UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





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


EXCHANGE
      ACT OF 1934





For
      the
      quarterly period ended June 30, 2006





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from ________ to _________





Commission
      File number: *333-52812*


**American
      Energy Production, Inc.**


(Exact
      name of registrant as specified in its charter)





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





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





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





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





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


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


Exchange
      Act of 1934 during the preceding 12 months (or for such shorter


period
      that the registrant was required to file such reports), and (2)


has
      been
      subject to such filing requirements for the past 90 days.




Yes
      [X]
      No [ ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated


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




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





Indicate
      by check mark whether the registrant is a shell company


(as
      defined in Rule 12b-2 of the Exchange Act).




Yes
      [ ]
      No [X]





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


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


American
      Energy Production, Inc.


Form
      10-Q
      Index


June
      30,
      2006




-1-




Page


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






-2-




PART
      I


FINANCIAL
      INFORMATION








Item
      1-Financial Statements





-3-








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





See
      accompanying notes to unaudited financial statements.








-4-





**American
                Energy Production, Inc.****(A
                Development Stage Company)****Balance
                Sheets*****(Continued)*****June
                30, 2006**
            
            
            **December
                31, 2005****(Unaudited)****Commitments
                and Contingencies (Note 7)****Stockholders'
                Equity**Convertible
                preferred stock, Series B, $0.0001 par value,5,000,000
                shares authorized, 3,500,000 issued and outstanding
            
            $
            350
            
            $
            400Common
                stock, $0.0001 par value, 500,000,000 shares authorized494,170,082
                and 452,870,082 shares issued and outstandingoutstanding,
                respectively
            
            
            49,417
            
            
            45,287Common
                stock issuable, $0.0001 par value, 75,000 shares
            
            
            8
            
            
            8Additional
                paid in capital
            
            
            23,998,249
            
            
            21,542,084Accumulated
                deficit
            
            
            (9,360,491
            )
            
            (9,360,491
            )Retained
                earnings accumulated during development stage
            
            
            6,815,683
            
            
            7,159,92621,503,216
            
            
            19,387,214Less:
                Subscription Receivable
            
            
            (902,000
            )
            
            (809,500
            )**Total
                Stockholders' Equity**
            
            
            **20,601,216**
            
            
            **18,577,714****Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **21,267,484**
            
            **$**
            **19,256,539****Net
                Asset Value Per Share**
            
            **$**
            **0.04**
            
            **$**
            **0.04**










See
      accompanying notes to unaudited financial statements.





-5-








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





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








See
      accompanying notes to unaudited financial statements








-6-





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





See
      accompanying notes to unaudited financial statements








-7-











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





See
      accompanying notes to unaudited financial statements








2
 -8-


**American
        Energy Production, Inc.**


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











See
      accompanying notes to unaudited financial statements








-9-





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











See
      accompanying notes to unaudited financial statements





-10-
 
 **American
          Energy Production, Inc.**
 **(A
          Development Stage Company)**
 **Notes
          to Financial Statements**
 **June
          30, 2006**
 **(Unaudited)**





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





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





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





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





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





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





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





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


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





**2.
      GOING CONCERN**





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





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





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






-11-
 **American
            Energy Production, Inc.**
 **(A
            Development Stage Company)**
 **Notes
            to Financial Statements**
 **June
            30, 2006**
 **(Unaudited)**






**3.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation and Concentration**





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





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





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





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




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





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





**Accounting
      Estimates**





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





**Cash
      and Cash Equivalents**





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





**Value
      of Investments**





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





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





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





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






-12-
 **American
            Energy Production, Inc.**
 **(A
            Development Stage Company)**
 **Notes
            to Financial Statements**
 **June
            30, 2006**
 **(Unaudited)**






**Beneficial
      Conversion Feature in Convertible Debentures**





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





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





**Fair
      Value of Financial Instruments**





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





**Revenue
      Recognition**





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





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





**Income
      Taxes**





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





**Net
      Loss per Common Share**





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





**Accumulated
      Other Comprehensive Income**





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





**Recent
      Accounting Developments**





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





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





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




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





-13-
 **American
            Energy Production, Inc.**
 **(A
            Development Stage Company)**
 **Notes
            to Financial Statements**
 **June
            30, 2006**
 **(Unaudited)**






**Reclassifications**





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





**INVESTMENTS
      IN AND ADVANCES TO AFFILIATES**





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





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





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





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





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





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





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





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





-14-
 **American
            Energy Production, Inc.**
 **(A
            Development Stage Company)**
 **Notes
            to Financial Statements**
 **June
            30, 2006**
 **(Unaudited)**






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





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





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





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





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





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





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





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





-15-
 **American
              Energy Production, Inc.**
 **(A
              Development Stage Company)**
 **Notes
              to Financial Statements**
 **June
              30, 2006**
 **(Unaudited)**








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








-16-
 **American
            Energy Production, Inc.**
 **(A
            Development Stage Company)**
 **Notes
            to Financial Statements**
 **June
            30, 2006**
 **(Unaudited)**








**5.
      DEBT**





*Our
      debt consisted of the following:*





***Lease
      Payable***


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





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





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





***Notes
      payable - Banks***




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





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





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





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





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





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





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





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





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





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








-17-
 **American
            Energy Production, Inc.**
 **(A
            Development Stage Company)**
 **Notes
            to Financial Statements**
 **June
            30, 2006**
 **(Unaudited)**





***Convertible
      Debentures:***





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





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


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





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





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





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





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





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





-18-






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





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





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





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





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





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





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





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





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





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





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





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





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





-19-






**6.
      STOCKHOLDERS’ EQUITY**





**Capital
      Structure**





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





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





***Issuances
      (Retirements) of Preferred Stock:***





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





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





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





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





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


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





***Issuances
      of Common Stock:***





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





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





-20-






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





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





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





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





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





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





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





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





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





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





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





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





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





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




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





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





-21-






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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





-22-






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





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





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





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





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





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





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





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




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




-23-






***Common
      Stock Issuable:***





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





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





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





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





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





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





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





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





***Common
      Stock Cancelled:***





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





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





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





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





-24-






**7.
      COMMITMENTS AND CONTINGENCIES**





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





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





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





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





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





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





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





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





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





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




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





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








-25-





**8.
      RELATED PARTY AND AFFILIATE TRANSACTIONS**





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





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





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





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





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





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





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





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





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





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





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





-26-
 **American
            Energy Production, Inc.**
 **(A
            Development Stage Company)**
 **Notes
            to Financial Statements**
 **June
            30, 2006**
 **(Unaudited)**








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








-27-
 **American
              Energy Production, Inc.**
 **(A
              Development Stage Company)**
 **Notes
              to Financial Statements**
 **June
              30, 2006**
 **(Unaudited)**





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





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





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


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





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





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





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





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





**OVERVIEW**





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





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





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





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





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





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





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





-28-






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


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


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





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





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





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





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


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




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




**RECENT
      DEVELOPMENTS**





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





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





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





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





-29-






**CRITICAL
      ACCOUNTING ESTIMATES AND POLICIES**




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





**GOING
      CONCERN**





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




**VALUATION
      OF NON-CASH ISSUANCES OF COMMON STOCK**





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





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





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





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





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





**EVALUATION
      OF ASSET IMPAIRMENT**





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





-30-






**VALUATION
      OF INVESTMENTS**





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





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





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





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





**VALUATION
      ALLOWANCE FOR DEFERRED TAX ASSETS**





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





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





**ESTIMATE
      OF RESERVES OF OIL AND GAS**





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





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








-31-





**RESULTS
      OF OPERATIONS**





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




**Six
                  Months Ended**
              **Three
                  Months Ended****June
                  30,**
              **June
                  30,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005****Investment
                  and Pre-BDC Operating Income**Oil
                  sales, net
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Investment
                  income - portfolio investmentsInterest
              
              
              -
              
              
              -
              
              
              -
              
              
              -Dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Total
                  Investment and Pre-BDC Operating Income**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-****Operating
                  Expenses**Compensation
              
              
              60,000
              
              
              60,000
              
              
              30,000
              
              
              30,000Consulting
              
              
              146,190
              
              
              35,486
              
              
              146,190
              
              
              7,486Depletion
              
              
              -
              
              
              -
              
              
              -
              
              
              -Depreciation
              
              
              3,914
              
              
              3,914
              
              
              1,968
              
              
              1,968Equipment
                  rental
              
              
              -
              
              
              -
              
              
              -
              
              
              -General
                  and administrative
              
              
              33,905
              
              
              11,341
              
              
              17,067
              
              
              6,861Production
              
              
              626
              
              
              -
              
              
              626
              
              
              -Professional
              
              
              112,394
              
              
              73,653
              
              
              87,928
              
              
              68,507Website
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Total
                  Operating Expenses**
              
              
              **357,029**
              
              
              **184,394**
              
              
              **283,779**
              
              
              **114,822****Net
                  Investment and Pre-BDC Operating Loss**
              
              
              **(357,029**
              **)**
              
              **(184,394**
              **)**
              
              **(283,779**
              **)**
              
              **(114,822**
              **)****Other
                  Income (Expense)**Gain
                  on settlement of debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  income
              
              
              20,000
              
              
              -
              
              
              -
              
              
              -Interest
                  expense
              
              
              (4,212
              )
              
              (473,850
              )
              
              (2,163
              )
              
              (90,260
              )Payroll
                  tax penalties
              
              
              (3,002
              )
              
              (3,002
              )
              
              (1,501
              )
              
              (1,501
              )Loss
                  on settlement
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Total
                  Other Income (Expense)**
              
              
              12,786
              
              
              (476,852
              )
              
              3,664
              
              
              (91,761
              )**Net
                  Increase (Decrease) in Net Assets (post BDC)**
                **and
                  Net Income (pre BDC)**
              
              **$**
              **(344,243**
              **)**
              **$**
              **(661,246**
              **)**
              **$**
              **(287,443**
              **)**
              **$**
              **(206,583**
              **)**
 -32-


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





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





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




*Operating
      Expenses* *:*





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





*Other
      Income (Expense)* *:*





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





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





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





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




*Operating
      Expenses* *:*





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





*Other
      Income (Expense)* *:*





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





**Liquidity
      and Capital Resources**




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





*Operating
      Activities*





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





-33-






*I* *nvesting
      Activities*





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





*Financing
      Activities*





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




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





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





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





**DEBT**





*Our
      debt consisted of the following:*





***Lease
      Payable***





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





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





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





***Notes
      payable - Banks***         ****


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





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





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





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





-34-






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





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





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





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





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





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





***Convertible
      Debentures:***





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





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





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





-35-






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





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


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





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





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





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





-36-






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





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





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





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





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





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





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





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





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





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





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





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





-37-






***Equity
      Financing***





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





***Liquidity***





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





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





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Contractual
      Obligations and Commercial Commitments**





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


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





**2006
      OUTLOOK**





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





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





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





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





-38-






**Item
      3. Quantitative and Qualitative Disclosures About Market Risk**





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





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





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




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




**Item
      4. Controls and Procedures.**





**Evaluation
      of Disclosure Controls and Procedures**





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





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






-39-






**PART
      II - Other Information**





**Item
      1. Legal Proceedings**





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





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





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





**Item
      1A. Risk Factors**




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




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





***Issuances
      of Preferred Stock:***





None





***Retirement
      of Preferred Stock***





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





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





***Issuances
      of Common Stock:***





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




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




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





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





-40-






***Common
      Stock Issuable:***





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





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





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





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





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




**Item
      3. Defaults Upon Senior Securities**


None





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


None





**Item
      5. Other Information**


None





**Item
      6. Exhibits**





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





Exhibit
                No.
            Description
                of Exhibit31.1*
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to Rule 13a-14 of the Securities Exchange
                Act
                of 1934, as amended.*32.1*
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act
                of
                2002.*


*
      Filed
      herewith







-41-





**SIGNATURES**





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







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





-42-