and recognized - (see Note 7 - Commitments and Contingencies
      and
      Note 8 - Related Party Transactions).





***Notes
      payable - Banks***


$70,000
                bank revolving line of credit, dated March 12, 2001, bearing interest
                at
                default rate of 18% per annum, due March 11, 2002.In
                Default at June 30, 2005.
            
            $
            17,464$19,396
                bank automobile loan, dated July 6, 2004, bearing interest at 6.99%
                per
                annum, monthly installments of principal and interest with final
                payment
                due in February 2006.
            
            
            4,818$
            22,282





On
      March
      12, 2001, we obtained a revolving bank line of credit in the amount of $70,000,
      of which $17,464 is 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 is secured by all equipment, which had been repossessed as of December
      31, 2001 and $23,075 was applied to the balance. As of June 30, 2005, the
      Company has recorded a total of $12,378 in accrued interest for this line of
      credit in the accompanying Balance Sheet. The line of credit is in default
      at
      June 30, 2005.





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





In
      July
      2004, we obtained a bank automobile loan in the amount of $19,396 (including
      accrued interest of 6.99% per annum). Monthly principal and interest payments
      of
      $1,077 are due with final payment in February 2006. The loan is secured by
      the
      automobile and as of June 30, 2005, the balance outstanding is
      $4,818.





-19-


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





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





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





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





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




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


***Convertible
        Debentures:***


$250,000
                Convertible Debenture, dated May 20, 2004, bearing interest at 8%
                per
                annum and due on December 1, 2005
            
            $
            70,000$400,000
                Convertible Debentures, dated June 15, 2004, bearing interest at
                8% per
                annum and due on December 1, 2005
            
            
            400,000Less:
                Debt discount
            
            
            (134,335
            )$
            335,665





-20-


In
      May
      2004, the Company received $250,000 in gross proceeds from the issuance of
      a
      convertible debenture. The terms of the convertible debenture includes an
      interest rate of 8% per annum and convertible at any time at the option of
      the
      holder or the Company into common shares of the Company at a price equal to
      fifty percent (50%) of the closing bid price of the common stock on the date
      written notice is received by the Company of the election to convert and is
      due
      December 1, 2005. On May 17, 2004, the convertible debenture holder elected
      to
      convert $30,000 of the balance into common shares of the Company and as a result
      of the conversion, 3,000,000 shares of common stock were issued at $0.01 per
      share (50% of the closing share price). On June 10, 2004, the convertible
      debenture holder elected to convert $85,000 of the balance into common shares
      of
      the Company and as a result of the conversion, 8,500,000 shares of common stock
      were issued at $0.01 per share (50% of the closing share price). On July 19,
      2004, the convertible debenture holder elected to convert $65,000 of the balance
      into common shares of the Company and as a result of the conversion, 6,500,000
      shares of common stock were issued at $0.01 per share (50% of the closing share
      price). The remaining $70,000 of the $250,000 convertible debenture remains
      outstanding at June 30, 2005.





In
      accordance with EITF Issue 98-5 as amended by EITF Issue 00-27, the Company
      has
      evaluated that the $250,000 convertible debenture discussed above has a
      beneficial conversion feature as the exercise price for is less than the fair
      value of the Company’s common stock on the measurement date. Accordingly, the
      Company has recognized this beneficial conversion feature by recording a
      debt discount as a contra account to the convertible debenture for $250,000
      and $250,000 to additional paid-in capital. As of June 30, 2005, $231,0216
      was
      amortized to interest expense and a debt discount of $18,979
      remains.




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 (See
      Acquisition Footnote). 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. The entire $400,000 is outstanding as of June 30,
      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 will be amortized over the debt
      term of 17.5 months or through the due date of December 5, 2005. As of June
      30,
      2005, $284,644 was amortized to interest expense and a debt discount of $115,356
      remains as of June 30, 2005.




-21-


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. All of $1,000,000 has been
      amortized to interest expense.




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


-22-


On
      January 5, 2004, the $2,000,000 convertible note payable was exchanged for
      a
      convertible debenture for the same amount and due January 1, 2007. The terms
      of
      the convertible debenture include an interest rate of 8% per annum and
      convertible at any time at the option of the holder or the Company into common
      shares of the Company at a price equal to fifty percent (50%) of the closing
      bid
      price of the common stock on the date written notice is received by the Company
      of the election to convert. In
      accordance with EITF Issue 98-5 and 00-27, the Company has evaluated that the
      convertible debenture has a beneficial conversion feature as the exercise price
      is less than the fair value of the Company’s common stock on the measurement
      date. Accordingly, the Company has recognized this beneficial conversion feature
      by charging the statement of operations $2,000,000 for interest expense and
      $2,000,000 for additional paid-in capital. The conversion feature inherent
      in
      the convertible debenture was fully recognized as of June 30, 2004 since it
      was
      disposed of through assignment to Bend Arch, the Company’s investee (see
      below)




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




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




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




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




-23-


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





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




As
      of June 30, 2005, the Company has recorded $141,699 of
      accrued interest for the convertible debentures outstanding. As discussed
      previously, several convertible debenture holders have elected to convert all
      or
      a portion of the convertible debentures into common stock. However, the
      conversion has not included accrued interest and although the Company believes
      that no further common stock will be issued for these conversions, the accrued
      balance for these converted debentures is included in the accrued interest
      balance as of June 30, 2005.




**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 302,030,234 were issued and outstanding as of June
      30,
      2005. However, in December 2003, 8,500,000 of previously issued shares were
      cancelled as the Company had exceeded the 100,000,000 share limit authorized
      at
      that time. These 8,500,000 shares were reissued in January 2004 with an approved
      vote to increase the authorized shares (See below). As of June 30, 2005,
      18,575,000 shares were issuable as discussed below.





On
      December 18, 2003, the Company’s shareholders approved an increase in authorized
      common shares from 100,000,000 to 500,000,000 and the authorization of 5,000,000
      shares of preferred stock, $0.0001 par value per share. Under the terms of
      the
      designation, these Series A shares are not entitled to dividends. The shares
      are
      convertible, at the option of the holder, at any time, into three times as
      many
      common shares as Series A, preferred that are held. There are no liquidation
      rights or preferences to Series A, preferred stock holders as compared to any
      other class of stock. These shares are non-voting, however, the holders, as
      a
      class may elect two directors. As of June 30, 2005, 4,000,000 preferred shares
      were issued and outstanding.





-24-


***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 Company’s president of the Company. The
      $464,005 indebtedness comprised the entire $52,510 of loan payable - related
      party and $411,495 of Note Payable - related party balances as recorded at
      December 31, 2003 (See Note 5 - Debt). The $411,495 note indebtedness had been
      acquired by the president in a private transaction from a former officer. In
      connection with the forgiveness of the note principal, the Company’s president
      forgave the related accrued interest totaling $64,527 in a separate transaction
      on the same date. As a result, the Company has treated this as a contribution
      of
      capital at the date of debt forgiveness by recording additional paid in
      capital.




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




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




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


-25-




***Issuances
      of Common Stock:***




On
      June
      7, 2001 (the "Agreement Date"), the Company issued 25,000 fully vested common
      shares as a sign on bonus to a new employee. The shares were valued at the
      trading price of $2.00 on the Agreement Date resulting in a compensation expense
      of $50,000. Under a 90 day agreement dated July 11, 2001 (the "Agreement Date")
      for promotional and marketing services, the Company issued 125,000 fully vested
      common shares and a stockholder paid the service provider 75,000 free trading
      shares. The trading price of the Company's common stock on the Agreement Date
      was $1.40. The 75,000 shares are treated as contributed capital. The Company
      recognized an aggregate consulting expense on the Agreement Date of $280,000
      based on the $1.40 fair market value of the stock.




On
      May
      23, 2002, the Company approved an Employee Benefit Plan ("the Plan") for the
      purpose of providing stock based awards to its employees as defined in the
      plan.
      Under the terms of the plan, the Board of Directors may discontinue the plan
      at
      any time and no employee has any rights to be granted shares under the plan.




On
      May
      25, 2002, the Company filed as an exhibit to a Form S-8 registration statement
      the above plan and registered 12,500,000 shares, of which 12,225,000 were
      granted and issued on May 29, 2002 as discussed below.




On
      May
      29, 2002, the Company issued 11,225,000 shares of common stock, pursuant to
      the
      plan, having a fair value of $2,806,250 based on the $.25 quoted trading price
      on the grant date in exchange for legal and consulting services. As of December
      31, 2002, the Company has expensed $2,335,938 of consulting fees, $110,418
      of
      legal fees, and deferred $359,896 related to future legal and consulting
      services.




On
      May
      29, 2002, the Company issued 1,000,000 shares of common stock, pursuant to
      the
      plan, having a fair value of $250,000 based on the $.25 quoted trading price
      on
      the grant date in exchange for services of a corporate officer. As of December
      31, 2002, the Company has expensed the entire $250,000 related to past services.




On
      June
      19, 2002, the Company declared a 20% stock divided totaling 7,074,764 shares
      having a fair value of $2,263,924 based on the $.32 quoted trading price on
      the
      declaration date. Accordingly, the Company had charged its accumulated deficit,
      and recorded the value to common stock and additional paid-in capital for the
      20% stock dividend. These shares were issued to stockholders of record as of
      August 16, 2002. All shares and per share amounts have been retroactively
      restated for all periods presented in the accompanying financial statements
      to
      give effect for the 20% stock dividend.




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.





-26-


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





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





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





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





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





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





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





-27-


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).




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).


-28-


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




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




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





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





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





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





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





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




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.


-29-


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




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




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




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




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.




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.





***Common
      Stock Issuable:***





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





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


-30-


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





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





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





In
      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. As of June 30, 2005, the shares
      had
      not been issued and have been recorded as Common Stock Issuable in the
      accompanying Financial Statements.





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 June 30, 2005.


-31-


***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).





-32-


**7.
      COMMITMENTS AND CONTINGENCIES**





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





The
      Company is subject to various lawsuits and unasserted claims from vendors for
      non-payment of accounts payable plus related legal fees. Excluding legal fees,
      which cannot be estimated, the Company has included all amounts in its accounts
      payable as of June 30, 2005.





In
      November 2003, a settlement was reached with a lessor to forgive the outstanding
      principal and interest on the related note payable resulting from leased
      computers once the transfer of 100,000 shares personally held by the Company’s
      president and sole director occurs (see Note 5 - Debt and Note 8 - Related
      Party
      Transactions). 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.





The
      Company has included $59,796 of unpaid Federal payroll taxes and employee
      withholdings and related penalties and interest in its accrued expenses as
      of
      June 30, 2005. Such amounts are subject to potential federal tax liens.




We
      have
      elected to be taxed as a regulated investment company under Subchapter M of
      the
      Internal Revenue Code. In order to maintain our status as a regulated investment
      company, we are required to (i) distribute at least 90% of our investment
      company taxable income and 90% of any ordinary pre-RIC built in gains we
      recognize between January 1, 2004 and December 31, 2013, less any taxes due
      on
      those gains to avoid corporate level taxes on the amount distributed to
      stockholders (other than any built in gain recognized between January 1, 2004
      and December 31, 2013) and (ii) distribute (actually or on a deemed basis)
      at
      least 98% of our income (both ordinary income and net capital gains) to avoid
      an
      excise tax. We intend 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 intend to make
      deemed distributions to our stockholders of any retained net capital gains.




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


-33-


In
      January 2004, we filed an election to become subject to Sections 55 through
      65
      of the Investment Company Act of 1940, such that we could commence conducting
      our business activities as a BDC. Additionally, 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 of 1933 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. The Company is
      presently registered as an Investment Company under the Act and as such, is
      authorized to issue up to $4,000,000 in “free-trading” stock at prices ranging
      from $0.01 to $0.10 per share.





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 pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. However, the filing was not acknowledged
      by the SEC and the Company re-filed the Form with the SEC, with an effective
      date of June 30, 2005. The Form 2-E filing discloses that 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.




We
      have
      determined that we may be out of compliance with certain of the rules and
      regulations governing the business and affairs, financial status, and financial
      reporting items required of BDCs. We are making every effort to determine our
      compliance as soon as is practicable with the relevant sections of the 1940
      Act
      and are working with our counsel to accomplish our review of that compliance.
      While we are seeking to comply with the 1940 Act, we cannot provide any specific
      time frame for our review to determine compliance. We cannot predict with
      certainty what, if any, regulatory consequences may result from the
      foregoing.




Our
      review may result in certain contingent liabilities to the Company as a result
      of potential actions by the SEC or others against the Company. Management as
      of
      the date of this report 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.


-34-


**8.
      RELATED PARTY AND AFFILIATE TRANSACTIONS**




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




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


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





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





In
      November 2003, a settlement was reached with a lessor to forgive the outstanding
      principal and interest on the related note payable resulting from leased
      computers once the transfer of 100,000 shares personally held by the Company’s
      president and sole director occurs (See Note 5 - Debt and Note 8 - Commitments
      and Contingencies). The Company’s president and sole director 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 for 100,000 common shares during a private
      placement. The settlement of $149,500 was paid by the Company’s sole
      officer/director personally and the Company has been released from all
      obligations related to the lawsuit.





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


-35-


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 sole officer/director free of
      charge .





Effective
      July 1, 2003, the Company entered into a salary and equipment rental agreement
      with its president and sole director. Under the terms of the agreement, the
      Company will pay a salary of $10,000 per month and $3,500 in equipment rental
      per month for the use of the Company’s president’s personal pickup truck, car,
      pulling unit, winch truck, backhoe and water truck used in the field operations.
      Additionally, the president and sole director has from time to time, advanced
      expenses of the Company from his personal funds. At December 31, 2003, the
      accrued balance owed to the president and sole director was $220,455. During
      the
      year ended December 31, 2004, the Company accrued $162,000 of expense related
      to
      the salary and rental agreement, composed of $120,000 for compensation and
      $42,000 for equipment rental fee. Additionally, the president and sole director
      advanced $26,270 of funds on behalf of the Company and the Company repaid
      $305,000 resulting in an accrual balance of $92,725 as of June 30, 2005,
      classified as a component of Due To Related Parties in the accompanying
      Financial Statements.





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





During
      the six months ended June 30, 2005, the Company advanced directly or indirectly,
      $136,556 of funds to its wholly-owned investees. This amount is included in
      the
      asset account entitled “Investment in and advanced to
      affiliates-majority-owned.


-36-


**9.
                FINANCIAL INFORMATION**
              
              Following
                is a schedule of financial highlights for the six months ended June
                30,
                2005:
            
            **Six****Months
                Ended****June
                30, 2005**Per
                Share Data:Net
                Asset Value at Beginning of Period (1)
            
            $
            0.01Net
                Operating Loss (1)
            
            
            (0.00
            )Net
                increase in Stockholders Deficiency from losses
            
            
            (0.00
            )Net
                Asset Value at End of Period
            
            $
            0.01Per
                Share Market Value at End of Period
            
            $
            0.02Total
                Return (2)
            
            
            -96
            %Common
                Stock Outstanding at End of Period
            
            
            302,030,234Ratio/Supplemental
                Data:Net
                Assets at End of Period
            
            
            1,870,520Ratio
                of Operating Expenses to Net Assets
            
            
            10
            %Ratio
                of Net Operating Loss to Net Assets
            
            
            -10
            %(1)
                Based on Total Shares Outstanding(2)
                Total return equals the increase of the ending market value over
                the
                December 31, 2004 price
              of
                $0.01 per share, divided by the beginning
                price.




**10.
      SUBSEQUENT EVENTS**




On
      June
      17, 2005, Mr. August Trevino of San Antonio, Texas was appointed an Independent
      Director of the Company. Mr. Trevino is the owner of Venture Capital Assistance
      Group Inc. Venture Capital Assistance Group specializes in helping start-up
      companies acquire financing and management advice. With Mr. Trevino's vast
      experience in evaluation of business he will be Chairman of the audit committee
      and evaluation committee. Mr. Trevino will fill the independent director
      position vacated by Shane Traveller.


-37-


**Item
      2. Management's Discussion and Analysis of Financial Condition and
      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-Q and with our annual report on Form 10-K for the year ended
      December 31, 2004.




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.





-38-


**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 the investment in other companies that acquire, develop, produce,
      explore and sell oil and gas. We anticipate that our investees 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 business development company effective in January 2004, we were
      engaged directly in the above activities since February 20, 2003, when we
      acquired certain oil assets and began our new development stage - (See below).
      Prior to that, we were f/k/a Communicate Now.com, Inc. and were incorporated
      on
      January 31, 2000 under the laws of the State of Delaware. On July 15, 2002,
      we
      changed our corporate name to American Energy Production, Inc.





On
      February 20, 2003, upon the acquisition of certain oil and gas assets, we
      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, we filed a Form N-54 with the Securities and Exchange
      Commission (“SEC”) to be regulated as a Business Development Company (“BDC”)
      pursuant to the provisions of section 54(a) of the Investment Company Act of
      1940 (“the 1940 Act”), to be subject to the provisions of section 55 through 65
      of the 1940 Act. We have determined that our operating model best approximates
      that of an investment company and intend to make investments into developing
      businesses in the oil and gas and other industries. Additionally, the Board
      of
      Directors determined that it was necessary to raise additional capital to carry
      out the company’s business plan and we filed a Form 1-E pursuant to the
      Securities Act of 1933 notifying the SEC of the our intent to sell up to
      $4,000,000 of 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. We are presently registered
      as an Investment Company under the 1940 Act and as such, authorized to issue
      up
      to $4,000,000 in “free-trading” stock at prices ranging from $0.01 to $0.10 per
      share.





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 pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. However, the filing was not acknowledged
      by the SEC and the Company re-filed the Form with the SEC, with an effective
      date of June 30, 2005. The Form 2-E filing discloses that 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.




As
      a BDC,
      we are structured in a manner more consistent with our current business
      strategy. As a result, we are positioned to raise capital in a more efficient
      manner and to develop and expand our business interests. The Company believes
      that potential acquisitions, in total, will enhance value to stockholders
      through capital appreciation and payments of dividends to us by our investee
      companies.




BDC
      regulation was created in 1980 by Congress to encourage the flow of public
      equity capital to small businesses in the United States. BDC’s, like all mutual
      funds and closed-end funds, are regulated by the 1940 Act. BDC’s report to
      stockholders like traditional operating companies and file regular quarterly
      and
      annual reports with the Securities and Exchange Commission. BDC’s are required
      to make available significant managerial assistance to their portfolio
      companies.


-39-


**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 to sustain its operations. We have substantial current obligations.
      We
      have had and could have 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, in their audit opinion for
      the
      years ended December 31, 2004 and 2003 that certain factors raise substantial
      doubt about our ability to continue as a going concern and these continuing
      factors are discussed in note 2 to our accompanying June 30, 2005 interim
      unaudited 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
      continually incurred net losses and this has resulted in a significant
      accumulated deficit and stockholders’ deficiency at June 30, 2005. We had a net
      loss of $661,246 and net cash used in operations of $201,663 for the six months
      ended June 30, 2005 and a deficit accumulated during the development stage
      of
      $7,421,635 at June 30, 2005. The Company is also in default on a note to a
      bank
      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.





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.




**RECENT
      DEVELOPMENTS**





We
      expect
      that future revenues in the near term will consist of any potential unrealized
      gains on our investment properties and in the long term any potential interest,
      dividends or realized gains if the Companies we invest in become profitable.
      Accordingly, the Company determined that it would be necessary to raise
      additional capital to carry out the company’s business plan and in January 2004,
      filed a Form 1-E pursuant to the Securities Act of 1933 notifying the SEC of
      the
      Company’s intent to sell up to $4,000,000 of the Company’s common stock. As our
      investees are wholly-owned, we are currently their only source of funding other
      than funding from their operations.





-40-


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 pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. However, the filing was not acknowledged
      by the SEC and the Company re-filed the Form with the SEC, with an effective
      date of June 30, 2005. The Form 2-E filing discloses that 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.




We
      have
      determined that we may be out of compliance with certain of the rules and
      regulations governing the business and affairs, financial status, and financial
      reporting items required of BDCs. We are making every effort to determine our
      compliance as soon as is practicable with the relevant sections of the 1940
      Act
      and are working with our counsel to accomplish our review of that compliance.
      While we are seeking to comply with the 1940 Act, we cannot provide any specific
      time frame for our review to determine compliance. We cannot predict with
      certainty what, if any, regulatory consequences may result from the
      foregoing.




Our
      review may result in certain contingent liabilities to the Company as a result
      of potential actions by the SEC or others against the Company. Management as
      of
      the date of this report could not reasonably estimate such contingent
      liabilities, if any.




The
      outcome of the above matter could have a significant impact on our ability
      to
      continue as a going concern.





In
      June
      2005, the Company received $185,000 of proceeds from the sale of common stock
      to
      two groups. The stock was valued at $0.01, the fair market value on the date
      of
      the sale. As of June 30, 2005, the shares had not been issued and have been
      recorded as Common Stock Issuable in the accompanying Financial
      Statements.




**GOING
      CONCERN**





The
      Independent Registered Public Accounting Firms’ reports to our financial
      statements for the year ended December 31, 2004 and December 31, 2003, include
      an emphasis paragraph in addition to their audit opinion stating that our
      recurring losses from operations, cash used in operations, working capital
      deficit and deficit accumulated during the development stage 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.




-41-


**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 the valuation of stock based compensation, the evaluation
      of
      the beneficial conversion feature in convertible debentures and preferred stock
      and investments. We also have other key accounting estimates and policies,
      but
      we believe that these other policies either do not generally require us to
      make
      estimates and judgments that are as difficult or as subjective, or it is less
      likely that they would have a material impact on our reported results of
      operations for a given period. For additional information see Note 3 “Summary of
      Significant Accounting Policies” in the notes to our unaudited financial
      statements contained in our quarterly report on Form 10-Q for the interim period
      ended June 30, 2005. 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.




**VALUATION
      OF NON-CASH ISSUANCES OF COMMON STOCK AND OTHER EQUITY
      INSTRUMENTS**





The
      Company issued common stock in non-cash transactions during the year ended
      December 31, 2004. The measurement date and period of recognition for various
      issuances is dependent on the individual facts and circumstances and various
      authoritative GAAP guidance. For these issuances, valuation is generally
      determined based on the fair market value of the instrument on the measurement
      date. For capital stock, values are generally determined based on quoted trading
      prices or comparable private placement transactions, as applicable, while for
      instruments such as warrants, valuation in generally determined through the
      use
      of option pricing models. As the Company has historically issued various
      instruments for services, these valuations generally have a material impact
      on
      our results of operations. There were no issuances of common stock in non-cash
      transactions during the six months ended June 30, 2005.





**EVALUATION
      OF BENEFICIAL CONVERSION FEATURE IN CONVERTIBLE DEBENTURES AND PREFERRED
      STOCK**





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 preferred stock. The Company has issued
      several convertible debentures and convertible preferred stock. 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.


-42-


**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.





For
      financial statement purposes, investments are recorded at their fair value.
      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, effective November 2004, the Company acquired Oil America Group
      and in January 2005, the Company formed a new controlled entity for purposes
      of
      holding this entity as an investment. Currently, readily determinable fair
      values do not exist for these transactions and the investment in the privately
      held company and the newly formed controlled entity are recorded at cost, which
      approximates estimated fair value as of March 31, 2005. The fair value of these
      investments is determined in good faith by the Company’s 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. There were no realized or unrealized gains or losses for the three
      months ended June 30, 2005.


-43-


**RESULTS
      OF OPERATIONS**




***Financial
      Analysis of the Six and Three Months Ended June 30, 2005 and
      2004***





**Three
                months ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004****Operating
                Income**Oil
                sales, net
            
            $
            -
            
            $
            17,548
            
            $
            -
            
            $
            40,010**Total
                Operating Income**
            
            
            **-**
            
            
            **17,548**
            
            
            **-**
            
            
            **40,010****Operating
                Expenses**Compensation
            
            
            30,000
            
            
            510,995
            
            
            60,000
            
            
            540,995Consulting
            
            
            7,486
            
            
            101,784
            
            
            35,486
            
            
            205,934Depletion
            
            
            -
            
            
            1,764
            
            
            -
            
            
            3,690Depreciation
            
            
            1,968
            
            
            22,180
            
            
            3,914
            
            
            42,103Equipment
                rental
            
            
            -
            
            
            10,500
            
            
            -
            
            
            21,000General
                and administrative
            
            
            6,862
            
            
            (7,793
            )
            
            11,341
            
            
            39,314Production
            
            
            -
            
            
            38,891
            
            
            -
            
            
            91,363Professional
            
            
            68,507
            
            
            42,500
            
            
            73,653
            
            
            103,562Website
            
            
            -
            
            
            (1,200
            )
            
            -
            
            
            28,550**Total
                Operating Expenses**
            
            
            **114,822**
            
            
            **719,620**
            
            
            **184,394**
            
            
            **1,076,510****Loss
                from Operations**
            
            
            **(114,822**
            **)**
            
            **(702,071**
            **)**
            
            **(184,394**
            **)**
            
            **(1,036,500**
            **)****Other
                Expense**Gain
                on settlement of debt
            
            
            -
            
            
            11,799
            
            
            -
            
            
            11,799Other
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -Interest
                expense
            
            
            (90,260
            )
            
            (300,058
            )
            
            (473,850
            )
            
            (2,975,808
            )Payroll
                tax expense and penalties
            
            
            (1,501
            )
            
            (1,501
            )
            
            (3,002
            )
            
            (3,002
            )Loss
                on settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Total
                Other Expense**
            
            
            (91,761
            )
            
            (289,760
            )
            
            (476,852
            )
            
            (2,967,011
            )**Net
                Loss**
            
            **$**
            **(206,583**
            **)**
            **$**
            **(991,831**
            **)**
            **$**
            **(661,246**
            **)**
            **$**
            **(4,003,511**
            **)**





-44-


***Three
      Months Ended June 30, 2005 versus 2004:***





*Revenue* *:*


Operating
      revenue decreased $17,548, or 100% to zero for the three months ended June
      30,
      2005 from $17,548 for the three months ended June 30, 2004. The Company is
      a
      Business Development Company (“BDC”) with investments in oil and gas production
      companies and has no sales by itself and the revenue in 2004 was prior to the
      Company becoming a BDC.





*Operating
      Expenses* *:*


Operating
      expenses decreased $604,797, or 521% to $114,822 for the three months ended
      June
      30, 2005 from $719,620 for the three months ended June 30, 2004. The decrease
      was primarily the result of a $480,995 decrease in compensation, a $94,298
      decrease in consulting and a $38,891 decrease in production. The decrease in
      compensation and consulting was primarily the result of a decrease in stock
      issued for services in 2005 as compared to 2004. The decrease in production
      was
      the result of the Company’s election to become a BDC in January 2005.





*Other
      Expense* *:*


Other
      expense decreased $197,999, or 193% to $91,761 for the three months ended June
      30, 2005 from $289,670 for the three months ended June 30, 2004. The decrease
      was primarily from a decrease in interest expense in relation to a
      beneficial conversion feature for convertible debentures issued in 2004 as
      the
      exercise price was less than the fair value of the Company’s common stock on the
      measurement date. This was offset by a $11,799 decrease in gain on settlement
      of
      debt that was in 2004 and zero in 2005.





***Six
      Months Ended June 30, 2005 versus 2004:***





*Revenue* *:*


Operating
      revenue decreased $40,010, or 100% to zero for the six months ended June 30,
      2005 from $40,010 for the six months ended June 30, 2004. The Company is a
      Business Development Company (“BDC”) with investments in oil and gas production
      companies and has no sales by itself and the revenue in 2004 was prior to the
      Company becoming a BDC.


-45-


*Operating
      Expenses* *:*


Operating
      expenses decreased $892,116, or 762% to $184,394 for the six months ended June
      30, 2005 from $1,076,510 for the six months ended June 30, 2004. The decrease
      was primarily the result of a $480,995 decrease in compensation, a $170,448
      decrease in consulting and a $91,363 decrease in production. The decrease in
      compensation and consulting was primarily the result of a decrease in stock
      issued for services in 2005 as compared to 2004. The decrease in production
      was
      the result of the Company’s election to become a BDC in January 2005.





*Other
      Expense* *:*


Other
      expense decreased $2,490,159, or 84% to $476,852 for the six months ended June
      30, 2005 from $2,967,011 for the six months ended June 30, 2004. The decrease
      was primarily from a decrease in interest expense in relation to a
      beneficial conversion feature for convertible debentures issued in 2004 as
      the
      exercise price was less than the fair value of the Company’s common stock on the
      measurement date. This was offset by a $11,799 gain on settlement of debt in
      2004 that and zero in 2005.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $106,446 at June 30, 2005 as compared to $268,665 at
      December 31, 2004, and working capital deficit was $893,830 at June 30, 2005
      as
      compared to $918,685 at December 31, 2004. The decrease in cash was primarily
      the result of the Company making advances of $136,556 to its majority-owned
      affiliates. The increase in the working capital deficit from December 31, 2004
      was primarily the result of the decrease in cash as discussed
      above.





*Operating
      Activities:* Net cash
      used in operating activities was $201,663 for the six months ended June 30,
      2005
      while cash that was used in operating activities was $261,143 for the six months
      ended June 30, 2004. The decrease in cash used in operations resulted primarily
      due to the fact of a decrease in the net loss, offset by a decrease in interest
      expense related to a beneficial conversion feature.





*Investing
      Activities:* Cash
      used in investing activities was $136,556 for the six months ended June 30,
      2005
      while cash used in investing activities was $1,044,115 for the six months ended
      June 30, 2004. The decrease in cash used in investing activities was primarily
      the result of a $839,166 decrease in prepaid advances to affiliates from 2004
      and a $106,435 decrease in purchase of equipment from 2004.


-46-


*Financing
      Activities* :
      Cash
      flows provided by financing activities was $176,000 for the six months ended
      June 30, 2005 while cash provided by financing activities was $1,509,500 for
      the
      six months ended June 30, 2004. The decrease in cash provided by financing
      activities was primarily due that in 2004, the Company received $850,000 of
      cash
      proceeds from the issuance of convertible debentures and $689,500 of cash
      proceeds from the sale of common stock. In 2005, the Company received $185,000
      from the sale of common stock that is issuable at June 30, 2005.




**DEBT**





*Our
      debt at June 30, 2005 consisted of the following:*





***Lease
      Payable***




$21,238
                computer equipment lease, bearing interest at 10% per
                annum
            
            $
            18,153





On
      April
      16, 2001, the Company leased computer equipment under a 36-month lease that
      was
      accounted for as a capital lease in the amount of $21,238 and at December 31,
      2004, the balance of principal was $18,153. The amount is personally guaranteed
      by a former officer/director and a current officer/director of the Company.
      The
      lease was secured by all leased equipment and perfected by a financing
      statement; however, the Company liquidated the equipment and paid the office
      space lessor the $4,000 proceeds.





As
      of
      June 30, 2005, the Company has recorded a total of $6,586 in accrued interest
      for this lease payable in the accompanying Balance Sheet.





In
      November 2003, a settlement was reached with the lessor to forgive the
      outstanding principal and accrued interest on the lease payable once the
      transfer of 100,000 shares of the Company’s common stock personally held by the
      Company’s president and director occurs. The president of the Company
      transferred these shares on September 15, 2003. As of March 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 during 2005 at
      which time the value of the shares exchanged and any related gain or loss will
      be determined and recognized.





-47-


***Notes
      payable - Banks***


$70,000
                bank revolving line of credit, dated March 12, 2001, bearing interest
                at
                default rate of 18% per annum, due March 11, 2002.In
                Default at June 30, 2005.
            
            $
            17,464$19,396
                bank automobile loan, dated July 6, 2004, bearing interest at 6.99%
                per
                annum, monthly installments of principal and interest with final
                payment
                due in February 2006.
            
            
            4,818$
            22,282





On
      March
      12, 2001, we obtained a revolving bank line of credit in the amount of $70,000,
      of which $17,464 is 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 is secured by all equipment, which had been repossessed as of December
      31, 2001 and $23,075 was applied to the balance. As of June 30, 2005, the
      Company has recorded a total of $12,378 in accrued interest for this line of
      credit in the accompanying Balance Sheet. The line of credit is in default
      at
      June 30, 2005.





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




In
      July
      2004, we obtained a bank automobile loan in the amount of $19,396 (including
      accrued interest of 6.99% per annum). Monthly principal and interest payments
      of
      $1,077 are due with final payment in February 2006. The loan is secured by
      the
      automobile and as of June 30, 2005, the balance outstanding is
      $4,818.





***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.


-48-


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




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




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





***Convertible
      Debentures:***


$250,000
                Convertible Debenture, dated May 20, 2004, bearing interest at 8%
                per
                annum and due on December 1, 2005
            
            $
            70,000$400,000
                Convertible Debentures, dated June 15, 2004, bearing interest at
                8% per
                annum and due on December 1, 2005
            
            
            400,000Less:
                Debt discount
            
            
            (134,335
            )$
            335,665





In
      May
      2004, the Company received $250,000 in gross proceeds from the issuance of
      a
      convertible debenture. The terms of the convertible debenture includes an
      interest rate of 8% per annum and convertible at any time at the option of
      the
      holder or the Company into common shares of the Company at a price equal to
      fifty percent (50%) of the closing bid price of the common stock on the date
      written notice is received by the Company of the election to convert and is
      due
      December 1, 2005. On May 17, 2004, the convertible debenture holder elected
      to
      convert $30,000 of the balance into common shares of the Company and as a result
      of the conversion, 3,000,000 shares of common stock were issued at $0.01 per
      share (50% of the closing share price). On June 10, 2004, the convertible
      debenture holder elected to convert $85,000 of the balance into common shares
      of
      the Company and as a result of the conversion, 8,500,000 shares of common stock
      were issued at $0.01 per share (50% of the closing share price). On July 19,
      2004, the convertible debenture holder elected to convert $65,000 of the balance
      into common shares of the Company and as a result of the conversion, 6,500,000
      shares of common stock were issued at $0.01 per share (50% of the closing share
      price). The remaining $70,000 of the $250,000 convertible debenture remains
      outstanding at June 30, 2005.





-49-


In
      accordance with EITF Issue 98-5 as amended by EITF Issue 00-27, the Company
      has
      evaluated that the $250,000 convertible debenture discussed above has a
      beneficial conversion feature as the exercise price for is less than the fair
      value of the Company’s common stock on the measurement date. Accordingly, the
      Company has recognized this beneficial conversion feature by recording a
      debt discount as a contra account to the convertible debenture for $250,000
      and $250,000 to additional paid-in capital. As of June 30, 2005, $231,0216
      was
      amortized to interest expense and a debt discount of $18,979
      remains.




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 (See
      Acquisition Footnote). 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. The entire $400,000 is outstanding as of June 30,
      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 will be amortized over the debt
      term of 17.5 months or through the due date of December 5, 2005. As of June
      30,
      2005, $284,644 was amortized to interest expense and a debt discount of $115,356
      remains as of June 30, 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.




-50-


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. All of $1,000,000 has been
      amortized to interest expense.




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




On
      January 5, 2004, the $2,000,000 convertible note payable was exchanged for
      a
      convertible debenture for the same amount and due January 1, 2007. The terms
      of
      the convertible debenture include an interest rate of 8% per annum and
      convertible at any time at the option of the holder or the Company into common
      shares of the Company at a price equal to fifty percent (50%) of the closing
      bid
      price of the common stock on the date written notice is received by the Company
      of the election to convert. In
      accordance with EITF Issue 98-5 and 00-27, the Company has evaluated that the
      convertible debenture has a beneficial conversion feature as the exercise price
      is less than the fair value of the Company’s common stock on the measurement
      date. Accordingly, the Company has recognized this beneficial conversion feature
      by charging the statement of operations $2,000,000 for interest expense and
      $2,000,000 for additional paid-in capital. The conversion feature inherent
      in
      the convertible debenture was fully recognized as of June 30, 2004 since it
      was
      disposed of through assignment to Bend Arch, the Company’s investee (see
      below)




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




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.


-51-


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




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




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





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




As
      of June 30, 2005, the Company has recorded $141,699 of
      accrued interest for the convertible debentures outstanding. As discussed
      previously, several convertible debenture holders have elected to convert all
      or
      a portion of the convertible debentures into common stock. However, the
      conversion has not included accrued interest and although the Company believes
      that no further common stock will be issued for these conversions, the accrued
      balance for these converted debentures is included in the accrued interest
      balance as of June 30, 2005.


-52-


***Equity
      Financing***





In
      June
      2005, the Company received $185,000 of proceeds from the sale of common stock
      to
      two groups. The stock was valued at $0.01, the fair market value on the date
      of
      the sale. As of June 30, 2005, the shares had not been issued and have been
      recorded as Common Stock Issuable in the accompanying Financial
      Statements.




***Liquidity***





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





In
      January 2004, we filed an election to become subject to Sections 55 through
      65
      of the Investment Company Act of 1940, such that we could commence conducting
      our business activities as a BDC. Additionally, 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 of 1933 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. The Company is
      presently registered as an Investment Company under the Act and as such, is
      authorized to issue up to $4,000,000 in “free-trading” stock at prices ranging
      from $0.01 to $0.10 per share.





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 pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. However, the filing was not acknowledged
      by the SEC and the Company re-filed the Form with the SEC, with an effective
      date of June 30, 2005. The Form 2-E filing discloses that 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.





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





-53-


**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Contractual
      Obligations and Commercial Commitments**





The
      following table highlights, as of June 30, 2005, our contractual obligations
      and
      commitments by type and period:


**Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1-3
                years**Debt:Convertible
                Debentures
            
            $
            400,000
            
            $
            400,000
            
            $
            -Bank
                Loans
            
            
            22,282
            
            
            22,282
            
            
            -Lease
                Payable
            
            
            18,153
            
            
            18,153
            
            
            -Total
                Contractual Obligations
            
            $
            440,435
            
            $
            440,435
            
            $
            -Less:
                Debt Discount on Convertible Debentures
            
            
            (64,335
            )
            
            (64,335
            )
            
            -Total
                Debt per Financial Statements
            
            $
            376,100
            
            $
            376,100
            
            $
            -




-54-


**2005
      OUTLOOK**




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




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




We
      have
      determined that we may be out of compliance with certain of the rules and
      regulations governing the business and affairs, financial status, and financial
      reporting items required of BDCs. We are making every effort to determine our
      compliance as soon as is practicable with the relevant sections of the 1940
      Act
      and are working with our counsel to accomplish our review of that compliance.
      While we are seeking to comply with the 1940 Act, we cannot provide any specific
      time frame for our review to determine compliance. We cannot predict with
      certainty what, if any, regulatory consequences may result from the
      foregoing.




Our
      review may result in certain contingent liabilities to the Company as a result
      of potential actions by the SEC or others against the Company. Management as
      of
      the date of this report 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.





**Item
      3. Evaluation of Disclosure Controls and Procedures.**





Charles
      Bitters, our Chief Executive Officer and Chief Financial Officer, has concluded
      that our disclosure controls and procedures are appropriate and effective.
      He
      has evaluated these controls and procedures as of the date of this report on
      Form 10-Q. There were no significant changes in our internal controls or in
      other factors that could significantly affect these controls subsequent to
      the
      date of their evaluation, including any corrective actions with regard to
      significant deficiencies and material weaknesses.


-55-





**PART
      II**




**Item
      1. Legal Proceedings**




The
      Company is subject to various lawsuits and unasserted claims from vendors for
      non-payment of accounts payable plus related legal fees. Excluding legal fees,
      which cannot be estimated, the Company has included all amounts in its accounts
      payable as of June 30, 2005.





In
      November 2003, a settlement was reached with a lessor to forgive the outstanding
      principal and interest on the related note payable resulting from leased
      computers once the transfer of 100,000 shares personally held by the Company’s
      president and sole director. As of September 30, 2004 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.





The
      Company has included $59,796 of unpaid Federal payroll taxes and employee
      withholdings and related penalties and interest in its accrued expenses as
      of
      June 30, 2005. Such amounts are subject to potential federal tax liens.




**Item
      2. Changes in Securities**




***Issuances
      of Preferred Stock:***




None




***Issuances
      of Common Stock:***




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.




In
      June 2005, the Company issued 4,000,000 shares of common stock. 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.


-56-


***Common
      Stock Issuable:***





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





In
      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. As of June 30, 2005, the shares had not
      been issued and have been recorded as Common Stock Issuable in the accompanying
      Financial Statements.




**Item
      3. Defaults Upon Senior Securities**


None





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


None





**Item
      5. Other Information**


None





**Item
      6. Exhibits and Reports on Form 8-K**


**(a)**  **Exhibits**





**Exhibit**
            **Description**31.1
            Certification
                by Principal Executive Officer31.2
            Certification
                of Principal Financial Officer32
            Certifications
                of Principal Executive and Financial Officer Pursuant to
                906





**(b)**  **Reports
      on Form 8-K.**





Date    Items
      Reported on


June
      21,
      2005   Item
      5.02


-57-


**SIGNATURES**


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 American Energy
      Production, Inc., in the capacities and on the dates indicated.








American Energy Production, Inc.Date: August
                13, 2005
              By:
              /s/ Charles
                BittersCharles
                  BittersPrincipal
                  Executive Officer, Principal Financial Officer,
                Sole
                  Director