UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





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


EXCHANGE
      ACT OF 1934





For
      the
      quarterly period ended June 30, 2007





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from ________ to _________





Commission
      File number:  *333-52812*


**American
      Energy Production, Inc.**


(Exact
      name of registrant as specified in its charter)





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





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





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





Indicate
      by check mark whether the registrant (1) has filed all reports
      required to be filed by Section 13 or 15(d) of the Securities Exchange
      Act of 1934 during the preceding 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has
      been
      subject to such filing requirements for the past 90 days. Yes
      [X]                              No
      [ ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer,
      or
      a non-accelerated filer (as defined in Rule 12b-2 of the Exchange
      Act).


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





Indicate
      by check mark whether the registrant is a shell company (as
      defined in Rule 12b-2 of the Exchange Act). Yes
      [
      ]                              No
      [X]





As
      of
      August 1, 2007, there were approximately 494,170,082 shares of
      common
      stock, $0.001 par value, issued and outstanding.


-1-




American
      Energy Production, Inc.


Form
      10-Q
      Index


June
      30,
      2007


PagePart
                I-Financial InformationItem
                1. Financial Statements
            4Consolidated
                Balance Sheets at June 30, 2007
                and
              December
                31, 2006 (Unaudited)
            4Consolidated
                Statements of Operations for the Six and Three
                Months EndedJune
                30, 2007 and 2006 (Unaudited)
            6Consolidated
                Statements of Cash Flows for the Six Months
                EndedJune
                30, 2007 and 2006 (Unaudited)
            7Notes
                to Consolidated Financial Statements
                (Unaudited)
            9Item
                2. Management's Discussion and Analysis of
                FinancialCondition
                and Results of Operations
            20Item
                3. Quantitative and Qualitative Disclosures
                AboutMarket
                Risk
            31Item
                4. Controls and Procedures
            31Part
                II-Other InformationItem
                1. Legal Proceedings
            32Item
                1A. Risk
                Factors
            32Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            32Item
                3. Defaults upon Senior Securities
            32Item
                4. Submission of Matters to a Vote of Security
                Holders
            33Item
                5. Other Information
            33Item
                6. Exhibits
            33Signatures
            34








-2-


PART
      I


FINANCIAL
      INFORMATION











Item
      1-Consolidated Financial Statements (Unaudited)


-3-


**American
      Energy Production, Inc.**


**Consolidated
      Balance Sheets**


**(Unaudited)**





**ASSETS****June
                30, 2007**
            
            
            **December
                31, 2006****Current
                Assets**Cash
            
            $
            90,437
            
            
            $
            88,155Accounts
                receivable
            
            
            1,205
            
            
            
            1,327Due
                from related parties
            
            
            79,353
            
            
            
            88,229Other
                current assets
            
            
            7,816
            
            
            
            11,695**Total
                Current Assets**
            
            ****
            **178,811**
            
            
            ****
            **189,406****Property
                and equipment, net**
            
            ****
            **5,127,633**
            
            
            ****
            **5,365,189****Other
                Assets**Development
                programs - related party
            
            
            97,071
            
            
            
            78,626Other
            
            
            192,229
            
            
            
            328,398Total
                Other Assets
            
            ****
            **289,300**
            
            
            ****
            **407,023****Total
                Assets**
            
            ****
            **5,595,743**
            
            
            ****
            **5,961,619****LIABILITIES****Current
                Liabilities**Accounts
                payable
            
            $
            373,021
            
            
            $
            327,191Other
                current liabilities
            
            
            167,843
            
            
            
            167,939Due
                to related parties
            
            
            1,259,880
            
            
            
            191,732Notes
                payable
            
            
            2,022,600
            
            
            
            2,043,177Accrued
                interest payable
            
            
            701,641
            
            
            
            616,622Accrued
                payroll taxes and penalties
            
            
            72,402
            
            
            
            72,576Lease
                payable
            
            
            16,131
            
            
            
            16,131**Total
                Current Liabilities**
            
            ****
            **4,613,517**
            
            
            ****
            **3,435,368****Asset
                Retirement Obligations**
            
            
            549,417
            
            
            
            533,449**Total
                Liabilities**
            
            **$**
            **5,162,934**
            
            
            **$**
            **3,968,817**





See
      accompanying notes to unaudited consolidated financial statements.


-4-


**American
      Energy Production, Inc.**


**Consolidated
      Balance Sheets *(Continued)***


**(Unaudited)**





**Commitments
                and Contingencies (Note 8)****Stockholders'
                Equity****June
                30, 2007**
            
            
            **December
                31, 2006**Convertible
                preferred stock, Series A, $0.0001 par value,5,000,000
                shares authorized, 3,500,000 shares
            
            $
            350
            
            
            $
            350Common
                stock, $0.0001 par value,500,000,000
                shares authorized, 494,170,082 shares
            
            
            49,417
            
            
            
            49,417Common
                stock issuable, $0.0001 par value, 75,000 shares
            
            
            8
            
            
            
            8Additional
                paid in capital
            
            
            23,927,250
            
            
            
            23,927,250Accumulated
                deficit
            
            
            (22,642,214
            )
            
            
            (21,082,222
            )1,334,810
            
            
            
            2,894,802Less:  Subscription
                Receivable
            
            
            (902,000
            )
            
            
            (902,000
            )**Total
                Stockholders' Equity**
            
            ****
            **432,810**
            
            
            ****
            **1,992,802****Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **5,595,743**
            
            
            **$**
            **5,961,619**













See
      accompanying notes to unaudited consolidated financial statements.


-5-





**American
      Energy Production, Inc.**


**Consolidated
      Statements of Operations**


**(Unaudited)**





**Three
                Months Ended**
            
            
            **Six
                Months Ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Revenues:**Oil
                sales, net
            
            $
            328,041
            
            
            $
            356,232
            
            
            $
            694,612
            
            
            $
            818,907**Total
                Revenue**
            
            
            328,041
            
            
            
            356,232
            
            
            
            694,612
            
            
            
            818,907**Operating
                Expenses**Compensation
            
            
            37,764
            
            
            
            30,000
            
            
            
            88,486
            
            
            
            60,000Consulting
            
            
            -
            
            
            
            186,817
            
            
            
            3,260
            
            
            
            146,190Depreciation,
                depletion and accretion
            
            
            381,561
            
            
            
            379,543
            
            
            
            383,507
            
            
            
            381,489Rent
            
            
            9,505
            
            
            
            3,362
            
            
            
            16,167
            
            
            
            5,603General
                and administrative
            
            
            118,498
            
            
            
            95,014
            
            
            
            200,547
            
            
            
            140,491Production
            
            
            689,159
            
            
            
            786,396
            
            
            
            1,343,070
            
            
            
            1,528,888Professional
            
            
            86,228
            
            
            
            93,228
            
            
            
            110,645
            
            
            
            119,470Taxes
            
            
            10,843
            
            
            
            55,258
            
            
            
            37,654
            
            
            
            124,270**Total
                Operating Expenses**
            
            ****
            **1,333,559**
            
            
            ****
            **1,629,617**
            
            
            ****
            **2,183,337**
            
            
            ****
            **2,506,400****Operating
                Loss**
            
            ****
            **(1,005,518**
            **)**
            
            ****
            **(1,273,385**
            **)**
            
            ****
            **(1,488,725**
            **)**
            
            ****
            **(1,687,494**
            **)****Other
                Income (Expense)**Other
                income
            
            
            16,753
            
            
            
            229,908
            
            
            
            16,753
            
            
            
            209,908Interest
                expense
            
            
            (82,566
            )
            
            
            (42,163
            )
            
            
            (85,019
            )
            
            
            (84,212
            )Payroll
                tax expense and penalties
            
            
            (1,501
            )
            
            
            (1,501
            )
            
            
            (3,002
            )
            
            
            (3,002
            )**Total
                Other Income (Expense)**
            
            
            (67,314
            )
            
            
            186,244
            
            
            
            (71,267
            )
            
            
            122,694**Net
                Loss**
            
            **$**
            **(1,072,832**
            **)**
            
            **$**
            **(1,087,141**
            **)**
            
            **$**
            **(1,559,992**
            **)**
            
            **$**
            **(1,564,800**
            **)****Net
                Loss Per Share - Basic and Diluted**
            
            **$**
            **(0.00**
            **)**
            
            **$**
            **(0.00**
            **)**
            
            **$**
            **(0.00**
            **)**
            
            **$**
            **(0.00**
            **)****Weighted
                average Shares Outstanding**
            
            ****
            **494,245,082**
            
            
            ****
            **483,873,137**
            
            
            ****
            **494,245,082**
            
            
            ****
            **483,873,137**








See
      accompanying notes to unaudited consolidated financial statements


-6-


**American
      EnergyProduction, Inc.**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**





**Six
                Months Ended****June
                30,****2007**
            
            
            **2006****Cash
                Flows From Operating Activities:**Net
                loss
            
            $
            (1,559,992
            )
            
            $
            (1,564,800
            )Adjustments
                to reconcile net loss tonet
                cash provided by (used in) operations:Depreciation
                expense
            
            
            329,414
            
            
            
            329,414Depletion
                expense
            
            
            41,966
            
            
            
            40,478Accretion
                expense
            
            
            12,127
            
            
            
            11,597Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            122
            
            
            
            18,367Other
                current assets
            
            
            3,879
            
            
            
            12,427Other
                assets
            
            
            136,169
            
            
            
            (81,009
            )Accounts
                payable
            
            
            45,830
            
            
            
            (7,215
            )Other
                current liabilities
            
            
            (96
            )
            
            
            31,814Due
                from related party
            
            
            8,876
            
            
            
            123,998Due
                to related party
            
            
            1,068,148
            
            
            
            (56,715
            )Accrued
                interest payable
            
            
            85,019
            
            
            
            84,212Accrued
                payroll taxes payable
            
            
            (175
            )
            
            
            3,002**Net
                Cash Provided By (Used In) Operating Activities**
            
            
            171,287
            
            
            
            (1,054,430
            )**Cash
                Flows From Investing Activities:**Investment
                in oil and gas properties
            
            
            (129,983
            )
            
            
            (366,136
            )Payments
                for development programs - related party
            
            
            (18,445
            )
            
            
            (19,986
            )**Net
                Cash Used In Investing Activities**
            
            $
            (148,428
            )
            
            $
            (386,122
            )**Cash
                Flows From Financing Activities:**Proceeds
                from notes payable
            
            
            -
            
            
            
            26,817Proceeds
                from common stock issuable, net ofoffering
                costs of $86,660
            
            
            -
            
            
            
            2,335,245Proceeds
                from repayment of subscription receivable
            
            
            -
            
            
            
            32,500Repayment
                of notes payable
            
            
            (20,577
            )
            
            
            -**Net
                Cash Provided By (Used In) Financing Activities**
            
            
            (20,577
            )
            
            
            2,394,562**Net
                Increase in Cash**
            
            ****
            **2,282**
            
            
            ****
            **954,010**Cash
                at Beginning of Period
            
            
            88,155
            
            
            
            526,132**Cash
                at End of Period**
            
            ****
            **90,437**
            
            
            ****
            **1,480,142**





See
      accompanying notes to unaudited consolidated financial statements


-7-





**American
      Energy Production, Inc.**


**Consolidated
      Statements of Cash Flows *(Continued)***


**(Unaudited)**








**Six
                Months Ended****June
                30,****2007**
            
            
            **2006**Cash
                interest paid
            
            **$**
            **-**
            
            
            **$**
            **-****Supplemental
                disclosure of  non-cash transactions**Capitalized
                asset retirement obligation
            
            $
            3,841
            
            
            $
            14,038Conversion
                of preferred stock to common stock
            
            
            -
            
            
            
            150Common
                stock issued for subscription receivable
            
            
            -
            
            
            
            250




See
      accompanying notes to unaudited consolidated financial statements


-8-


**1.           HISTORY
      AND NATURE OF BUSINESS**





American
      Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”, “our”) is
      a publicly traded oil and gas company that is engaged primarily in the
      acquiring, developing, producing, exploring and selling of oil and natural
      gas.
      The Company traditionally has acquired oil and gas companies that have the
      potential for increased oil and natural gas production utilizing new
      technologies, well workovers and fracture stimulation systems. Additionally,
      the
      Company has expanded its scope of business to include the drilling of new wells
      with its own equipment through its wholly-owned subsidiary
      companies.




The
      Company’s wholly-owned subsidiaries are primarily involved in three areas of oil
      and gas operations.




1.
      Leasing programs.




2.
      Production acquisitions




3.
      Drilling and producing with proven and emerging technologies.




The
      Company believes that for the foreseeable future, the world will be highly
      dependent on oil and natural gas. Currently, alternative fuels are far more
      expensive than fossil fuels and because of the politically unstable conditions
      of many of the energy producing regions of the world.  As a result,
      the Company believes that oil and natural gas will remain a key yet volatile
      component of the world energy future and furthermore, with the ever increasing
      world demand for energy, the domestic production of oil and gas will play an
      even greater role in America’s future then it already has to date.




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





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




On
      January 12, 2004, the Company filed a Form N-54A with the Securities and
      Exchange Commission (“SEC”) to be regulated as a BDC under the Investment
      Company Act of 1940, as amended (“Act”).




In
      May
      2006, the SEC Staff issued a comment letter to the Company (the “Comment
      Letter”) raising a number of questions relating to the Company’s BDC operations.
      In response to the Comment Letter, the Company undertook a review of its
      compliance with the 1940 Act and subsequently determined that it was not in
      compliance with several important provisions of the 1940 Act. Accordingly,
      and
      after careful consideration of the 1940 Act requirements applicable to BDCs,
      the
      Board determined that continuation as a BDC was not in the best interests of
      the
      Company and its shareholders




On
      March
      13, 2007, at a Special Meeting of Shareholders, the Shareholders approved and
      authorized the Board to withdraw the Company’s election to be treated as a BDC
      under the 1940 Act and the election of three directors to the
      Board.  On April 3, 2007, the Company filed a Form N-54C to withdraw
      its election to be regulated as a BDC and as of that date, is no longer a BDC
      under the 1940 Act.  The Company is no longer a BDC with
      unconsolidated majority-owned portfolio companies but rather be an oil and
      gas
      operating company with consolidated subsidiaries. The results of operations
      for
      April 1, 2007 through April 3, 2007 were not material and therefore, the Company
      will utilize April 1, 2007 as the inception date for the new development
      stage


-9-




At
      a
      meeting held on May 16, 2007, the Board of Directors reviewed the Company’s
      current business and financial performance, the recent trading range of its
      Common Stock and inability to obtain additional capital from the investment
      community with 494,170,082 shares of Common Stock issued and outstanding and
      500,000,000 shares of Common Stock authorized. As a result, the Board determined
      that a reverse stock split was desirable and in the best interest of the
      Company.  On July 5, 2007, the Company filed a Definitive 14A Proxy
      Statement with the SEC giving notice of a special shareholders meeting to be
      held on August 17, 2007 for the purpose of approving a one-for-twenty five
      reverse stock split.




**2.  GOING
      CONCERN**





As
      reflected in the accompanying financial statements, the Company has a net loss
      of $1,559,992 for the six months ended June 30, 2007. Additionally, the Company
      is also in default on certain notes to banks, has a negative working capital
      balance of $4,434,706 at June 30, 2007 and is subject to certain contingencies
      as discussed in Notes 1 and 7, which could have a material impact on the
      Company’s financial condition and operations. The ability of the Company to
      continue as a going concern is dependent on the Company’s ability to raise
      capital and generate sufficient revenues and cash flow from its business plan
      as
      an oil and gas operating company. The Company is authorized to issue 500,000,000
      shares of its $0.0001 par value common stock and as of the date of this report,
      there are 494,074,082 shares outstanding.  As a result, the ability of
      the Company to raise capital from the sale of common stock is minimal and is
      a
      serious impediment to the Company’s ability to provide liquidity during the time
      frame that the Company is commencing its business plan as an oil and gas
      operating company.  The financial statements included in this report
      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.




**3.  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation and Concentration**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America for interim financial information and with the instructions to Form
      10-Q
      of Regulation S-K.  They do not include all information and footnotes
      required by accounting principles generally accepted in the United States of
      America for complete financial statements.  Except as discussed below
      under BDC Conversion and disclosed herein, there has been no material change
      in
      the information disclosed in the notes to the financial statements included
      in
      the Company's Form December 31, 2006 10-K (“2006 10-K”) filed with the
      SEC.  However, the 10-K was not on a consolidated basis due to the
      Company’s BDC reporting status and the June 30, 2007 10-Q is on a consolidated
      basis as the Company is no longer a reporting BDC.  As discussed under
      BDC Conversion below, the December 31, 2006 amounts disclosed in this 10-Q
      have
      been retrospectively applied to be comparable with the June 30, 2007
      amounts.  In the opinion of Management, all adjustments considered
      necessary for a fair presentation, consisting solely of normal recurring
      adjustments, have been made.  Operating results for the six months
      ended June 30, 2007 are not necessarily indicative of the results that may
      be
      expected for the year ending December 31, 2007.




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





-10-


**Accounting
      Estimates**





When
      preparing financial statements in conformity with U.S. GAAP, our management
      must
      make estimates based on future events which affect the reported amounts of
      assets and liabilities, the disclosure of contingent assets and liabilities
      as
      of the date of the financial statements, and revenues and expenses during the
      reporting period.  Actual results could differ from these
      estimates.  .





**Principles
      of Consolidation**





The
      accompanying consolidated financial statements as of June 30, 2007 include
      the
      general accounts of American Energy and its wholly-owned subsidiaries Bend
      Arch
      Petroleum, Inc., Production Resources, Inc., Oil America Group, Inc. and AMEP
      Strategic Investments, Inc.  All significant intercompany
      transactions, accounts and balances have been eliminated.





**Cash
      and Cash Equivalents**





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





**Oil
      and Gas Properties**




The
      Company uses the successful efforts method of accounting for its oil and gas
      properties.   Costs incurred by the Company related to the
      acquisition of oil and gas properties and the cost of drilling successful wells
      are capitalized.   Costs to maintain wells and related equipment
      and lease and well operating costs are charged to expense as
      incurred.   Gains and losses arising from sales of properties are
      included in income.   Unproved properties are assessed
      periodically for possible impairment.




**Property
      and Equipment**





The
      Company’s oil and gas rig is depreciated over its estimated useful life of ten
      years, using the straight line method.  Vehicles are depreciated over
      their estimated useful life of three years, using the straight line
      method.  Maintenance, repairs and minor replacements are charged to
      operations in the year incurred.




**Asset
      Retirement Obligations**




The
      Company accounts for asset retirement obligations in accordance with Statement
      of Financial Accounting Standards (“SFAS”) No. 143, *Accounting for Asset
      Retirement Obligations*. The asset retirement obligations represent the
      estimated present value of the amounts expected to be incurred to plug, abandon,
      and remediate the producing properties at the end of their productive lives,
      in
      accordance with state laws, as well as the estimated costs associated with
      the
      reclamation of the property surrounding. The Company determines the asset
      retirement obligations by calculating the present value of estimated cash flows
      related to the liability. The asset retirement obligations are recorded as
      a
      liability at the estimated present value as of the asset’s inception, with an
      offsetting increase to producing properties. Periodic accretion of the discount
      related to the estimated liability is recorded as an expense in the statement
      of
      operations.


-11-




The
      estimated liability is determined using significant assumptions, including
      current estimates of plugging and abandonment costs, annual inflation of these
      costs, the productive lives of wells, and a risk-adjusted interest rate. Changes
      in any of these assumptions can result in significant revisions to the estimated
      asset retirement obligations. Revisions to the asset retirement obligations
      are
      recorded with an offsetting change to producing properties, resulting in
      prospective changes to depletion and depreciation expense and accretion of
      the
      discount. Because of the subjectivity of assumptions and the relatively long
      lives of most of the wells, the costs to ultimately retire the Company’s wells
      may vary significantly from prior estimates.




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




We
      account for the impairment of long-lived assets in accordance SFAS No. 144,
      *Accounting for the Impairment or Disposal of Long-Lived Assets*, which
      requires that long-lived assets be reviewed for impairment whenever events
      or
      changes in circumstances indicate that the book value of the asset may not
      be
      recoverable.   Recoverability of the asset is measured by
      comparison of its carrying amount to the undiscounted cash flow that the asset
      or asset group is expected to generate.   If such assets or asset
      groups are considered to be impaired, the loss recognized is the amount by
      which
      the carrying amount of the property, if any, exceeds its fair market
      value.   Based upon the Company’s evaluation, no impairment was
      determined for the six months ended June 30, 2007.




**Fair
      Value of Financial Instruments**





We
      define
      the fair value of a financial instrument as the amount at which the instrument
      could be exchanged in a current transaction between willing parties. The
      carrying value of accounts receivable, accounts payable and accrued liabilities
      approximates fair value because of the short maturity of those instruments.
      The
      estimated fair value of our other obligations is estimated based on the current
      rates offered to us for similar maturities.  Based on prevailing
      interest rates and the short-term maturity of all of our indebtedness,
      management believes that the fair value of our obligations approximates book
      value at June 30, 2007.





**Revenue
      Recognition**




The
      Company sells 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.





**Stock-Based
      Compensation**




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123(R), *Share-Based Payments*, and recognizes compensation
      expense for all stock-based payments based on the grant-date fair
      value.





The
      Company accounts for stock options or warrants issued to non-employees for
      goods
      or services in accordance with the fair value method of SFAS 123(R) and Emerging
      Issues Task Force 96-18, *Accounting for Equity Instruments that Are issued
      to Other Than Employees For Acquiring in Conjunction with Selling Goods or
      Services*.   Under this method, the Company records an
      expense equal to the fair value of the options or warrants
      issued.  The fair value is computed using an options pricing
      model.




-12-


**Concentration
      of Risk**




Our
      financial instruments that are potentially exposed to credit risk consist
      primarily of cash, trade receivable and other receivables for which the carrying
      amounts approximate fair value.  At certain times during the period,
      our demand deposits held in banks exceeded the federally insured limit of
      $100,000.  The Company has not experienced any losses related to these
      deposits.




**Income
      Taxes**




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




**Net
      Loss per Common Share**




Basic
      loss per share is computed only on the weighted average number of common shares
      outstanding during the respective periods.




**Recent
      Accounting Developments**





In
      July
      2006, the Financial Accounting Standards Board ("FASB") issued Financial
      Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes,
      an
      Interpretation of SFAS No. 109. FIN 48 prescribes guidance to address
      inconsistencies among entities with the measurement and recognition in
      accounting for income tax positions for financial statement purposes.
      Specifically, FIN 48 addresses the timing of the recognition of income tax
      benefits. FIN 48 requires the financial statement recognition of an income
      tax
      benefit when the entity determines that it is more-likely-than-not that the
      tax
      position will be ultimately sustained. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The adoption of this standard did not have
      a
      material impact on the Company’s results of operations and financial
      position.





**BDC
      Conversion**




As
      a
      result of the Company’s conversion from a BDC company to an oil and gas
      operating company, the change in accounting is considered a change in accounting
      principle. As a result, in accordance with Statement of Financial Accounting
      Standard 154, "Accounting for Changes and Error Corrections," which requires
      that a change in accounting principle be retrospectively applied to all prior
      periods presented, the Company’s financial statements are presented on an
      operating and consolidated basis for all current and prior periods presented
      on
      a retrospective basis without regard to the BDC method of
      accounting.  The Company does not believe that withdrawing its
      election to be regulated as a BDC will have any impact on its federal income
      tax
      status, because the Company never elected to be treated as a regulated
      investment company under Subchapter M of the Internal Revenue Code. Instead,
      the
      Company has always been subject to corporate level federal income tax on its
      income (without regard to any distributions it makes to its shareholders) as
      a
“regular” corporation under Subchapter C of the Internal Revenue
      Code.


-13-


**Reclassifications**





Certain
      amounts in the 2006 financial statements have been reclassified to conform
      to
      the 2007 presentation.




**4.**
            **PROPERTY
                AND EQUIPMENT**




Property
      and equipment is comprised of the following at June 30, 2007 and December 31,
      2006:




**June
                30,**
              **2007**
            ****
            ****
            **Dec.
                31,**
              **2006**Oil
                and gas properties, successful efforts method
            
            $
            4,106,400
            
            
            $
            4,381,342Other
                property and equipment
            
            
            1,527,947
            
            
            
            1,397,964Total
            
            
            5,634,347
            
            
            
            5,779,306Less:
                Accumulated depreciation and depletion
            
            
            506,714
            
            
            
            (414,117
            )Property
                and equipment, net
            
            $
            5,127,633
            
            
            $
            5,365,189




**5.     DEBT**




*Our
      debt at June 30, 2007 consisted of the following:*


****


***Lease
              Payable***
            
            **June
                30,**
              **2007**
            
            
            **Dec.
                31,**
              **2006**$21,238
                computer equipment lease, bearing interest at 10% per
                annum
            
            $
            16,131
            
            
            $
            16,131





On
      April
      16, 2001, the Company leased computer equipment under a 36-month lease that
      was
      accounted for as a capital lease in the amount of $21,238 and at March 31,
      2006,
      the balance of principal was $16,131.  The amount is personally
      guaranteed by a former officer/director and the Chief Executive Officer of
      the
      Company. The lease was secured by all leased equipment and perfected by a
      financing statement; however, the Company liquidated the equipment and paid
      the
      office space lessor the $4,000 proceeds.  As of June 30, 2007, the
      Company has recorded a total of $14,444 in accrued interest for this lease
      payable in the accompanying Balance Sheet.





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





-14-




As
      of
      June 30, 2007, the Company has recorded $129,608 of accrued interest for
      previously issued convertible debentures.  Several convertible
      debenture holders previously elected to convert all or a portion of the
      convertible debentures into common stock.  However, the conversion has
      not included accrued interest and although the Company believes that no further
      common stock will be issued for these conversions, the accrued interest balance
      for these converted debentures is included in the accrued interest balance
      as of
      June 30, 2007.




***Notes
              Payable***
            
            **June
                30,**
              **2007**
            
            
            **Dec.
                31,**
              **2006**$2,000,000
                Promissory Note, dated February 20, 2003, bearinginterest
                at 8% per annum and due on July 25, 2007
            
            $
            2,000,000
            
            
            $
            2,000,000




On
      June
      15, 2004, Bend Arch Petroleum, Inc. (“Bend Arch”), a wholly-owned subsidiary of
      the Company executed a $2,000,000 promissory note accruing interest at 8% with
      Proco Operating Co., Inc., a company controlled by the brother of the Company’s
      Chief Executive Officer (See Note 9 – Related Party Transactions and Note 10 –
Operator Agreement) with a maturity date of July 25, 2007.  The
      purpose of the Note is to secure payment for oil and gas leases and wells
      located in Comanche and Eastland counties in the State of Texas sold to Bend
      Arch by Proco on June 15, 2004. The Note replaced a $2,000,000 convertible
      debenture dated January 5, 2004.




The
      terms
      of the Note include (i) the payment of interest at a rate of eight percent
      (8%)
      per annum (ii) principal and interest due and payable on July 25, 2007 (iii)
      no
      prepayment penalty (iv) payment made in excess of sixty (60) days after the
      due
      date of July 25, 2007 is a default of the Note and Bend Arch will forfeit all
      ownership of the related leases and wells and relinquish operations on the
      lease
      and wells to Proco, and (v) upon a default of the Note, Bend Arch will vacate
      the leases with no rights of ownership and execute the necessary documents
      to
      transfer the leases and wells to Proco or its assigns. (See Note 11 – Subsequent
      Events).






As
      of
      June 30, 2007, the Company has accrued $577,589 of accrued interest on the
      Promissory Note and is included as a component of Accrued Interest payable
      in
      the accompanying financial statements.




***Other
              Notes Payable***
            
            **June
                30,**
              **2007**
            
            
            **Dec.
                31,**
              **2006**Vehicle
                Note – Production Resources, Inc.
            
            $
            5,876
            
            
            $
            23,642Vehicle
                Note – Bend Arch Petroleum, Inc.
            
            
            16,724
            
            
            
            19,535$
            22,600
            
            
            $
            43,177




-15-


**6.  ASSET
      RETIREMENT OBLIGATIONS**




The
      following represents a reconciliation of the asset retirement obligations for
      the period from January 1, 1, 2006 to June 30, 2007:





Asset
                retirement obligations at beginning of period
            
            $
            533,449Revision
                to estimate and additions
            
            
            12,127Liabilities
                settled during the period
            
            
            -Accretion
                of discount
            
            
            3,449Asset
                retirement obligations at end of period
            
            $
            549,417




**7.     STOCKHOLDERS’
      EQUITY**




**Capital
      Structure**





We
      are
      authorized to issue up to 500,000,000 shares of our common stock, $0.0001 par
      value per share, of which 494,170,082 were issued and outstanding as of June
      30,
      2007.  Additionally, as of June 30, 2007, 75,000 shares were issuable
      as discussed below.





We
      are
      authorized to issue up to 5,000,000 shares of our preferred stock, $0.0001
      par
      value per share, of which 3,500,000 were issued and outstanding as of June
      30,
      2007.  All of the preferred stock is held by the Chief Executive
      Officer of the Company. 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.





There
      were no changes in the common stock or preferred stock outstanding balances
      for
      the six months ended June 30, 2007.





***Common
      Stock Issuable:***





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





**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.





-16-


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 and accrued expenses as of June 30, 2007.





As
      of
      June 30, 2007, the Company and certain of its wholly-owned subsidiaries are
      delinquent in the filing of franchise tax reports with the State of Texas and
      the State of Delaware and as a result, the Company and certain of its
      wholly-owned subsidiaries are not in good standing.  Subsequent to
      June 30, 2007, the Company and its wholly-owned subsidiaries have filed the
      required reports and may face certain penalties and interest due to the
      delinquent status of the reports (See Note 11 – Subsequent Events).





In
      November 2003, a settlement was negotiated with a lessor to forgive the
      outstanding principal and interest on the related note payable resulting from
      leased computers once the transfer of 100,000 shares personally held by the
      Company’s Chief Executive Officer occurs (see Note 5 – Debt and Note 8 – Related
      Party Transactions).  As of March 31, 2007 the transaction has not
      been finalized as the lessor has not agreed to the
      settlement.  However, the 100,000 shares were transferred to the
      lessor in September 2003.  The Company expects to fully resolve this
      matter in the future at which time the value of the shares exchanged and any
      related gain or loss will be determined and recognized.





The
      Company has included $72,402 of unpaid Federal payroll taxes and employee
      withholdings and related penalties and interest in its accrued expenses as
      of
      June 30, 2007.  Although the unpaid Federal taxes are from the
      predecessor company, Communicate Now.com, Inc., such amounts are subject to
      potential federal tax liens for the Company.





The
      Company has $373,021 of accounts payable as of June 30, 2007 and the majority
      of
      this balance is from the predecessor company, Communicate Now.com,
      Inc.  Since these trade accounts payable have been outstanding for an
      extended period of time with no communication between the Company and any of
      the
      vendors, the Company is commencing the process of eliminating the liabilities
      from its records.  However, there can be no assurance that the Company
      will be successful in its efforts to eliminate the liabilities.




In
      December 2005 and January 2006, the Company determined that certain issuances
      of
      common stock had not been properly disclosed in reports made by the Company’s
      transfer agent. The Company discussed these items with the transfer agent and
      the transactions have been reconciled and recorded properly in the Company
      records. However, the Company believes that two of these transactions, an
      unauthorized issuance by the transfer agent of 15,000,000 shares and an
      additional unauthorized issuance of 2,500,000 shares, should be reimbursed
      to
      the Company by either the third party who received the shares or the transfer
      agent. The Company has recorded the fair market valuation of the two
      transactions in the amount of $875,000 as a subscription receivable as of June
      30, 2007 and is in discussions with both the third party and the transfer agent
      to resolve the issue. As of the date of these financial statements, no
      resolution of the matter has been completed.




As
      previously discussed, in May 2006, the Company received a letter of inquiry
      from
      the SEC, primarily related to its operations as a BDC and its compliance with
      the requirements thereto. In response to the SEC correspondence, the Company
      conducted a review of its compliance with the 1940 Act and determined that
      it
      was not in compliance with the 1940 Act. On March 13, 2007, a Special Meeting
      of
      Shareholders (the “Special Meeting”) of the Company was held to authorize the
      Board of Directors of the Company (the “Board”) to withdraw the Company’s
      election to be treated as a BDC under the 1940 Act and to elect to the Board,
      Mr. John D. Powell, Mr. Larry P. Horner and Mr. Charles Bitters.  As a
      result of the Special Meeting, the Shareholders approved both items and on
      April
      3, 2007, the Company filed a Form N-54C with the SEC to effect the BDC
      withdrawal.  The Company may face certain contingent liabilities as a
      result of potential actions by the SEC or others against the Company. As of
      the
      date of this report, management could not reasonably estimate such contingent
      liabilities, if any. The outcome of the above matter could have a significant
      impact on our ability to continue as a going concern.




The
      Company is authorized to issue 500,000,000 shares of its $0.0001 par value
      common stock and as of the date of this report, there are 494,074,082 shares
      outstanding.  As a result, the ability of the Company to raise capital
      from the sale of common stock is minimal and is a serious impediment to the
      Company’s ability to provide liquidity during the time frame that the Company is
      commencing its business plan as an oil and gas operating company.  The
      financial statements included in this report do not include any adjustments
      that
      might be necessary if the Company is unable to continue as a going
      concern.


-17-


**9.     RELATED
      PARTY TRANSACTIONS**





We
      currently do not have a lease and we are not paying rent on our space. It is
      being provided to the Company by the Chief Executive Officer free of
      charge.





Effective
      July 1, 2003, the Company entered into a salary and equipment rental agreement
      with its Chief Executive Officer.  As of January 1, 2005, the $3,500
      per month equipment rental agreement with the Chief Executive Officer was
      terminated. As of December 31, 2006, the Company owed the Chief Executive
      Officer $98,225 for unpaid amounts under the agreement.  During the
      six months ended June 30, 2007, the Company accrued but did not pay $60,000
      for
      compensation, reduced the balance $3,000 as a correction of a deposit
      incorrectly recorded in fiscal 2006, increased the balance $10,000 as a
      correction for advances made by the Chief Executive Officer previously and
      the
      Chief Executive Officer advanced $95,200 of funds on behalf of the
      Company.  As a result, the accrued balance as of June 30, 2007 is
      $260,425 and is classified as a component of Due To Related Parties in the
      accompanying financial statements.





The
      Chief
      Executive Officer of the Company is owed $504,203 for advances and unpaid
      equipment rental charges made on behalf of Bend Arch Petroleum, Inc. (“Bend
      Arch”), the Company’s wholly-owed subsidiary.  As of December 31,
      2006, Bend Arch owed the Chief Executive Officer $81,222 for previous advances
      and equipment rental charges at $3,500 per month.  During the six
      months ended June 30, 2007, the Chief Executive Officer advanced $511,732 of
      funds to Bend Arch, the Company recorded $27,000 for equipment rental charges
      (including a $6,000 correction) and repaid $115,500 to the Chief Executive
      Officer resulting in the $504,203 balance at June 30, 2007 classified as a
      component of Due to Related Parties in the accompanying financial
      statements.




At
      June
      30, 2007, the net  amount due to the operator of the Company’s oil and
      gas production activities was $480,466 and is classified as a component of
      Due
      to Related Parties in the accompanying financial statements.  The
      operator is Proco Operating Co., Inc. (“Proco”) and is a related party as Proco
      is controlled by the brother of the Company’s Chief Executive Officer (See Note
      10 – Operating Agreement).




At
      June
      30, 2007, Production Resources, Inc. (“PRI”), a wholly-owned subsidiary of the
      Company owes $14,785 to the President of PRI and this amount is classified
      as a
      component of Due to related parties in the accompanying financial
      statements.




**10.     OPERATING
      AGREEMENT**




On
      November 1, 2003, the Company entered into an operating agreement for its oil
      and gas production activities with Proco, a company controlled by the brother
      of
      the Company’s Chief Executive Officer (See Note 9 – Related Party
      Transactions).




The
      term
      of the operating agreement is equal to the term of the oil and gas leases held
      by the Company.  In general, the operator incurs costs which are
      billed to the Company, and the operator markets and sells oil and collects
      payments from customers. Such payments are then remitted to the
      Company.




The
      operator has a first and preferred lien on the leasehold interests of the
      Company against any sums due to the Operator by the Company.




-18-


**11.     SUBSEQUENT
      EVENTS**




Effective
      July 25, 2007, Bent Arch executed a Modification and Extension Agreement (the
      “Agreement”) in relation to a $2,000,000 Promissory Note (Note”) that became due
      and payable on the same date. (See Note 5 – Debt).




The
      Agreement modifies the terms of the Note as follows:


·The
                maturity
                date of the Note is extended to September 25, 2007.
              ·Bend
                Arch
                covenants that as long as the Note is outstanding and unpaid, no
                transfer,
                assignment or sale of the underlying leases and wells securing the
                payment
                of the Note will be allowed without the written approval of
                Proco.


In
      July
      and August 2007, the Company filed all past due franchise tax reports with
      the
      State of Texas and the State of Delaware.  As a result, management
      anticipates that the Company and all of its wholly-owned subsidiaries will
      be
      declared in good standing in the near future (See Note 8 – Commitments and
      Contingencies).




-19-


**Item
      2. Management's Discussion and Analysis of FinancialCondition
      and Results of Operations.**





The
      following analysis of our financial condition and results of operations
      contained in this section should be read in conjunction with our financial
      statements and related notes and schedules thereto appearing elsewhere in this
      Quarterly Report, as well as the sections entitled "Selected Financial Data"
      and
      "Management's Discussion and Analysis of Financial Condition and Results of
      Operations" and the financial statements and related notes and schedules thereto
      included in our annual report on Form 10-K for the year ended December 31,
      2006.





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


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


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


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


•
            future
                changes in laws or regulations and conditions in our operating areas;
                and•
            the
                risks, uncertainties and other factors we identify from time to time
                in
                our filings with the Securities and Exchange Commission, including
                our
                Form 10-Ks, Form 10-Qs and Form
                8-Ks.





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





**OVERVIEW**





American
      Energy Production, Inc. (“American Energy”, “the Company”, “we”, “us”,
“our”)  is a publicly traded oil and gas company that is engaged
      primarily in the acquiring, developing, producing, exploring and selling of
      oil
      and natural gas. The Company traditionally has acquired oil and gas companies
      that have the potential for increased oil and natural gas production utilizing
      new technologies, well workovers and fracture stimulation systems.  We
      have expanded our scope of business to include the drilling of new wells with
      its own equipment through our wholly-owned subsidiary companies.




Our
      subsidiaries are primarily involved in three areas of oil and gas
      operations.




1.
      Leasing Programs.




2.
      Production Acquisitions




3.
      Drilling and Producing with Proven and Emerging Technologies.


-20-




We
      believe that for the foreseeable future, the world will be highly dependent
      on
      oil and natural gas. Currently, alternative fuels are far more expensive than
      fossil fuels and because of the politically unstable conditions of many of
      the
      energy producing regions of the world.  We believe that oil and
      natural gas will remain a key yet volatile component of the world energy future
      and furthermore, that with the ever increasing world demand for energy, the
      domestic production of oil and gas will play an even greater role in America’s
      future then it already has to date.




As
      reflected in the accompanying financial statements, the Company has a net loss
      of $1,559,992 for the six months ended June 30, 2007. Additionally, the Company
      is also in default on certain notes to banks, has a negative working capital
      balance of $4,434,706 at June 30, 2007 and is subject to certain contingencies
      as discussed in Notes 1 and 7, which could have a material impact on the
      Company’s financial condition and operations. The ability of the Company to
      continue as a going concern is dependent on the Company’s ability to raise
      capital and generate sufficient revenues and cash flow from its business plan
      as
      an oil and gas operating company. The Company is authorized to issue 500,000,000
      shares of its $0.0001 par value common stock and as of the date of this report,
      there are 494,074,082 shares outstanding.  As a result, the ability of
      the Company to raise capital from the sale of common stock is minimal and is
      a
      serious impediment to the Company’s ability to provide liquidity during the time
      frame that the Company is commencing its business plan as an oil and gas
      operating company.  The financial statements included in this report
      do not include any adjustments that might be necessary if the Company is unable
      to continue as a going concern.





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





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


·
            The
                Company’s ability to continue to obtain sources of outside financing to
                support near term operations and to allow the Company to continue
                to make
                investments.  The Company is authorized to issue 500,000,000
                shares of its $0.0001 par value common stock and as of the date of
                this
                report, there are 494,074,082 shares outstanding.  As a result,
                the ability of the Company to raise capital from the sale of common
                stock
                is minimal and is a serious impediment to the Company’s ability to provide
                liquidity during the time frame that the Company is commencing its
                business plan as an oil and gas operating company.  The
                financial statements included in this report do not include any
                adjustments that might be necessary if the Company is unable to continue
                as a going concern.





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





·
            The
                Company and certain of its wholly-owned subsidiaries are delinquent
                in the
                filing of franchise tax reports with the State of Texas and the State
                of
                Delaware and as a result, the Company and certain of its wholly-owned
                subsidiaries are not in good standing.  The Company and its
                wholly-owned subsidiaries are in the process of filing the required
                reports and may face certain penalties and interest due to the delinquent
                status of the reports.





-21-


**RECENT
      DEVELOPMENTS**





On
      April
      26, 2007, the Company filed a Form 8-K disclosing that Salberg & Company,
      P.A. (“Salberg”) has declined to stand for re-election as the Company’s
      independent registered public accounting firm with respect to the audit of
      the
      Company's financial statements for the year ended December 31,
      2007.  Salberg informed the Company on April 19, 2007 that it could
      not continue to satisfy the partner rotation requirement promulgated by the
      Sarbanes-Oxley Act of 2002. Salberg had served as the Company's independent
      registered public accounting firm for the financial statements at December
      31,
      2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004.
      Salberg’s audit reports for such years did not contain an adverse opinion or
      disclaimer of opinion, nor were they qualified or modified as to uncertainty,
      audit scope, or accounting principles except for a modification as to the
      Company's ability to continue as a going concern. There were no disagreements
      with Salberg on any matter of accounting principles or practices, financial
      statement disclosure, or auditing scope or procedures, which disagreement(s),
      if
      not resolved to the satisfaction of Salberg would have caused it to make
      reference to the subject matter of the disagreement(s) in connection with its
      reports. There were no reportable events as set forth in Item 304(a)(1)(iv)
      of
      Regulation S-B.




The
      Company's board of directors has authorized the appointment of Shelley
      International LLC (“Shelley”) to serve as the Company's independent registered
      public accounting firm for fiscal 2007 reporting including the unaudited
      quarterly reviews for March 31, 2007, June 30, 2007, September 30, 2007 and
      the
      audited financial statements for the year ended December 31,
      2007.  During the fiscal years ending December 31, 2006, 2005 and 2004
      and prior to the appointment of Shelley, neither the Company, or anyone on
      its
      behalf, consulted with Shelley regarding any of the accounting or auditing
      concerns stated in Item 304(a)(2) of Regulation S-B.




At
      a
      meeting held on May 16, 2007, the Board of Directors reviewed the Company’s
      current business and financial performance, the recent trading range of its
      Common Stock and inability to obtain additional capital from the investment
      community with 494,170,082 shares of Common Stock issued and outstanding and
      500,000,000 shares of Common Stock authorized. As a result, the Board determined
      that a reverse stock split was desirable and in the best interest of the
      Company.  On July 5, 2007, the Company filed a Definitive 14A Proxy
      Statement with the SEC giving notice of a special shareholders meeting to be
      held on August 17, 2007 for the purpose of approving a one-for-twenty five
      reverse stock split.




Effective
      July 25, 2007, Bent Arch executed a Modification and Extension Agreement (the
      “Agreement”) in relation to a $2,000,000 Promissory Note (Note”) that became due
      and payable on the same date.




The
      Agreement modifies the terms of the Note as follows:




·The
                maturity
                date of the Note is extended to September 25, 2007.
              ·Bend
                Arch
                covenants that as long as the Note is outstanding and unpaid, no
                transfer,
                assignment or sale of the underlying leases and wells securing the
                payment
                of the Note will be allowed without the written approval of the
                lender.




In
      July
      and August 2007, the Company filed all past due franchise tax reports with
      the
      State of Texas and the State of Delaware.  As a result, management
      anticipates that the Company and all of its wholly-owned subsidiaries will
      be
      declared in good standing in the near future.




-22-


**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, depreciable
      and
      depletable useful lives of property and equipment, the evaluation of whether
      our
      assets are impaired, the valuation allowance for deferred tax assets and the
      estimate of reserves of oil and gas that are used to develop projected income
      whereby an appropriate discount rate has been used.  We also have
      other key accounting estimates and policies, but we believe that these other
      policies either do not generally require us to make estimates and judgments
      that
      are as difficult or as subjective, or it is less likely that they would have
      a
      material impact on our reported results of operations for a given
      period.  For additional information see Note 3 “Summary of Significant
      Accounting Policies” in the notes to our unaudited financial statements
      contained in our June 30, 2007 quarterly report on Form
      10-Q.  Although we believe that our estimates and assumptions are
      reasonable, they are based upon information presently
      available.  Actual results may differ significantly from these
      estimates.




**GOING
      CONCERN**




The
      independent registered public accounting firms’ reports to our financial
      statements at December 31, 2006 and 2005 and for the years ended December 31,
      2006, 2005 and 2004, include an explanatory paragraph in addition to their
      audit
      opinion stating that our recurring losses from operations, net cash used in
      operations, stockholders’ (deficiency) equity, working capital deficiency, being
      in default on certain notes payable to banks and being in the development stage
      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.





**BDC
      CONVERSION**




As
      a
      result of the Company’s conversion from a BDC company to an oil and gas
      operating company, the change in accounting is considered a change in accounting
      principle. As a result, in accordance with Statement of Financial Accounting
      Standard 154, "Accounting for Changes and Error Corrections," which requires
      that a change in accounting principle be retrospectively applied to all prior
      periods presented, the Company’s financial statements are presented on an
      operating and consolidated basis for all current and prior periods presented
      on
      a retrospective basis without regard to the BDC method of
      accounting.  The Company does not believe that withdrawing its
      election to be regulated as a BDC will have any impact on its federal income
      tax
      status, because the Company never elected to be treated as a regulated
      investment company under Subchapter M of the Internal Revenue Code. Instead,
      the
      Company has always been subject to corporate level federal income tax on its
      income (without regard to any distributions it makes to its shareholders) as
      a
“regular” corporation under Subchapter C of the Internal Revenue
      Code.




**DEPRECIABLE
      AND DEPLETABLE USEFUL LIVES OF PROPERTY AND EQUIPMENT**




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




-23-


**EVALUATION
      OF ASSET IMPAIRMENT**





We
      account for the impairment of long-lived assets including proved properties
      in
      accordance with Financial Accounting Standards, SFAS No. 144, *Accounting for
      the Impairment or Disposal of Long-Lived Assets*, which requires that
      long-lived assets be reviewed for impairment whenever events or changes in
      circumstances indicate that the book value of the asset may not be
      recoverable.  Recoverability of the asset is measured by comparison of
      its carrying amount to the undiscounted cash flow that the asset or asset group
      is expected to generate.  If such assets or asset groups are
      considered to be impaired, the loss recognized is the amount by which the
      carrying amount of the property if any, exceeds its fair market
      value.  Based on our impairment analysis of property and equipment, no
      impairment charge has been recorded for the six months ended June 30,
      2007.





**VALUATION
      ALLOWANCE FOR DEFERRED TAX ASSETS**





In
      assessing the recoverability of deferred tax assets, management considers
      whether it is more likely than not that some portion or all of the deferred
      tax
      assets will be realized.  The valuation allowance at December 31, 2005
      was $2,074,898 and increased by $189,786 in 2006 to $2,264,684 at December
      31,
      2006.  Net operating loss carry-forwards aggregate approximately
      $6,660,833 and expire in the years through 2026.





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





**OIL
      AND GAS PROPERTIES**




The
      Company uses the successful efforts method of accounting for its oil and gas
      properties.   Costs incurred by the Company related to the
      acquisition of oil and gas properties and the cost of drilling successful wells
      are capitalized.   Costs to maintain wells and related equipment
      and lease and well operating costs are charged to expense as
      incurred.   Gains and losses arising from sales of properties are
      included in income.   Unproved properties are assessed
      periodically for possible impairment.




**PROPERTY
      AND EQUIPMENT**





The
      Company’s oil and gas rig is depreciated over its estimated useful life of ten
      years, using the straight line method.  Vehicles are depreciated over
      their estimated useful life of three years, using the straight line
      method.  Maintenance, repairs and minor replacements are charged to
      operations in the year incurred.




**ASSET
      RETIREMENT OBLIGATIONS**




The
      Company accounts for asset retirement obligations in accordance with Statement
      of Financial Accounting Standards (“SFAS”) No. 143, *Accounting for Asset
      Retirement Obligations*. The asset retirement obligations represent the
      estimated present value of the amounts expected to be incurred to plug, abandon,
      and remediate the producing properties at the end of their productive lives,
      in
      accordance with state laws, as well as the estimated costs associated with
      the
      reclamation of the property surrounding. The Company determines the asset
      retirement obligations by calculating the present value of estimated cash flows
      related to the liability. The asset retirement obligations are recorded as
      a
      liability at the estimated present value as of the asset’s inception, with an
      offsetting increase to producing properties. Periodic accretion of the discount
      related to the estimated liability is recorded as an expense in the statement
      of
      operations.




-24-


The
      estimated liability is determined using significant assumptions, including
      current estimates of plugging and abandonment costs, annual inflation of these
      costs, the productive lives of wells, and a risk-adjusted interest rate. Changes
      in any of these assumptions can result in significant revisions to the estimated
      asset retirement obligations. Revisions to the asset retirement obligations
      are
      recorded with an offsetting change to producing properties, resulting in
      prospective changes to depletion and depreciation expense and accretion of
      the
      discount. Because of the subjectivity of assumptions and the relatively long
      lives of most of the wells, the costs to ultimately retire the Company’s wells
      may vary significantly from prior estimates.




**RESULTS
      OF OPERATIONS**





***Six
      and Three Months ended June 30, 2007 compared to Six and Three Months Ended
      June
      30, 2006.***





**Three
                Months Ended**
            
            
            **Six
                Months Ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Revenues:**Oil
                sales, net
            
            $
            328,041
            
            
            $
            356,232
            
            
            $
            694,612
            
            
            $
            818,907**Total
                Revenue****Operating
                Expenses**Compensation
            
            
            37,764
            
            
            
            30,000
            
            
            
            88,486
            
            
            
            60,000Consulting
            
            
            -
            
            
            
            186,817
            
            
            
            3,260
            
            
            
            146,190Depreciation,
                depletion and accretion
            
            
            381,561
            
            
            
            379,543
            
            
            
            383,507
            
            
            
            381,489Rent
            
            
            9,505
            
            
            
            3,362
            
            
            
            16,167
            
            
            
            5,603General
                and administrative
            
            
            118,498
            
            
            
            95,014
            
            
            
            200,547
            
            
            
            140,491Production
            
            
            689,159
            
            
            
            786,396
            
            
            
            1,343,070
            
            
            
            1,528,888Professional
            
            
            86,228
            
            
            
            93,228
            
            
            
            110,645
            
            
            
            119,470Taxes
            
            
            10,843
            
            
            
            55,258
            
            
            
            37,654
            
            
            
            124,270**Total
                Operating Expenses**
            
            ****
            **1,333,559**
            
            
            ****
            **1,629,617**
            
            
            ****
            **2,183,337**
            
            
            ****
            **2,506,400****Operating
                Loss**
            
            ****
            **(1,005,518**
            **)**
            
            ****
            **(1,273,385**
            **)**
            
            ****
            **(1,488,725**
            **)**
            
            ****
            **(1,687,494**
            **)****Other
                Income (Expense)**Other
                income
            
            
            16,753
            
            
            
            229,908
            
            
            
            16,753
            
            
            
            209,908Interest
                expense
            
            
            (82,566
            )
            
            
            (42,163
            )
            
            
            (85,019
            )
            
            
            (84,212
            )Payroll
                tax expense and penalties
            
            
            (1,501
            )
            
            
            (1,501
            )
            
            
            (3,002
            )
            
            
            (3,002
            )**Total
                Other Income (Expense)**
            
            
            (67,314
            )
            
            
            186,244
            
            
            
            (71,267
            )
            
            
            122,694**Net
                Loss**
            
            **$**
            **(1,072,832**
            **)**
            
            **$**
            **(1,087,141**
            **)**
            
            **$**
            **(1,559,992**
            **)**
            
            **$**
            **(1,564,800**
            **)**


-25-


**Six
      Months Ended June 30, 2007 compared to June 30, 2006**





*Revenues:*





Revenues
      decreased $124,295 or 15%, to $694,612 for 2007 from $818,907 for
      2006.  The decrease was due to the Company not being able to focus on
      its oil and gas operations because of insufficient operating cash.





*Operating
      Expenses:*





Operating
      expenses decreased $323,064, or 13%, to $2,183,337 for 2007 from $2,506,400
      for
      2006.  The decrease was primarily the result of a $142,930
      decrease in consulting expense and a $185,818 decrease in production
      expense.   The decrease in consulting was primarily for a
      financial advisory consulting agreement in 2006 with no comparable amount in
      2007.  The decrease in production expense was primarily from the
      Company not being able to focus on its oil and gas operations because of
      insufficient operating cash.





*Other
      Income (Expense):*





Other
      income (expense) increased $193,961 of expense, or 158% to $71,267 of expense
      for 2007 from $122,694 of income for 2006.  The increase in expense
      was primarily from $193,154 decrease in other income from 2006 related to a
      $189,908 one time gain for Bend Arch.




**Three
      Months Ended June 30, 2007 compared to June 30, 2006**





*Revenues:*





Revenues
      decreased $28,191 or 8%, to $328,041 for 2007 from $356,232 for
      2006.  The decrease was due to the Company not being able to focus on
      its oil and gas operations because of insufficient operating cash.





*Operating
      Expenses:*





Operating
      expenses decreased $296,058, or 18%, to $1,333,559 for 2007 from $1,629,617
      for
      2006.  The decrease was primarily the result of a $186,817
      decrease in consulting expense and a $97,237 decrease in production
      expense. The decrease in consulting was primarily for a financial advisory
      consulting agreement in 2006 with no comparable amount in 2007.  The
      decrease in production expense was primarily from the Company not being able
      to
      focus on its oil and gas operations because of insufficient operating
      cash.





-26-


*Other
      Income (Expense):*





Other
      income (expense) increased $253,558 of expense, or 136% to $67,314 of expense
      for 2007 from $186,244 of income for 2006.  The increase in expense
      was primarily from a $213,154 decrease in other income from 2006 related to
      a
      $189,908 one time gain for Bend Arch.




**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $90,437 at June 30, 2007 as compared to $88,155 at
      December 31, 2006, and working capital deficit was $4,434,706 at June 30, 2007
      as compared to a working capital deficit of $3,245,962 at December 31,
      2006.  The increase in the working capital deficit was primarily from
      a $1,068,148  increase in due to related parties.





*Operating
      Activities*





Cash
      provided by operating activities was $171,287 for the six months ended June
      30,
      2007 compared to cash used of $1,054,430 for the six months ended June 30,
      2006.  The decrease in cash used in operations from 2006 to 2007 was
      primarily from an increase in the due to related parties and accrued interest
      payable balances in 2007 as compared to 2006.





*Investing
      Activities*





Cash
      used
      in investing activities was $148,428 for the six months ended June 30, 2007
      compared to cash used of $386,122 for the six months ended June 30,
      2006.  The decrease in cash used resulted primarily from a decrease in
      the investment in oil and gas properties due to the Company not being able
      to
      focus on its oil and gas operations because of insufficient operating
      cash


*Financing
      Activities*





Cash
      used
      in financing activities was $20,577 for the six months ended June 30, 2007
      compared to $2,394,562 of cash provided for the six months ended June 30,
      2006.  In 2006, the Company had $2,335,245 of net cash proceeds from
      the issuance of common stock and $32,500 of cash proceeds from the repayment
      of
      a subscription receivable.





Our
      principal uses of cash to date have been for operating activities and we have
      funded our operations previously primarily by incurring indebtedness in the
      form
      of convertible debentures and issuing common stock.  Our debt
      obligations pose a significant liquidity risk to our business and stockholders
      by requiring us to dedicate a substantial portion of our cash flow to principal
      and interest payments on our debt obligations, thereby reducing the availability
      of our cash flow to fund working capital, capital expenditures and other
      corporate requirements.  Additionally, these debt obligations may
      impede us from obtaining additional financing in the future for working capital,
      capital expenditures and other corporate requirements and may make us more
      vulnerable to a downturn in our business and limit our flexibility to plan
      for,
      or react to, changes in our business.





-27-


**Debt:**





The
      following summarizes our debt obligations at June 30, 2007:





*Our
      debt consisted of the following:*


***Lease
                Payable***
              
              **June
                  30,**
                **2007**
              
              
              **Dec.
                  31,**
                **2006**$21,238
                  computer equipment lease, bearing interest at 10% per
                  annum
              
              $
              16,131
              
              
              $
              16,131
  On
      April
      16, 2001, the Company leased computer equipment under a 36-month lease that
      was
      accounted for as a capital lease in the amount of $21,238 and at March 31,
      2006,
      the balance of principal was $16,131.  The amount is personally
      guaranteed by a former officer/director and the Chief Executive Officer of
      the
      Company. The lease was secured by all leased equipment and perfected by a
      financing statement; however, the Company liquidated the equipment and paid
      the
      office space lessor the $4,000 proceeds.  As of June 30, 2007, the
      Company has recorded a total of $14,444 in accrued interest for this lease
      payable in the accompanying Balance Sheet.





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




As
      of
      June 30, 2007, the Company has recorded $129,608 of accrued interest for
      previously issued convertible debentures.  Several convertible
      debenture holders have elected to convert all or a portion of the convertible
      debentures into common stock.  However, the conversion has not
      included accrued interest and although the Company believes that no further
      common stock will be issued for these conversions, the accrued interest balance
      for these converted debentures is included in the accrued interest balance
      as of
      June 30, 2007.


***Notes
                Payable***
              
              **June
                  30,**
                **2007**
              
              
              **Dec.
                  31,**
                **2006**$2,000,000
                  Promissory Note, dated February 20, 2003, bearinginterest
                  at 8% per annum and due on July 25, 2007
              
              $
              2,000,000
              
              
              $
              2,000,000




On
      June
      15, 2004, Bend Arch Petroleum, Inc. (“Bend Arch”), a wholly-owned subsidiary of
      the Company executed a $2,000,000 promissory note accruing interest at 8% with
      Proco Operating Co., Inc., a company controlled by the brother of the Company’s
      President (See Note 9 – Related Party Transactions and Note 10 – Operator
      Agreement) with a maturity date of July 25, 2007.  The purpose of the
      Note is to secure payment for oil and gas leases and wells located in Comanche
      and Eastland counties in the State of Texas sold to Bend Arch by Proco on June
      15, 2004. The Note replaced a $2,000,000 convertible debenture dated January
      5,
      2004.




-28-


The
      terms
      of the Note include (i) the payment of interest at a rate of eight percent
      (8%)
      per annum (ii) principal and interest due and payable on July 25, 2007 (iii)
      no
      prepayment penalty (iv) payment made in excess of sixty (60) days after the
      due
      date of July 25, 2007 is a default of the Note and Bend Arch will forfeit all
      ownership of the related leases and wells and relinquish operations on the
      lease
      and wells to Proco, and (v) upon a default of the Note, Bend Arch will vacate
      the leases with no rights of ownership and execute the necessary documents
      to
      transfer the leases and wells to Proco or its assigns.




As
      of
      June 30, 2007, the Company has accrued $577,589 of accrued interest on the
      Promissory Note and is included as a component of Accrued Interest payable
      in
      the accompanying financial statements.




***Other
                Notes Payable***
              
              **June
                  30,**
                **2007**
              
              
              **Dec.
                  31,**
                **2006**Vehicle
                  Note – Production Resources, Inc.
              
              $
              5,876
              
              
              $
              23,642Vehicle
                  Note – Bend Arch Petroleum, Inc.
              
              
              16,724
              
              
              
              19,535$
              22,600
              
              
              $
              43,177


***Equity
      Financing***





For
      the
      six months ended June 30, 2007 and 2006, the Company received zero and
      $2,335,245 of proceeds, net of offering costs, from the issuance of common
      stock, respectively.





***Liquidity***




To
      continue with our business plan, we will require additional working capital
      as
      we have not been generating sufficient cash from operations to fund our
      operating activities through the end of fiscal 2007.  The ability of
      the Company to continue as a going concern is dependent on the Company’s ability
      to raise capital and generate revenues and cash flow from its business plan
      as
      an oil and gas operating company. The Company is authorized to issue 500,000,000
      shares of its $0.0001 par value common stock and as of the date of this report,
      there are 494,074,082 shares outstanding.  As a result, the ability of
      the Company to raise capital from the sale of common stock is minimal and is
      a
      serious impediment to the Company’s ability to provide liquidity during the time
      frame that the Company is commencing its business plan as an oil and gas
      operating company.  The financial statements included in this report
      do not include any adjustments that might be necessary if the Company is unable
      to continue as a going concern.




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





-29-


**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Contractual
      Obligations and Commercial Commitments**





The
      following table highlights, as of June 30, 2007, our contractual obligations
      and
      commitments by type and period:




**Payments
                Due by Period****Contractual
                Obligations**
            
            **Total**
            
            
            **Less
                than 1 year**
            
            
            **1-3
                years**
            
            
            **4-5
                years**
            
            
            **After
                5 years**Debt:Lease
                Payable
            
            $
            16,131
            
            
            $
            16,131
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Notes
                Payable
            
            
            2,022,600
            
            
            
            2,022,600
            
            
            
            -
            
            
            
            -
            
            
            
            -Accrued
                Interest Payable
            
            
            701,641
            
            
            
            701,641
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
                Debt
            
            $
            2,740,372
            
            
            $
            2,740,372
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -





**2007
      OUTLOOK**




The
      ability of the Company to continue as a going concern is dependent on the
      Company’s ability to raise capital and going forward, generate revenues and cash
      flow from its business plan as an oil and gas operating company. The Company
      is
      authorized to issue 500,000,000 shares of its $0.0001 par value common stock
      and
      as of the date of this report, there are 494,074,082 shares
      outstanding.  As a result, the ability of the Company to raise capital
      from the sale of common stock is minimal and is a serious impediment to the
      Company’s ability to provide liquidity during the time frame that the Company is
      commencing its business plan as an oil and gas operating company.  The
      financial statements included in this report do not include any adjustments
      that
      might be necessary if the Company is unable to continue as a going
      concern.




As
      an oil
      and gas operating company, the Company is highly dependent on the success of
      its
      wholly-owned subsidiaries. There is no assurance that additional equity or
      debt
      financing will be available on terms acceptable to management or that the
      Company’s wholly-owned subsidiaries will be successful.





-30-


**Item
      3. Quantitative andQualitative Disclosures About
      Market Risk**





We
      are
      exposed to market risks related to changes in interest rates. Our debt is at
      fixed rates of interest from 8% to a default 18% per annum rate as the result
      of
      being in default of certain debt as of June 30, 2007. There is a risk that
      additional debt may be declared in default in the future and the higher default
      rate of 18% may have a negative affect on our operations.





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





**Item
      4. Controls andProcedures.**





**Evaluation
      of Disclosure Controls and Procedures**





(a)
            At
                the end of the period covered by the report, we carried out an evaluation,
                under the supervision and with the participation of our management,
                including our Chief Executive Officer, Chief Financial Officer, of
                the
                effectiveness of the design and operation of our disclosure controls
                and
                procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
                Exchange Act of 1934).  Based on that evaluation, our Chief
                Executive Officer, Chief Financial Officer has concluded that our
                current
                disclosure controls and procedures are effective to allow timely
                decisions
                regarding required disclosure of any material information relating
                to us
                that is required to be disclosed by us in the reports we file or
                submit
                under the Securities Act of 1934.  On May 25, 2006, the Company
                received a letter of inquiry from the SEC related to, among other
                things,
                the Company’s disclosure controls and procedures.  In that
                letter, the SEC noted the Company’s repeated requests for extensions of
                time to file its required reports.  Subsequently, the Company
                has conducted a review of its disclosure controls and procedures
                designed
                to ensure that all future filings and submissions to the SEC are
                consistent with the requirements of federal securities laws and are
                not
                otherwise misleading.  The review resulted in the implementation
                of additional controls to ensure that future filings are complete,
                accurate and made on a timely basis.  The Company has engaged
                corporate and BDC counsel to assist the Company in its discussions
                with
                the SEC and with the filing process.  Additionally, the Company
                has engaged an accounting consultant to ensure that its financial
                records
                are maintained and recorded in a timely manner.  Finally, the
                Company has identified and appointed – subject to shareholder election –
                new members to the Board of Directors, such that the Company’s management
                has significant experience relating to its primary
                business.  The implementation of these additional controls and
                procedures allowed the Company’s Chief Executive Officer and Chief
                Financial Officer to conclude that the current disclosure controls
                and
                procedures are effective, as
                required.





(b)
            There
                have been no changes in the Company’s internal controls over financial
                disclosure and reporting that occurred during the most recent fiscal
                quarter that has materially affected, or is reasonable likely to
                affect,
                the company’s internal control over financial
                reporting.








-31-


**PART
      II  - Other Information**





**Item
      1.  Legal Proceedings**





The
      Company is subject to various lawsuits and unasserted claims from vendors for
      non-payment of accounts payable plus related legal fees. Excluding legal fees,
      which cannot be estimated, the Company has included all amounts in its accounts
      payable or accrued expenses as of June 30, 2007.





The
      Company and certain of its majority-owned portfolio companies are delinquent
      in
      the filing of certain franchise tax reports with the State of Texas and the
      State of Delaware and as a result, the Company and certain of its majority-owned
      portfolio companies are not in good standing.  The Company and its
      majority-owned portfolio companies are in the process of filing the required
      reports and may face certain penalties and interest due to the delinquent status
      of the reports.  In July and August 2007, the Company filed all past
      due franchise tax reports with the State of Texas and the State of
      Delaware.  As a result, management anticipates that the Company and
      all of its wholly-owned subsidiaries will be declared in good standing in the
      near future.





The
      Company has included $72,402 of unpaid Federal payroll taxes and employee
      withholdings and related penalties and interest in its accrued expenses as
      of
      June 30, 2007.  Although the unpaid Federal taxes are from the
      predecessor company, Communicate Now.com, Inc., such amounts are subject to
      potential federal tax liens for the Company.





The
      Company has $373,021 of accounts payable as of June 30, 2007 and the majority
      of
      this balance is from the predecessor company, Communicate Now.com,
      Inc.  Since these trade accounts payable have been outstanding for an
      extended period of time with no communication between the Company and any of
      the
      vendors, the Company is commencing the process of eliminating the liabilities
      from its records.  However, there can be no assurance that the Company
      will be successful in its efforts to eliminate the liabilities.





**Item
      1A.  Risk Factors**




Our
      business, financial condition, operating results and cash flows can be impacted
      by a number of factors, any one of which could cause our actual results to
      vary
      materially from recent results or from our anticipated future results. For
      a
      discussion identifying additional risk factors and important factors that could
      cause actual results to differ materially from those anticipated, see the
      discussions in “Risk Factors, “ “Forward-Looking Statements,” “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” and
“Notes to Financial Statements” in our Form 10-K for December 31, 2006 and in
      this Form 10-Q.




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





None





**Item
      3. Defaults Upon Senior Securities**





None





-32-


**Item
      4. Submission of matters toa Vote of Securities
      Holders**





On
      March
      13, 2007, at a Special Meeting of Shareholders, the Shareholders approved and
      authorized the Board to withdraw the Company’s election to be treated as a BDC
      under the 1940 Act and the election of three directors to the
      Board.




At
      a
      meeting held on May 16, 2007, the Board of Directors reviewed the Company’s
      current business and financial performance, the recent trading range of its
      Common Stock and inability to obtain additional capital from the investment
      community with 494,170,082 shares of Common Stock issued and outstanding and
      500,000,000 shares of Common Stock authorized. As a result, the Board determined
      that a reverse stock split was desirable and in the best interest of the
      Company.  On July 5, 2007, the Company filed a Definitive 14A Proxy
      Statement with the SEC giving notice of a special shareholders meeting to be
      held on August 17, 2007 for the purpose of approving a one-for-twenty five
      reverse stock split.




**Item
      5. Other Information**





None





**Item
      6.  Exhibits**





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





Exhibit
                No.
            
            Description
                of Exhibit20.1
            
            Form
                N-54C –Notification
                of
                withdrawal of election to be subject to sections 55 through 65 of
                the
                Investment Company Act of 1940 filed pursuant to section 54(c) of
                the
                Investment Company Act of 1940 - Incorporated
                by
                Reference.22.1
            
            Schedule
                14A -
                Definitive Proxy Statement filed February 8, 2007 – Incorporated by
                Reference.22.1
            
            Schedule
                14A -
                Definitive Proxy Statement filed July 5, 2007 – Incorporated by
                Reference.31.1*
            
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to Rule 13a-14 of the Securities Exchange
                Act
                of 1934, as amended.*32.1*
            
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act
                of
                2002.*


*
      Filed
      herewith





-33-


**SIGNATURES**





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




AMERICAN
                ENERGY PRODUCTION, INC.
              (Registrant)Date:  August
                14,
                2007
            By:
            /s/ Charles
              BittersCharles
              BittersChief
              Executive Officer and Chief
              Financial Officer


-34-