# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-Q

# QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2004

Commission File
#333-52812

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

TEXAS(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 August 13, 2004: 198,621,144

# AMERICAN ENERGY
PRODUCTION, INC.FORM 10-Q

Table of Contents

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2

# PART I 
FINANCIAL INFORMATION

# Item 1. Financial Statements

Filed herewith are our following
unaudited financial statements:

Balance Sheet at June 30,
2004

Statements of Operations for the
three and six months ended June 30, 2004 and 2003

Statements of Changes in
Stockholders Equity (Deficiency) for the six months ended June 30, 2004

Statements of Cash Flows for the six
months ended June 30, 2004 and 2003

Notes to Financial
Statements

3

American Energy Production, Inc.
                      (A Development Stage Company)
                               Balance Sheet
                               (Unuadited)

|ASSETS                                                   | June 30, 2004
|-------------------------------------------------------- | -------------
|Current Assets                                           |              
|Cash                                                     |              
|Accounts receivable - related party                      |              
|                                                         |              
|Total Current Assets                                     |              
|                                                         |              
|Oil and gas properties and equipment, net                |              
|                                                         |              
|Investments:                                             |              
|Prepaid acquisition cost                                 |              
|Investments in and advances to affiliates - wholly-owned |              
|                                                         |              
|Total Investments                                        |              
|                                                         |              
|Total Assets                                             |              
|                                                         |              
|                                                         |              
|LIABILITIES                                              |              
|Current Liabilities                                      |              
|Cash overdraft                                           |              
|Accounts payable                                         |              
|Due to  related parties                                  |              
|Accrued interest payable - current                       |              
|Accrued payroll taxes and penalties                      |              
|Lease payable                                            |              
|Notes payable                                            |              
|Loan payable - officer                                   |              
|Note payable - related party                             |              
|                                                         |              
|Total Current Liabilities                                |              
|                                                         |              
|Convertible note payable                                 |              
|Convertible debentures, net of discount                  |              
|Accrued interest payable - long term                     |              
|                                                         |              
|Total Long Term Liabilities                              |              
|                                                         |              
|Total Liabilities                                        |              
|                                                         |              

See accompanying notes to financial statements

4

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

|Stockholders' Equity                                           | June 30, 2004
|-------------------------------------------------------------- | -------------
|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 |              
|192,121,144 shares issued and outstanding                      |              
|Common stock issuable, $0.0001 par value, 75,000 shares        |              
|Additional paid in capital                                     |              
|Accumulated deficit                                            |              
|Deficit accumulated during development stage                   |              
|                                                               |              
|                                                               |              
|Less:  Subscription Receivable                                 |              
|                                                               |              
|Total Stockholders' Equity                                     |              
|                                                               |              
|Total Liabilities and Stockholders' Equity                     |              
|                                                               |              
|                                                               |              

See accompanying notes to financial statements

5

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

|                                       | Three months ended
June 30, | Six months ended
June 30, | Period from
February 20, 2003
(Inception of
Development Stage) |             |  
|-------------------------------------- | --------------------------- | ------------------------- | -------------------------------------------------------------- | ----------- | -
|
|Oil sales, net                         |                             |                           | $                                                              | 17,548      |  
|                                       |                             |                           |                                                                |             |  
|Operating Expenses                     |                             |                          
|Compensation                           |                             |                           |                                                                | 510,995     |  
|Consulting                             |                             |                           |                                                                | 101,784     |  
|Depletion                              |                             |                           |                                                                | 1,764       |  
|Depreciation                           |                             |                           |                                                                | 22,180      |  
|Equipment rental                       |                             |                           |                                                                | 10,500      |  
|General and administrative             |                             |                           |                                                                | (7,793      | )
|Production                             |                             |                           |                                                                | 38,891      |  
|Professional                           |                             |                           |                                                                | 42,500      |  
|Website                                |                             |                           |                                                                | (1,200      | )
|                                       |                             |                           |                                                                |             |  
|Total Operating Expenses               |                             |                           |                                                                | 719,620     |  
|                                       |                             |                           |                                                                |             |  
|Loss from Operations                   |                             |                           |                                                                | (702,071    | )
|                                       |                             |                           |                                                                |             |  
|Other Expense                          |                             |                          
|Gain on settlement of debt             |                             |                           |                                                                | 11,799      |  
|Interest expense                       |                             |                           |                                                                | (300,057    | )
|Payrol tax expense and penalties       |                             |                           |                                                                | (1,501      | )
|Loss on settlement                     |                             |                           |                                                                | --          |  
|                                       |                             |                           |                                                                |             |  
|Total Other Expense                    |                             |                           |                                                                | (289,760    | )
|                                       |                             |                           |                                                                |             |  
|Net Loss                               |                             |                           | $                                                              | (991,831    | )
|                                       |                             |                           |                                                                |             |  
|Net Loss Per Share - Basic and Diluted |                             |                           | $                                                              | (0.01       | )
|                                       |                             |                           |                                                                |             |  
|Weighted average Shares                |                             |                           |                                                                | 163,864,102 |  
|                                       |                             |                           |                                                                |             |  

See accompanying notes to financial statements

6

American Energy
Production, Inc.       (A Development Stage Company)          Statement of Changes in
Stockholders' Equity (Deficiency)                  (Unuadited)         Six Months ended
June 30, 2004

|                                                     | Preferred Stock
Shares  Amount | Common Stock
Shares      Amount | Common Stock
Issuable
Shares   Amount | Subscription
Receivable | Additional
Paid-In
Capital | Accumulated
Deficit | Accumulated
During
Development
Stage | Deferred
Services | Total
Stockholders'
Equity
Deficiency |             |  |  
|---------------------------------------------------- | ------------------------------ | ------------------------------- | ------------------------------------- | ----------------------- | -------------------------- | ------------------- | ------------------------------------ | ----------------- | ------------------------------------- | ----------- |  | -
|
|BALANCE AT  DECEMBER 31, 2003                        |                                |                                 |                                       | --                      |                            | $                   | --                                   |                   |                                       | 93,051,449  |  | $
|Common stock issued for conversion of                |                                |                                
|convertible debentures                               |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | 64,833,333  |  |  
|Common stock issued for subscription receivable      |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | 200,000     |  |  
|Convertible debentures beneficial conversion feature |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | --          |  |  
|Common stock issued for cash,                        |                                |                                
|net of offering costs of $62,500                     |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | 18,836,362  |  |  
|Common stock that was issuable at 12-31-03           |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | 8,500,000   |  |  
|Common stock issued upon conversion                  |                                |                                
|of debentures for services                           |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | 1,000,000   |  |  
|Common stock issued in exchange for chemical         |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | 700,000     |  |  
|Common stock issued for acquisition                  |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | 5,000,000   |  |  
|Preferred stock issued for conversion of debt        |                                |                                 |                                       | 3,500,000               |                            |                     | 350                                  |                   |                                       | --          |  |  
|Compensation expense in excess of debt to officer    |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | --          |  |  
|Preferred stock issued for services                  |                                |                                 |                                       | 500,000                 |                            |                     | 50                                   |                   |                                       | --          |  |  
|Amortization of deferred services                    |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | --          |  |  
|Net loss, six months ended June 30, 2004             |                                |                                 |                                       | --                      |                            |                     | --                                   |                   |                                       | --          |  |  
|                                                     |                                |                                 |                                       |                         |                            |                     |                                      |                   |                                       |             |  |  
|BALANCE AT JUNE 30, 2004                             |                                |                                 |                                       | 4,000,000               |                            | $                   | 400                                  |                   |                                       | 192,121,144 |  | $
|                                                     |                                |                                 |                                       |                         |                            |                     |                                      |                   |                                       |             |  |  
|                                                     |                                |                                 |                                       |                         |                            |                     |                                      |                   |                                       |             |  |  

See accompanying notes
to financial statements

7

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

|                                                | Six Months Ended June 30
2004                     2003 | Period from
February 20, 2003
(Inception of
Development Stage)
to June 30, 2004
|----------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------------------------------
|Cash Flows From Operating Activities:           |                                                        |                                                                                
|Net loss                                        |                                                        |                                                                                
|Adjustments to reconcile net loss to            |                                                        |                                                                                
|net cash used in operations:                    |                                                        |                                                                                
|Stock issued for debt and services              |                                                        |                                                                                
|Stock issued for 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 |                                                        |                                                                                
|Increase in accounts payable                    |                                                        |                                                                                
|Decrease in due to related party                |                                                        |                                                                                
|Increase in accrued interest payable            |                                                        |                                                                                
|Increase in accrued payroll taxes payable       |                                                        |                                                                                
|                                                |                                                        |                                                                                
|Net Cash Used In Operating Activities           |                                                        |                                                                                
|                                                |                                                        |                                                                                
|Cash Flows From Investing Activities:           |                                                        |                                                                                
|Prepaid acquisition cost disbursement           |                                                        |                                                                                
|Purchase of equipment                           |                                                        |                                                                                
|Prepaid advances to affiliates                  |                                                        |                                                                                
|Purchase of oil lease                           |                                                        |                                                                                
|                                                |                                                        |                                                                                
|Net Cash Used In Investing Activities           |                                                        |                                                                                
|                                                |                                                        |                                                                                
|                                                |                                                        |                                                                                

See accompanying notes
to financial statements

8

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

|                                                  | Six Months Ended June 30
2004                     2003 | Period from
February 20, 2003
(Inception of
Development Stage)
to December 31, 2003
|------------------------------------------------- | ------------------------------------------------------ | -----------------------------------------------------------------------------------
|Cash Flows From Financing Activities:             |                                                        |                                                                                    
|Proceeds for note payable - officer               |                                                        |                                                                                    
|Repayment of officer loan                         |                                                        |                                                                                    
|Proceeds from loan  - other                       |                                                        |                                                                                    
|Repayment of loan proceeds - other                |                                                        |                                                                                    
|Proceeds from issuance of convertible             |                                                        |                                                                                    
|debetures                                         |                                                        |                                                                                    
|Proceeds from issuance of                         |                                                        |                                                                                    
|common stock, net of offering costs               |                                                        |                                                                                    
|of $62,500                                        |                                                        |                                                                                    
|Repayment of lease payable                        |                                                        |                                                                                    
|                                                  |                                                        |                                                                                    
|Net Cash Provided By Financing Activities         |                                                        |                                                                                    
|                                                  |                                                        |                                                                                    
|Net Increase in Cash                              |                                                        |                                                                                    
|Cash at Beginning of Period                       |                                                        |                                                                                    
|                                                  |                                                        |                                                                                    
|Cash at End of Period                             |                                                        |                                                                                    
|                                                  |                                                        |                                                                                    
|Cash interest paid                                |                                                        |                                                                                    
|                                                  |                                                        |                                                                                    
|Supplemental disclosure of  non-cash transactions |                                                        |                                                                                    
|Asset acquisition paid with convertible           |                                                        |                                                                                    
|note payable                                      |                                                        |                                                                                    
|Conversion of note payable to convertible         |                                                        |                                                                                    
|debtenture                                        |                                                        |                                                                                    
|Conversion of indebtedeness to preferred          |                                                        |                                                                                    
|Conversion of convertible debentures to           |                                                        |                                                                                    
|common stock                                      |                                                        |                                                                                    
|Asset acquisition paid with convertible           |                                                        |                                                                                    
|debenture and stock                               |                                                        |                                                                                    
|Common stock issued for subscription              |                                                        |                                                                                    
|receivble                                         |                                                        |                                                                                    
|Transfer of assets and liabilities to affiliate:  |                                                        |                                                                                    
|Oil and gas properties and equipment, net         |                                                        |                                                                                    
|Convertible debenture                             |                                                        |                                                                                    
|Accrued interest payable                          |                                                        |                                                                                    
|Net receivable from transfer of assets            |                                                        |                                                                                    
|and liabilities                                   |                                                        |                                                                                    
|                                                  |                                                        |                                                                                    

See accompanying notes
to financial statements

9

# American Energy
Production, Inc.(A Development Stage
Company)

# Notes to Financial
Statements June 30, 2004

# Note 1 Basis of
Presentation

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

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

For further information, refer to the
audited financial statements and footnotes of the Company for the year ending December 31,
2003 included in the Companys Form 10-KSB.

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

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

# Nature of Operations

American Energy Production, Inc.
(American Energy, the Company, we, us) is
a publicly traded business development company (see below) that is engaged primarily in
the investment in other companies that acquire, develop, produce, explore and sell oil and
gas. The Company anticipates that its investees will be able to sell all oil that it can
produce to petroleum refiners and marketers under the terms of short-term purchase
contracts and at prices in accordance with arrangements that are customary in the oil
industry. 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) On June 15,
2004, the Company exited its direct activities in the oil and gas business by transferring
its oil and gas assets and certain related liabilities to its wholly-owned investee, Bend
Arch Petroleum, Inc. Operating as a Business development Company, the Company now provides
significant managerial assistance to its wholly-owned investees who are engaged in the oil
and gas business. Previously, the Company was f/k/a Communicate Now.com, Inc. and was
incorporated on January 31, 2000 under the laws of the State of Texas. On July 15, 2002,
the Company changed its corporate name to American Energy Production, Inc.

On February 20, 2003, upon the
acquisition of certain oil and gas assets, the Company entered into a new development
stage. Activities during the development stage include acquisition of assets, obtaining
geological reports, developing an implementation plan to extract oil and gas, completing
initial sales of oil, seeking capital, registering as a business development company, and
restructuring, including the disposition of certain assets and liabilities, in order to
operate as a business development company.

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.

10

# Significant Accounting
Policies

# Use of 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 fiscal
year 2004 include the valuation of our investment in our investees, valuation stock based
issuances for employee and non-employee services or debt settlements, depreciable and
depletable useful lives of property and equipment up until the date of disposition,, the
evaluation of whether our assets are impaired, valuation of warrants issued with debt and
the related beneficial conversion feature, and the valuation allowance for deferred tax
assets.

# 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) wholly-owned
companies if holdings, directly or indirectly, represent 100% of the issuers voting
common stock, (ii) majority-owned, if holdings, directly or indirectly, represent
over 50% of the issuers voting common stock, (iii) controlled companies if
the holdings, directly or indirectly, represent over 25% and up to 50% of the
issuers voting common stock and (iv) other affiliates if the holdings,
directly or indirectly, represent 5% to 25% of the issuers voting common stock.
Investments  other than securities represent all investments other than in
securities of the issuer.

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

For financial statement purposes,
investments are recorded at their fair value. Effective June 15, 2004, the Company
acquired a privately held oil company and effective April 1, 2004, the Company also formed
a new controlled entity to transfer its assets and certain liabilities into for purposes
of holding this entity as an investment (See Note 4  Investments in and Advances to
Affiliates). Currently, readily determinable fair values do not exist for these
transactions and the investment in the privately held company and the newly formed
controlled entity are recorded at cost at June 30, 2004. Going forward, the fair value of
these investments will be 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.

Realized gains (losses) from the sale
of investments and unrealized gains (losses) from the valuation of investments are
reflected in operations during the period incurred. There were no realized or unrealized
gains or losses for the three and six month periods ended June 30, 2004

11

# Revenue Recognition

The Company previously sold crude oil
under short-term agreements at prevailing market rates. Revenue from oil sales is
recognized at the point of sale, that is, when oil is extracted from the tanks. Generally
this is the point where the customer has taken title and has assumed the risks and rewards
of ownership, the sales price is fixed or determinable and collectibility is reasonably
assured. Effective as of June 15, 2004, the Company will no longer directly recognize any
revenues from oil and gas activities.

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.

# Concentrations

We are currently operating as a
business development company and maintain investments in two wholly-owned investees.
Accordingly, our only source of revenues will be any interest or dividends received from
these investments, any unrealized gains from the valuation of these investees or any
realized gains from any disposition of these investees. Currently, we are the
investees only source of funding other than any funding that they may derive from
their operations. These investees are also in a development stage and operating with net
losses. Should we be unable to provide further funding to these investees, the success of
their operations, and ultimately, our operations, may be at risk.

# Reclassifications

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

# 3. GOING CONCERN

As reflected in the accompanying
financial statements, the Company has a net loss of $4,003,511 and net cash used in
operations of $261,143 for the six months ended June 30, 2004 and a working capital
deficiency of $391,345 and a deficit accumulated during the development stage of
$5,713,905 at June 30, 2004. The Company is also in default on certain notes to banks and
is in the development stage with minimal revenues. The ability of the Company to continue
as a going concern is dependent on the Companys ability to further implement its
business plan, raise capital, and generate revenues. The financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a
going concern

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

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

12

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.

In January, February and May of 2004,
the Company received $850,000 of proceeds from the issuance of convertible debentures
authorized by the Form 1-E filing (See Note 6  Long-Term Debt and Note 7 
Stockholders Deficiency).

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

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

# 4. INVESTMENTS IN AND
ADVANCES TO AFFILIATES

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

At June 15, 2004, the full
consideration was paid by the Company and in accordance with the rules of a business
development company; the $800,000 purchase price for the capital stock of PRI has been
recorded as a component of Investment in and advances to affiliate  wholly-owned. As
of June 15, 2004, the Company had advanced $366,598 of expenditures on behalf of PRI and
effective with the acquisition, this amount has been reclassed as a component of the
Investment in and advances to affiliate  wholly-owned in the accompanying balance
sheet.

At June 30, 2004, the total
investment and advance in affiliate for PRI reflected in the accompanying financial
statements is $1,166,598. 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. Going
forward, the fair value of this investment will be determined in good faith by the
Companys Board of Directors and due to the inherent uncertainty of these valuations,
the estimates may differ significantly from the values that would have been used had a
ready market for the investments existed.

As of June 30, 2004, the Company had
made $609,124 of advances on behalf of its wholly-owned and controlled affiliate, Bend
Arch Petroleum, Inc., (Bend Arch) and this amount has been recorded as a
component of Investment in and advances to affiliates-wholly-owned, in the accompanying
balance sheet.

On February 20, 2003 (the
Acquisition Date), the Company acquired from a certain related party assignor,
who is controlled by the brother (see Note 6  Long-term Debt and Note 9 
Related Party Transactions) of the Companys president and sole director, an interest
in certain oil and gas leases, oil and gas wells located on those leases, surface and
underground equipment, pipelines and other property and fixtures in or on the leases,
rights of way, leases, contracts and agreements for pipeline compressor stations or
boosters utilized in the operations of the facilities by the assignors. The above
properties are located in Comanche and Eastland Counties, Texas, in the United States of
America. The Company plans 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.

13

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

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

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

# 5. SHORT-TERM DEBT

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

Lease Payable

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

14

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. At June 30, 2004, the Company has recorded a total of $4,434 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 sole director occurs. The president of
the Company transferred these shares on September 15, 2003. As of June 30, 2004 the
transaction has not been finalized as the lessor has not agreed to the settlement. The
Company expects to fully resolve this matter in 2004 at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized  (see Note
8  Commitments and Contingencies and Note 9  Related Party Transactions).

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 June 30, 2004  | 
|                                                                                 | 

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
June 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. At June 30, 2004, the Company has
recorded a total of $8,652 in accrued interest for this line of credit in the accompanying
Balance Sheet. The line of credit is in default at June 30, 2004.

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

Loans and Note Payable
Settlement with Related Party

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

On January 5, 2004, the entire
$52,510 amount outstanding was exchanged for designated Series A preferred stock. (See
below and Note 7  Stockholders Deficiency).

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

15

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

# 6. LONG-TERM DEBT

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

Convertible Debentures:

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

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). The remaining $135,000 of the $250,000 convertible debenture remains
outstanding at June 30, 2004. In July and August 2004, the remaining $135,000 was
converted into 2,500,000 shares of common stock at $0.01 per share (50% of the closing
share price)

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

Effective June 15, 2004, the Company
issued a $400,000 convertible debenture to PRI in accordance with the acquisition
agreement between PRI and the Company (See Note 4  Investment in and Advances to
Affiliates). 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 June 30, 2004.

16

In accordance with EITF Issue 98-5,
as amended by EITF Issue 00-027, the Company has evaluated that the convertible debenture
discussed above has a beneficial conversion feature as the exercise price is less than the
fair value of the Companys common stock on the measurement date. Accordingly, the
Company has recognized this beneficial conversion feature by recording a debt discount as
a contra account to the convertible debenture for $400,000 and $400,000 to additional
paid-in capital. The debt discount will be amortized over the debt term of 17.5 months or
through the due date of December 5, 2005. At June 30, 2004, the Company has recorded
$11,428 of amortization of the debt discount for the period from June 15 through June 30,
2004 and has recorded this amount as interest expense in the statement of operations.

On February 20, 2003, the Company
executed a $2,000,000 convertible promissory note accruing interest at 6% with a company
controlled by the brother of the Companys sole officer and director (See Note 9
 Related Party Transactions). The maturity date was July 25, 2007. The note was
payable at maturity in preferred stock of the Company at $1.00 per share and. the
preferred stock was convertible into common stock at $1.00 per share. Additionally, at the
option of the holder, the debt may be settled for cash. The note is secured by a deed of
trust and a lien against the leases and the wells and other liens against the same leases
and wells of $25,000.

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

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

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).

17

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

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

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

At June 30, 2004, the Company has
recorded $109,699 of accrued interest for the convertible debentures outstanding.

# 7. STOCKHOLDERS
DEFICIENCY

# Capital Structure

We were previously authorized to
issue up to 100,000,000 shares of our common stock, $0.0001 par value per share, of which
93,051,449 were issued and outstanding at December 31, 2003. However, in December 2003,
8,500,000 of previously issued shares were cancelled as the Company had exceeded the
100,000,000 authorized share limit. These 8,500,000 shares were reissued in January 2004
with an approved vote to increase the authorized shares (See below). At June 30, 2004,
192,121,144 shares were outstanding and 75,000 shares were issuable to a party from an
error related to a Regulation S offering in 2003 discussed below.

On December 18, 2003, the
Companys shareholders approved an increase in authorized common shares from
100,000,000 to 500,000,000 and the authorization of 5,000,000 shares of preferred stock,
$0.0001 par value per share. Under the terms of the designation, these Series A shares are
not entitled to dividends. The shares are convertible, at the option of the holder, at any
time, into three times as many common shares as Series A, preferred that are held. There
are no liquidation rights or preferences to Series A, preferred stock holders as compared
to any other class of stock. These shares are non-voting, however, the holders, as a class
may elect two directors. At June 30, 2004, 4,000,000 preferred shares were issued and
outstanding.

18

Issuances of Preferred
Stock:

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

On January 5, 2004, the Board of
Directors approved the issuance of 3,500,000 of the 4,000,000 designated Series A
preferred stock in exchange for the conversion of $464,005 of indebtedness owed to the
Companys president of the Company. The $464,005 indebtedness comprised the entire
$52,510 of loan payable  related party and $411,495 of Note Payable  related
party balances as recorded at December 31, 2003. (See Note 6)The $411,495 note
indebtedness had been acquired by the president in a private transaction from a former
officer. In connection with the forgiveness of the note principal, the Companys
president forgave the related accrued interest totaling $64,527 in a separate transaction
on the same date. As a result, the Company has treated this as a contribution of capital
at the date of debt forgiveness by charging additional paid in capital.

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

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

In accordance with FAS 123, the
Company has valued the preferred stock, based on the conversion rate and quoted trade
price of the common stock on the grant date, at $135,000 which is recorded in operations
in the six months ended 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.

Issuances of Common Stock:

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

In January 2004, the Company received
$600,000 in gross proceeds from the issuance of two convertible debentures, one for
$100,000 and the other for $500,000. On February 5, 2004, the $100,000 convertible
debenture holder elected to convert the entire balance into common shares of the Company
and as a result of the conversion, 3,333,333 shares of common stock were issued at $0.03
per share (50% of the closing share price on February 5, 2004).

In March, 2004, $200,000 of the
$500,000 convertible debenture was converted into 20,000,000 shares of common stock at
$0.01 (50% of the closing price). In April and May 2004, the remaining $300,000 of
convertible debenture was converted into 30,000,000 shares of common stock at $0.01 (50%
of the closing price).

19

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

In January 2004, the Company issued a $30,000
convertible debenture to a consultant for services related to the filing by the Company to
become a BDC as mentioned previously. On February 5, 2004, the convertible holder elected
to convert the entire balance into common shares of the Company and 1,000,000 shares of
common stock were issued at $0.03 per share (50% of the closing share price on February 5,
2004).

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

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

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

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

In May 2004, the Company received
$250,000 in gross proceeds from the issuance of a convertible debenture. On May 17, 2004,
$30,000 of the convertible debenture was converted into 3,000,000 shares of common stock
at $0.01 per share (50% of the closing share price). On June 10, 2004, $85,000 of the
convertible debenture was converted into 8,500,000 shares of common stock at $0.01 per
share (50% of the closing share price). At June 30, 2004, the remaining $135,000 of
convertible debenture was outstanding.

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

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

In May 2004, the Company issued
700,000 shares of common stock at $0.01 per share to two individuals in exchange of oil
chemical to be used by the Company.

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

In June 2004, the Company issued
1,090,909 shares of common stock at $.11 per share 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).

20

Common Stock Issuable:

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

# 8. COMMITMENTS AND
CONTINGENCIES

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

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, 2004.

In November 2003, a settlement was
reached with a lessor to forgive the outstanding principal and interest on the related
note payable resulting from leased computers once the transfer of 100,000 shares
personally held by the Companys president and sole director occurs (see Note 5
 Short-Term Debt and Note 9  Related Party Transactions). As of June 30, 2004
the transaction has not been finalized as the lessor has not agreed to the settlement.
However, the 100,000 shares were transferred to the lessor in September 2003. The Company
expects to fully resolve this matter in 2004 at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized.

The Company has included $53,791 of
unpaid Federal payroll taxes and employee withholdings and related penalties and interest
in its accrued expenses as of June 30, 2004. Such amounts are subject to potential federal
tax liens.

On May 21, 2004, the Company received
correspondence from the Securities and Exchange Commission (SEC) regarding our
notification of late filing on Form 12b-25 for the quarterly period ended March 31, 2004
on Form 10-Q. The correspondence from the SEC notified us that the reason for our
requested extension of time was insufficient and that the same justification was utilized
for the filing of Form 12b-25 for the quarterly period ended December 31, 2003, September
30, 2003 and June 30, 2003. The SEC has notified the Company that the Form 10-Q for the
period ended March 31, 2004 is not considered to of been filed timely and that we should
respond to the SEC regarding corrective action to be taken concerning disclosure controls
and procedures and that the SEC correspondence should be discussed with the Board of
Directors. The accompanying financial statements do not include a provision for any cost
of actions, if any, that may be taken by the SEC against the Company for this item.

# 9. RELATED PARTY
TRANSACTIONS

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

(see Notes 2 and 4)

Effective July 1, 2003, the Company
entered into a salary and equipment rental agreement with its president and sole director.
Under the terms of the agreement, the Company will pay a salary of $10,000 per month and
$3,500 in equipment rental per month for the use of the Companys presidents
personal pickup truck, car, pulling unit, winch truck, backhoe and water truck used in the
field operations. At December 31, 2003, the accrued balance was $20,000. During the six
months ended June 30, 2004, the Company accrued $81,000 of expense related to this
agreement, composed of $60,000 for compensation and $21,000 for equipment rental fee
resulting in an accrual balance of $101,000 at June 30, 2004, classified as a component of
Due To Related Parties in the accompanying Financial Statements.

21

In November 2003, a settlement was
reached with a lessor to forgive the outstanding principal and interest on the related
note payable resulting from leased computers once the transfer of 100,000 shares
personally held by the Companys president and sole director occurs (See Note 5
 Short-Term Debt and Note 8  Commitments and Contingencies). The
Companys president and sole director has personally guaranteed the obligation. As of
June 30, 2004, the transaction has not been finalized as the lessor has not agreed to the
settlement. However, the 100,000 shares were transferred to the lessor in September 2003.
The Company expects to fully resolve this matter in 2004 at which time the value of the
shares exchanged and any related gain or loss will be determined and recognized.

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

During the six months ended June 30,
2004 the Company advanced directly or indirectly, $975,722 of funds to its wholly-owned
investees. This amount is included in the asset account entitled Investment in and
advances to affiliates-wholly-owned.

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

22

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

# SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS

The following is a discussion of our
financial condition, results of operations, liquidity and capital resources. This
discussion should be read in conjunction with our audited financial statements and the
notes thereto included elsewhere in this Form 10-Q and with our annual report on Form
10-KSB for the year ended December 31, 2003. Some of the statements under
Description of Business, Risk Factors, Managements
Discussion and Analysis or Plan of Operation, and elsewhere in this Report and in
the Companys periodic filings with the Securities and Exchange Commission constitute
forward-looking statements. These statements involve known and unknown risks, significant
uncertainties and other factors what may cause actual results, levels of activity,
performance or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward- looking
statements. Such factors include, among other things, those listed under Risk
Factors and elsewhere in this Report.

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

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

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

# GENERAL

American Energy Production, Inc.
(American Energy, the Company, we, us) is
a publicly traded business development company (see below) that is engaged primarily in
the investment in other companies that acquire, develop, produce, explore and sell oil and
gas. The Company anticipates that its investees will be able to sell all oil that it can
produce to petroleum refiners and marketers under the terms of short-term purchase
contracts and at prices in accordance with arrangements that are customary in the oil
industry. 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) On June 15,
2004, the Company exited its direct activities in the oil and gas business by transferring
its oil and gas assets and certain related liabilities to its wholly-owned investee, Bend
Arch Petroleum, Inc. Operating as a Business development Company, the Company now provides
significant managerial assistance to its wholly-owned investees who are engaged in the oil
and gas business. Previously, the Company was f/k/a Communicate Now.com, Inc. and was
incorporated on January 31, 2000 under the laws of the State of Texas. On July 15, 2002,
the Company changed its corporate name to American Energy Production, Inc.

23

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 ,seeking capital, registering as a business development company, and
restructuring, including the disposition of certain assets and liabilities, in order to
operate as a business development company.

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

# OVERVIEW OF COMPANY.

Since its inception, the Company has
suffered recurring losses from operations and has been dependent on existing stockholders
and new investors to provide the cash resources to sustain its operations. We have
substantial current obligations. We have had and could have losses, deficits and
deficiencies in liquidity, which could impair our ability to continue as a going concern.
Our independent auditors have indicated, in their audit opinion for the year ended
December 31, 2003, that certain factors raise substantial doubt about our ability to
continue as a going concern and these continuing factors are discussed in note 3 to our
accompanying June 30, 2004 interim financial statements. Since its inception, the Company
has suffered recurring losses from operations and has been dependent on existing
stockholders and new investors to provide the cash resources to sustain its operations. We
have continually incurred net losses and this has resulted in a significant accumulated
deficit and stockholders deficiency at June 30, 2004. We had a net loss of
$4,003,511 and net cash used in operations of $261,143 for the six months ended June 30,
2004 and a working capital deficiency of $391,345, and a deficit accumulated during the
development stage of $5,713,905 at June 30, 2004. The Company is also in default on a note
to a bank and is in the development stage with minimal revenues. The ability of the
Company to continue as a going concern is dependent on the Companys ability to
further implement its business plan, raise capital, and generate revenues. The financial
statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern

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

24

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

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

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

# RECENT DEVELOPMENTS

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

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

In January, February and May of 2004,
the Company received $850,000 of proceeds from the issuance of convertible debentures
authorized by the Form 1-E.

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

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

At June 15, 2004, the full
consideration was paid by the Company and in accordance with the rules of a business
development company; the $800,000 purchase price for the capital stock of PRI has been
recorded as a component of Investment in and advances to affiliate  wholly-owned. At
June 15, 2004, the Company had advanced $366,598 of expenditures on behalf of PRI and
effective with the acquisition, this amount has been reclassed as a component of the
Investment in and advances to affiliate  wholly-owned.

25

At June 30, 2004, the total
investment and advance in affiliate for PRI reflected in the accompanying financial
statements is $1,166,598. 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. Going
forward, the fair value of this investment will be determined in good faith by the
Companys Board of Directors and due to the inherent uncertainty of these valuations,
the estimates may differ significantly from the values that would have been used had a
ready market for the investments existed.

As of June 30, 2004, the Company had
made $609,124 of advances on behalf of its wholly controlled affiliate, Bend Arch
Petroleum, Inc., (Bend Arch) and this amount has been recorded as investment
in and advances to affiliates-wholly-owned, in the accompanying balance sheet.

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

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

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

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

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

On May 21, 2004, the Company received
correspondence from the Securities and Exchange Commission (SEC) regarding our
notification of late filing on Form 12b-25 for the quarterly period ended March 31, 2004
on Form 10-Q. The correspondence from the SEC notified us that the reason for our
requested extension of time was insufficient and that the same justification was utilized
for the filing of Form 12b-25 for the quarterly period ended December 31, 2003, September
30, 2003 and June 30, 2003. The SEC has notified the Company that the Form 10-Q for the
period ended March 31, 2004 is not considered to of been filed timely and that we should
respond to the SEC regarding corrective action to be taken concerning disclosure controls
and procedures and that the SEC correspondence should be discussed with the Board of
Directors. The accompanying financial statements do not include a provision for any cost
of actions, if any, that may be taken by the SEC against the Company for this item.

26

# 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-QSB for
the quarterly period ended June 30, 2004. Although we believe that our estimates and
assumptions are reasonable, they are based upon information presently available. Actual
results may differ significantly from these estimates.

# GOING CONCERN

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

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

The Company issued common stock in
non-cash transactions during the six months ended June 30, 2004. The measurement date and
period of recognition for various issuances is dependent on the individual facts and
circumstances and various authoritative GAAP guidance. For these issuances, valuation is
generally determined based on the fair market value of the instrument on the measurement
date. For capital stock, values are generally determined based on quoted trading prices or
comparable private placement transactions, as applicable, while for instruments such as
warrants, valuation in generally determined through the use of option pricing models. As
the Company has historically issued various instruments for services, these valuations
generally have a material impact on our results of operations.

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

In accordance with EITF Issue 98-5,
as amended by EITF 00-27, we must evaluate the potential effect of any beneficial
conversion terms related to convertible instruments such as convertible debt or preferred
stock. The Company has issued several convertible debentures and convertible preferred
stock. A beneficial conversion may exist if the holder, upon conversion, may receive
instruments that exceed the value of the convertible instrument. Valuation of the benefit
is determined based upon various factors including the valuation of equity instruments,
such as warrants, that may have been issued with the convertible instruments, conversion
terms, value of the instruments to which the convertible instrument is convertible, etc.
Accordingly, the ultimate value of the beneficial feature is considered an estimate due to
the partially subjective nature of valuation techniques. As we have issued several
convertible instruments in 2004, the beneficial conversion amounts have a material impact
on our results of operations.

27

# 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) wholly-owned
companies if holdings, directly or indirectly, represent 100% of the issuers voting
common stock, (ii) majority-owned, if holdings, directly or indirectly, represent
over 50% of the issuers voting common stock, (iii) controlled companies if
the holdings, directly or indirectly, represent over 25% and up to 50% of the
issuers voting common stock and (iv) other affiliates if the holdings,
directly or indirectly, represent 5% to 25% of the issuers voting common stock.
Investments  other than securities represent all investments other than in
securities of the issuer.

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

For financial statement purposes,
investments are recorded at their fair value. Effective June 15, 2004, the Company
acquired a privately held oil company and effective April 1, 2004, the Company also formed
a new controlled entity to transfer its assets and certain liabilities into for purposes
of holding this entity as an investment. Currently, readily determinable fair values do
not exist for these transactions and the investment in the privately held company and the
newly formed controlled entity are recorded at cost at June 30, 2004. Going forward, the
fair value of these investments will be 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.

28

# RESULTS OF OPERATIONS

Financial Analysis of the
Three and Six Months Ended June 30, 2004 and 2003

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

|                                 | Three months ended
June 30, | Six months ended
June 30,
|-------------------------------- | --------------------------- | -------------------------
|Oil sales, net                   |                             |                          
|                                 |                             |                          
|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       |                             |                          
|Interest expense                 |                             |                          
|Payrol tax expense and penalties |                             |                          
|Loss on settlement               |                             |                          
|                                 |                             |                          
|Total Other Expense              |                             |                          
|                                 |                             |                          
|Net Loss                         |                             |                          
|                                 |                             |                          

Three Months Ended June
30, 2004:

Revenue:

Operating revenue increased $17,548,
or 100%, to $17,548 for the three months ended June 30, 2004 from zero for the three
months ended June 30, 2003. The increase was primarily the result of the fact that the
Company entered a new development stage on February 20, 2003, as the result of the
acquisition of certain oil and gas assets. Until February 20, 2003, the Company was
actively seeking oil and gas leases for acquisition and operation and had no sales.

Operating Expenses:

Operating expenses increased
$247,731, or 379% to $719,620 for the three months ended June 30, 2004 from $471,889 for
the three months ended June 30, 2003. The increase was primarily the result of a $510,995
increase in compensation offset by a $252,491 decrease in consulting and a $90,450
decrease in website expense. The increase in compensation was primarily the result of a
$480,995 expense related to the beneficial conversion for the issuance of preferred stock
to an officer in exchange for debt. The decrease in consulting was because in 2003, the
Company recorded $354,725 of consulting expense related to stock issued for services as
compared to $101,784 in 2004. The decrease in website was because in 2003, the Company
recorded $89,250 of website expense related to stock issued for services as compared to $0
in 2004.

29

Other Expense:

Other expense increased $234,618, or
439% to $289,760 for the three months ended June 30, 2004 from $55,141 for the three
months ended June 30, 2003. In accordance with EITF Issue 98-5, as amended by EITF 00-27,
the Company has evaluated that the issuance of several convertible debentures during the
three months ended June 30, 2004 has a beneficial conversion feature as the exercise price
for is less than the fair value of the Companys common stock on the measurement
date. Accordingly, the Company has recognized this beneficial conversion feature by
charging the statement of operations $261,429 for interest expense.

Six Months Ended June 30,
2004:

Revenue:

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

Operating Expenses:

Operating expenses increased
$224,600, or 698% to $1,076,510 for the six months ended June 30, 2004 from $851,910 for
the six months ended June 30, 2003. The increase was primarily the result of a $540,995
increase in compensation offset by a $443,862 decrease in consulting and a $120,200
decrease in website expense. The increase in compensation was primarily the result of a
$480,995 expense related to the beneficial conversion for the issuance of preferred stock
to an officer in exchange for debt. The decrease in consulting was because in 2003, the
Company recorded $649,796 of consulting expense related to stock issued for services as
compared to $205,934 in 2004. The decrease in website was because in 2003, the Company
recorded $148,750 of website expense related to stock issued for services as compared to
$28,550 in 2004.

Other Expense:

Other expense increased $2,888,407,
or 4,867% to $2,867,011 for the six months ended June 30, 2004 from $78,604 for the six
months ended June 30, 2003. In accordance with EITF Issue 98-5, as amended by EITF 00-27,
the Company has evaluated that the issuance of several convertible debentures during the
six months ended June 30, 2004 has a beneficial conversion feature as the exercise price
for is less than the fair value of the Companys common stock on the measurement
date. Accordingly, the Company has recognized this beneficial conversion feature by
charging the statement of operations $2,891,429 for interest expense

# Liquidity and Capital
Resources

Cash and cash equivalents were
$204,674 at June 30, 2004 as compared to $432 at December 31, 2003, and working capital
deficit was $391,345 at June 30, 2004 as compared to $1,147,830 at December 31, 2003. The
increase in cash was primarily the result of the Company receiving $850,000 of proceeds
from the issuance of convertible debentures and $689,500 of net proceeds from the issuance
of common stock during the six months ended June 30, 2004. The reduction in the working
capital deficit from December 31, 2003 was primarily the result of the conversion of
$528,532 of indebtedness into preferred stock and the increase in cash.

Operating
Activities: Net cash used in operating activities was $261,143 for the six
months ended June 30, 2004 while cash that was used in operating activities was $10,200
for the six months ended June 30, 2003. The increase in cash used in operations resulted
primarily due to the fact of increases in accrued interest, accounts payable and accrued
payroll taxes.

30

Investing
Activities: Cash used in investing activities was $1,044,115 for the six
months ended June 30, 2004 and there were no investing cash flow activities during the six
months ended June 30, 2003. The increase in cash used in investing activities was
primarily from $975,722 of advances to affiliates and $106,435 of purchase for equipment.

Financing
Activities: Cash flows provided by financing activities was $1,509,500 for
the six months ended June 30, 2004 while cash provided by financing activities was $10,200
for the six months ended June 30, 2003. The increase in cash provided by financing
activities was primarily due to $850,000 of cash proceeds received by the Company from the
issuance of convertible debentures and $689,500 of cash proceeds, net of $62,500 of
offering costs, from the sale of common stock.

# SHORT-TERM DEBT

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

Lease Payable

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

On April 16, 2001, the Company leased
computer equipment under a 36 month lease that was accounted for as a capital lease in the
amount of $21,238 and at June 30, 2004, the balance of principal was $18,153. The amount
is personally guaranteed by a former officer/director and a current officer/director of
the Company. The lease was secured by all leased equipment and perfected by a financing
statement; however, the Company liquidated the equipment and paid the office space lessor
the $4,000 proceeds. At June 30, 2004, the Company has recorded a total of $4,434 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 sole director occurs. The president of
the Company transferred these shares on September 15, 2003. As of June 30, 2004 the
transaction has not been finalized as the lessor has not agreed to the settlement. The
Company expects to fully resolve this matter in 2004 at which time the value of the shares
exchanged and any related gain or loss will be determined and recognized.

Notes payable 
Banks

|                                                                                 | 
|-------------------------------------------------------------------------------- | 
|$70,000 bank revolving line of credit, dated March 12, 2001, bearing interest at | 
|default rate of 18% per annum, due March 11, 2002. In Default at June 30,        | 
|2004                                                                             | 
|                                                                                 | 

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
June 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. At June 30, 2004, the Company has
recorded a total of $8,652 in accrued interest for this line of credit in the accompanying
Balance Sheet. The line of credit is in default at June 30, 2004.

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

31

Loans and Note Payable
Settlement with Related Party

Beginning in January of 2002 and
through December 2003, the Companys sole 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 charging 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.

# LONG-TERM DEBT

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

Convertible Debentures:

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

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). The remaining $135,000 of the $250,000 convertible debenture remains
outstanding at June 30, 2004. In July and August 2004, the remaining $135,000 was
converted into 2,500,000 shares of common stock at $0.01 per share (50% of the closing
share price)

32

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

Effective June 15, 2004, the Company
issued a $400,000 convertible debenture to PRI in accordance with the acquisition
agreement between PRI and the Company. 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 June 30, 2004.

In accordance with EITF Issue 98-5,
as amended by EITF Issue 00-027, the Company has evaluated that the convertible debenture
discussed above has a beneficial conversion feature as the exercise price is less than the
fair value of the Companys common stock on the measurement date. Accordingly, the
Company has recognized this beneficial conversion feature by recording a debt discount as
a contra account to the convertible debenture for $400,000 and $400,000 to additional
paid-in capital. The debt discount will be amortized over the debt term of 17.5 months or
through the due date of December 5, 2005. At June 30, 2004, the Company has recorded
$11,428 of amortization of the debt discount for the period from June 15 through June 30,
2004 and has recorded this amount as interest expense in the statement of operations.

On February 20, 2003, the Company
executed a $2,000,000 convertible promissory note accruing interest at 6% with a company
controlled by the brother of the Companys sole officer and director (See Note 9
 Related Party Transactions). The maturity date was July 25, 2007. The note was
payable at maturity in preferred stock of the Company at $1.00 per share and. the
preferred stock was convertible into common stock at $1.00 per share. Additionally, at the
option of the holder, the debt may be settled for cash. The note is secured by a deed of
trust and a lien against the leases and the wells and other liens against the same leases
and wells of $25,000.

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

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

33

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

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

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

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

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

At June 30, 2004, the Company has
recorded $109,699 of accrued interest for the convertible debentures outstanding.

Equity Financing

For the six month period ended June
30, 2004, the Company received $689,500 of cash proceeds, net of $62,500 of offering
costs, from the Effective March 29, 2004, the Company received a $500,000 commitment to
purchase 4,545,464 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.

34

Liquidity

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

Our ability to obtain additional
financing depends on many factors beyond our control, including the state of the capital
markets, the market price of our common stock, the prospects for our business and the
approval by our stockholders of an amendment to our certificate of incorporation
increasing the number of shares of common stock we are authorized to issue. The necessary
additional financing may not be available to us or may be available only on terms that
would result in further dilution to the current owners of our common stock. Failure to
obtain commitments for financing would have a material adverse effect on our business,
results of operations and financial condition. If the financing we require to sustain our
working capital needs is unavailable or insufficient or we do not receive the necessary
financing, we may be unable to continue as a going concern.

# Contractual Obligations
and Commercial Commitments

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

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

# Recent Accounting
Developments

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

35

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

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

# 2004 OUTLOOK

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

# Item 3. Evaluation of
Disclosure Controls and Procedures.

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

Management and our Independent
registered Public Accounting firm have advised our independent director that during
certain interim procedures, they noted certain deficiencies in internal control related
to:

| | o | Documentation and maintenance of certain corporate agreements and contracts which provide
the basis for recording certain accounting transactions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

We are in process of implementing
financial corrective actions as of the date of this report on Form 10-Q. We have performed
substantial additional procedures designed to ensure that these internal control
deficiencies did not lead to material misstatements in our financial statements for the
three and six months ended June 30, 2004.

We will continue to evaluate the
effectiveness of our disclosure controls and internal controls and procedures on an
ongoing basis and will take further action as appropriate.

# 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 June 30, 2004.

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

The Company has included $53,791 of
unpaid Federal payroll taxes and employee withholdings and related penalties and interest
in its accrued expenses as of June 30, 2004. Such amounts are subject to potential federal
tax liens.

36

On May 21, 2004, the Company received
correspondence from the Securities and Exchange Commission (SEC) regarding our
notification of late filing on Form 12b-25 for the quarterly period ended March 31, 2004
on Form 10-Q. The correspondence from the SEC notified us that the reason for our
requested extension of time was insufficient and that the same justification was utilized
for the filing of Form 12b-25 for the quarterly period ended December 31, 2003, September
30, 2003 and June 30, 2003. The SEC has notified the Company that the Form 10-Q for the
period ended March 31, 2004 is not considered to of been filed timely and that we should
respond to the SEC regarding corrective action to be taken concerning disclosure controls
and procedures and that the SEC correspondence should be discussed with the Board of
Directors. The accompanying financial statements do not include a provision for any cost
of actions, if any, that may be taken by the SEC against the Company for this item.

# Item 2. Changes in
Securities

Issuances of Preferred
Stock:

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

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

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

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

In accordance with FAS 123, the
Company has valued the preferred stock, based on the conversion rate and quoted trade
price of the common stock on the grant date, at $135,000 which is recorded in operations
in the six months ended 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.

37

Issuances of Common Stock:

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

In January 2004, the Company received
$600,000 in gross proceeds from the issuance of two convertible debentures, one for
$100,000 and the other for $500,000. On February 5, 2004, the $100,000 convertible
debenture holder elected to convert the entire balance into common shares of the Company
and as a result of the conversion, 3,333,333 shares of common stock were issued at $0.03
per share (50% of the closing share price on February 5, 2004).

In March, 2004, $200,000 of the
$500,000 convertible debenture was converted into 20,000,000 shares of common stock at
$0.01 (50% of the closing price). In April and May 2004, the remaining $300,000 of
convertible debenture was converted into 30,000,000 shares of common stock at $0.01 (50%
of the closing price).

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

In January 2004, the Company issued a $30,000
convertible debenture to a consultant for services related to the filing by the Company to
become a BDC as mentioned previously. On February 5, 2004, the convertible holder elected
to convert the entire balance into common shares of the Company and 1,000,000 shares of
common stock were issued at $0.03 per share (50% of the closing share price on February 5,
2004).

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

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

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

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

In May 2004, the Company received
$250,000 in gross proceeds from the issuance of a convertible debenture. On May 17, 2004,
$30,000 of the convertible debenture was converted into 3,000,000 shares of common stock
at $0.01 per share (50% of the closing share price). On June 10, 2004, $85,000 of the
convertible debenture was converted into 8,500,000 shares of common stock at $0.01 per
share (50% of the closing share price). At June 30, 2004, the remaining $135,000 of
convertible debenture was outstanding.

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

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

38

In May 2004, the Company issued
700,000 shares of common stock at $0.01 per share to two individuals in exchange of oil
chemical to be used by the Company.

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

In June 2004, the Company issued
1,090,909 shares of common stock at $.11 per share 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.

Common Stock Issuable:

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

# Item 3. Defaults Upon
Senior Securities

None

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

None

# Item 5. Other Information

None

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

# (a) Exhibits

# Exhibit      Description            
                     
                     
                      
                      
Location

31.1           
          Certification by Principal Executive Officer          
                    
                    
                                        Page 65

31.2           
          Certification of Principal Financial Officer 
                     
                      
       
                                        Page 66

32              
            Certifications of Principal Executive and Financial Officer Pursuant to 906  
         Page 67

# (b) Reports on Form 8-K.

None

39

# 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                                    /s/ Charles Bitters 
----------------------------------------------------
      Charles Bitters | TITLE                       
Principal Executive Officer,
Principal Financial Officer,
Sole Director | DATE
August 16, 2004
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------