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, 2005

Commission File
#333-52812

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

DELAWARE(State
or other jurisdiction of incorporation or organization)

74-2945581(IRS Employer
Identification Number)

6073 Hwy 281 South,
Mineral Wells, TX 76067(Address of principal
executive offices)(Zip Code)

(210) 410-8158(Registrants
telephone no., including area code)

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

The number of shares outstanding of
the Companys common stock outstanding on May 15, 2005: 298,030,234

# AMERICAN ENERGY
PRODUCTION, INC.

# FORM 10-Q

Table of Contents

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PART I - FINANCIAL
INFORMATION

Item 1.  Financial
Statements

Filed herewith are our
following unaudited financial statements:

Balance Sheet (Unaudited)
at March 31, 2005

Statements of Operations
(Unaudited) for the three months ended March 31, 2005 and 2004

Statements of Cash Flows
(Unaudited) for the three months ended March 31, 2005 and 2004

Schedule of Investments
(Unaudited) at March 31, 2005

Notes to Financial
Statements (Unaudited)

1

American Energy
Production, Inc.                              (A Development Stage Company)
                                     Balance Sheet
                                     March 31, 2005
                                      (Unaudited)

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

Commitments and
Contingencies (Note 7)

See accompanying notes
to unaudited financial statements.

2

# American Energy
Production, Inc.(A evelopment Stage Company)Balance Sheet (Continued)March 31,
2005(Unaudited)

|                                                               | 
|-------------------------------------------------------------- | 
|Stockholders' Equity                                           | 
|Convertible preferred stock, Series B, $0.0001 par value,      | 
|5,000,000 shares authorized, 4,000,000 issued and outstanding  | 
|Common stock, $0.0001 par value, 500,000,000 shares authorized | 
|298,030,234 shares issued and outstanding                      | 
|Common stock issuable, $0.0001 par value, 4,075,000 shares     | 
|Additional paid in capital                                     | 
|Accumulated deficit                                            | 
|Deficit accumulated during development stage                   | 
|                                                               | 
|                                                               | 
|Less:  Subscription Receivable                                 | 
|                                                               | 
|Total Stockholders' Equity                                     | 
|                                                               | 
|                                                               | 
|Total Liabilities and Stockholders' Equity                     | 
|                                                               | 
|                                                               | 
|                                                               | 

See accompanying notes
to unaudited financial statements.

3

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

|                                     | Three Ended
Months 31,
March | Period from
February 20, 2003
(Inception of
Development Stage)
to March 31, |  
|------------------------------------ | ---------------------------- | --------------------------------------------------------------------------- | -
|
|Operating Income                     |                              |                                                                             |  
|Oil sales, net                       |                              |                                                                             | $
|                                     |                              |                                                                             |  
|Total Operating Income               |                              |                                                                             |  
|Operating Expenses                   |                              |                                                                            
|Compensation                         |                              |                                                                             |  
|Consulting                           |                              |                                                                             |  
|Depletion                            |                              |                                                                             |  
|Depreciation                         |                              |                                                                             |  
|Equipment rental                     |                              |                                                                             |  
|General and administrative           |                              |                                                                             |  
|Production                           |                              |                                                                             |  
|Professional                         |                              |                                                                             |  
|Website                              |                              |                                                                             |  
|                                     |                              |                                                                             |  
|Total Operating Expenses             |                              |                                                                             |  
|                                     |                              |                                                                             |  
|Loss from Operations                 |                              |                                                                             |  
|Other Expense                        |                              |                                                                            
|Gain on settlement of debt           |                              |                                                                             |  
|Other income                         |                              |                                                                             |  
|Interest expense                     |                              |                                                                             |  
|Payroll tax expense and penalties    |                              |                                                                            
|                                     |                              |                                                                             |  
|Loss on settlement                   |                              |                                                                             |  
|                                     |                              |                                                                             |  
|Total Other Expense                  |                              |                                                                             |  
|                                     |                              |                                                                             |  
|Net Loss                             |                              |                                                                             | $
|                                     |                              |                                                                             |  
|Net Loss Per Share-Basic and Diluted |                              |                                                                             | $
|                                     |                              |                                                                             |  
|Weighted average Shares              |                              |                                                                             |  
|                                     |                              |                                                                             |  

See accompanying notes
to unaudited financial statements

4

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

|                                                  | Three Months Ended
March 31, | Period from
February 20, 2003
(Inception of
Development Stage) |  
|------------------------------------------------- | ---------------------------- | -------------------------------------------------------------- | -
|
|Cash Flows From Operating Activities:             |                              |                                                                |  
|Net loss                                          |                              |                                                                | $
|Adjustments to reconcile net loss to net cash     |                              |                                                               
|used in operations:                               |                              |                                                               
|Stock issued for debt and services                |                              |                                                                |  
|Stock issued for equipment                        |                              |                                                                |  
|                                                  |                              |                                                                |  
|Stock issued for chemical                         |                              |                                                                |  
|                                                  |                              |                                                                |  
|Stock issued in settlement                        |                              |                                                                |  
|                                                  |                              |                                                                |  
|Gain on settlement of debt                        |                              |                                                                |  
|Loss on settlement                                |                              |                                                               
|                                                  |                              |                                                                |  
|Interest expense related to convertible           |                              |                                                               
|debentures beneficial conversion feature          |                              |                                                                |  
|Compensation expense in excess of debt to officer |                              |                                                                |  
|                                                  |                              |                                                                |  
|Amortization of deferred services                 |                              |                                                                |  
|                                                  |                              |                                                                |  
|Depreciation                                      |                              |                                                                |  
|Depletion                                         |                              |                                                                |  
|                                                  |                              |                                                                |  
|Changes in operating assets and liabilities:      |                              |                                                               
|Decrease in accounts receivable - related party   |                              |                                                                |  
|Decrease in cash overdraft                        |                              |                                                                |  
|                                                  |                              |                                                                |  
|Increase in accounts payable                      |                              |                                                                |  
|                                                  |                              |                                                                |  
|Decrease in due to related party                  |                              |                                                                |  
|                                                  |                              |                                                                |  
|Increase in accrued interest payable              |                              |                                                                |  
|                                                  |                              |                                                                |  
|Increase in accrued payroll taxes payable         |                              |                                                                |  
|                                                  |                              |                                                                |  
|                                                  |                              |                                                                |  
|                                                  |                              |                                                               
|Net Cash Used In Operating Activities             |                              |                                                                |  
|Cash Flows From Investing Activities:             |                              |                                                               
|Prepaid acquisition cost disbursement             |                              |                                                                |  
|Purchase of equipment                             |                              |                                                                |  
|                                                  |                              |                                                                |  
|Advances to affiliates/investees                  |                              |                                                                |  
|                                                  |                              |                                                                |  
|Purchase of oil lease                             |                              |                                                                |  
|                                                  |                              |                                                                |  
|Net Cash Used In Investing Activities             |                              |                                                                | $
|                                                  |                              |                                                                |  

See accompanying notes
to unaudited financial statements

5

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

|                                                      | Three Months Ended
March 31, | Period from
February 20, 2003
(Inception of
Development Stage) |  
|----------------------------------------------------- | ---------------------------- | -------------------------------------------------------------- | -
|
|Cash Flows From Financing Activities:                 |                              |                                                                |  
|Proceeds from cash overdraft                          |                              |                                                                |  
|Proceeds for note payable - officer                   |                              |                                                                |  
|                                                      |                              |                                                                |  
|Repayment of officer loan                             |                              |                                                                |  
|                                                      |                              |                                                                |  
|Proceeds from loan  - other                           |                              |                                                                |  
|Repayment of loan proceeds - other                    |                              |                                                                |  
|Proceeds from issuance of convertible debentures      |                              |                                                                |  
|                                                      |                              |                                                                |  
|Proceeds from issuance of                             |                              |                                                               
|common stock, net of offering costs of $134,500       |                              |                                                                |  
|Repayment of lease payable                            |                              |                                                                |  
|                                                      |                              |                                                                |  
|Net Cash Provided By Financing Activities             |                              |                                                                |  
|                                                      |                              |                                                                |  
|                                                      |                              |                                                                |  
|Net (Decrease) Increase in Cash                       |                              |                                                                |  
|                                                      |                              |                                                                |  
|Cash at Beginning of Period                           |                              |                                                               
|                                                      |                              |                                                                |  
|                                                      |                              |                                                                |  
|Cash at End of Period                                 |                              |                                                                | $
|                                                      |                              |                                                                |  
|                                                      |                              |                                                                |  
|Cash interest paid                                    |                              |                                                                | $
|Supplemental disclosure of  non-cash transactions     |                              |                                                               
|Asset acquisition paid with convertible note payable  |                              |                                                                | $
|Conversion of note payable to convertible debenture   |                              |                                                                |  
|Conversion of indebtedness to preferred stock         |                              |                                                                |  
|Conversion of convertible debentures to common stock  |                              |                                                                |  
|Asset acquisition paid with conv. debenture and stock |                              |                                                                |  
|Asset acquisition paid with stock                     |                              |                                                                |  
|Common stock issued for subscription receivable       |                              |                                                                |  
|Stock Subscription receivable (23,964,530 shares)     |                              |                                                                |  
|Transfer of assets and liabilities to affiliate:      |                              |                                                               
|Oil and gas properties and equipment, net             |                              |                                                                |  
|                                                      |                              |                                                                |  
|Convertible debenture                                 |                              |                                                                |  
|                                                      |                              |                                                                |  
|Accrued interest payable                              |                              |                                                                |  
|                                                      |                              |                                                                |  

See accompanying notes
to unaudited financial statements

6

American
Energy Production, Inc.(A  Development Stage Company)Schedule of
InvestmentsMarch 1, 2005Unaudited)

|Portfolio
Company                          | Industry | Title of
Securities Held
By The Company | Percentage of
Class Held on
a Fully Diluted
Basis (2) | At March 31, 2005
   Cost             Fair Value
|------------------------------------------ | -------- | --------------------------------------- | ----------------------------------------------------- | ------------------------------------------------
|Control Investments - Majority Owned (1)   |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|Production Resources, Inc.                 |          |                                         | Oil and Gas Production                                |                                                 
|                                           |          |                                         |                                                       |                                                 
|Oil America Group, Inc.                    |          |                                         | Oil and Gas Production                                |                                                 
|                                           |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|Bend Arch Petroleum, Inc.                  |          |                                         | Oil and Gas Production                                |                                                 
|                                           |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|AMEP Strategic Investments, Inc.           |          |                                         | Investment                                            |                                                 
|                                           |          |                                         |                                                       |                                                 
|Total Control Investments - Majority Owned |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|Total Investments                          |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|Unearned Income                            |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|Total Investments, net of Unearned Income  |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 
|                                           |          |                                         |                                                       |                                                 

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

See accompanying notes
to unaudited financial statements

7

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

# 1. HISTORY AND NATURE OF
BUSINESS

American Energy Production, Inc.
(American Energy, the Company, we, us,
our) is a publicly traded business development company (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. 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 has filed a Form 2-E pursuant to the Securities Act
of 1933 notifying the SEC of the Companys termination of the offering. The Form 2-E
filing discloses that the Company received $1,820,000 of proceeds from the offering, net
of $30,000 of expenses, through the sale of 171,000,000 shares of the Companys
$0.001 par value common stock.

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 Act.
BDCs report to stockholders like traditional operating companies and file regular
quarterly and annual reports with the Securities and Exchange Commission. BDCs are
required to make available significant managerial assistance to their portfolio companies.

8

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

# 2. GOING CONCERN

As reflected in the accompanying
financial statements, the Company has a net loss of $454,663 and net cash used in
operations of $75,447 for the three months ended March 31, 2005 and a working capital
deficiency of $867,466 and a deficit accumulated during the development stage of
$7,215,052 at March 31, 2005. The Company is also in default on certain notes to banks and
is in the development stage with minimal revenues. The ability of the Company to continue
as a going concern is dependent on the Companys ability to further implement its
business plan, raise capital, and generate revenues. The financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a
going concern

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

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

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

On February 22, 2005, the
Companys Board of Directors determined that it was in the best interest of the
Company to discontinue the offering discussed above and to investigate other financing
alternatives. Accordingly, the Company filed a Form 2-E pursuant to the Securities Act of
1933 notifying the SEC of the Companys termination of the offering. The Form 2-E
filing discloses that the Company received $1,820,000 of proceeds from the offering, net
of $30,000 of expenses, through the sale of 171,000,000 shares of the Companys
$0.001 par value common stock.

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

9

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

# 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

# Basis of Presentation
and Concentration

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

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

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

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

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

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

# Accounting Estimates

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

# Cash and Cash Equivalents

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

# 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.

10

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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

For financial statement purposes,
investments are recorded at their fair value. Effective June 15, 2004, the Company
acquired a privately held oil company; effective April 1, 2004, the Company formed a new
controlled entity to transfer its assets and certain liabilities into for purposes of
holding this entity as an investment, effective November 2004, the Company acquired Oil
America Group and in January 2005, the Company formed a new controlled entity for purposes
of holding this entity as an investment (See Note 4  Investments in and Advances to
Affiliates). Currently, readily determinable fair values do not exist for these
transactions and the investment in the privately held company and the newly formed
controlled entity are recorded at cost, which approximates estimated fair value as of
March 31, 2005. The fair value of these investments is determined in good faith by the
Companys Board of Directors pursuant to a valuation policy and consistent valuation
process. Due to the inherent uncertainty of these valuations, the estimates may differ
significantly from the values that would have been used had a ready market for the
investments existed and the differences may be material. Our valuation methodology
includes the examination of among other things, the underlying portfolio company
performance, financial condition and market changing events that impact valuation.

Realized gains (losses) from the sale
of investments and unrealized gains (losses) from the valuation of investments are
reflected in operations during the period incurred. There were no realized or unrealized
gains or losses for the three months ended March 31, 2005.

# Beneficial Conversion
Feature in Convertible Debentures

In accordance with EITF Issue 98-5,
as amended by EITF 00-27, we must evaluate the potential effect of any beneficial
conversion terms related to convertible instruments such as convertible debt or
convertible preferred stock. The Company has issued convertible debentures. A beneficial
conversion may exist if the holder, upon conversion, may receive instruments that exceed
the value of the convertible instrument. Valuation of the benefit is determined based upon
various factors including the valuation of equity instruments, such as warrants, that may
have been issued with the convertible instruments, conversion terms, value of the
instruments to which the convertible instrument is convertible, etc. Accordingly, the
ultimate value of the beneficial feature is considered an estimate due to the partially
subjective nature of valuation techniques.

# 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, 2005.

# Revenue Recognition

Prior to electing BDC status and
transferring oil and gas assets to an investee, the Company previously sold crude oil
under short-term agreements at prevailing market rates. Revenue from oil sales is
recognized at the point of sale, that is, when oil is extracted from the tanks. Generally
this is the point where the customer has taken title and has assumed the risks and rewards
of ownership, the sales price is fixed or determinable and collectibility is reasonably
assured. Revenues from the current and future activities as a Business Development Company
which may include investment income such as interest income and dividends, and realized or
unrealized gains and losses on investments will be recognized in accordance with the
AICPAs Audit and Accounting Guide, Audits of Investment Companies.

11

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

# Income Taxes

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

# Net Loss per Common Share

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

# Accumulated Other
Comprehensive Income

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

# 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.

12

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

In December 2004, the FASB issued
SFAS No. 123 (Revised), entitled Share-Based Payment. This revised Statement
eliminates the alternative to use APB Opinion No. 25s intrinsic value method of
accounting that was provided in SFAS No. 123 as originally issued. Under Opinion 25,
issuing stock options to employees generally resulted in recognition of no compensation
cost. This Statement requires entities to recognize the cost of employee services received
in exchange for awards of equity instruments based on the grant-date fair value of those
awards. For public companies that file as a small business issuer, this Statement is
effective as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of SFAS 123 (Revised) will have an impact the
financial statements if the Company issues stock options to the employees in the future.

# Reclassifications

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

# 4. INVESTMENTS IN AND
ADVANCES TO AFFILIATES

As of March 31, 2005, investments
consisted of the following:

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

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

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

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

At March 31, 2005, the total
investment and advance in affiliate for PRI reflected in the accompanying financial
statements is $1,268,598. This amount is the historical cost for the Company and a readily
determinable fair value does not exist for the underlying common stock of PRI. The fair
value of this investment is determined in good faith by the Companys Board of
Directors and due to the inherent uncertainty of these valuations, the estimates may
differ significantly from the values that would have been used had a ready market for the
investments existed and that difference may be material.

13

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

As of March 31, 2005, the Company had
made $1,263,688 of net advances on behalf of its majority-owned affiliate, Bend Arch
Petroleum, Inc., (Bend Arch) and this amount has been recorded as investment
in and advances to affiliates in the accompanying balance sheet.

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

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

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

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

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

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

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

As of March 31, 2005, the Company had
made $77,306 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.

14

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

# 5. DEBT

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

Lease Payable

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

On April 16, 2001, the Company leased
computer equipment under a 36-month lease that was accounted for as a capital lease in the
amount of $21,238 and at December 31, 2004, the balance of principal was $18,153. The
amount is personally guaranteed by a former officer/director and a current
officer/director of the Company. The lease was secured by all leased equipment and
perfected by a financing statement; however, the Company liquidated the equipment and paid
the office space lessor the $4,000 proceeds. As of March 31, 2005, the Company has
recorded a total of $5,907 in accrued interest for this lease payable in the accompanying
Balance Sheet.

In November 2003, a settlement was
reached with the lessor to forgive the outstanding principal and accrued interest on the
lease payable once the transfer of 100,000 shares of the Companys common stock
personally held by the Companys president and director occurs. The president of the
Company transferred these shares on September 15, 2003. As of March 31, 2005, the
transaction has not been finalized as the lessor has not agreed to the settlement. The
Company expects to fully resolve this matter during 2005 at which time the value of the
shares exchanged and any related gain or loss will be determined and recognized 
(see Note 7  Commitments and Contingencies and Note 8  Related Party
Transactions).

Notes payable 
Banks

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

On March 12, 2001, we obtained a
revolving bank line of credit in the amount of $70,000, of which $17,463 is outstanding at
March 31, 2005. The interest rate was originally at 11.5% but has converted to the default
rate of 18% per annum as the line of credit was due March 11, 2002 and was in default.
This line of credit is secured by all equipment which had been repossessed as of December
31, 2001 and $23,075 was applied to the balance. As of March 31, 2005, the Company has
recorded a total of $11,203 in accrued interest for this line of credit in the
accompanying Balance Sheet. The line of credit is in default at March 31, 2005.

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

In July 2004, we obtained a bank
automobile loan in the amount of $19,396 (including accrued interest of 6.99% per annum).
Monthly principal and interest payments of $1,077 are due with final payment in February
2006. The loan is secured by the automobile and as of March 31, 2005, the balance
outstanding is $9,318.

15

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

Loans and Note Payable
Settlement with Related Party

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

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

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

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

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

Convertible Debentures:

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

16

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

In May 2004, the Company received
$250,000 in gross proceeds from the issuance of a convertible debenture. The terms of the
convertible debenture includes an interest rate of 8% per annum and convertible at any
time at the option of the holder or the Company into common shares of the Company at a
price equal to fifty percent (50%) of the closing bid price of the common stock on the
date written notice is received by the Company of the election to convert and is due
December 1, 2005. On May 17, 2004, the convertible debenture holder elected to convert
$30,000 of the balance into common shares of the Company and as a result of the
conversion, 3,000,000 shares of common stock were issued at $0.01 per share (50% of the
closing share price). On June 10, 2004, the convertible debenture holder elected to
convert $85,000 of the balance into common shares of the Company and as a result of the
conversion, 8,500,000 shares of common stock were issued at $0.01 per share (50% of the
closing share price). On July 19, 2004, the convertible debenture holder elected to
convert $65,000 of the balance into common shares of the Company and as a result of the
conversion, 6,500,000 shares of common stock were issued at $0.01 per share (50% of the
closing share price). The remaining $70,000 of the $250,000 convertible debenture remains
outstanding at March 31, 2005.

In accordance with EITF Issue 98-5,
as amended by EITF Issue 00-27, the Company has evaluated that the $250,000 convertible
debenture discussed above has a beneficial conversion feature as the exercise price for is
less than the fair value of the Companys common stock on the measurement date.
Accordingly, the Company has recognized this beneficial conversion feature by recording a
debt discount as a contra account to the convertible debenture for $250,000 and $250,000
to additional paid-in capital. As of March 31, 2005, $219,806 was amortized to interest
expense and a debt discount of $30,194 remains.

Effective June 15, 2004, the Company
issued a $400,000 convertible debenture to PRI in accordance with the acquisition
agreement between PRI and the Company (See Acquisition Footnote). The terms of the
convertible debenture includes an interest rate of 8% per annum and convertible at any
time at the option of the holder or the Company into common shares of the Company at a
price equal to fifty percent (50%) of the closing bid price of the common stock on the
date written notice is received by the Company of the election to convert and is due
December 1, 2005. The entire $400,000 is outstanding as of March 31, 2005.

In accordance with EITF Issue 98-5,
as amended by EITF Issue 00-027, the Company has evaluated that the convertible debenture
discussed above has a beneficial conversion feature as the exercise price is less than the
fair value of the Companys common stock on the measurement date. Accordingly, the
Company has recognized this beneficial conversion feature by recording a debt discount as
a contra account to the convertible debenture for $400,000 and $400,000 to additional
paid-in capital. The debt discount will be amortized over the debt term of 17.5 months or
through the due date of December 5, 2005. As of March 31, 2005, $216,479 was amortized to
interest expense and a debt discount of $183,521 remains as of March 31, 2005.

17

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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,
none of the $1,000,000 convertible debenture remains outstanding as of March 31, 2005.

In accordance with EITF Issue 98-5 as amended
by EITF Issue 00-27, the Company has evaluated that the $1,000,000 convertible debenture
discussed above has a beneficial conversion feature as the exercise price for is less than
the fair value of the Companys common stock on the measurement date. Accordingly,
the Company has recognized this beneficial conversion feature by recording a debt discount
as a contra account to the convertible debenture for $1,000,000 and $1,000,000 to
additional paid-in capital. All of $1,000,000 has been amortized to interest expense as of
March 31, 2005.

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

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

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

18

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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.

As of March 31, 2005, the Company has
recorded $133,721 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, 2005.

19

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

# 6. STOCKHOLDERS
EQUITY

# Capital Structure

We were previously authorized to
issue up to 100,000,000 shares of our common stock, $0.0001 par value per share, of which
298,030,234 were issued and outstanding as of March 31, 2005. However, in December 2003,
8,500,000 of previously issued shares were cancelled as the Company had exceeded the
100,000,000 authorized share limit. These 8,500,000 shares were reissued in January 2004
with an approved vote to increase the authorized shares (See below). As of March 31, 2005,
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, 2005, 4,000,000 preferred shares were issued and
outstanding.

Issuances of Preferred
Stock:

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

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

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

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

20

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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.

Issuances of Common Stock:

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

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

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

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

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

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

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

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

21

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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

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

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

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

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

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

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

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

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

22

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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

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

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

Under the terms of the same
Regulation S offering discussed previously, during the year ended December 31,
2003, an additional 21,964,530 shares were sold to subscribing investors at an average of
$0.055 per share (See Common Stock Issuable below). Gross proceeds were $1,218,387. The
unrelated party retained an offering cost equivalent to 88% of gross proceeds totaling
$1,076,272 which 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.

23

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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

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

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

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

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

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

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

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.

Common Stock Issuable:

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

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

24

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

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

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

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

In 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 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. The shares have not been issued and have been
recorded as Common Stock Issuable as of March 31, 2005.

Common Stock Cancelled:

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

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

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

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

25

# American Energy
Production, Inc.(A  Development Stage Company)Notes  to Financial StatementsMarch 31, 2005(Unaudited)

# 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, 2005.

In November 2003, a settlement was
reached with a lessor to forgive the outstanding principal and interest on the related
note payable resulting from leased computers once the transfer of 100,000 shares
personally held by the Companys president and sole director occurs (see Note 5
 Debt and Note 7  Related Party Transactions). As of March 31, 2005 the
transaction has not been finalized as the lessor has not agreed to the settlement.
However, the 100,000 shares were transferred to the lessor in September 2003. The Company
expects to fully resolve this matter during 2005 at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized.

The Company has included $58,294 of
unpaid Federal payroll taxes and employee withholdings and related penalties and interest
in its accrued expenses as of March 31, 2005. Such amounts are subject to potential
federal tax liens. We have elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code. In order to maintain our status as a regulated
investment company, we are required to (i) distribute at least 90% of our investment
company taxable income and 90% of any ordinary pre-RIC built in gains we recognize between
January 1, 2004 and December 31, 2013, less any taxes due on those gains to avoid
corporate level taxes on the amount distributed to stockholders (other than any built in
gain recognized between January 1, 2004 and December 31, 2013) and (ii) distribute
(actually or on a deemed basis) at least 98% of our income (both ordinary income and net
capital gains) to avoid an excise tax. We intend to make distributions on a quarterly
basis to our stockholders of all of our income, except for certain net capital gains and
adjustments for long-term incentive compensation expense. We intend to make deemed
distributions to our stockholders of any retained net capital gains.

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

26

# American Energy
Production, Inc.                                              (A Development Stage
Company)                                              Notes to Financial Statements
                                                     March 31, 2005
                                                      (Unaudited)

# 8. RELATED PARTY
TRANSACTIONS

On February 20, 2003, the Company acquired
certain oil and gas properties for $2,000,000 from a company controlled by the brother of
the Companys president and sole director in exchange for a market rate promissory
note. The promissory note was subsequently exchanged for a convertible debenture and
transferred to a majority-owned affiliate (See Note 6  Debt). The oil and gas
properties were also transferred to that same majority-owned affiliate (See Note 4 
Investments).

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

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

In November 2003, a settlement was
reached with a lessor to forgive the outstanding principal and interest on the related
note payable resulting from leased computers once the transfer of 100,000 shares
personally held by the Companys president and sole director occurs (See Note 5
 Debt and Note 7  Commitments and Contingencies). The Companys president
and sole director has personally guaranteed the obligation. As of March 31, 2005, the
transaction has not been finalized as the lessor has not agreed to the settlement.
However, the 100,000 shares were transferred to the lessor in September 2003. The Company
expects to fully resolve this matter during 2005 at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized.

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

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

We currently do not have a lease and
we are not paying rent on our space. It is being provided to the Company by our sole
officer/director free of charge.

Effective July 1, 2003, the Company
entered into a salary and equipment rental agreement with its president and sole director.
Under the terms of the agreement, the Company will pay a salary of $10,000 per month and
$3,500 in equipment rental per month for the use of the Companys presidents
personal pickup truck, car, pulling unit, winch truck, backhoe and water truck used in the
field operations. Additionally, the president and sole director has from time to time,
advanced expenses of the Company from his personal funds. At December 31, 2003, the
accrued balance owed to the president and sole director was $220,455. During the year
ended December 31, 2004, the Company accrued $162,000 of expense related to the salary and
rental agreement, composed of $120,000 for compensation and $42,000 for equipment rental
fee. Additionally, the president and sole director advanced $23,770 of funds on behalf of
the Company and the Company repaid $295,000 resulting in an accrual balance of $111,225 as
of March 31, 2005, classified as a component of Due To Related Parties in the accompanying
Financial Statements.

27

# American Energy
Production, Inc.                                              (A Development Stage
Company)                                              Notes to Financial Statements
                                                     March 31, 2005
                                                      (Unaudited)

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, 2005, the Company advanced directly or indirectly, $129,806 of funds to its
wholly-owned investees. This amount is included in the asset account entitled
Investment in and advanced to affiliates-majority-owned.

28

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

# SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS

The following is a discussion of our
financial condition, results of operations, liquidity and capital resources. This
discussion should be read in conjunction with our audited financial statements and the
notes thereto included elsewhere in this Form 10-Q and with our annual report on Form 10-K
for the year ended December 31, 2004. Some of the statements under Description of
Business, Risk Factors, Managements Discussion and Analysis
or Plan of Operation, and elsewhere in this Report and in the Companys
periodic filings with the Securities and Exchange Commission constitute forward-looking
statements. These statements involve known and unknown risks, significant uncertainties
and other factors what may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward- looking statements. Such
factors include, among other things, those listed under Risk Factors and
elsewhere in this Report.

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

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

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

# GENERAL

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

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

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

29

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

On February 22, 2005, our 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, we
filed a Form 2-E pursuant to the Securities Act of 1933 notifying the SEC of the
termination of the offering. The Form 2-E filing discloses that we received $1,820,000 of
proceeds from the offering, net of $30,000 of expenses, through the sale of 171,000,000
shares of our $0.001 par value common stock.

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

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

# OVERVIEW OF COMPANY.

Since its inception, the Company has
suffered recurring losses from operations and has been dependent on existing stockholders
and new investors to provide the cash resources to sustain its operations. We have
substantial current obligations. We have had and could have losses, deficits and
deficiencies in liquidity, which could impair our ability to continue as a going concern.
Our Independent Registered Public Accounting Firm has indicated, in their audit opinion
for the years ended December 31, 2004 and 2003 that certain factors raise substantial
doubt about our ability to continue as a going concern and these continuing factors are
discussed in note 2 to our accompanying March 31, 2005 interim unaudited financial
statements. Since its inception, the Company has suffered recurring losses from operations
and has been dependent on existing stockholders and new investors to provide the cash
resources to sustain its operations.

30

We have continually incurred net
losses and this has resulted in a significant accumulated deficit and stockholders
deficiency at March 31, 2005. We had a net loss of $454,663 and net cash used in
operations of $75,447 for the three months ended March 31, 2005 and a working capital
deficiency of $867,466, and a deficit accumulated during the development stage of
$7,215,052 at March 31, 2005. The Company is also in default on a note to a bank and is in
the development stage with minimal revenues. The ability of the Company to continue as a
going concern is dependent on the Companys ability to further implement its business
plan, raise capital, and generate revenues. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going
concern

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

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

| |  | The
Companys ability to continue to obtain sources of outside financing to support near
term operations and to allow the Company to continue to make investments
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Companys ability to increase profitability and sustain a cash flow level that will
ensure support for continuing operations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------

# RECENT DEVELOPMENTS

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

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 has filed a Form 2-E pursuant to the Securities Act
of 1933 notifying the SEC of the Companys termination of the offering. The Form 2-E
filing discloses that the Company received $1,820,000 of proceeds from the offering, net
of $30,000 of expenses, through the sale of 171,000,000 shares of the Companys
$0.001 par value common stock.

31

# CRITICAL ACCOUNTING
ESTIMATES AND POLICIES

The methods, estimates and judgment
we use in applying our most critical accounting policies have a significant impact on the
results we report in our financial statements. The Securities and Exchange Commission has
defined the most critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and require us to make our most
difficult and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based upon this definition, our most critical
estimates include going concern, the valuation of stock based compensation, the evaluation
of the beneficial conversion feature in convertible debentures and preferred stock and
investments. We also have other key accounting estimates and policies, but we believe that
these other policies either do not generally require us to make estimates and judgments
that are as difficult or as subjective, or it is less likely that they would have a
material impact on our reported results of operations for a given period. For additional
information see Note 3 Summary of Significant Accounting Policies in the notes
to our unaudited financial statements contained in our quarterly report on Form 10-Q for
the interim period ended March 31, 2005. Although we believe that our estimates and
assumptions are reasonable, they are based upon information presently available. Actual
results may differ significantly from these estimates.

# GOING CONCERN

The Independent Registered Public
Accounting Firms reports to our financial statements for the year ended December 31,
2004 and December 31, 2003, include an emphasis paragraph in addition to their audit
opinion stating that our recurring losses from operations, cash used in operations,
working capital deficit and deficit accumulated during the development stage raise
substantial doubt about our ability to continue as a going concern. Our financial
statements do not include any adjustments to reflect the possible effects on
recoverability and classification of assets or the amounts and classification of
liabilities that may result from our inability to continue as a going concern.

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

The Company issued common stock in
non-cash transactions during the three months ended March 31, 2005. The measurement date
and period of recognition for various issuances is dependent on the individual facts and
circumstances and various authoritative GAAP guidance. For these issuances, valuation is
generally determined based on the fair market value of the instrument on the measurement
date. For capital stock, values are generally determined based on quoted trading prices or
comparable private placement transactions, as applicable, while for instruments such as
warrants, valuation in generally determined through the use of option pricing models. As
the Company has historically issued various instruments for services, these valuations
generally have a material impact on our results of operations.

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

In accordance with EITF Issue 98-5,
as amended by EITF 00-27, we must evaluate the potential effect of any beneficial
conversion terms related to convertible instruments such as convertible debt or preferred
stock. The Company has issued several convertible debentures and convertible preferred
stock. A beneficial conversion may exist if the holder, upon conversion, may receive
instruments that exceed the value of the convertible instrument. Valuation of the benefit
is determined based upon various factors including the valuation of equity instruments,
such as warrants, that may have been issued with the convertible instruments, conversion
terms, value of the instruments to which the convertible instrument is convertible, etc.
Accordingly, the ultimate value of the beneficial feature is considered an estimate due to
the partially subjective nature of valuation techniques.

32

# INVESTMENTS

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

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

For financial statement purposes,
investments are recorded at their fair value. Effective June 15, 2004, the Company
acquired a privately held oil company; effective April 1, 2004, the Company formed a new
controlled entity to transfer its assets and certain liabilities into for purposes of
holding this entity as an investment, effective November 2004, the Company acquired Oil
America Group and in January 2005, the Company formed a new controlled entity for purposes
of holding this entity as an investment. Currently, readily determinable fair values do
not exist for these transactions and the investment in the privately held company and the
newly formed controlled entity are recorded at cost, which approximates estimated fair
value as of March 31, 2005. The fair value of these investments is determined in good
faith by the Companys Board of Directors pursuant to a valuation policy and
consistent valuation process. Due to the inherent uncertainty of these valuations, the
estimates may differ significantly from the values that would have been used had a ready
market for the investments existed and the differences may be material. Our valuation
methodology includes the examination of among other things, the underlying portfolio
company performance, financial condition and market changing events that impact valuation.

Realized gains (losses) from the sale
of investments and unrealized gains (losses) from the valuation of investments are
reflected in operations during the period incurred. There were no realized or unrealized
gains or losses for the three months ended March 31, 2005.

33

# RESULTS OF OPERATIONS

Financial Analysis of the
Three Months Ended March 31, 2005 and 2004

|                                  | Three Months Ended
March 31,
|--------------------------------- | ----------------------------
|
|Operating Income                  |                             
|Oil sales, net                    |                             
|                                  |                             
|Total Operating Income            |                             
|                                  |                             
|Operating Expenses                |                             
|Compensation                      |                             
|Consulting                        |                             
|Depletion                         |                             
|Depreciation                      |                             
|Equipment rental                  |                             
|General and administrative        |                             
|Production                        |                             
|Professional                      |                             
|Website                           |                             
|                                  |                             
|Total Operating Expenses          |                             
|                                  |                             
|Loss from Operations              |                             
|                                  |                             
|Other Expense                     |                             
|Interest expense                  |                             
|Payroll tax expense and penalties |                             
|                                  |                             
|Total Other Expense               |                             
|                                  |                             
|                                  |                             
|Net Loss                          |                             
|                                  |                             

34

Three Months Ended March
31, 2005:

Revenue:

Operating revenue decreased $22,462,
or 100% to zero for the three months ended March 31, 2005 from $22,462 for the three
months ended March 31, 2004. The Company is a Business Development Company
(BDC) with investments in oil and gas production companies and has no sales by
itself and the revenue in 2004 was prior to the Company becoming a BDC.

Operating Expenses:

Operating expenses decreased
$287,319, or 745% to $69,572 for the three months ended March 31, 2005 from $356,891 for
the three months ended March 31, 2004. The decrease was primarily the result of a $76,150
decrease in consulting, a $55,916 decrease in professional, a $29,750 decrease in website
expense and a $52,472 decrease in production. The decrease in consulting, professional and
website expense was primarily the result of a decrease in stock issued for services in
2005 as compared to 2004. The decrease in production was the result of the Companys
election to become a BDC in January 2005.

Other Expense:

Other expense decreased $2,292,160,
or 86% to $385,091 for the three months ended March 31, 2005 from $2,677,251 for the three
months ended March 31, 2004. The decrease was entirely from a decrease in interest expense
in relation to a beneficial conversion feature for convertible debentures issued in 2004
as the exercise price was less than the fair value of the Companys common stock on
the measurement date.

# Liquidity and Capital
Resources

Cash and cash equivalents were
$58,912 at March 31, 2005 as compared to $268,665 at December 31, 2004, and working
capital deficit was $867,466 at March 31, 2005 as compared to $918,685 at December 31,
2004. The decrease in cash was primarily the result of the Company making advances of
$129,806 to its majority-owned affiliates. The increase in the working capital deficit
from December 31, 2004 was primarily the result of the decrease in cash as discussed
above.

Operating
Activities: Net cash used in operating activities was $75,447 for the three
months ended March 31, 2005 while cash that was used in operating activities was $215,696
for the three months ended March 31, 2004. The decrease in cash used in operations
resulted primarily due to the fact of a decrease in the net loss, offset by a decrease in
interest expense related to a beneficial conversion feature.

Investing
Activities: Cash used in investing activities was $129,806 for the three
months ended March 31, 2005 while cash used in investing activities was $403,122 for the
three months ended March 31, 2004. The decrease in cash used in investing activities was
primarily the result of $386,522 of prepaid acquisition cost disbursements in 2004, offset
by $129,806 of advances to affiliates in 2005.

Financing
Activities: Cash flows used in financing activities was $4,500 for the
three months ended March 31, 2005 while cash provided by financing activities was $900,000
for the three months ended March 31, 2005. The decrease in cash provided by financing
activities was primarily due that in 2004, the Company received $600,000 of cash proceeds
from the issuance of convertible debentures and $300,000 of cash proceeds from the sale of
common stock.

35

# DEBT

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

Lease Payable

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

On April 16, 2001, the Company leased
computer equipment under a 36 month lease that was accounted for as a capital lease in the
amount of $21,238 and at June 30, 2004, the balance of principal was $18,153. The amount
is personally guaranteed by a former officer/director and a current officer/director of
the Company. The lease was secured by all leased equipment and perfected by a financing
statement; however, the Company liquidated the equipment and paid the office space lessor
the $4,000 proceeds. As of September 30, 2004, the Company has recorded a total of $4,888
in accrued interest for this lease payable in the accompanying Balance Sheet.

In November 2003, a settlement was
reached with the lessor to forgive the outstanding principal and accrued interest on the
lease payable once the transfer of 100,000 shares of the Companys common stock
personally held by the Companys president and director occurs. The president of the
Company transferred these shares on September 15, 2003. As of September 30, 2004 the
transaction has not been finalized as the lessor has not agreed to the settlement. The
Company expects to fully resolve this matter during 2005 at which time the value of the
shares exchanged and any related gain or loss will be determined and recognized.

Notes payable 
Banks

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

On March 12, 2001, we obtained a
revolving bank line of credit in the amount of $70,000, of which $17,464 is outstanding at
September 30, 2004. The interest rate was originally at 11.5% but has converted to the
default rate of 18% per annum as the line of credit was due March 11, 2002 and was in
default. This line of credit is secured by all equipment which had been repossessed as of
December 31, 2001 and $23,075 was applied to the balance. As of March 31, 2005, the
Company has recorded a total of $11,203 in accrued interest for this line of credit in the
accompanying Balance Sheet. The line of credit is in default at March 31, 2005.

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

In July 2004, we obtained a bank
automobile loan in the amount of $19,396 (including accrued interest of 6.99% per annum).
Monthly principal and interest payments of $1,077 are due with final payment in February
2006. The loan is secured by the automobile and as of March 31, 2005, the balance
outstanding is $9,318.

36

Loans and Note Payable
Settlement with Related Party

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

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

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

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

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

Convertible Debentures:

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

In May 2004, the Company received
$250,000 in gross proceeds from the issuance of a convertible debenture. The terms of the
convertible debenture includes an interest rate of 8% per annum and convertible at any
time at the option of the holder or the Company into common shares of the Company at a
price equal to fifty percent (50%) of the closing bid price of the common stock on the
date written notice is received by the Company of the election to convert and is due
December 1, 2005. On June 10, 2004, the convertible debenture holder elected to convert
$85,000 of the balance into common shares of the Company and as a result of the
conversion, 8,500,000 shares of common stock were issued at $0.01 per share (50% of the
closing share price). On July 19, 2004, the convertible debenture holder elected to
convert $65,000 of the balance into common shares of the Company and as a result of the
conversion, 6,500,000 shares of common stock were issued at $0.01 per share (50% of the
closing share price). The remaining $70,000 of the $250,000 convertible debenture remains
outstanding at March 31, 2005.

In accordance with EITF Issue 98-5 as
amended by EITF Issue 00-27, the Company has evaluated that the $250,000 convertible
debenture discussed above has a beneficial conversion feature as the exercise price for is
less than the fair value of the Companys common stock on the measurement date.
Accordingly, the Company has recognized this beneficial conversion feature by charging the
statement of operations $250,000 for interest expense and $250,000 for additional paid-in
capital. The conversion feature inherent in the convertible debentures was recognized as
of June 30, 2004 since they were immediately convertible and a substantial portion was
converted as of June 30, 2004. As of March 31, 2005, $219,806 was amortized to interest
expense and a debt discount of $30,194 remains.

37

Effective June 15, 2004, the Company
issued a $400,000 convertible debenture to PRI in accordance with the acquisition
agreement between PRI and the Company (See Acquisition Footnote). The terms of the
convertible debenture includes an interest rate of 8% per annum and convertible at any
time at the option of the holder or the Company into common shares of the Company at a
price equal to fifty percent (50%) of the closing bid price of the common stock on the
date written notice is received by the Company of the election to convert and is due
December 1, 2005. The entire $400,000 is outstanding at March 31, 2005.

In accordance with EITF Issue 98-5,
as amended by EITF Issue 00-027, the Company has evaluated that the convertible debenture
discussed above has a beneficial conversion feature as the exercise price is less than the
fair value of the Companys common stock on the measurement date. Accordingly, the
Company has recognized this beneficial conversion feature by recording a debt discount as
a contra account to the convertible debenture for $400,000 and $400,000 to additional
paid-in capital. The debt discount will be amortized over the debt term of 17.5 months or
through the due date of December 5, 2005. As of March 31, 2005, $216,479 was amortized to
interest expense and a debt discount of $183,521 remains as of March 31, 2005. In August
2004, the Company received $1,000,000 in gross proceeds from the issuance of a convertible
debenture. The terms of the convertible debenture includes an interest rate of 8% per
annum and convertible at any time at the option of the holder or the Company into common
shares of the Company at a price equal to fifty percent (50%) of the closing bid price of
the common stock on the date written notice is received by the Company of the election to
convert and is due December 1, 2005. On September 14, 2004, the convertible debenture
holder elected to convert $100,000 of the balance into common shares of the Company and as
a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per
share (50% of the closing share price). On September 22, 2004, the convertible debenture
holder elected to convert $100,000 of the balance into common shares of the Company and as
a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per
share (50% of the closing share price). On October 8, 2004, the convertible debenture
holder elected to convert $100,000 of the balance into common shares of the Company and as
a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per
share (50% of the closing share price). On October 12, 2004, the convertible debenture
holder elected to convert $100,000 of the balance into common shares of the Company and as
a result of the conversion, 10,000,000 shares of common stock were issued at $0.01 per
share (50% of the closing share price). On November 4, 2004, the convertible debenture
holder elected to convert $200,000 of the balance into common shares of the Company and as
a result of the conversion, 20,000,000 shares of common stock were issued at $0.01 per
share (50% of the closing share price). On January 18, 2005, the convertible debenture
holder elected to convert $38,462 of the balance into common shares of the Company and as
a result of the conversion, 2,500,000 shares of common stock were issued at $0.015386 per
share. On January 31, 2005, the convertible debenture holder elected to convert $38,462 of
the balance into common shares of the Company and as a result of the conversion, 2,500,000
shares of common stock were issued at $0.015386 per share. On February 2, 2005, the
convertible debenture holder elected to convert $153,846 of the balance into common shares
of the Company and as a result of the conversion, 10,000,000 shares of common stock were
issued at $0.015386 per share. On February 14, 2005, the convertible debenture holder
elected to convert $169,231 of the balance into common shares of the Company and as a
result of the conversion, 11,000,000 shares of common stock were issued at $0.015386 per
share.

As a result of the above conversions,
none of the $1,000,000 convertible debenture remains outstanding as of March 31, 2005.

38

In accordance with EITF Issue 98-5 as amended
by EITF Issue 00-27, the Company has evaluated that the $1,000,000 convertible debenture
discussed above has a beneficial conversion feature as the exercise price for is less than
the fair value of the Companys common stock on the measurement date. Accordingly,
the Company has recognized this beneficial conversion feature by recording a debt discount
as a contra account to the convertible debenture for $1,000,000 and $1,000,000 to
additional paid-in capital. All of $1,000,000 has been amortized to interest expense as of
March 31, 2005.

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

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

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

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

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

39

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

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

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

As of March 31, 2005, the Company has
recorded $133,721 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, 2005.

Equity Financing

None

Liquidity

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

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

40

# Off-Balance Sheet
Arrangements

We have no off-balance sheet
arrangements.

# Contractual Obligations
and Commercial Commitments

The following table highlights, as of
March 31, 2005, our contractual obligations and commitments by type and period:

|Contractual Obligations                 | Total | Less than 1
year | 1-3 years
|--------------------------------------- | ----- | ---------------- | ---------
|Debt:                                   |       |                  |          
|Convertible Debentures, net of discount |       |                  | $        
|Bank Loans                              |       |                  |          
|Lease Payable                           |       |                  |          
|                                        |       |                  |          
|Total Debt                              |       |                  | $        
|                                        |       |                  |          

# 2005 OUTLOOK

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

# Item 3. Evaluation of
Disclosure Controls and Procedures.

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

# PART II

# Item 1. Legal Proceedings

The Company is subject to various
lawsuits and unasserted claims from vendors for non-payment of accounts payable plus
related legal fees. Excluding legal fees, which cannot be estimated, the Company has
included all amounts in its accounts payable as of March 31, 2005.

In November 2003, a settlement was
reached with a lessor to forgive the outstanding principal and interest on the related
note payable resulting from leased computers once the transfer of 100,000 shares
personally held by the Companys president and sole director. As of September 30,
2004 the transaction has not been finalized as the lessor has not agreed to the
settlement. However, the 100,000 shares were transferred to the lessor in September 2003.
The Company expects to fully resolve this matter during 2005 at which time the value of
the shares exchanged and any related gain or loss will be determined and recognized.

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The Company has included $58,294 of
unpaid Federal payroll taxes and employee withholdings and related penalties and interest
in its accrued expenses as of March 31, 2005. Such amounts are subject to potential
federal tax liens.

# Item 2. Changes in
Securities

Issuances of Preferred
Stock:

None

Issuances of Common Stock:

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

In March 2005, the Company issued
$2,500,000 shares of common stock at $0.01 per share to an entity in exchange for a
$25,000 subscription receivable.

Common Stock Issuable:

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

In 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 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. The shares have not been issued and have been
recorded as Common Stock Issuable as of March 31, 2005.

# Item 3. Defaults Upon
Senior Securities

None

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

None

# Item 5. Other Information

# None

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

# (a) Exhibits

# Exhibit   Description

31.1 Certification by
Principal Executive Officer

31.2 Certification of Principal
Financial Officer

32 Certifications
of Principal Executive and Financial Officer Pursuant to 906

(b) Reports on Form 8-K.

Date           
             Items Reported on 
March 25, 2005                 item 8.01

# 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.

|NAME AND SIGNATURE  | TITLE | DATE
|------------------- | ----- | ----
|/s/ Charles Bitters |       |     
|Charles Bitters     |       |     
|                    |       |     
|                    |       |     

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