SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, 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 SEPTEMBER 30, 2004

Commission File
#333-52812

AMERICAN ENERGY PRODUCTION,
INC.(Exact name of small business issuer as specified in its charter)

DELAWAREState
or other jurisdiction of incorporation or organization)

74-2945581 (IRS Employer
Identification Number)

6073 Hwy 281 South,
Mineral Wells, TX 76067Address 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 November 10, 2004: 269,530,234

1

AMERICAN ENERGY
PRODUCTION, INC. FORM 10-Q

Table of Contents

|        | 
|------- | 
|PART I  | 
|Item 1  | 
|Item 2  | 
|Item 3  | 
|PART II | 
|Item 1  | 
|Item 2  | 
|Item 3  | 
|Item 4  | 
|Item 5  | 
|Item 6  | 
|        | 

2

PART I  FINANCIAL
INFORMATION

Item 1. Financial
Statements

Filed herewith are our following
unaudited financial statements:

Balance Sheet at
September 30, 2004

Statements of Operations for the
three and nine months ended September 30, 2004 and 2003

Statement of Cash Flows for the nine
months ended September 30, 2004 and 2003

Schedule of Investments
at September 30, 2004

Notes to Financial Statements

3

# American Energy
Production, Inc.(A Development Stage Company)September
30, 2004Balance
Sheet(Unaudited)

# ASSETS

|                                                           | 
|---------------------------------------------------------- | 
|Current Assets                                             | 
|Cash                                                       | 
|Accounts receivable - related party                        | 
|                                                           | 
|Total Current Assets                                       | 
|                                                           | 
|Property and equipment, net                                | 
|                                                           | 
|Investments:                                               | 
|Investments in and advances to affiliates - majority-owned | 
|                                                           | 
|Total Investments                                          | 
|                                                           | 
|Total Assets                                               | 
|                                                           | 
|LIABILITIES                                                | 
|Current Liabilities                                        | 
|Accounts payable                                           | 
|Due to  related parties                                    | 
|Accrued interest payable - current                         | 
|Accrued payroll taxes and penalties                        | 
|Lease payable                                              | 
|Notes payable                                              | 
|                                                           | 
|Total Current Liabilities                                  | 
|                                                           | 
|Convertible debentures, net of discount                    | 
|Accrued interest payable - long term                       | 
|                                                           | 
|Total Long Term Liabilities                                | 
|                                                           | 
|Total Liabilities                                          | 
|                                                           | 

Commitments and
Contingencies (Note 8)

See accompanying notes
to financial statements

4

# American Energy
Production, Inc.(A Development Stage Company)September
30, 2004Balance
Sheet (Continued)(Unaudited)

|                                                               | 
|-------------------------------------------------------------- | 
|Stockholders Equity                                            | 
|Convertible preferred stock, Series B, $0.0001 par value,      | 
|5,000,000 shares authorized, 4,000,000 issued and outstanding  | 
|Common stock, $0.0001 par value, 500,000,000 shares authorized | 
|229,530,234 shares issued and outstanding                      | 
|Common stock issuable, $0.0001 par value, 75,000 shares        | 
|Additional paid in capital                                     | 
|Accumulated deficit                                            | 
|Deficit accumulated during development stage                   | 
|                                                               | 
|                                                               | 
|Less:  Subscription Receivable                                 | 
|                                                               | 
|Total Stockholders' Equity                                     | 
|                                                               | 
|Total Liabilities and Stockholders' Equity                     | 
|                                                               | 

See
accompanying notes to financial statements.

See accompanying notes
to financial statements

5

# American Energy
Production, Inc.(A Development Stage Company)September
30, 2004Statements
of Operations(Unaudited)

|                                     | Three months ended
September 30, | Nine months ended
September 30, | Period from
February 20, 2003
(Inception of
Development Stage) |             |  
|------------------------------------ | -------------------------------- | ------------------------------- | -------------------------------------------------------------- | ----------- | -
|
|Operating Income                     |                                  |                                 |                                                                |             |  
|Oil sales, net                       |                                  |                                 | $                                                              | --          |  
|                                     |                                  |                                 |                                                                |             |  
|Total Operating Income               |                                  |                                 |                                                                | --          |  
|Operating Expenses                   |                                  |                                
|Compensation                         |                                  |                                 |                                                                | 30,000      |  
|Consulting                           |                                  |                                 |                                                                | 36,000      |  
|Depletion                            |                                  |                                 |                                                                | --          |  
|Depreciation                         |                                  |                                 |                                                                | 1,762       |  
|Equipment rental                     |                                  |                                 |                                                                | 10,500      |  
|General and administrative           |                                  |                                 |                                                                | 16,467      |  
|Production                           |                                  |                                 |                                                                | --          |  
|Professional                         |                                  |                                 |                                                                | 29,272      |  
|Website                              |                                  |                                 |                                                                | --          |  
|Total Operating Expenses             |                                  |                                 |                                                                | 124,002     |  
|                                     |                                  |                                 |                                                                |             |  
|Loss from Operations                 |                                  |                                 |                                                                | (124,002    | )
|                                     |                                  |                                 |                                                                |             |  
|Other Expense                        |                                  |                                
|Gain on settlement of debt           |                                  |                                 |                                                                | --          |  
|Other income                         |                                  |                                 |                                                                | 6,726       |  
|Interest expense                     |                                  |                                 |                                                                | (1,088,256  | )
|Payroll tax expense and penalties    |                                  |                                 |                                                                | (1,501      | )
|Loss on settlement                   |                                  |                                 |                                                                | --          |  
|                                     |                                  |                                 |                                                                |             |  
|Total Other Expense                  |                                  |                                 |                                                                | (1,083,031  | )
|                                     |                                  |                                 |                                                                |             |  
|Net Loss                             |                                  |                                 | $                                                              | (1,207,033  | )
|                                     |                                  |                                 |                                                                |             |  
|Net Loss Per Share-Basic and Diluted |                                  |                                 | $                                                              | (0.01       | )
|                                     |                                  |                                 |                                                                |             |  
|Weighted average Shares              |                                  |                                 |                                                                | 202,009,978 |  
|                                     |                                  |                                 |                                                                |             |  

See accompanying notes
to financial statements

6

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

|                                                  | Nine Months Ended September 30,
2004                          2003 | Period from
February 20, 2003
(Inception of
Development Stage)
to September 30, 2004
|------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------------------------
|Cash Flows From Operating Activities:             |                                                                    |                                                                                     
|Net loss                                          |                                                                    |                                                                                     
|Adjustments to reconcile net loss to net cash     |                                                                    |                                                                                     
|used in operations:                               |                                                                    |                                                                                     
|Stock issued for debt and services                |                                                                    |                                                                                     
|Stock issued for equipment                        |                                                                    |                                                                                     
|Stock issued for chemical                         |                                                                    |                                                                                     
|Stock issued in settlement                        |                                                                    |                                                                                     
|Gain on settlement of debt                        |                                                                    |                                                                                     
|Loss on settlement                                |                                                                    |                                                                                     
|Interest expense related to convertible           |                                                                    |                                                                                     
|debentures beneficial conversion feature          |                                                                    |                                                                                     
|Compensation expense in excess of debt to officer |                                                                    |                                                                                     
|Amortization of deferred services                 |                                                                    |                                                                                     
|Depreciation                                      |                                                                    |                                                                                     
|Depletion                                         |                                                                    |                                                                                     
|Changes in operating assets and liabilities:      |                                                                    |                                                                                     
|Decrease in accounts receivable - related party   |                                                                    |                                                                                     
|Decrease in cash overdraft                        |                                                                    |                                                                                     
|Increase in accounts payable                      |                                                                    |                                                                                     
|Decrease in due to related party                  |                                                                    |                                                                                     
|Increase in accrued interest payable              |                                                                    |                                                                                     
|Increase in accrued payroll taxes payable         |                                                                    |                                                                                     
|                                                  |                                                                    |                                                                                     
|Net Cash Used In Operating Activities             |                                                                    |                                                                                     
|                                                  |                                                                    |                                                                                     
|Cash Flows From Investing Activities:             |                                                                    |                                                                                     
|Prepaid acquisition cost disbursement             |                                                                    |                                                                                     
|Purchase of equipment                             |                                                                    |                                                                                     
|Prepaid advances to affiliates                    |                                                                    |                                                                                     
|Purchase of oil lease                             |                                                                    |                                                                                     
|                                                  |                                                                    |                                                                                     
|Net Cash Used In Investing Activities             |                                                                    |                                                                                     
|                                                  |                                                                    |                                                                                     

See accompanying notes
to financial statements

7

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

|                                                            | Nine Months Ended September 30,
2004                          2003 | Period from
February 20, 2003
(Inception of
Development Stage)
to September 30, 2004
|----------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------------------------
|Cash Flows From Financing Activities:                       |                                                                    |                                                                                     
|Proceeds for note payable - officer                         |                                                                    |                                                                                     
|Repayment of officer loan                                   |                                                                    |                                                                                     
|Proceeds from loan  - other                                 |                                                                    |                                                                                     
|Repayment of loan proceeds - other                          |                                                                    |                                                                                     
|Proceeds from issuance of convertible debebtures            |                                                                    |                                                                                     
|Proceeds from issuance of                                   |                                                                    |                                                                                     
|common stock, net of offering costs of $134,500             |                                                                    |                                                                                     
|Repayment of lease payable                                  |                                                                    |                                                                                     
|                                                            |                                                                    |                                                                                     
|Net Cash Provided By Financing Activities                   |                                                                    |                                                                                     
|                                                            |                                                                    |                                                                                     
|Net Increase in Cash                                        |                                                                    |                                                                                     
|Cash at Beginning of Period                                 |                                                                    |                                                                                     
|                                                            |                                                                    |                                                                                     
|Cash at End of Period                                       |                                                                    |                                                                                     
|                                                            |                                                                    |                                                                                     
|Cash interest paid                                          |                                                                    |                                                                                     
|                                                            |                                                                    |                                                                                     
|Supplemental disclosure of  non-cash transactions           |                                                                    |                                                                                     
|Asset acquisition paid with convertible note payable        |                                                                    |                                                                                     
|Conversion of note payable to convertible debenture         |                                                                    |                                                                                     
|Conversion of indebtedeness to preferred stock              |                                                                    |                                                                                     
|Conversion of convertible debentures to common stock        |                                                                    |                                                                                     
|Asset acquisition paid with convertible debenture and stock |                                                                    |                                                                                     
|Common stock issued for subscription receivable             |                                                                    |                                                                                     
|Stock Subscription receivable (23,964,530 shares)           |                                                                    |                                                                                     
|Transfer of assets and liabilities to affiliate:            |                                                                    |                                                                                     
|Oil and gas properties and equipment, net                   |                                                                    |                                                                                     
|Convertible debenture                                       |                                                                    |                                                                                     
|Accrued interest payable                                    |                                                                    |                                                                                     
|Net receivable from transfer of assets and liabilities      |                                                                    |                                                                                     

See accompanying notes
to financial statements

8

# American
Energy Production, Inc.(A Development Stage Company)Schedule of Investments
September
30, 2004 (Unaudited)

|Portfolio
Company                          | Industry | Title of
Securities Held
By The Company | Percentage
of
Class Held
on
a Fully
Diluted
Basis (2) | At September 30, 2004
Cost        Fair Value
|------------------------------------------ | -------- | --------------------------------------- | ----------------------------------------------------- | --------------------------------------------
|Control Investments - Majority Owned (1)   |          |                                         |                                                       |                                             
|                                           |          |                                         |                                                       |                                             
|Production Resources, Inc.                 |          |                                         | Oil and Gas Production                                |                                             
|                                           |          |                                         |                                                       |                                             
|Bend Arch Petroleum, Inc.                  |          |                                         | Oil and Gas Production                                |                                             
|                                           |          |                                         |                                                       |                                             
|Total Control Investments - Majority Owned |          |                                         |                                                       |                                             
|                                           |          |                                         |                                                       |                                             
|Total Investments                          |          |                                         |                                                       |                                             
|Unearned Income                            |          |                                         |                                                       |                                             
|                                           |          |                                         |                                                       |                                             
|Total Investments, net of Unearned Income  |          |                                         |                                                       |                                             
|                                           |          |                                         |                                                       |                                             

(1)    
          Majority owned investments are generally defined under the Investment Company
          Act of 1940 as companies in which we own more than 50% of the voting securities
          of the company. If we own 100% of a Company, it is presented as majority owned.
          (2)     All common stock is in private companies, non-income producing and
          restricted at the relevant period end.

See accompanying notes
to financial statements

9

# American Energy
Production, Inc.(A Development Stage Company)September
30, 2004Notes to Financial
Statements (Unaudited)

# Note 1 Basis of
Presentation

The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America 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 consolidated 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,
2003 included in the Companys Form 10-KSB.

The accompanying financial statements
are prepared in accordance with the guidance in the AICPAs Audit and Accounting
Guide, Audits of Investment Companies since the Company elected to be
regulated as a Business Development Company effective January 29, 2004 (see Note 2).

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

The Companys investees have a
concentration in the oil and gas business in Texas, USA.

# Note 2 Nature of
Operations and Summary of Significant Accounting Policies

# Nature of Operations

American Energy Production, Inc.
(American Energy, the Company, we, us) 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
Texas. 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.

10

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 (Act), to be
subject to the provisions of section 55 through 65 of the 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 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.

# Significant Accounting
Policies

# 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 and effective April 1, 2004, the Company also formed
a new controlled entity to transfer its assets and certain liabilities into 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 at
September 30, 2004. 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 and nine month periods ended September 30, 2004

# Revenue Recognition

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

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

11

# Reclassifications

Certain amounts in the three and nine
months ended September 30, 2003 financial statements have been reclassified to conform to
the 2004 presentation.

# 3.              GOING
CONCERN

As reflected in the accompanying
financial statements, the Company has a net loss of $5,210,544 and net cash used in
operations of $372,882 for the nine months ended September 30, 2004 and a working capital
deficiency of $310,606 and a deficit accumulated during the development stage of
$6,920,938 at September 30, 2004. The Company is also in default on certain notes to banks
and is in the development stage with minimal revenues. The ability of the Company to
continue as a going concern is dependent on the Companys ability to further
implement its business plan, raise capital, and generate revenues. The financial
statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern

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

We 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.

During the nine month period ending
September 30, 2004, the Company received $1,850,000 of proceeds from the issuance of
convertible debentures authorized by the Form 1-E filing (See Note 6  Long-Term Debt
and Note 7  Stockholders Deficiency).

In January 2004, the Company secured
a $5,000,000 commitment for financing and received an initial $500,000 under the
commitment from an unrelated third party. Additionally, in April 2004, the Company secured
an additional $10,000,000 commitment for financing from the same unrelated third party
discussed above.

As a result, we believe we will have
sufficient resources to cover our working capital requirements for the next twelve months.

12

# 4.     INVESTMENTS
IN AND ADVANCES TO AFFILIATES

As of September 30, 2004, investments
consisted of the following:

|                                 | Cost | Fair Value
|-------------------------------- | ---- | ----------
|Investments in Equity Securities |      |           
|Less: Unearned Income            |      |           
|Total                            |      |           

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.

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  wholly-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
 wholly-owned.

At September 30, 2004, the total
investment and advance in affiliate for PRI reflected in the accompanying financial
statements is $1,198,598. 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.

As of September 30, 2004, the Company
had made $1,398,776 of advances on behalf of its wholly controlled 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 6  Long-term Debt and Note 9 
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.

13

On January 5, 2004, the $2,000,000
convertible promissory note (See Note 6  Long-Term 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.

# 5.              SHORT-TERM
DEBT

Our short-term debt at September 30,
2004 consisted of the following:

|Lease Payable                                                       | 
|------------------------------------------------------------------- | 
|$21,238 computer equipment lease, bearing interest at 10% per annum | 

On April 16, 2001, the Company leased
computer equipment under a 36 month lease that was accounted for as a capital lease in the
amount of $21,238 and at June 30, 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 September 30, 2004, the Company
has recorded a total of $4,888 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 September 30, 2004 the
transaction has not been finalized as the lessor has not agreed to the settlement. The
Company expects to fully resolve this matter in 2004 at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized  (see Note
8  Commitments and Contingencies and Note 9  Related Party Transactions).

14

# 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 September 30, 2004 | 
|                                                                                  
|$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                                                                      | 
|                                                                                   | 
|                                                                                   | 

On March 12, 2001, we obtained a
revolving bank line of credit in the amount of $70,000, of which $17,463 is outstanding at
September 30, 2004. 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 September 30, 2004, the
Company has recorded a total of $9,437 in accrued interest for this line of credit in the
accompanying Balance Sheet. The line of credit is in default at September 30, 2004.

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 was recorded as a gain on
settlement of debt in the statement of operations.

In July 2004, we obtained a bank
automobile loan in the amount of $19,396, which is outstanding at September 30, 2004. The
interest rate is 6.99% per annum with eighteen (18) monthly principal and interest
payments of $1,077 with final payment due in February 2006. The loan is secured by the
automobile.

# Loans and Note Payable
Settlement with Related Party

Beginning in January of 2002 and
through December 2003, the Companys officer/director has 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 9  Related Party Transactions and Note
7  Stockholders Deficiency).

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 7  Stockholders Deficiency).

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.

15

# 6.              LONG-TERM
DEBT

Our long-term debt at September 30,
2004 consisted of the following:

Convertible Debentures:

|                                                                                    | 
|----------------------------------------------------------------------------------- | 
|$250,000 Convertible Debenture, dated May 20, 2004, bearing interest at 8% per      | 
|annum and due on December 1, 2005                                                   | 
|                                                                                    | 
|$400,000 Convertible Debentures, dated June 15, 2004, bearing interest at 8% per    | 
|annum and due on December 1, 2005                                                   | 
|                                                                                    | 
|Less: Debt discount                                                                 | 
|                                                                                    | 
|$1,000,000 Convertible debenture, dated August 17, 2004, bearing interest at 8% per | 
|annum and due on December 1, 2005                                                   | 
|                                                                                    | 
|                                                                                    | 
|                                                                                    | 

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 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 September 30, 2004. 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 charging the statement of operations
$250,000 for interest expense and $250,000 for additional paid-in capital. The conversion
feature inherent in the convertible debentures was recognized as of June 30, 2004 since
they were immediately convertible and a substantial portion was converted as of June 30,
2004.

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 at September 30, 2004.

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. At September 30, 2004, the Company has recorded
$80,000 of amortization of the debt discount for the period from June 15 through September
30, 2004 and has recorded this amount as interest expense in the statement of operations.

16

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). The remaining $800,000 of the $1,000,000 convertible debenture
remains outstanding at September 30, 2004.

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 charging the
statement of operations $1,000,000 for interest expense and $1,000,000 for additional
paid-in capital. The conversion feature inherent in the convertible debentures was
recognized as of September 30, 2004 since they were immediately convertible and a portion
was converted as of September 30, 2004 and management believes that the remaining $800,000
will be converted by the debenture holder.

On February 20, 2003, the Company
executed a $2,000,000 convertible promissory note accruing interest at 6% with a company
controlled by the brother of the Companys sole officer and director (See Note 9
 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 promissory note 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 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 debentures was fully recognized at the 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
wholly-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).

17

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 at the 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 at the as of June 30,
2004 since they were fully converted as of June 30, 2004.

At September 30, 2004, the Company
has recorded $118,186 of accrued interest  long-term for the convertible debentures
outstanding.

# 7.              STOCKHOLDERS DEFICIENCY

# Capital Structure

We were previously authorized to
issue up to 100,000,000 shares of our common stock, $0.0001 par value per share, of which
93,051,449 were issued and outstanding at December 31, 2003. However, in December 2003,
8,500,000 of previously issued shares were cancelled as the Company had exceeded the
100,000,000 authorized share limit. These 8,500,000 shares were reissued in January 2004
with an approved vote to increase the authorized shares (See below). At September 30,
2004, 229,530,234 shares were outstanding and 75,000 shares were issuable to a party from
an error related to a Regulation S offering in 2003 discussed below.

18

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. At September 30, 2004, 4,000,000 preferred shares were issued and
outstanding.

# Issuances of Preferred
Stock:

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

On January 5, 2004, the Board of
Directors approved the issuance of 3,500,000 of the 4,000,000 designated Series A
preferred stock in exchange for the conversion of $464,005 of indebtedness owed to the
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 6 ). 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 (See Note 5).

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 is recorded in operations
in the nine months ended September 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.

# Issuances of Common
Stock:

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

19

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. 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 April and May 2004, the remaining $300,000 of
convertible debenture was converted into 30,000,000 shares of common stock at $0.01 (50%
of the closing price).

In total, 53,333,333 shares of common
stock were issued from the conversion of the convertible debentures discussed above.

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. 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 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 received
$250,000 in gross proceeds from the issuance of a convertible debenture. On May 17, 2004,
$30,000 of the convertible debenture was converted into 3,000,000 shares of common stock
at $0.01 per share (50% of the closing share price). On June 10, 2004, $85,000 of the
convertible debenture was converted into 8,500,000 shares of common stock at $0.01 per
share (50% of the closing share price). On July 19, 2004, $65,000 of the convertible
debenture was converted into 6,500,000 shares of common stock at $0.01 per share (50% of
the closing share price). At September 30, 2004, the remaining $70,000 of convertible
debenture was outstanding.

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. 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.

20

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

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

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

In August 2004, the Company received
$1,000,000 in gross proceeds from the issuance of a convertible debenture. On September
14, 2004, $100,000 of the convertible debenture was converted into 10,000,000 shares of
common stock at $0.01 per share (50% of the closing share price). On September 22, 2004,
$100,000 of the convertible debenture was converted into 10,000,000 shares of common stock
at $0.01 per share (50% of the closing share price). At September 30, 2004, the remaining
$800,000 of convertible debenture was outstanding.

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 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 one of the Companys investee. Accordingly, the $20,000 was
recorded as an investment.

# Common Stock Issuable:

At June 30, 2004, 75,000 shares
remained issuable to an overseas investor who had subscribed for an amount exceeding the
shares that were actually issued under the terms of the Regulation S offering
in 2003. The investor had paid for the full subscription, and as such, no amounts are due
to the Company.

In July 2004, the Company entered
into a consulting agreement with a third party for services for 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 September
30, 2004, $15,000 of consulting fees were due but the Company paid only $6,000 of this
amount, leaving a balance due of $9,000, comprised of $3,000 in cash and $6,000 in common
stock due. Accordingly, the Company has recorded $9,000 as accounts payable in the
accompanying Financial Statements as of September 30, 2004.

# 8.              COMMITMENTS
AND CONTINGENCIES

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

21

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 September 30, 2004.

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
 Short-Term Debt and Note 9  Related Party Transactions). 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 in 2004 at which time the value of the
shares exchanged and any related gain or loss will be determined and recognized.

The Company has included $55,292 of
unpaid Federal payroll taxes and employee withholdings and related penalties and interest
in its accrued expenses as of September 30, 2004. 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.

# 9.              RELATED
PARTY TRANSACTIONS

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 wholly-owned affiliate (See Note 6  Long-Term Debt).
The oil and gas properties were also transferred to that same wholly-owned affiliate. (see
Note 4)

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 nine
months ended June 30, 2004, the Company accrued $121,500 of expense related to the salary
and rental agreement, composed of $90,000 for compensation and $31,500 for equipment
rental fee. Additionally, the president and sole director advanced $13,770 of funds on
behalf of the Company and the Company repaid $265,000 resulting in an accrual balance of
$90,725 at September 30, 2004, classified as a component of Due To Related Parties in the
accompanying Financial Statements.

22

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
 Short-Term Debt and Note 8  Commitments and Contingencies). The
Companys president and sole director has personally guaranteed the obligation. 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 in 2004 at which time the value of
the shares exchanged and any related gain or loss will be determined and recognized.

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 nine months ended
September 30, 2004 the Company advanced directly or indirectly, $1,797,374 of funds to its
wholly-owned investees. This amount is included in the asset account entitled
Investment in and advanced to affiliates-wholly-owned.

At September 30, 2004 accounts
receivable from the operator and amounts due to the operator were $3,484 and $93,572,
respectively and are included in the accompanying balance sheet as accounts
receivable-related party and Due to related parties, respectively.

# 10.     SUBSEQUENT
EVENTS

In October 2004, Tom
Baker resigned his position as a Director           of the Company to pursue other
business interests. There were no disagreements           with the Company on any matters
related to the Companys operations,           policies or practices. On October 5,
2004, Shane Travelier was appointed to the           Board of Directors of the Company to
fill a vacancy left by the resignation of           Tom Baker. Mr. Travelier is a
licensed CPA and brings an extensive background in           service to public companies
both as an independent auditor, then later as an           officer and director.
Additionally, Mr. Travelier has significant experience in           relation to Business
Development Companys (BDC) and the           Company will benefit from
this experience in that it is a BDC. Mr. Travelier           will be the designated financial
expert for the Company and Chairman           of the Audit Committee.

On November 9, 2004, the Company
signed a definitive agreement to purchase all of the outstanding shares of Oil American
Group Inc. (Oil America) in a stock for stock trade and will issue 4,000,000
shares of restricted 144 stock to the owner and president of Oil America. Oil America will
become a wholly owned investee of the Company, specializing in oil and gas acquisitions,
drilling prospective properties and managing oil and gas partnerships.

23

# 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-KSB for the year ended December 31, 2003.

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.

# GENERAL

American Energy Production, Inc.
(American Energy, the Company, we, us) 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.

24

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 (Act), to be
subject to the provisions of section 55 through 65 of the 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 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.

# 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 auditors have indicated, in their audit opinion for the year ended
December 31, 2003, that certain factors raise substantial doubt about our ability to
continue as a going concern and these continuing factors are discussed in note 3 to our
accompanying September 30, 2004 interim 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 September 30, 2004. We had a net loss of $5,210,544 and net cash used in
operations of $372,882 for the nine months ended September 30, 2004 and a working capital
deficiency of $310,606, and a deficit accumulated during the development stage of
$6,920,938 at September 30, 2004. 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.

25

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

In April 2004, we announced a
financing arrangement with an unrelated third party for a an additional commitment of up
to $10,000,000 from Yanzu, Inc. (Yanzu) for new oil and gas exploration and
secondary oil recovery operations on existing Company owned properties and to continue the
Companys strategy of acquiring oil and gas income properties. The terms of the
financing involve restricted shares to be purchased at a price between $.10 and $.18 per
share depending on the current share price of the Companys stock. The stock will be
Rule 144 shares with a one-year restriction and no registration rights. When Yanzu has
purchased $1 million of the 144 restricted Company stock, they will be granted a seat on
the Companys Board of Directors acquisition committee.

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.

During the nine months ended
September 30, 2004, the Company received $1,850,000 of proceeds from the issuance of
convertible debentures authorized by the Form 1-E.

In January 2004, the Company secured
a $5,000,000 commitment for financing and received an initial $500,000 under the
commitment from an unrelated third party. Additionally, in April 2004, the Company secured
an additional $10,000,000 commitment for financing from the same unrelated third party
discussed above.

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 a component of Investment in and advances to 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 and advances to affiliate  majority-owned.

26

At September 30, 2004, the total
investment and advance in affiliate for PRI reflected in the accompanying financial
statements is $1,198,598. 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 September 30, 2004, the Company
had made $1,398,776 of advances on behalf of its wholly controlled affiliate, Bend Arch
Petroleum, Inc., (Bend Arch) and this amount has been recorded as investment
in and advances to affiliates-majority-owned, 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 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.

On January 5, 2004, the $2,000,000
convertible promissory note 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. (Oil America) in a stock for stock trade and will issue 4,000,000
shares of restricted 144 stock to the owner and president of Oil America. Oil America will
become a wholly owned investee of the Company, specializing in oil and gas acquisitions,
drilling prospective properties and managing oil and gas partnerships.

27

# CRITICAL ACCOUNTING
ESTIMATES AND POLICIES

The methods, estimates and judgment
we use in applying our most critical accounting policies have a significant impact on the
results we report in our financial statements. The Securities and Exchange Commission has
defined the most critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and require us to make our most
difficult and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based upon this definition, our most critical
estimates include going concern, the valuation of stock based compensation, the 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 quarterly period ended September 30, 2004. Although we believe that our estimates and
assumptions are reasonable, they are based upon information presently available. Actual
results may differ significantly from these estimates.

# GOING CONCERN

The independent auditors
reports to our financial statements for the year ended December 31, 2003 and December 31,
2002, include an emphasis paragraph in addition to their audit opinion stating that our
recurring losses from operations, working capital deficiency and default on our
convertible debentures raise substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustments to reflect the possible
effects on recoverability and classification of assets or the amounts and classification
of liabilities that may result from our inability to continue as a going concern.

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

The Company issued common stock in
non-cash transactions during the nine months ended September 30, 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.

# 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. As we have issued several
convertible instruments in 2004, the beneficial conversion amounts have a material impact
on our results of operations.

28

# 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 and effective April 1, 2004, the Company also formed
a new controlled entity to transfer its assets and certain liabilities into 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 at September 30, 2004. 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.

29

# RESULTS OF OPERATIONS

# Financial Analysis of
the Three and Nine Months Ended September 30, 2004 and 2003

|                                  | Three months ended
September 30,
2004                2003 | Nine months ended
September 30,
2004                2003
|--------------------------------- | --------------------------------------------------------- | --------------------------------------------------------
|Operating Income                  |                                                           |                                                         
|Oil sales, net                    |                                                           |                                                         
|                                  |                                                           |                                                         
|Total Operating Income            |                                                           |                                                         
|                                  |                                                           |                                                         
|Operating Expenses                |                                                           |                                                         
|Compensation                      |                                                           |                                                         
|Consulting                        |                                                           |                                                         
|Depletion                         |                                                           |                                                         
|Depreciation                      |                                                           |                                                         
|Equipment rental                  |                                                           |                                                         
|General and administrative        |                                                           |                                                         
|Production                        |                                                           |                                                         
|Professional                      |                                                           |                                                         
|Website                           |                                                           |                                                         
|                                  |                                                           |                                                         
|Total Operating Expenses          |                                                           |                                                         
|                                  |                                                           |                                                         
|Loss from Operations              |                                                           |                                                         
|                                  |                                                           |                                                         
|Other Expense                     |                                                           |                                                         
|Gain on settlement of debt        |                                                           |                                                         
|Other income                      |                                                           |                                                         
|Interest expense                  |                                                           |                                                         
|Payroll tax expense and penalties |                                                           |                                                         
|Loss on settlement                |                                                           |                                                         
|                                  |                                                           |                                                         
|Total Other Expense               |                                                           |                                                         
|                                  |                                                           |                                                         
|Net Loss                          |                                                           |                                                         
|                                  |                                                           |                                                         

# Three Months Ended
September 30, 2004:

Revenue:

There was zero operating revenue for
the three months ended September 30, 2004 and zero for the three months ended September
30, 2003. The Company is a Business Development Company with investments in oil and gas
production companies and has no sales by itself.

Operating Expenses:

Operating expenses decreased
$287,902, or 446% to $124,002 for the three months ended September 30, 2004 from $411,904
for the three months ended September 30, 2003. The decrease was primarily the result of a
$171,517 decrease in consulting and a $89,250 decrease in website expense. The decrease in
consulting and website expense was primarily the result of a decrease in stock issued for
services in 2004 as compared to 2003.

30

Other Expense:

Other expense increased $1,032,834,
or 1,159% to $1,083,031 for the three months ended September 30, 2004 from $50,198 for the
three months ended September 30, 2003. In accordance with EITF Issue 98-5, as amended by
EITF 00-27, the Company has evaluated that the issuance of a convertible debenture during
the three months ended September 30, 2004 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 $1,000,000 for interest expense.

# Nine Months Ended
September 30, 2004:

Revenue:

Operating revenue increased $40,010,
or 100%, to $40,010 for the nine months ended September 30, 2004 from zero for the nine
months ended September 30, 2003. The increase was primarily the result of the fact that
the Company entered a new development stage on February 20, 2003, as the result of the
acquisition of certain oil and gas assets. Until February 20, 2003, the Company was
actively seeking oil and gas leases for acquisition and operation and had no sales. The
$40,010 represents direct oil sales by the Company before certain oil assets were
transferred to an investee in June 2004.

Operating Expenses:

Operating expenses decreased $63,302,
or 526% to $1,200,512 for the nine months ended September 30, 2004 from $1,263,814 for the
nine months ended September 30, 2003. The decrease was primarily the result of a $540,995
increase in compensation offset by a $615,379 decrease in consulting and a $209,450
decrease in website expense. The increase in compensation was primarily the result of a
$480,995 expense related to the beneficial conversion for the issuance of preferred stock
to an officer in exchange for debt. The decrease in consulting and website expense related
to a decrease in stock issued for services in 2004 as compared to 2003.

Other Expense:

Other expense increased $3,921,240,
or 3,805% to $4,050,043 for the nine months ended September 30, 2004 from $128,802 for the
nine months ended September 30, 2003. In accordance with EITF Issue 98-5, as amended by
EITF 00-27, the Company has evaluated that the issuance of several convertible debentures
during the nine months ended September 30, 2004 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 $3,960,000 for interest expense

# Liquidity and Capital
Resources

Cash and cash equivalents were
$281,282 at September 30, 2004 as compared to $432 at December 31, 2003, and working
capital deficit was $310,606 at September 30, 2004 as compared to $1,147,830 at December
31, 2003. The increase in cash was primarily the result of the Company receiving
$1,850,000 of proceeds from the issuance of convertible debentures and $717,500 of net
proceeds from the issuance of common stock during the nine months ended September 30,
2004. The reduction in the working capital deficit from December 31, 2003 was primarily
the result of the conversion of $528,532 of indebtedness into preferred stock and the
increase in cash.

Operating Activities:

Net cash used
in operating activities was $372,882 for the nine months ended September 30, 2004 while
cash that was used in operating activities was $114,434 for the nine months ended
September 30, 2003. The increase in cash used in operations resulted primarily due to the
fact of increases in accrued interest, accounts payable and accrued payroll taxes.

31

Investing Activities:

Cash used in
investing activities was $1,903,165 for the nine months ended September 30, 2004 while
cash used in investing activities was $28,300 for the nine months ended September 30,
2003. The increase in cash used in investing activities was primarily from $1,797,374 of
advances to affiliates and $143,830 of purchase for equipment.

Financing Activities:

Cash flows
provided by financing activities was $2,556,896 for the nine months ended September 30,
2004 while cash provided by financing activities was $156,029 for the nine months ended
September 30, 2003. The increase in cash provided by financing activities was primarily
due to $1,850,000 of cash proceeds received by the Company from the issuance of
convertible debentures and $717,500 of cash proceeds, net of $134,500 of offering costs,
from the sale of common stock.

# SHORT-TERM DEBT

Our short-term debt at September 30,
2004 consisted of the following:

# Lease Payable

|                                                                    | 
|------------------------------------------------------------------- | 
|$21,238 computer equipment lease, bearing interest at 10% per annum | 

On April 16, 2001, the Company leased
computer equipment under a 36 month lease that was accounted for as a capital lease in the
amount of $21,238 and at June 30, 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 September 30, 2004, the Company has recorded a total of $4,888
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 September 30, 2004 the
transaction has not been finalized as the lessor has not agreed to the settlement. The
Company expects to fully resolve this matter in 2004 at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized.

# 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 September 30, 2004 | 
|                                                                                   
|$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                                                                       | 
|                                                                                    | 

On March 12, 2001, we obtained a
revolving bank line of credit in the amount of $70,000, of which $17,463 is outstanding at
September 30, 2004. 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 September 30, 2004, the
Company has recorded a total of $9,437 in accrued interest for this line of credit in the
accompanying Balance Sheet. The line of credit is in default at September 30, 2004.

32

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 was recorded as a gain on
settlement of debt in the statement of operations.

In July 2004, we obtained a bank
automobile loan in the amount of $19,396, which is outstanding at September 30, 2004. The
interest rate is 6.99% per annum with eighteen (18) monthly principal and interest
payments of $1,077 with final payment due in February 2006. The loan is secured by the
automobile.

# Loans and Note Payable
Settlement with Related Party

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

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

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

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

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

# 6.              LONG-TERM
DEBT

Our long-term debt
at September 30, 2004 consisted of the following:

# Convertible Debentures:

|                                                                                    | 
|----------------------------------------------------------------------------------- | 
|$250,000 Convertible Debenture, dated May 20, 2004, bearing interest at 8% per      | 
|annum and due on December 1, 2005                                                   | 
|                                                                                    | 
|$400,000 Convertible Debentures, dated June 15, 2004, bearing interest at 8% per    | 
|annum and due on December 1, 2005                                                   | 
|                                                                                    | 
|Less: Debt discount                                                                 | 
|                                                                                    | 
|$1,000,000 Convertible debenture, dated August 17, 2004, bearing interest at 8% per | 
|annum and due on December 1, 2005                                                   | 
|                                                                                    | 

33

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 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 September 30, 2004.

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 charging the
statement of operations $250,000 for interest expense and $250,000 for additional paid-in
capital. The conversion feature inherent in the convertible debentures was recognized as
of June 30, 2004 since they were immediately convertible and a substantial portion was
converted as of June 30, 2004.

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 at September 30, 2004.

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. At September 30, 2004, the Company has recorded
$80,000 of amortization of the debt discount for the period from June 15 through September
30, 2004 and has recorded this amount as interest expense in the statement of operations.

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). The remaining $800,000 of the $1,000,000 convertible debenture
remains outstanding at September 30, 2004.

34

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 charging the
statement of operations $1,000,000 for interest expense and $1,000,000 for additional
paid-in capital. The conversion feature inherent in the convertible debentures was
recognized as of September 30, 2004 since they were immediately convertible and a portion
was converted as of September 30, 2004 and management believes that the remaining $800,000
will be converted by the debenture holder.

On February 20, 2003, the Company
executed a $2,000,000 convertible promissory note accruing interest at 6% with a company
controlled by the brother of the Companys sole officer and director. The maturity
date was July 25, 2007. The note was payable at maturity in preferred stock of the Company
at $1.00 per share and. the preferred stock was convertible into common stock at $1.00 per
share. Additionally, at the option of the holder, the debt may be settled for cash. The
note 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 promissory note 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 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 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 the oil and gas properties secured by the $2,000,000 convertible debenture to its
wholly-owned affiliate Bend Arch. Accordingly, the $2,000,000 convertible debenture along
with $77,589 of accrued interest was transferred to Bend Arch on June 15, 2004.

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

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

35

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.

At September 30, 2004, the Company
has recorded $118,186 of accrued interest  long-term for the convertible debentures
outstanding.

# Equity Financing

For the nine month period ended
September 30, 2004, the Company received $717,500 of cash proceeds, net of $134,500 of
offering costs.

# Liquidity

To continue with our business plan,
we will require additional short-term working capital We cannot assure you that that we
will obtain sufficient proceeds, if any, and borrowings under any interim financing we are
able to secure will be sufficient to meet our projected cash flow needs.

Our ability to obtain additional
financing depends on many factors beyond our control, including the state of the capital
markets, the market price of our common stock, the prospects for our business and the
approval by our stockholders of an amendment to our certificate of incorporation
increasing the number of shares of common stock we are authorized to issue. 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. 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.

36

# Contractual Obligations
and Commercial Commitments

The following table highlights, as of
September 30, 2004, our contractual obligations and commitments by type and period:

|                                        | Payments Due by Period
|--------------------------------------- | ----------------------
|
|Short-Term Debt:                        |                       
|Bank Loans                              |                       
|Lease Payable                           |                       
|                                        |                       
|Total Short-Term Debt                   |                       
|                                        |                       
|Long-Term Debt:                         |                       
|Convertible Debentures, net of discount |                       
|Accrued Interest Payable                |                       
|                                        |                       
|Total Long-Term Debt                    |                       
|                                        |                       
|Total Debt                              |                       
|                                        |                       

# Recent Accounting
Developments

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, which as an interpretation defines when and who
consolidates a variable interest entity, or VIE.  This new
consolidation model applies to entities (i) where the equity investors (if any) do
not have a controlling financial interest, or (ii) whose equity investment at risk is
insufficient to finance that entitys activities without receiving additional
subordinated financial support from other parties and requires additional disclosures for
all enterprises involved with the VIE.  FIN 46 is effective during 2003 depending on
when the VIE is created.  We do not believe that the adoption of FIN 46 will have a
significant impact on our financial position and results of operations.

In May 2003, the FASB issued SFAS No.
149; Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(SFAS 149) which provides for certain changes in the accounting treatment of
derivative contracts. SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, except for certain provisions that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15, 2003,
which should continue to be applied in accordance with their respective effective dates.
The guidance should be applied prospectively. The adoption of SFAS 149 did not have a
material impact on the Companys financial position, results of operations or
liquidity.

In May 2003, the Financial Accounting
Standards Board issued SFAS No. 150 (SFAS 150), Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.It establishes
standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The adoption of FAS
150 did not have a significant impact on our financial position and results of operations.

37

# 2004 OUTLOOK

The ability to invest further will be
heavily dependent on securing additional capital from investors or debt. There is no
assurance that additional equity or debt financing will be available on terms acceptable
to Management.

# 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.

# 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 September 30, 2004.

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 in 2004 at which time the value of the
shares exchanged and any related gain or loss will be determined and recognized.

The Company has included $55,292 of
unpaid Federal payroll taxes and employee withholdings and related penalties and interest
in its accrued expenses as of September 30, 2004. Such amounts are subject to potential
federal tax liens.

# Item 2. Changes in
Securities

# 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.

38

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. 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 is recorded in operations
in the nine months ended September 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.

# Issuances of Common
Stock:

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

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. 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 April and May 2004, the remaining $300,000 of
convertible debenture was converted into 30,000,000 shares of common stock at $0.01 (50%
of the closing price).

In total, 53,333,333 shares of common
stock were issued from the conversion of the convertible debentures discussed above.

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. 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 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.

39

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 received
$250,000 in gross proceeds from the issuance of a convertible debenture. On May 17, 2004,
$30,000 of the convertible debenture was converted into 3,000,000 shares of common stock
at $0.01 per share (50% of the closing share price). On June 10, 2004, $85,000 of the
convertible debenture was converted into 8,500,000 shares of common stock at $0.01 per
share (50% of the closing share price). On July 19, 2004, $65,000 of the convertible
debenture was converted into 6,500,000 shares of common stock at $0.01 per share (50% of
the closing share price). At September 30, 2004, the remaining $70,000 of convertible
debenture was outstanding.

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.

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.

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

In August 2004, the Company received
$1,000,000 in gross proceeds from the issuance of a convertible debenture. On September
14, 2004, $100,000 of the convertible debenture was converted into 10,000,000 shares of
common stock at $0.01 per share (50% of the closing share price). On September 22, 2004,
$100,000 of the convertible debenture was converted into 10,000,000 shares of common stock
at $0.01 per share (50% of the closing share price). At September 30, 2004, the remaining
$800,000 of convertible debenture was outstanding.

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.

40

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.

# Common Stock Issuable:

At September 30, 2004, 75,000 shares
remained issuable to an overseas investor who had subscribed for an amount exceeding the
shares that were actually issued under the terms of the Regulation S offering
in 2003. The investor had paid for the full subscription, and as such, no amounts are due
to the Company.

In July 2004, the Company entered
into a consulting agreement with a third party for services for 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 September
30, 2004, $15,000 of consulting fees were due but the Company paid only $6,000 of this
amount, leaving a balance due of $9,000, comprised of $3,000 in cash and $6,000 in common
stock due. Accordingly, the Company has recorded $9,000 as accounts payable in the
accompanying Financial Statements as of September 30, 2004.

# Item 3. Defaults Upon
Senior Securities

None

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

None

# Item 5. Other
Information

In October 2004, Tom Baker resigned
his position as a Director of the Company to pursue other business interests. There were
no disagreements with the Company on any matters related to the Companys operations,
policies or practices. On October 5, 2004, Shane Travelier was appointed to the Board of
Directors of the Company to fill a vacancy left by the resignation of Tom Baker. Mr.
Travelier is a licensed CPA and brings an extensive background in service to public
companies both as an independent auditor, then later as an officer and director.
Additionally, Mr. Travelier has significant experience in relation to Business Development
Companys (BDC) and the Company will benefit from this experience in that
it is a BDC. Mr. Travelier will be the designated financial expert for the
Company and Chairman of the Audit Committee.

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

# (a)    Exhibits

|Exhibit | Description
|------- | -----------
|        | 31         
|        |            
|        | 31         
|        |            
|        | 32         

# (b)              Reports
on Form 8-K.

None

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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.

|November 12 2004 |  | BY: /S/ Charles Bitters 
Charles Bitters Principal Executive Officer,
Principal Financial Officer,Sole Director
|---------------- |  | -----------------------------------------------------------------------------------------------------------------------------

43