**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





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


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED **MARCH 31, 2006**





*Commission
      File* ***#333-52812*** **





**AMERICAN
      ENERGY PRODUCTION, INC.**


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





**DELAWARE**


(State
      or
      other jurisdiction of incorporation or organization)





**74-2945581**


(IRS
      Employer Identification Number)





**6073
      Hwy 281 South, Mineral Wells, TX 76067**


(Address
      of principal executive offices)(Zip Code)





**(210)
      410-8158**


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




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes
      [X]
      No [ ]




The
      number of shares outstanding of the Company's common stock outstanding on May
      15, 2006: 456,870,082. Additionally, 4,075,000 shares are issuable as of May
      15,
      2006.




-1-
 *Table
          of Contents*


**AMERICAN
      ENERGY PRODUCTION, INC.**


**FORM
      10-Q**


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




-2-
 *Table
          of Contents*


**PART
      I - FINANCIAL INFORMATION**





Item
      1.
      Financial Statements





Filed
      herewith are our following unaudited financial statements:





Balance
      Sheet (Unaudited) at March 31, 2006





Statements
      of Operations (Unaudited) for the three months ended
      March 31, 2006





Statements
      of Cash Flows (Unaudited) for the three months ended March
      31, 2006





Statement
      of Changes in Net Assets (Unaudited) at March 31,
      2006





Schedule
      of Investments (Unaudited) at March 31, 2006





Notes
      to Financial Statements (Unaudited)





-3-
 *Table
          of Contents*


**American
                Energy Production, Inc.****(A
                Development Stage Company)****March
                31, 2006****Balance
                Sheet****(Unaudited)**




**ASSETS****Current
                Assets**Cash
            
            $
            198,775**Total
                Current Assets**
            
            
            **198,775****Property
                and equipment, net**
            
            
            **25,084****Investments:**Investments
                in and advances to affiliates - majority-owned
            
            
            19,182,670**Total
                Investments**
            
            
            **19,182,670****Total
                Assets**
            
            **$**
            **19,406,529****LIABILITIES****Current
                Liabilities**Accounts
                payable
            
            $
            302,858Due
                to related parties
            
            
            85,725Convertible
                debentures
            
            
            57,967Accrued
                interest payable
            
            
            132,215Accrued
                payroll taxes and penalties
            
            
            64,299Lease
                payable
            
            
            16,131Notes
                payable
            
            
            -**Total
                Current Liabilities**
            
            **$**
            **659,195****Net
                Assets**
            
            **$**
            **18,747,334**





See
      accompanying notes to unaudited financial statements.





-4-
 *Table
          of Contents*


**American
                Energy Production, Inc.****(A
                Development Stage Company)****March
                31, 2006****Balance
                Sheet*****(Continued)*****(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
            
            $
            350Common
                stock, $0.0001 par value, 500,000,000 shares authorized456,870,082
                shares issued and outstanding
            
            
            45,687Common
                stock issuable, $0.0001 par value, 4,075,000 shares
            
            
            408Additional
                paid in capital
            
            
            21,860,254Accumulated
                deficit
            
            
            (9,360,491
            )Retained
                earnings (deficit) accumulated during development stage
            
            
            7,103,12619,649,334Less:
                Subscription Receivable
            
            
            (902,000
            )**Total
                Stockholders' Equity**
            
            
            **18,747,334****Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **19,406,529****Net
                Asset Value Per Share**
            
            **$**
            **0.04**




See
      accompanying notes to unaudited financial statements.




-5-
 *Table
          of Contents*


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





**Period
                from****February
                20, 2003****Three
                Months Ended**
            
            **(Inception
                of****March
                31,**
            
            **Development
                Stage)****2006**
            
            **2005**
            
            **to
                March 31, 2006****Investment
                and Pre-BDC Operating Income**Oil
                sales, net
            
            $
            -
            
            $
            -
            
            $
            46,658Investment
                income - portfolio investmentsInvestments
            
            
            -
            
            
            -
            
            
            -Dividends
            
            
            -
            
            
            -
            
            
            -**Total
                Investment and Pre-BDC Operating Income**
            
            
            **-**
            
            
            **-**
            
            
            **46,658****Operating
                Expenses**Compensation
            
            
            30,000
            
            
            30,000
            
            
            812,596Consulting
            
            
            -
            
            
            28,000
            
            
            1,125,193Depletion
            
            
            -
            
            
            -
            
            
            3,987Depreciation
            
            
            1,946
            
            
            1,946
            
            
            83,906Equipment
                rental
            
            
            -
            
            
            -
            
            
            63,000General
                and administrative
            
            
            16,837
            
            
            4,479
            
            
            169,273Production
            
            
            -
            
            
            -
            
            
            142,723Professional
            
            
            24,466
            
            
            5,147
            
            
            394,164Website
            
            
            -
            
            
            -
            
            
            322,583**Total
                Operating Expenses**
            
            
            **73,249**
            
            
            **69,572**
            
            
            **3,122,426****Net
                Investment and Pre-BDC Operating Loss**
            
            
            **(73,249**
            **)**
            
            **(69,572**
            **)**
            
            **(3,075,768**
            **)****Realized
                and Unrealized Gain from**
              **Investments
                and Other Income (Expense)**Gain
                on settlement of debt
            
            
            -
            
            
            -
            
            
            18,364Other
                income
            
            
            20,000
            
            
            -
            
            
            44,155Unrealized
                gain on investments
            
            
            -
            
            
            -
            
            
            14,852,861Interest
                expense
            
            
            (2,050
            )
            
            (383,590
            )
            
            (4,550,821
            )Payroll
                tax expense and penalties
            
            
            (1,501
            )
            
            (1,501
            )
            
            (18,664
            )Loss
                on settlement
            
            
            -
            
            
            -
            
            
            (167,000
            )**Total
                Realized and Unrealized Gain from Investments and Other Income
                (Expense)**
            
            
            16,449
            
            
            (385,091
            )
            
            10,178,895**Net
                Income (Loss)**
            
            **$**
            **(56,800**
            **)**
            **$**
            **(454,663**
            **)**
            **$**
            **7,103,126****Net
                Income (Loss) Per Share-Basic and Diluted**
            
            **$**
            **(0.00**
            **)**
            **$**
            **(0.00**
            **)**
            **$**
            **0.03****Weighted
                average Shares**
            
            
            **456,733,971**
            
            
            **273,519,123**
            
            
            **229,526,141**




See
      accompanying notes to unaudited financial statements


-6-
 *Table
          of Contents*


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




**Period
                from****February
                20, 2003****Three
                Months Ended**
            
            **(Inception
                of****March
                31,**
            
            **Development
                Stage)****2006**
            
            **2005**
            
            **to
                March 31, 2006****Cash
                Flows From Operating Activities:**Net
                income (loss)
            
            $
            (56,800
            )
            $
            (454,663
            )
            $
            7,103,126Adjustments
                to reconcile net income (loss) tonet
                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
            
            
            -
            
            
            369,924
            
            
            4,280,000Compensation
                expense in excess of debt to officer
            
            
            -
            
            
            -
            
            
            480,995Amortization
                of deferred services
            
            
            -
            
            
            -
            
            
            405,796Depreciation
            
            
            1,946
            
            
            1,946
            
            
            83,906Depletion
            
            
            -
            
            
            -
            
            
            3,987Changes
                in operating assets and liabilities:Decrease
                in accounts receivable - related party
            
            
            -
            
            
            -
            
            
            3,484Decrease
                in cash overdraft
            
            
            -
            
            
            -
            
            
            (6,726
            )Increase
                in accounts payable
            
            
            (6,180
            )
            
            6,179
            
            
            62,071Decrease
                (increase) in due to related party
            
            
            (17,000
            )
            
            (14,000
            )
            
            (63,776
            )Increase
                in accrued interest payable
            
            
            2,050
            
            
            13,665
            
            
            218,073Increase
                in accrued payroll taxes payable
            
            
            1,500
            
            
            1,502
            
            
            18,662**Net
                Cash Used In Operating Activities**
            
            
            (74,484
            )
            
            (75,447
            )
            
            (1,106,073
            )**Cash
                Flows From Investing Activities:**Prepaid
                acquisition cost disbursement
            
            
            -
            
            
            -
            
            
            -Purchase
                of equipment
            
            
            -
            
            
            -
            
            
            (178,974
            )Advances
                to affiliates/investees
            
            
            (424,500
            )
            
            (129,806
            )
            
            (3,799,842
            )Purchase
                of oil lease
            
            
            -
            
            
            -
            
            
            (8,500
            )**Net
                Cash Used In Investing Activities**
            
            $
            (424,500
            )
            $
            (129,806
            )
            $
            (3,987,316
            )





See
      accompanying notes to unaudited financial statements


-7-
 *Table
          of Contents*




**American
                Energy Production, Inc.****(A
                Development Stage Company)****Statements
                of Cash Flows*****(Continued)*****(Unaudited)****Period
                from****February
                20, 2003****Three
                Months Ended**
            
            **(Inception
                of****March
                31,**
            
            **Development
                Stage)****2006**
            
            **2005**
            
            **to
                March 31, 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
            
            
            -
            
            
            (4,500
            )
            
            (105,976
            )Proceeds
                from issuance of convertible debentures
            
            
            -
            
            
            -
            
            
            1,850,000Proceeds
                from common stock issuable, net ofoffering
                costs of $0 and $0
            
            
            193,920
            
            
            -
            
            
            2,434,553Proceeds
                from receipt of subscription receivable
            
            
            32,500
            
            
            -
            
            
            32,500Proceeds
                from issuance ofcommon
                stock, net of offering costs of $0 and $0
            
            
            -
            
            
            -
            
            
            994,823Repayment
                of lease payable
            
            
            -
            
            
            -
            
            
            (87
            )**Net
                Cash Provided By (Used In) Financing Activities**
            
            
            226,420
            
            
            (4,500
            )
            
            5,292,164**Net
                (Decrease) Increase in Cash**
            
            
            **(272,564**
            **)**
            
            **(209,753**
            **)**
            
            **198,775**Cash
                at Beginning of Period
            
            
            471,339
            
            
            268,665
            
            
            -**Cash
                at End of Period**
            
            
            **198,775**
            
            
            **58,912**
            
            
            **198,775**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
            
            
            125,000
            
            
            25,000
            
            
            934,500Stock
                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





-8-
 *Table
          of Contents*


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




**Three****Months
                Ended****March
                31, 2006**Decrease
                in net assets from operations:Net
                operating losses
            
            
            (56,800
            )Net
                decrease in net assets from operations
            
            
            (56,800
            )Common
                Stock transactions
            
            
            226,420Total
                increase in Net Assets
            
            
            169,620Net
                Assets:Beginning
                of Period
            
            
            18,577,714End
                of period
            
            $
            18,747,334




See
      accompanying notes to unaudited financial statements


-9-
 *Table
          of Contents*






**American
                  Energy Production, Inc.****(A
                  Development Stage Company)****Schedule
                  of Investments****March
                  31, 2006****(Unaudited)**
  **Percentage
                  of****Title
                  of**
              
              **Class
                  Held on****Portfolio**
              
              
              
              **Securities
                  Held**
              
              **a
                  Fully Diluted**
              
              **At
                  March 31, 2006****Company**
              
              **Industry**
              
              **By
                  The Company**
              
              **Basis
                  (2)**
              
              **Cost**
              
              **Fair
                  Value****Control
                  Investments - Majority Owned (1)**Production
                  Resources, Inc.
              
              
              Oil
                  and Gas Production
              
              
              Common
                  Stock
              
              
              100
              %
              $
              974,565
              
              $
              4,646,585Oil
                  America Group, Inc.
              
              
              Oil
                  and Gas Production
              
              
              Common
                  Stock
              
              
              100
              %
              
              187,000
              
              
              187,000Bend
                  Arch Petroleum, Inc.
              
              
              Oil
                  and Gas Production
              
              
              Common
                  Stock
              
              
              100
              %
              
              3,109,688
              
              
              14,290,529AMEP
                  Strategic Investments, Inc.
              
              
              Investment
              
              
              Common
                  Stock
              
              
              100
              %
              
              58,556
              
              
              58,556**Total
                  Control Investments - Majority Owned**
              
              
              
              
              
              
              
              
              
              
              $
              4,329,809
              
              $
              19,182,670**Total
                  Investments**
              
              
              
              
              
              
              
              
              
              
              
              **4,329,809**
              
              
              **19,182,670****Unearned
                  Income**
              
              
              
              
              
              
              
              
              
              
              
              **-**
              
              
              **-****Total
                  Investments, net of Unearned Income**
              
              
              
              
              
              
              
              
              
              
              **$**
              **4,329,809**
              
              **$**
              **19,182,670**(1)
                  Majority owned investments are generally defined under the Investment
                  Company Act of 1940 as companies in which we own more than
                  50% of the voting securities of the company. If we own 100% of
                  a Company,
                  it is presented as majority owned.(2)
                  All common stock is in private companies, non-income producing
                  and
                  restricted at the relevant period end.





See
      accompanying notes to unaudited financial statements


-10-
 *Table
          of Contents*


**1.**  **HISTORY
      AND NATUREOF BUSINESS**




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




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





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





On
      January 12, 2004, the Company filed a Form N-54 with the Securities and Exchange
      Commission (“SEC”) to be regulated as a Business Development Company (“BDC”)
      pursuant to the provisions of section 54(a) of the Investment Company Act of
      1940, the (“Act”), to be subject to the provisions of section 55 through 65 of
      the Act. The Company has determined that its operating model best approximates
      that of an investment company and intends to make investments into developing
      businesses in the oil and gas and other industries. Additionally, the Board
      of
      Directors determined that it was necessary to raise additional capital to carry
      out the company’s business plan and the Company filed a Form 1-E pursuant to the
      Securities Act of 1933 notifying the SEC of the Company’s intent to sell up to
      $4,000,000 of the Company’s common stock at prices between $0.01 and $0.10 per
      share, or 40,000,000 and 400,000,000 shares, respectively. On January 29, 2004,
      the 1-E filing notification with the SEC became effective. Accordingly, the
      Company is presently registered as an Investment Company under the
      Act.




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




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




In
      March
      2006, the Board of Directors met and discussed the Company’s status as a BDC.
      When the Company elected to become a BDC, it was its intention to provide debt
      and equity capital to companies that it believed presented opportunities for
      superior performance through liquidity events, recapitalizations, internal
      growth, product or geographic expansion, the completion of complementary add-on
      acquisitions, or industry consolidations. The Company generally expected to
      invest in emerging and development-stage companies which otherwise lacked the
      necessary capital and depth of management to expand their businesses.




-11-
 *Table
          of Contents*


The
      Board
      of Directors is currently reviewing the Company’s compliance with the 1940 Act,
      in order to determine if it is in compliance with several important provisions
      of the 1940 Act, including the capital structure requirements. There is a risk
      that the SEC could take enforcement action against the Company if the SEC
      determines that the Company has not been operating in compliance with the 1940
      Act.





The
      Company’s significant compliance costs as a BDC, in terms of both time and
      dollars, have operated as a drag on the Company’s resources and in many respects
      have diverted the effective utilization of capital previously raised by the
      Company to effectuate its overall investment business plan. Further, since
      the
      Company commenced operating as a BDC, the business, regulatory and financial
      climates have changed, making operations as a BDC more challenging and
      difficult.





At
      the
      time of this report, the Board of Directors has not completed its review of
      the
      Company’s compliance with the 1940 Act.




**2.
      GOING CONCERN**




As
      reflected in the accompanying financial statements, the Company has a net loss
      of $56,800 and net cash used in operations of $74,484 for the three months
      ended
      March 31, 2006. Additionally, the Company has a working capital deficiency
      of
      $460,420 as of March 31, 2006 and is also in default on certain notes to banks
      and is in the development stage with no revenues as a BDC. The ability of the
      Company to continue as a going concern is dependent on the Company’s ability to
      further implement its business plan, raise capital, and generate revenues.
      The
      financial statements do not include any adjustments that might be necessary
      if
      the Company is unable to continue as a going concern.





The
      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.




In
      January 2004, we filed an election to become subject to Sections 55 through
      65
      of the Investment Company Act of 1940, such that we could commence conducting
      our business activities as a BDC. Additionally, the Board of Directors
      determined that it was necessary to raise additional capital to carry out the
      company’s business plan and the Company filed a Form 1-E pursuant to the
      Securities Act of 1933 notifying the SEC of the Company’s intent to sell up to
      $4,000,000 of the Company’s common stock at prices between $0.01 and $0.10 per
      share, or 40,000,000 and 400,000,000 shares, respectively. On January 29, 2004,
      the 1-E filing notification with the SEC became effective.





On
      February 22, 2005, the Company’s Board of Directors determined that it was in
      the best interest of the Company to discontinue the offering discussed above
      and
      to investigate other financing alternatives. Accordingly, the Company filed
      a
      Form 2-E pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. However, the filing was not acknowledged
      by the SEC and the Company re-filed the Form with the SEC, with an effective
      date of June 30, 2005. The Form 2-E filing discloses that the Company received
      $1,820,000 of proceeds from the offering, net of $30,000 of expenses, through
      the sale of 171,000,000 shares of the Company’s $0.001 par value common stock.




-12-
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On
      July
      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 registered Investment
      Company under the Act, the Company is authorized to issue up to $5,000,000
      in
“free-trading” stock at prices ranging from $0.0015 to $0.10 per
      share.




As
      a
      result of the July 2005 1-E filing discussed above, through March 31, 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 (See Note 7 - Commitments and Contingencies).





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.




**3.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation and Concentration**





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





The
      unaudited financial statements have been prepared in accordance with accounting
      principles generally accepted in the United States of America and the rules
      and
      regulations of the United States of America Securities and Exchange Commission
      for interim 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 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.




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**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.





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**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 March 31,
      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.





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**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
      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 no longer may issue based
      compensation under the 1940 Act.





**Reclassifications**





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




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





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





**Cost**
            
            **Fair
                Value**Investments
                in Equity Securities
            
            $
            4,329,809
            
            $
            19,182,670Less:
                Unearned Income
            
            
            -
            
            
            -Total
            
            $
            4,329,809
            
            $
            19,182,670




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






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







At
      June
      15, 2004, the full consideration was paid by the Company and in accordance
      with
      the rules of a 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
      March 31, 2006, the total investment and advance in affiliate for PRI reflected
      in the accompanying financial statements is $4,646,585, comprised of $974,565
      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. The
      $974,565 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 and due to the inherent
      uncertainty of these valuations, the estimates may differ significantly from
      the
      values that would have been used had a ready market for the investments existed
      and that difference may be material.


-17-
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As
      of
      March 31, 2006, the Company had made $3,109,688 of net advances on behalf of
      its
      majority-owned affiliate, Bend Arch Petroleum, Inc., (“Bend Arch”). As of March
      31, 2006, the total investment and advance in affiliate for Bend Arch reflected
      in the accompanying financial statements is $14,290,529, comprised of $3,109,688
      of historical cost and an unrealized gain on investments of $11,180,841. 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 and due to the inherent uncertainty of these valuations,
      the estimates may differ significantly from the values that would have been
      used
      had a ready market for the investments existed and that difference may be
      material.





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





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




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




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




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





On
      November 9, 2004, the Company signed a definitive agreement to purchase all
      of
      the outstanding shares of Oil American Group Inc. (“OAG”) in a stock for stock
      trade. The purchase price was 4,000,000 shares of restricted 144 Company stock
      and was valued at $72,000, or $0.018 per share, the fair market value on
      November 9, 2004. Additionally, the Company has made $115,000 of advances on
      behalf of its OAG. Including the advances, the total of $187,000 has been
      recorded as investment in and advances to affiliates in the accompanying balance
      sheet. OAG is now a majority-owned investee of the Company, specializing in
      oil
      and gas acquisitions, drilling prospective properties and managing oil and
      gas
      partnerships.


-18-
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          of Contents*





As
      of
      March 31, 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.




**5.
      DEBT**





*Our
      debt at March 31, 2006 consisted of the following:*


****  ****


***Lease
              Payable***
            
            **2006**
            
            **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 March 31,
      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 March 31, 2006, the Company has recorded a total
      of
      $8,400 in accrued interest for this lease payable in the accompanying Balance
      Sheet.


In
      November 2003, a settlement was reached with the lessor to forgive the
      outstanding principal and accrued interest on the lease payable once the
      transfer of 100,000 shares of the Company’s common stock personally held by the
      Company’s president and director occurs. The president of the Company
      transferred these shares on September 15, 2003. As of March 31, 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***
            
            
            **2006**
            
            
            **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





-19-
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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.





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***Convertible
                Debentures:***
            
            **2006**
            
            **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 March 31, 2006.
      The
      Company anticipates that an agreement will be structured whereby additional
      advances made by the Company will be utilized to eliminate the remaining
      balance. However, no agreement has been reached as of the date of these
      Financial Statements and the $57,967 balance is in default as the due date
      was
      December 1, 2005.




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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 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).




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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.




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As
      of
      March 31, 2006, the Company has recorded $123,815 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 March 31, 2006.




**6.
      STOCKHOLDERS’ EQUITY**




**Capital
      Structure**





We
      are
      authorized to issue up to 500,000,000 shares of our common stock, $0.0001 par
      value per share, of which 456,870,082 were issued and outstanding as of March
      31, 2006. However, in December 2003, 8,500,000 of previously issued shares
      were
      cancelled as the Company had exceeded the 100,000,000 share limit authorized
      at
      that time. These 8,500,000 shares were reissued in January 2004 with an approved
      vote to increase the authorized shares (See below). Additionally, as of March
      31, 2006, 4,075,000 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 March 31, 2006, 3,500,000 preferred shares
      were issued and outstanding.





***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. In February 2004, the Company announced the addition of
      two
      new outside directors to the Board of Directors as previously
      authorized.




On
      January 5, 2004, the Board of Directors approved the issuance of 3,500,000
      of
      the 4,000,000 designated Series A preferred stock in exchange for the conversion
      of $464,005 of indebtedness owed to the President of the Company. The $464,005
      indebtedness comprised the entire $52,510 of loan payable - related party and
      $411,495 of Note Payable - related party balances as recorded at December 31,
      2003 (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.




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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:





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.





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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.





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





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





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





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


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





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




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





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.





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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.




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.




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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 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.





As
      a
      result of the July 2005 1-E filing discussed previously, through March 31,
      2006,
      the Company received $2,434,553 of proceeds from the offering, net of $193,967
      of expenses, through the sale of 131,930,758 shares of the Company’s $0.001 par
      value common stock (See Note 7 - Commitments and Contingencies).





***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.


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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.





As
      of
      March 31, 2006, the Company has 4,075,000 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.





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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).





**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 March 31, 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 March 31, 2006 the transaction has not been
      finalized as the lessor has not agreed to the settlement. However, the 100,000
      shares were transferred to the lessor in September 2003. The Company expects
      to
      fully resolve this matter in the future at which time the value of the shares
      exchanged and any related gain or loss will be determined and recognized.





The
      Company has included $64,299 of unpaid Federal payroll taxes and employee
      withholdings and related penalties and interest in its accrued expenses as
      of
      March 31, 2006. Such amounts are subject to potential federal tax liens.




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


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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
      January 2004, we filed an election to become subject to Sections 55 through
      65
      of the Investment Company Act of 1940, such that we could commence conducting
      our business activities as a BDC. Additionally, the Board of Directors
      determined that it was necessary to raise additional capital to carry out the
      company’s business plan and the Company filed a Form 1-E pursuant to the
      Securities Act of 1933 notifying the SEC of the Company’s intent to sell up to
      $4,000,000 of the Company’s common stock at prices between $0.01 and $0.10 per
      share, or 40,000,000 and 400,000,000 shares, respectively. On January 29, 2004,
      the 1-E filing notification with the SEC became effective. The Company is
      presently registered as an Investment Company under the Act and as such, is
      authorized to issue up to $4,000,000 in “free-trading” stock at prices ranging
      from $0.01 to $0.10 per share.





On
      February 22, 2005, the Company’s Board of Directors determined that it was in
      the best interest of the Company to discontinue the offering discussed above
      and
      to investigate other financing alternatives. Accordingly, the Company filed
      a
      Form 2-E pursuant to the Securities Act of 1933 notifying the SEC of the
      Company’s termination of the offering. However, the filing was not acknowledged
      by the SEC and the Company re-filed the Form with the SEC, with an effective
      date of June 30, 2005. The Form 2-E filing discloses that the Company received
      $1,820,000 of proceeds from the offering, net of $30,000 of expenses, through
      the sale of 171,000,000 shares of the Company’s $0.001 par value common stock.





On
      July
      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. The Company is presently
      registered as an Investment Company under the 1940 Act and as such, is
      authorized to issue up to $5,000,000 in “free-trading” stock at prices ranging
      from $0.0015 to $0.10 per share.





As
      a
      result of the July 2005 1-E filing discussed above, through March 31, 2006,
      the
      Company received $2,434,553 of proceeds from the offering, net of $193,967
      of
      expenses, through the sale of 131,930,758 shares of the Company’s $0.001 par
      value common stock.





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 March 31, 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
      March 31, 2006 and is in discussions with both the third party and the transfer
      agent to resolve the issue. As of the date of these financial statements, no
      resolution of the matter has been completed.




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




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




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




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**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 March 31, 2006, the
      transaction has not been finalized as the lessor has not agreed to the
      settlement. However, the 100,000 shares were transferred to the lessor in
      September 2003. The Company expects to fully resolve this matter in the future
      at which time the value of the shares exchanged and any related gain or loss
      will be determined and recognized.





In
      December 2003, a cash settlement was 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 sole officer/director free of charge .




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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 three months ended
      March
      31, 2006, the Company accrued $30,000 for compensation, repaid $57,000 and
      the
      president and previous sole director advanced $10,000 of funds on behalf of
      the
      Company. As a result, the accrued balance is $85,725 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 three months ended March 31, 2006, the Company advanced directly or
      indirectly, $424,500 of funds to its wholly-owned investees. In total, the
      Company has advanced $3,380,809 of funds to its wholly-owned investees and
      this
      amount is included in the asset account entitled “Investment in and advanced to
      affiliates-majority-owned.


**9.
                FINANCIAL INFORMATION**
              Following
                is a schedule of financial highlights for the three months ended
                March 31,
                2006:
            
            **Three
                Months****Ended****March
                31, 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
            
            $
            0.05Total
                Return (2)
            
            
            -88
            %Common
                Stock Outstanding and Issuable at End of Period
            
            
            460,945,082Ratio/Supplemental
                Data:Net
                Assets at End of Period
            
            $
            18,747,334Ratio
                of Operating Expenses to Net Assets
            
            
            0
            %Ratio
                of Net Operating Loss to Net Assets
            
            
            0
            %




(1)
                Based on Total Shares Outstanding and Issuable(2)
                Total return equals the increase of the ending market value over
                the
                December 31, 2005 priceof
                $0.05 per share, divided by the beginning
                price.


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




**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




Safe
      Harbor - The following is a discussion of our financial condition, results
      of
      operations, liquidity and capital resources. This discussion should be read
      in
      conjunction with our audited financial statements for the year ended December
      31, 2005 and the notes thereto included elsewhere in this Form 10-Q.




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





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





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





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





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**GENERAL**




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




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





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





On
      January 12, 2004, the Company filed a Form N-54 with the Securities and Exchange
      Commission (“SEC”) to be regulated as a Business Development Company (“BDC”)
      pursuant to the provisions of section 54(a) of the Investment Company Act of
      1940 (the (“Act”)), to be subject to the provisions of section 55 through 65 of
      the Act. The Company has determined that its operating model best approximates
      that of an investment company and intends to make investments into developing
      businesses in the oil and gas and other industries. Additionally, the Board
      of
      Directors determined that it was necessary to raise additional capital to carry
      out the company’s business plan and the Company filed a Form 1-E pursuant to the
      Securities Act of 1933 notifying the SEC of the Company’s intent to sell up to
      $4,000,000 of the Company’s common stock at prices between $0.01 and $0.10 per
      share, or 40,000,000 and 400,000,000 shares, respectively. On January 29, 2004,
      the 1-E filing notification with the SEC became effective. The Company is
      presently registered as an Investment Company under the Act.




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




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




**OVERVIEW
      OF COMPANY.**





Since
      its
      inception, the Company has suffered recurring losses from operations and has
      been dependent on existing stockholders and new investors to provide the cash
      resources to sustain its operations. As reflected in the accompanying financial
      statements, the Company has a net loss of $56,800 and net cash used in
      operations of $74,484 for the three months ended March 31, 2006. Additionally,
      the Company has a working capital deficiency of $460,420 as of March 31, 2006
      and is also in default on certain notes to banks and is in the development
      stage
      with no revenues as a BDC. The ability of the Company to continue as a going
      concern is dependent on the Company’s ability to further implement its business
      plan, raise capital, and generate revenues. The financial statements do not
      include any adjustments that might be necessary if the Company is unable to
      continue as a going concern.


-37-
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          of Contents*


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


-
            The
                Company’s ability to continue to obtain sources of outside financing to
                support near term operations and to allow the Company to continue
                to make
                investments -
              The
                  Company’s ability to increase profitability and sustain a cash flow level
                  that will ensure support for continuing
                  operations.





In
      accordance with BDC regulations, our majority-owned portfolio companies are
      not
      consolidated and accordingly, their financial information is not included in
      our
      accompanying audited Financial Statements. However, a significant portion of
      the
      proceeds received by the Company from the issuance of convertible debentures
      and
      the sale of common stock has been utilized as advances for our investees. The
      following represents unaudited supplemental information for the three months ended March 31, 2006 for our
      majority-owned portfolio companies.





**Description**
            ****
            **Production**
              **Resources,
                Inc.**
            ****
            **Bend
                Arch Petroleum, Inc.**
            ****
            **Oil
                America Group**
            ****
            **AMEP
                Strategic Investments**Revenue
            
            $
            67,172
            
            $
            391,328
            
            $
            -
            
            $
            -Expenses
            
            
            85,972
            
            
            740,737
            
            
            12,440
            
            
            -Operating
                Loss
            
            
            (18,800
            )
            
            (349,409
            )
            
            (12,440
            )
            
            -Other
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                Loss
            
            $
            (18,800
            )
            $
            (349,409
            )
            $
            (12,440
            )
            $
            -




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 investees.




**RECENT
      DEVELOPMENTS**




On
      July
      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 registered Investment
      Company under the Act, the Company is authorized to issue up to $5,000,000
      in
“free-trading” stock at prices ranging from $0.0015 to $0.10 per
      share.





As
      a
      result of the July 2005 1-E filing discussed above, through December 31, 2005,
      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.





-38-
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          of Contents*


In
      March
      2006, the Board of Directors met and discussed the Company’s status as a BDC.
      When the Company elected to become a BDC, it was its intention to provide debt
      and equity capital to companies that it believed presented opportunities for
      superior performance through liquidity events, recapitalizations, internal
      growth, product or geographic expansion, the completion of complementary add-on
      acquisitions, or industry consolidations. The Company generally expected to
      invest in emerging and development-stage companies which otherwise lacked the
      necessary capital and depth of management to expand their businesses.




The
      Board
      of Directors is currently reviewing the Company’s compliance with the 1940 Act,
      in order to determine if it is in compliance with several important provisions
      of the 1940 Act, including the capital structure requirements. There is a risk
      that the SEC could take enforcement action against the Company if the SEC
      determines that the Company has not been operating in compliance with the 1940
      Act.





The
      Company’s significant compliance costs as a BDC, in terms of both time and
      dollars, have operated as a drag on the Company’s resources and in many respects
      have diverted the effective utilization of capital previously raised by the
      Company to effectuate its overall investment business plan. Further, since
      the
      Company commenced operating as a BDC, the business, regulatory and financial
      climates have changed, making operations as a BDC more challenging and
      difficult.





At
      the
      time of this report, the Board of Directors has not completed its review of
      the
      Company’s compliance with the 1940 Act.




**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 three months ended march 31, 2006. Although we believe that our estimates
      and assumptions are reasonable, they are based upon information presently
      available. Actual results may differ significantly from these
      estimates.




**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.




-39-
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          of Contents*


**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 of the Company’s president and 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 three months ended
      March 31, 2006.





**VALUATION
      OF INVESTMENTS**




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


-40-
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          of Contents*


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 at December 31, 2005. 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.




-41-
 *Table
          of Contents*


**RESULTS
      OF OPERATIONS**


Results
      of Operations




***Three
      months ended March 31, 2006 compared to March 31,
      2005.***






**Three
                Months Ended****March
                31,****2006**
            
            **2005****Operating
                Expenses**Compensation
            
            
            30,000
            
            
            30,000Consulting
            
            
            -
            
            
            28,000Depreciation
            
            
            1,946
            
            
            1,946General
                and administrative
            
            
            16,837
            
            
            4,479Professional
            
            
            24,466
            
            
            5,147**Total
                Operating Expenses**
            
            
            **73,249**
            
            
            **69,572****Loss
                from Operations**
            
            
            **(73,249**
            **)**
            
            **(69,572**
            **)****Other
                Income (Expense)**Other
                income
            
            
            20,000
            
            
            -Interest
                expense
            
            
            (2,050
            )
            
            (383,590
            )Payroll
                tax expense and penalties
            
            
            (1,501
            )
            
            (1,501
            )**Total
                Other Income (Expense)**
            
            
            16,449
            
            
            (385,091
            )**Net
                Loss**
            
            **$**
            **(56,800**
            **)**
            **$**
            **(454,663**
            **)**





-42-
 *Table
          of Contents*


*Revenue* *:*





There
      was
      no revenue for the three months ended March 31, 2006 or March 31, 2005,
      respectively.




*Operating
      Expenses* *:*





Operating
      expenses increased $3,677, or 5%, to $73,249 for 2006 from $69,572 for 2005.
      The
      increase was primarily the result of a $19,320 increase in professional and
      a
      $12,358 increase in general and administrative, offset by a $28,000 decrease
      in
      consulting. 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 decrease in consulting was primarily that in 2005, stock
      was
      issued for services compared to none in 2006.





*Other
      Income (Expense)* *:*





Other
      income (expense) increased $401,540 of income, or 104% to $16,449 of income
      for
      2006 from $385,091 of expense for 2005. The increase was primarily from a
      $381,541 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 $198,775 at March 31, 2006 as compared to $471,339 at
      December 31, 2005, and working capital deficit was $460,420 at March 31, 2006
      as
      compared to $207,486 at December 31, 2005. The decrease in cash was primarily
      from $425,500 of net advances to the Company’s majority-owned investees, offset
      by $226,420 of cash proceeds from financing activities.





*Operating
      Activities*





Cash
      used
      in operating activities was $74,484 for the three months ended March 31, 2006
      compared to cash used of $75,447 for the three months ended March 31, 2005,
      or a
      change of less than 1%.





*Investing
      Activities*





Cash
      used
      in investing activities was $424,500 for the three months ended March 31, 2006
      compared to $129,806 for the three months ended March 31, 2005. The increase
      in
      cash used resulted entirely from an increase in advances made by the Company
      for
      its majority-owned investees.


-43-
 *Table
          of Contents*





*Financing
      Activities*





Cash
      provided by financing activities was $226,420 for the three months ended March
      31, 2006 compared to cash used of $4,500 for the three months ended March 31,
      2005. The increase in cash provided resulted primarily from $193,920 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 March 31, 2006:




**DEBT**





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




***Lease
              Payable***
            
            **2006**
            
            **2005**$21,238
                computer equipment lease, bearing interest at 10% per
                annum
            
            $
            16,131
            
            $
            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 March 31,
      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 December 31, 2005, the Company has recorded a total
      of $8,400 in accrued interest for this lease payable in the accompanying Balance
      Sheet.





In
      November 2003, a settlement was reached with the lessor to forgive the
      outstanding principal and accrued interest on the lease payable once the
      transfer of 100,000 shares of the Company’s common stock personally held by the
      Company’s president and director occurs. The president of the Company
      transferred these shares on September 15, 2003. As of March 31, 2006, 2005,
      the
      transaction has not been finalized as the lessor has not agreed to the
      settlement. The Company expects to fully resolve this matter in the future
      at
      which time the value of the shares exchanged and any related gain or loss will
      be determined and recognized.





-44-
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***Notes
                payable - Banks***
            
            
            **2006**
            
            
            **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.





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.




-45-
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In
      July
      2003, the Company received $35,000 from an unrelated party. As of December
      31,
      2003, the Company had repaid the principal portion of this loan for $35,000
      and
      $2,000 in accrued interest.




***Convertible
                Debentures:***
            
            **2006**
            
            **2005**$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. 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 March 31, 2006. The Company anticipates that an agreement will be
      structured whereby additional advances made by the Company will be utilized
      to
      eliminate the remaining balance. However, no agreement has been reached as
      of
      the date of these Financial Statements and the $57,967 balance is in default
      as
      the due date was December 1, 2005.




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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.




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. 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).




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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.





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As
      of
      March 31, 2006, the Company has recorded $123,815 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 March 31, 2006.





***Equity
      Financing***





For
      the
      three months ended March 31, 2006 and 2005 the Company received $193,920 and
      zero 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
      investees. We cannot assure you that we will receive distributions from our
      majority-owned investees, if any, and that borrowings under any interim
      financing we are able to secure will be sufficient to meet our projected cash
      flow needs.





Our
      ability to obtain additional financing depends on many factors beyond our
      control, including the state of the capital markets, the market price of our
      common stock, the prospects for our business as a BDC and the success of our
      majority-owned investees. Additionally, any necessary additional financing
      may
      not be available to us or may be available only on terms that would result
      in
      further dilution to the current owners of our common stock. Failure to obtain
      commitments for 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.





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**Contractual
      Obligations and Commercial Commitments**





The
      following table highlights, as of March 31, 2006, our contractual obligations
      and commitments by type and period:


**Payments
                Due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **After
                5 years**Debt:Lease
                Payable.
            
            $
            16,131
            
            $
            16,131
            
            $
            -
            
            $
            -
            
            $
            -Convertible
                Debentures
            
            
            57,967
            
            
            57,967
            
            
            -
            
            
            -
            
            
            -Accrued
                Interest Payable
            
            
            132,215
            
            
            132,215
            
            
            -
            
            
            -
            
            
            -Total
                Debt
            
            $
            206,313
            
            $
            206,313
            
            $
            -
            
            $
            -
            
            $
            -




**200** **6
      OUTLOOK**




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




**Item
      3. Evaluation of DisclosureControls and Procedures.**





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





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**PART
      II**




**Item
      1. Legal Proceedings**




The
      Company is subject to various lawsuits and unasserted claims from vendors for
      non-payment of accounts payable plus related legal fees. Excluding legal fees,
      which cannot be estimated, the Company has included all amounts in its accounts
      payable as of March 31, 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. As of March 31, 2006 the transaction
      has
      not been finalized as the lessor has not agreed to the settlement. However,
      the
      100,000 shares were transferred to the lessor in September 2003. The Company
      expects to fully resolve this matter in the future at which time the value
      of
      the shares exchanged and any related gain or loss will be determined and
      recognized.





The
      Company has included $64,299 of unpaid Federal payroll taxes and employee
      withholdings and related penalties and interest in its accrued expenses as
      of
      March 31, 2006. Such amounts are subject to potential federal tax liens.




**Item
      2. Changes inSecurities**




***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 March 31, 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 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.




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***Common
      Stock Issuable:***





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





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. The Company is presently
      registered as an Investment Company under the 1940 Act and as such, is
      authorized to issue up to $5,000,000 in “free-trading” stock at prices ranging
      from $0.0015 to $0.10 per share.





As
      a
      result of the June 2005 1-E filing discussed above, through March 31, 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.





At
      March
      31, 2006, the Company has 4,075,000 shares issuable as discussed
      above.





**Item
      3. Defaults Upon SeniorSecurities**




None





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




None





**Item
      5. Other Information**




In
      March
      2006, the Board of Directors met and discussed the Company’s status as a BDC.
      When the Company elected to become a BDC, it was its intention to provide debt
      and equity capital to companies that it believed presented opportunities for
      superior performance through liquidity events, recapitalizations, internal
      growth, product or geographic expansion, the completion of complementary add-on
      acquisitions, or industry consolidations. The Company generally expected to
      invest in emerging and development-stage companies which otherwise lacked the
      necessary capital and depth of management to expand their businesses.




The
      Board
      of Directors is currently reviewing the Company’s compliance with the 1940 Act,
      in order to determine if it is in compliance with several important provisions
      of the 1940 Act, including the capital structure requirements. There is a risk
      that the SEC could take enforcement action against the Company if the SEC
      determines that the Company has not been operating in compliance with the 1940
      Act.





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The
      Company’s significant compliance costs as a BDC, in terms of both time and
      dollars, have operated as a drag on the Company’s resources and in many respects
      have diverted the effective utilization of capital previously raised by the
      Company to effectuate its overall investment business plan. Further, since
      the
      Company commenced operating as a BDC, the business, regulatory and financial
      climates have changed, making operations as a BDC more challenging and
      difficult.





At
      the
      time of this report, the Board of Directors has not completed its review of
      the
      Company’s compliance with the 1940 Act.




**Item
      6. Exhibits**




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





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








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**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed by the following persons on behalf of American Energy
      Production, Inc., in the capacities and on the dates indicated.





Date: March
              18, 2006
            By:
            /s/ Charles
              BittersCharles
                BittersPrincipal
                Executive Officer, Principal Financial Officer,Director






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