U.S.
      SECURITIES AND EXCHANGE COMMISSION





Washington,
      D.C. 20549





FORM
      10-QSB








(Mark
      One)


x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934





For
      the
      quarterly period ended September 30, 2006





o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934





For
      the
      transition period from _______ to _______





Commission
      file number 0-25455





**LEXINGTON
      RESOURCES, INC.**


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






NEVADA
            88-0365453(State
                or other jurisdiction of
                Identification No.)
            (I.R.S.
                Employerincorporation
                of organization)












**7473
      West Lake Mead Road**


**Las
      Vegas, Nevada 89128**


(Address
      of Principal Executive Offices)





**(702)
      382-5139**


(Issuer's
      telephone number)





n/a


(Former
      name, former address and former fiscal year, if
      changed since last report)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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
o






Applicable
      only to issuers involved in bankruptcy proceedings during the preceding five
      years.




N/A


1





Check
      whether the Registrant filed all documents required to be filed by Section
      12,
      13 and 15(d) of the Exchange Act after the distribution of securities under
      a
      plan confirmed by a court.





Yes o  No o


Applicable
      only to corporate issuers




Indicate
          by check mark whether the registrant is an accelerated filer (as defined
          in
          exchange A Rule 12b-2)
 
 Yes  ̈ No x
 
 Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act).
  Yes  ̈ No x


State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date:




Class
            
            Outstanding
                as of  November 8, 2006Common
                Stock, $.00025 par value
            
            38,766,270







Transitional
      Small Business Disclosure Format (check one) Yes
x No
o








2


**LEXINGTON
        RESOURCES, INC.**
 **INTERIM
        CONSOLIDATED**  **FINANCIAL
        STATEMENTS**
  **SEPTEMBER 30,
        2006**
 **(UNAUDITED)**
  PagePART
                  I.
              FINANCIAL
                  INFORMATION
              4ITEM
                  1.
              INTERIM
                  CONSOLIDATED FINANCIAL STATEMENTS
              4CONSOLIDATED
                  BALANCE SHEETS
              4INTERIM
                  CONSOLIDATED STATEMENTS OF OPERATIONS
              5INTERIM
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
              6NOTES
                  TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
              7ITEM
                  2.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              15ITEM
                  3.
              CONTROLS
                  AND PROCEDURES
              28PART
                  II.
              OTHER
                  INFORMATION
              28ITEM
                  1.
              LEGAL
                  PROCEEDINGS
              28ITEM
                  2.
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              29ITEM
                  3.
              DEFAULTS
                  UPON SENIOR SECURITIES
              30ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              31ITEM
                  5.
              OTHER
                  INFORMATION
              31ITEM
                  6.
              EXHIBITS
              32SIGNATURES
              32






3


**PART
      1. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**




**LEXINGTON
      RESOURCES, INC.**


**CONSOLIDATED
        BALANCE SHEETS**
 September
                  30,
                2006
              
              
              December
                  31,
                2005(Unaudited)
              
              
              (Unaudited)**ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              113,408
              
              $
              520,332Accounts
                  receivable
              
              
              1,524,458
              
              
              184,546Due
                  from related parties (Note 7)
              
              
              145,177
              
              
              -Prepaid
                  expenses and other
              
              
              3,777
              
              
              -Current
                  portion of deferred finance fees (Note 5)
              
              
              55,875
              
              
              401,7151,842,695
              
              
              1,106,593**DEFERRED
                  FINANCE FEES**(Note
                  5)
              
              
              -
              
              
              267,810**PROPERTY
                  AND EQUIPMENT**(Note 4)Oil
                  and gas properties - full cost method of accountingProved,
                  net of accumulated depletion $575,943 (2005 - $420,937)
              
              
              6,413,428
              
              
              2,329,448Unproved
              
              
              8,799,922
              
              
              4,000,02415,213,350
              
              
              6,329,472Other
                  equipment, net of accumulated depreciation of $470,016 (2005 -
                  $1,328)
              
              
              5,102,094
              
              
              2,16720,315,444
              
              
              6,331,639$
              22,158,139
              
              $
              7,706,042**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****CURRENT
                  LIABILITIES**Accounts
                  payable and accrued liabilities
              
              $
              5,907,204
              
              $
              936,265Promissory
                  note and other short term advances (Note 5)
              
              
              625,151
              
              
              601,973Current
                  portion of convertible notes and accrued interest (Note 5)
              
              
              578,833
              
              
              1,940,7817,111,188
              
              
              3,479,019**CONVERTIBLE
                  NOTES**(Note
                  5)
              
              
              -
              
              
              1,220,965**LONG
                  TERM DEBT**(Note
                  5)
              
              
              1,295,961
              
              
              -**DERIVATIVE
                  LIABILITY**(Note
                  6)
              
              
              1,389,883
              
              
              -9,797,032
              
              
              4,699,984**CONTINGENCIES
                  AND COMMITMENTS**(Notes 1, 4, 5 & 7)**STOCKHOLDERS’
                  EQUITY**(Note
                  6)Common
                  stock $.00025 par value: 200,000,000 shares authorizedPreferred
                  stock, $.001 par value: 75,000,000 shares authorizedIssued
                  and outstanding:38,766,270
                  common shares (December 31, 2005 - 18,627,523)
              
              
              10,611
              
              
              5,575Additionalpaid-in
                  capital
              
              
              28,926,175
              
              
              16,297,665Common
                  stock purchase warrants
              
              
              3,406,778
              
              
              2,809,836Accumulated
                  deficit
              
              
              (19,982,457
              )
              
              (16,107,018
              )12,361,107
              
              
              3,006,058$
              22,158,139
              
              $
              7,706,042
  The
        accompanying notes are an integral part of these interim consolidated financial
        statements.
 4
  **LEXINGTON
        RESOURCES, INC.**
 
 **INTERIM
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 
 For
                  the three month period ended
              For
                  the nine month period endedSeptember
                  30,
              September
                  30,2006
              
              
              2005
              
              
              2006
              
              
              2005**REVENUES**Oil
                  and gas revenue
              
              $
              153,363
              
              $
              137,458
              
              $
              410,873
              
              $
              530,721Drilling
                  and service revenue
              
              
              838,309
              
              
              -
              
              
              1,527,419
              
              
              -991,672
              
              
              137,458
              
              
              1,938,292
              
              
              530,721**OPERATING
                  EXPENSES**Operating
                  costs and taxes
              
              
              176,619
              
              
              58,612
              
              
              294,901
              
              
              180,073Rig,
                  well and pulling unit expense
              
              
              92,647
              
              
              -
              
              
              555,537
              
              
              -Salaries,
                  wages and related
              
              
              238,550
              
              
              -
              
              
              715,493
              
              
              -Depreciation,
                  depletion and amortization
              
              
              238,543
              
              
              104,761
              
              
              623,693
              
              
              244,641General
                  and administrative
              
              
              363,950
              
              
              115,974
              
              
              1,103,279
              
              
              684,925Consulting
                  - stock-based
              
              
              -
              
              
              1,138,238
              
              
              -
              
              
              1,913,991Investor
                  relations and promotion
              
              
              223,600
              
              
              525
              
              
              2,154,575
              
              
              602,2451,333,909
              
              
              1,418,110
              
              
              5,447,478
              
              
              3,625,875**NET
                  LOSS FROM OPERATIONS**
              
              
              (342,237
              )
              
              (1,280,652
              )
              
              (3,509,186
              )
              
              (3,095,154
              )**INTEREST
                  AND FINANCE FEES**(Note 5)
              
              
              (147,517
              )
              
              (3,365,248
              )
              
              (3,137,653
              )
              
              (3,373,998
              )**GAIN
                  ON DERIVATIVE LIABILITY**(Note
                  6)
              
              
              461,900
              
              
              -
              
              
              2,771,400
              
              
              -**NET
                  LOSS FOR THE PERIOD**
              
              $
              (27,854
              )
              $
              (4,645,900
              )
              $
              (3,875,439
              )
              $
              (6,469,152
              )
 
 **BASIC
                  AND FULLY DILUTED**
                **NET
                  LOSS PER SHARE**
              
              $
              (0.00
              )
              $
              (0.26
              )
              $
              (0.12
              )
              $
              (0.37
              )**WEIGHTED
                  AVERAGE COMMON SHARES**
                **OUTSTANDING**
              
              
              38,766,270
              
              
              17,557,753
              
              
              32,285,314
              
              
              17,375,441
 
  The
        accompanying notes are an integral part of these interim consolidated financial
        statements.
 
  5
   **LEXINGTON
        RESOURCES, INC.**
 
 **INTERIM
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 
 For
                  the nine month period endedSeptember
                  30,2006
              
              
              2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss for the period
              
              $
              (3,875,439
              )
              $
              (6,469,152
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Stock-based
                  compensation
              
              
              -
              
              
              1,913,991Non-cash
                  expenses
              
              
              187,500
              
              
              153,708Oil
                  and gas depletion
              
              
              155,005
              
              
              244,641Depreciation
              
              
              468,688
              
              
              498Non-cash
                  interest and finance fees (Note 5)
              
              
              2,880,638
              
              
              3,326,799Gain
                  on derivative liability
              
              
              (2,771,400
              )
              
              -Changes
                  in working capital assets and liabilities:Accounts
                  receivable
              
              
              (538,403
              )
              
              (26,411
              )Prepaid
                  expenses and other
              
              
              16,672
              
              
              (12,000
              )Accounts
                  payable
              
              
              (142,331
              )
              
              (195,226
              )Accrued
                  liabilities
              
              
              43,058
              
              
              -**NET
                  CASH FLOWS USED IN OPERATING ACTIVITIES**
              
              
              (3,576,012
              )
              
              (1,047,012
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of equipment
              
              
              (339,879
              )
              
              -Additions
                  to oil and gas properties
              
              
              (4,938,883
              )
              
              (2,245,408
              )Cash
                  acquired on acquisition of Oak Hills, net of transaction
                  costs
              
              
              119,544
              
              
              -**NET
                  CASH FLOWS USED IN INVESTING ACTIVITIES**
              
              
              (5,159,218
              )
              
              (2,245,408
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Drilling
                  obligation payments
              
              
              -
              
              
              (1,180,915
              )Advances
                  to related parties
              
              
              (130,005
              )
              
              -Convertible
                  note advances (repayments)
              
              
              (745,516
              )
              
              4,645,950Long
                  term debt repayments
              
              
              (222,423
              )
              
              -Proceeds
                  on sale of common stock
              
              
              9,426,250
              
              
              512,630**NET
                  CASH FLOWS PROVIDED BY FINANCING ACTIVITIES**
              
              
              8,328,306
              
              
              3,977,665**INCREASE
                  (DECREASE) IN CASH AND CASH EQUIVALENTS**
              
              
              (406,924
              )
              
              685,245**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
              
              
              520,332
              
              
              326,293**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              113,408
              
              $
              1,011,538
  **SUPPLEMENTAL
        CASH FLOW INFORMATION** (Note
        8).
 The
        accompanying notes are an integral part of these interim consolidated financial
        statements.
  6
   **NOTE
        1:****NATURE
        OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION**
 
 Lexington
        Resources, Inc., a Nevada corporation, and its wholly owned subsidiary Lexington
        Oil & Gas Ltd. Co., an Oklahoma Limited Liability Corporation (“Lexington”),
        were organized for the purposes of the acquisition and development of oil
        and
        natural gas properties in the United States, concentrating on unconventional
        gas
        production initiatives that include coal bed methane gas acquisitions and
        developments in the Arkoma Basin in the State of Oklahoma as well as Barnett
        Shale targeted acquisitions and developments in the Dallas Fort Worth Basin
        in
        the State of Texas.
 
 On
        January 23, 2006, the Company acquired 100% of the shares of Oak Hills Drilling
        and Operating International, Inc., and its wholly owned operating subsidiary,
        Oak Hills Drilling and Operating LLC (“Oak Hills”). The purpose of the
        acquisition of Oak Hills was to enable the Company to improve scheduling
        of
        property development, to decrease costs associated with drilling and completing
        wells, and to increase the Company's control over its oil and gas leasehold
        developments by utilizing Oak Hills’ in house drilling and completion teams for
        its property exploration initiatives and gas well development
        programs.
 
 **Going
        Concern**
 The
        consolidated financial statements have been prepared on the basis of a going
        concern which contemplates the realization of assets and the satisfaction
        of
        liabilities in the normal course of business. The Company has a working capital
        deficiency of $5,268,493 at September 30, 2006, has incurred losses since
        inception of $19,982,457 and further losses are anticipated in the development
        of its oil and gas properties raising substantial doubt as to the Company’s
        ability to continue as a going concern. The ability of the Company to continue
        as a going concern is dependent on raising additional capital to fund ongoing
        losses and property development and ultimately on generating future profitable
        operations. The Company will continue to fund operations with advances and debt
        instruments, as well as further equity placements.
 
 Additional
        issuances of equity or convertible debt securities will result in dilution
        to
        our current shareholders. Further, such securities might have rights,
        preferences or privileges senior to our common stock. Additional financing
        may
        not be available upon acceptable terms, or at all. If adequate funds are
        not
        available or are not available on acceptable terms, we may not be able to
        take
        advantage of prospective new business endeavors or opportunities, which could
        significantly and materially restrict our business operations.
 
 During
        the period the Company completed a private placement of units at $1.00 per
        unit
        for gross proceeds of $7,650,000 as described in Note 6.
  Reclassification
 Certain
        amounts from prior periods have been
        reclassified to the current period presentation. This reclassification has
        resulted in no changes to the Company's accumulated deficit or net losses
        presented.
 **Unaudited
        Interim Financial Statements**
 The
        accompanying unaudited interim consolidated financial statements have been
        prepared in accordance with generally accepted accounting principles for
        interim
        financial information and with the instructions to Form 10-QSB of Regulation
        S-B. They do not include all information and footnotes required by United
        States
        generally accepted accounting principles for complete financial statements.
        However, except as disclosed herein, there have been no material changes
        in the
        information disclosed in the notes to the financial statements for the year
        ended December 31, 2005 included in the Company's Annual Report on Form 10-KSB
        filed with the Securities and Exchange Commission. The interim unaudited
        consolidated financial statements should be read in conjunction with those
        financial statements included in the Form 10-KSB. In the opinion of management,
        all adjustments considered necessary for a fair presentation, consisting
        solely
        of normal recurring adjustments, have been made. Operating results for the
        nine
        months ended September 30, 2006, are not necessarily indicative of the results
        that may be expected for the year ending December 31, 2006.
 
 
 **NOTE
        2:****STOCK-BASED
        COMPENSATION**
 
 On
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        Financial Accounting Standards Board (“FASB”) Statement No. 123(R), *Share-Based
        Payment,* (“SFAS
        123R”). Prior to January 1, 2006, the Company accounted for share-based payments
        under the recognition and measurement provisions of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* (“APB
        25”), and related Interpretations, as permitted by FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS
        123”). In accordance with APB 25, no compensation cost was required to be
        recognized for options granted that had an exercise price equal to the market
        value of the underlying common stock on the date of grant.
  7
  **NOTE
        2:****STOCK-BASED
        COMPENSATION (continued)**
 
 The
        Company adopted SFAS 123R using the modified-prospective-transition method.
        Under this method, compensation cost recognized for the nine months ended
        September 30, 2006 includes: a) compensation cost for all share-based payments
        granted prior to, but not yet vested as of December 31, 2005, based on the
        grant-date fair value estimated in accordance with the original provisions
        of
        SFAS 123, and b) compensation cost for all share-based payments granted
        subsequent to December 31, 2005, based on the grant-date fair value estimated
        in
        accordance with the provisions of SFAS 123R. In addition, deferred stock
        compensation related to non-vested options is required to be eliminated against
        additional paid-in capital upon adoption of SFAS 123R. The results for the
        prior
        periods have not been restated.
 
 All
        previously granted stock options had fully vested as at December 31, 2005
        and
        during the period ended September 30, 2006, the Company did not grant any
        new
        stock options or modify any previously existing stock options. Accordingly,
        the
        Company’s results of operations for the period ended September 30, 2006 were no
        different than if the Company had not adopted SFAS 123R. As a result, no
        pro
        forma disclosure of the impact of adopting SFAS 123R has been provided. The
        following table illustrates the effect on net loss and net loss per share
        had
        the Company applied the fair value recognition provisions of SFAS No. 123
        to
        stock-based compensation for the comparative nine month period ended September
        30, 2005:
 
 Nine
                  months ended September 30, 2005Net
                  loss
              
              As
                  reported
              $
              (6,469,152)SFAS
                  123 compensation expense
              
              Pro-forma
              
              (841,307)Net
                  loss
              
              Pro-forma
              $
              (7,310,459)Basic
                  and diluted net loss per share
              
              Pro-forma
              $
              (0.42)
 
 **NOTE
        3:****ACQUISITION
        OF OAK HILLS DRILLING AND OPERATING INTERNATIONAL,
        INC.**
 
 On
        January 23, 2006, the Company acquired 100% of the shares of Oak Hills from
        the existing shareholders for an aggregate of 6,000,000 restricted shares
        of the
        Company’s common stock. The assets of Oak Hills were independently valued at
        approximately $5.85 million and management of the Company determined a net
        tangible fair value of approximately $3.82 million as the basis for the total
        number of common shares issued at a price per share of $0.637. As of the
        acquisition date, Oak Hills had secured promissory notes totaling $1.28 million
        owed to certain of the Oak Hills vendors. The $1.28 million in promissory
        notes
        accrue interest at 9% per annum, and require no payments of interest or
        principal until the end of a two year term ending January 22, 2008.
 
 The
        purpose of the acquisition of Oak Hills was to enable the Company to improve
        scheduling of property development, to decrease costs associated with drilling
        and completing wells, and to increase the Company's control over its oil
        and gas
        leasehold developments by utilizing Oak Hills’ in house drilling and completion
        teams for its property exploration initiatives and gas well development
        programs.
 
 Prior
        to
        the acquisition of Oak Hills, there were 18,627,523 shares of common stock
        of
        the Company outstanding. Accordingly, the pre-acquisition shareholders of
        the
        Company owned approximately 76% of the post-acquisition issued and outstanding
        shares of the Company’s common stock. As a result this business combination has
        been accounted for using the purchase method with the Company being the
        acquirer.
 
 The
        fair
        value of the assets acquired and liabilities assumed effective January 23,
        2006
        are as follows:
 Current
                  assets
              $
              1,024,458Property,
                  plant and equipment
              
              5,228,736Current
                  liabilities
              
              (842,836)Due
                  to related parties
              
              (1,280,789)Long
                  term debt
              
              (222,423)$
              3,907,146
 
  8
  **NOTE
        3:****ACQUISITION
        OF OAK HILLS (continued)**
 
 Consideration
                  paid-
                  6,000,000 common shares at $0.6374 per share
              $
              3,824,190-
                  transaction costs
              
              82,956$
              3,907,146
 
 The
        results of operations and cash flows presented include those of the Company
        for
        all periods presented and those of Oak Hills for the period from January
        23,
        2006 to September 30, 2006.
 
 The
        following unaudited pro forma information for the three and nine month periods
        ended September 30, 2006 and 2005 presents the pro forma results of operations
        as if the acquisition had occurred as of January 1, 2006 and January 1, 2005
        respectively. The pro forma information presented is not necessarily indicative
        of what would have occurred had the acquisition been made as of January 1,
        2006
        and 2005, nor is it necessarily indicative of future results of operations.
        The
        following pro forma amounts give effect to appropriate adjustments for an
        increase in depreciation, additional intercompany profit elimination and
        an
        increase in weighted average shares outstanding.
 
 For
                  the three month period ended
              For
                  the nine month period endedSeptember
                  30,
              September
                  30,2006
              
              
              2005
              
              
              2006
              
              
              2005Revenues
              
              $
              991,672
              
              $
              1,122,099
              
              $
              2,284,925
              
              $
              2,552,742Net
                  loss
              
              $
              (27,854
              )
              $
              (4,517,087
              )
              $
              (3,851,367
              )
              $
              (6,652,781
              )Net
                  loss per share - basic and diluted
              
              $
              (0.00
              )
              $
              (0.19
              )
              $
              (0.12
              )
              $
              (0.28
              )Weighted
                  average shares outstanding
              
              
              38,766,270
              
              
              23,557,753
              
              
              32,768,830
              
              
              23,375,441
 
 
 **NOTE
        4:****PROPERTY
        AND EQUIPMENT**
 
 Property
        and equipment includes the following:
 September
                  30,
              
              
              December
                  31,2006
              
              
              2005**Oil
                  and gas properties:**Proved,
                  subject to depletion
              
              $
              6,989,371
              
              $
              2,750,385Unproved,
                  not subject to depletion
              
              
              8,799,922
              
              
              4,000,024Accumulated
                  depletion
              
              
              (575,943
              )
              
              (420,937
              )Net
                  oil and gas properties
              
              
              15,213,350
              
              
              6,329,472Other
                  equipment
              
              
              5,572,110
              
              
              3,495Accumulated
                  depreciation
              
              
              (470,016
              )
              
              (1,328
              )Net
                  other property and equipment
              
              
              5,102,094
              
              
              2,167Property
                  and equipment, net of accumulated depreciation and
                  depletion
              
              $
              20,315,444
              
              $
              6,331,639
 
 The
        Company's oil and gas activities are currently conducted in the United States.
        During the period ended September 30, 2006, the Company completed the following
        transactions related to its oil and gas activities:
 
 **Acquisition
        of Oak Hills Drilling and Operating International, Inc.**
 On
        January 23, 2006, the Company completed the acquisition of Oak Hills as
        described in Note 3.
  9
  **NOTE
        4:****PROPERTY
        AND EQUIPMENT (continued)**
 
 **Joint
        Exploration Agreement - Arkoma Basin, Oklahoma**
 On
        March
        3, 2006, effective January 31, 2006, the Company entered into an exploration
        agreement with Dylan Peyton, LLC (“Dylan”) of Dallas, Texas to jointly develop
        Lexington’s Arkoma Basin leases located in Hughes and MacIntosh Counties in the
        State of Oklahoma (the “Arkoma Basin Exploration Agreement”).  The
        properties will be developed on a 50/50 equal working interest basis.  An
        affiliate to Dylan, named Avatar Energy, LLC, will become the operator for
        the
        project supplying at least one drilling rig to the project.  The Company
        has assigned 50% of its undeveloped leasehold interests in Oklahoma in exchange
        for cash proceeds of $575,000 which equates to approximately 50% of the
        Company’s originally incurred leasing costs.  Assignments to 50% of the
        Company’s undeveloped leasehold interests in Coal Creek, South Lamar, Middle
        Creek, and H-9 Prospects have been effected to Dylan.  Well bores and
        acreage relating to previously drilled and completed wells by the Company
        will
        not form part of any assignments under the Arkoma Basin Exploration
        Agreement.  Proceeds from this disposal were recorded as a reduction of the
        capitalized costs without recognition of a gain or loss as the disposal did
        not
        result in a change of 20 percent or more in the Company’s depletion rate.
 
 During
        the third quarter, 658 net acres of the Company’s leases relating the H-9
        Prospect acreage lapsed according to their terms resulting in an impairment
        to
        the carrying value of unamortized property of $315,357.  In accordance with
        the provisions of full cost accounting, the Company transferred this carrying
        value into its cost pool subject to amortization.
 
 **Joint
        Exploration Agreement - Comanche County, Texas**
 On
        March
        3, 2006, effective January 31, 2006, the Company entered into an exploration
        agreement with Dylan to jointly develop approximately 5,000 acres of Barnett
        Shale and shallow gas targets in Comanche County, Texas (the “Comanche County
        Exploration Agreement”). The property will be developed on a 50/50 equal working
        interest basis.  The Company’s subsidiary, Oak Hills will become the
        operator of the project.  The Company will pay approximately $1,250,000 for
        its 50% working interest in the new acreage through a combination of $575,000
        in
        cash (paid during the period) and approximately $675,000 of carried drilling
        costs in the first Comanche Barnett Shale test well required to be drilled
        on or
        before September 2006.  The test well commenced drilling on September 1,
        2006 and the Company is currently evaluating the final costs associated with
        drilling in order to determine the total amounts owing. It is estimated that
        the
        total amount owing for the acreage will be $1,400,000, resulting in an amount
        remaining to be paid of $350,000 after deducting the original payment of
        $575,000 and the carried drilling costs estimated to be $475,000. The $350,000
        may be paid by the Company in cash or restricted stock with piggy back
        registration rights at a 15% discount to the 30 day weighted average preceding
        the completion of the drilling of the test well.
 
 **NOTE
        5:****LONG
        TERM DEBT, SHORT TERM DEBT AND OTHER ADVANCES**
 
 During
        the period ended September 30, 2006, the Company had the following activity
        in
        connection with long term debt, short term debt and other advances:
 
 **Promissory
        note**
 On
        December 20, 2005 the Company obtained an unsecured loan by way of promissory
        note from a shareholder of the Company totaling $600,000. The term of the
        loan
        is for two years with interest calculated at 10% per annum. Interest is to
        be
        paid on a quarterly basis with the principal to be repaid on or before the
        two
        year loan period. As of September 30, 2006, $25,151 (December 31, 2005 -
        $1,973)
        of accrued interest remains unpaid on this loan. Subject to available funds,
        the
        Company intends to repay this loan during the next 12 months and accordingly
        it
        has been classified as a current liability.
 
 **Long
        term debt**
 As
        at the
        date of the Oak Hills acquisition, Oak Hills had outstanding notes payable
        to
        financial institutions totaling $222,423 secured by certain assets of Oak
        Hills
        with interest rates ranging from 6.25% to 11.5% and maturing through October
        2010. Subsequent to the acquisition of Oak Hills, the balance of these loans
        have been repaid and the security has been released.
 
 As
        at the
        date of the Oak Hills acquisition, Oak Hills had outstanding promissory notes
        totaling $1,295,961 which accrue interest at 9% per annum, and require no
        payments of interest or principal until the end of a two year term ending
        January 22, 2008. These promissory notes are owed to certain former shareholders
        of Oak Hills, being vendors in the Oak Hills acquisition described in Note
        3 and
        are secured against the assets of Oak Hills. During the period ended September
        30, 2006, the Company accrued $77,330 of interest on these loans resulting
        in
        $196,737 of accrued interest owing which has been included in accounts payable.
  10
  **NOTE
        5:****LONG
        TERM DEBT, SHORT TERM DEBT AND OTHER ADVANCES
        (continued)**
 
 **Other
        short term advances**
 During
        the first quarter of 2006, the Company received an advance from a shareholder
        of
        the Company of $500,000. This amount was unsecured, non-interest bearing
        and
        without specific terms of repayment. During the period, this amount was applied
        towards subscriptions in connection with the Company’s private placement. (Refer
        to Note 6).
 
 **Secured
        convertible notes**
 As
        at
        December 31, 2005, the Company had secured convertible debt principal
        outstanding of $4,854,314 less an unamortized discount of $1,801,901 resulting
        in a net carrying value of $3,052,413 of which $1,831,448 plus accrued interest
        of $109,333 was recorded as a current liability. During the period ended
        September 30, 2006, the Company paid a total of $187,130 of interest, repaid
        a
        total of $745,516 of principal, converted a total of $3,390,122 of principal
        and
        $33,625 of interest into common shares of the Company at a price of $1.00
        per
        share under the provisions of the Convertible Note agreements. Also during
        the
        period, the Company recorded non-cash finance fees totaling $1,651,688 relating
        to the amortization of the discount on both converted and unconverted notes
        and
        $613,650 relating to the amortization of deferred issuance costs. As at
        September 30, 2006, the Company had convertible debt principal outstanding
        of
        $718,675 less an unamortized discount of $150,213 resulting in a net carrying
        value of $568,462 which, in addition to $10,371 of accrued interest, has
        been
        recorded as a current liability. (Refer to Note 6).
 
 
 **NOTE
        6:****STOCKHOLDERS'
        EQUITY**
 
 The
        authorized capital of the Company consists of 200,000,000 voting common shares
        with $0.00025 par value, and 75,000,000 non-voting preferred shares with
        $0.001
        par value.
 
 **Common
        Stock Issuances -Nine months ended September 30, 2006**
 
 The
        Company entered into a one year consulting contract with a third party
        contractor, to provide financial and investor public relations and related
        matters in Germany. In connection with this agreement the Company issued
        400,000
        restricted shares of the Company’s common stock with a fair value of $300,000
        and agreed to pay approximately $353,000 (EUR $293,000) over the term of
        the
        agreement. The $300,000 was initially recorded as a deferred compensation
        equity
        item of which $187,500 was expensed during the period.
 
 During
        the period 1,150,000 stock options were re-assigned from International Market
        Trend, Inc. (“IMT”) to two consultants of IMT in connection with business
        development services provided by IMT and the consultants to the Company.
        The
        options are exercisable at $1.25 per share for a term of 5 years and replaced
        1,150,000 options previously granted to IMT which were concurrently cancelled.
        The exercise prices, terms and conditions of the new options issued were
        identical to those of the stock options cancelled. As these options are a
        reissuance of the original options and not a modification or replacement
        of the
        original option, the Company has not remeasured the fair value of the options
        at
        the reissuance date.
 
 A
        total
        of 1,650,000 shares of common stock were issued on the exercise of options
        (500,000 at $1.00 per share and 1,150,000 at $1.25 per share) for cash proceeds
        of $1,937,500. All shares issued were previously registered on Form
        S-8.
 
 A
        total
        of 250,000 shares of common stock were issued on the exercise of Series B
        warrants at $1.00 per share for cash proceeds of $250,000. The Series A and
        Series B warrants were originally issued as part of the secured convertible
        note
        unit offering and the shares of common stock underlying the warrants were
        registered by way of a Registration Statement on Form SB-2. The Series A
        and
        Series B warrants were originally issued at exercise prices of $1.50 per
        share
        and $1.25 per share, respectively. Under the original terms of the warrants,
        the
        exercise prices were subject to change under certain conditions relating
        to a
        subsequent financing. As a result of the private placement completed during
        the
        period, the Series A and Series B warrants were all repriced to $1.00 per
        share.
        During the period, the Company recorded a non-cash finance cost of $615,300
        being the estimated fair value increase in the warrants resulting from the
        price
        reduction described above.
 
 The
        Company issued 6,000,000 restricted shares of common stock in connection
        with
        the acquisition of Oak Hills as described in Note 3.
 
 The
        Company issued 3,423,747 shares of common stock on conversion of certain
        convertible note principal and interest amounts as described in Note
        5.
  11
  NOTE
        6:STOCKHOLDERS'
        EQUITY (continued)
 
 During
        the period, the Company completed a private placement pursuant to which the
        Company issued an aggregate of 7,650,000 units ("Unit") of the Company’s
        securities at a subscription price of U.S. $1.00 per Unit for total gross
        proceeds of $7,650,000; with each Unit being comprised of one common share
        and
        one non-transferable common stock purchase warrant ("Warrant"). Each resulting
        Warrant entitles the subscriber to purchase an additional common share (“Warrant
        Share”) of the Company at a price of $1.25 per share for the period commencing
        upon the date of issuance of the Units by the Company and ending on the day
        which is the earlier of (i) 18 months from the date of issuance of the Units
        and
        (ii) 12 months from the effective date of the Company’s proposed registration
        statement. Both the Warrant Shares and the common shares issued pursuant
        to the
        private placement offering are to be proposed for registration under the
        United
        States Securities Act of 1933, as amended. The Company paid finders fees
        of 5%
        of the gross cash proceeds received under the private placement offering
        and 10%
        restricted common shares on the gross units issued, with such restricted
        shares
        carrying piggy back registration rights. Of the total Units sold, 7,450,000
        are
        subject to potential damages relating to the registration requirement. Effective
        July 3, 2006, the Company filed a Form SB-2 Registration Statement under
        the
        United States Securities Act of 1933, as amended, to register the 8,415,000
        common shares issued and 7,650,000 common shares underlying the common stock
        purchase warrants. This registration statement was not declared effective
        before
        financial penalties were due pursuant to registration timing.  Penalties
        accrued and unpaid to September 30, 2006 total $85,217 and have been included
        in
        accounts payable and accrued liabilities (see derivative liability discussion
        below) .  The Company continues to incur 1.5% of $7,450,000 raised per
        month of delay until the Registration Statement is declared
        effective.
 
 The
        Company accounted for the various components of the private placement
        transaction using the provisions of SFAS No. 133 *Accounting
        for Derivative Instruments and Hedging Activities* ;
        EITF
        Issue No. 00-19 *Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        in a
        Company’s Own Stock* ;
        EITF
        Issue No. 05-4 *The
        Effect of Liquidated Damages Clause on Freestanding Financial Instruments
        Subject to Issue No. 00-19* and
        related amendments and guidance.
 
 The
        following table summarizes the initial allocation of the proceeds from the
        private placement:
 
 Gross
                  proceeds
              
              $
              7,650,000Fair
                  value of warrants subject to registration damages
              
              
              (4,172,000
              )Estimated
                  fair value of liquidated damages on common shares and
                  warrants
              
              
              (74,500
              )Share
                  issuance costs
              
              
              (411,250
              )Proceeds
                  allocated to equity components
              
              $
              2,992,250Allocated
                  as follows:Common
                  shares
              
              $
              2,880,250Warrants
                  not subject to registration damages
              
              
              112,000$
              2,992,250
 
 **Private
        placement warrants**
 The
        fair
        value of the Warrants at inception was estimated to be $4,284,000 and has
        been
        allocated between warrants subject to damages (derivative liability) and
        warrants not subject to damages (equity) as outlined above. The fair value
        of
        the warrants at inception was estimated using the Black-Scholes option-pricing
        model with the following assumptions: expected warrant life of 1.33 years,
        risk-free interest rate of 4.81%, dividend yield of 0% and expected volatility
        of 77%.
 
 **Liquidated
        damages related to common stock and warrants issued to investors in the private
        placement**
 The
        Company determined that the warrants and related liquidated damages provisions
        associated with the common stock issuable upon exercise of the warrants did
        not
        meet the criteria for equity accounting under EITF 00-19. Further, the Company
        determined that the liquidated damages provision related to the common stock
        issued is an embedded derivative under SFAS No. 133.
  12
  **NOTE
        6:****STOCKHOLDERS'
        EQUITY (continued)**
 
 As
        at
        issuance of the shares and warrants, the fair value of the warrants was
        estimated to be $4,172,000 using the Black-Scholes option-pricing model as
        described above. The fair value of the liquidated damages on the common stock
        and warrants at issuance was estimated to be $74,500. This estimate was based
        on
        the probability of non-registration over the term of the warrants, being
        the
        maximum period of damages provided for under the subscription agreements.
        The
        total fair value of the combined warrants and liquidated damages was $4,246,500
        at issuance of the shares and warrants and was recorded as a derivative
        liability which will be revalued each quarter until the liquidated damages
        provisions expire. Changes in the fair value estimate over this period will
        be
        recorded in the consolidated statement of operations.
 
 As
        at
        June 30, 2006, the fair value of the warrants was estimated to be $1,788,000
        using the Black-Scholes option-pricing model with the following assumptions:
        expected warrant life of 1.33 years, risk-free interest rate of 5.16%, dividend
        yield of 0% and expected volatility of 74%. As at June 30, 2006, the fair
        value
        of the liquidated damages on the common stock and warrants was estimated
        to be
        $149,000. As at June 30, 2006, the combined derivative liability had a carrying
        value of $1,937,000. During the period ended June 30, 2006, the Company recorded
        a gain of $2,309,500 on the change in the carrying value of the derivative
        liability resulting primarily from a decline in the price of the Company’s
        common stock of approximately 33%.
 
 As
        at
        September 30, 2006, the fair value of the warrants was estimated to be
        $1,117,500 using the Black-Scholes option-pricing model with the following
        assumptions: expected warrant life of 1.17 years, risk-free interest rate
        of
        4.71%, dividend yield of 0% and expected volatility of 72%. As at September
        30,
        2006, the fair value of the liquidated damages on the common stock and warrants
        was estimated to be $357,600. As at September 30, 2006, the combined derivative
        liability had a carrying value of $1,475,100, of which $85,217 is recorded
        in
        accounts payable and accrued liabilities as such amount is currently due.
        During
        the three-month period ended September 30, 2006, the Company recorded a further
        gain of $461,900 on the change in the carrying value of the derivative liability
        resulting primarily from a decline in the price of the Company’s common stock of
        approximately 14%.
 
 The
        carrying value of the derivative liability is summarized as
        follows:
 
 Derivative
                  liability:Fair
                  value of warrants subject to registration damages
              
              $
              4,172,000Estimated
                  fair value of liquidated damages on common shares and
                  warrants
              
              
              74,500Balance
                  as at issuance of the shares and warrants
              
              
              4,246,500Change
                  in fair value for the period ended June 30, 2006
              
              
              (2,309,500
              )Change
                  in fair value for the period ended September 30, 2006
              
              
              (461,900
              )Less:
                  actual damages accrued to September 30, 2006
              
              
              (85,217
              )Derivative
                  liability, September 30, 2006
              
              $
              1,389,883Allocated
                  as follows:Fair
                  value of warrants subject to registration damages
              
              $
              1,117,500Estimated
                  fair value of liquidated damages on common shares and
                  warrants
              
              
              357,600Less:
                  actual damages accrued to September 30, 2006
              
              
              (85,217
              )$
              1,389,883
 
 
 **NOTE
        7:****RELATED
        PARTY TRANSACTIONS**
 
 The
        Company previously entered into a one year contract with IMT on November
        10,
        2003, a private company that performs a wide range of management,
        administrative, financial, and business development services to the Company.
        The
        contract has been renewed annually. During the period, the Company incurred
        $90,000 in fees to IMT.
 
 During
        the period ended September 30, 2006 the Company incurred (a) $135,000 to
        its
        officers for management fees, (b) $15,000 to an officer and director for
        expense
        reimbursements and (c) $40,000 in fees to a director.
  13
  **NOTE
        7:****RELATED
        PARTY TRANSACTIONS (continued)**
 
 During
        the period, the Company incurred $65,769 in fees to the sole officer and
        director of Oak Hills who is also a director of the Company. In addition,
        Oak
        Hills incurred $31,500 to this director and a relative of this director for
        rent
        on the Company’s field offices in Oklahoma. This director has previously been
        assigned a 10% carried working interest in each well successfully drilled
        on the
        Wagnon lease, as partial compensation for his involvement in obtaining and
        facilitating the execution of the Farm-Out Agreement and to compensate for
        his
        services relating to operation and completion of wells to be located on the
        Wagnon lease, and has also been provided the right to purchase up to an
        additional 5% working interest of the Company’s total interest in all wells
        drilled by the Company on its properties provided that funds for this
        participation are paid prior to the commencement of drilling of said wells.
        As
        at September 30, 3006, a total of $137,161 is owed to the Company from this
        director and / or affiliates of this director for costs incurred in connection
        with certain well interests. Subsequent to September 30, 2006, the Company
        has
        received $46,922 of the amounts owing.
 
 On
        January 1, 2005, the Company appointed Oak Hills as its elected operator
        for
        wells on its Wagnon Lease, and for further drilling to be conducted by the
        Company. During the period the Company acquired Oak Hills who continues to
        act
        as operator.
 
 Refer
        to
        Notes 3 and 4.
 
 
 **NOTE
        8:****SUPPLEMENTAL
        DISCLOSURE WITH RESPECT TO CASH FLOWS**
 
 Nine
                  months ended September 30,2006
              
              
              2005Cash
                  paid during the period for:Interest
              
              $
              208,829
              
              $
              8,750Income
                  taxes
              
              $
              -
              
              $
              -Non-cash
                  investing and financing:Unpaid
                  property additions
              
              $
              4,100,000
              
              $
              -
 
 
 **NOTE
        8:****SUBSEQUENT
        EVENTS**
 
 On
        October 2, 2006, the Company entered into a convertible debt set-off agreement
        with Dylan (the “Convertible Debt Agreement”), relating to amounts due and owing
        to Dylan from fractures and completion of certain coal bed methane gas wells.
        Pursuant to the terms and provisions of the Convertible Debt Agreement: (i)
        Oak
        Hills sold to Ada Energy Services LLC (“AES”) certain of its assets, including
        two Wilson 600 duplex pumps for an aggregate consideration of $120,000 as
        a
        set-off for the debt due and owing to Dylan; (ii) Oak Hills will have 120
        days
        to pay the amount of $120,000 due and owing to Dylan to re-purchase the two
        Wilson pumps from AES for $120,000 plus the cost of any work done on them
        other
        than repairs made for damages caused by AES’ usage of the pumps; (iii) Oak Hills
        made a payment of $20,000 to Avatar Energy relating to the completion and
        fracture job on the Gray Well #1H-22 and the fracture job on the Dylan Well
        #1-23; and (iv) in the event Oak Hills does not re-purchase the Wilson pumps
        for
        $120,000 within the 120 days, the sale of the pumps will constitute full
        and
        complete settlement of the $120,000 due and owing Dylan.
 
 Subsequent
        to September 30, 2006, Cude Oilfield Contractors Inc. and Cude Energy Services
        Inc. (collectively, the “Lienholders”), recorded mineral property liens to
        secure payment in connection with amounts owed to the Lienholders by the
        Company
        totaling $589,407 relating to labor, materials and services provided by the
        Lienholders to certain of the Company’s drilling sites located in Texas. The
        properties subject to the liens include the Olive Lease in Tarrant County,
        the
        Martin Cantrell Lease in Parker County and the Gilbert Lease in Palo Pinto
        County.




14


Statements
      made in this Form 10-QSB that are not historical or current facts are
      "forward-looking statements" made pursuant to the safe harbor provisions of
      Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
      Securities Exchange Act of 1934. These statements often can be identified by
      the
      use of terms such as "may," "will," "expect," "believe," "anticipate,"
      "estimate," "approximate" or "continue," or the negative thereof. We intend
      that
      such forward-looking statements be subject to the safe harbors for such
      statements. We wish to caution readers not to place undue reliance on any such
      forward-looking statements, which speak only as of the date made. Any
      forward-looking statements represent management's best judgment as to what
      may
      occur in the future. However, forward-looking statements are subject to risks,
      uncertainties and important factors beyond our control that could cause actual
      results and events to differ materially from historical results of operations
      and events and those presently anticipated or projected. We disclaim any
      obligation subsequently to revise any forward-looking statements to reflect
      events or circumstances after the date of such statement or to reflect the
      occurrence of anticipated or unanticipated events. Please note that throughout
      this Quarterly Report, and unless otherwise noted, the words “we”, “our” or the
“Company” refer to Lexington Resources, Inc.




**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





**GENERAL**





Lexington
      Resources, Inc. is a corporation organized under the laws of the State of
      Nevada. We currently trade on the OTC Bulletin Board under the symbol "LXRS"
      and
      on the Frankfurt and Berlin Stock Exchanges under the symbol “LXR”; WKN: AØBKLP.
      Our oil and gas operations are conducted through our wholly owned subsidiary,
      Lexington Oil and Gas Ltd. Co., an Oklahoma limited liability company.





Two
      additional wholly-owned subsidiaries, Oak Hills Drilling and Operating
      International, Inc., a Nevada company, and Oak Hills Drilling and Operating
      LLC,
      an Oklahoma limited liability company (“Oak Hills”), were acquired in the first
      quarter of 2006. Oak Hills Drilling and Operating International Inc. is the
      private parent company to Oak Hills that provides comprehensive well drilling,
      completion, and maintenance services.





We
      have
      evolved into an integrated drilling and production company by acquiring our
      contract operator Oak Hills. This enables us to more comprehensively control
      our
      development process and more easily schedule the rate of drilling and production
      initiatives. We acquired Oak Hills as a 100% owned subsidiary. We now benefit
      from both service industry revenues and gas revenues from exploration and
      production while being able to drill and complete wells on our own schedule
      with
      higher quality control. As of the date of this Quarterly Report, we are
      considering monetizing our assets and those of Oak Hills to decrease liabilities
      and overhead incurred from capital expenditures and a lack of debt and equity
      resources.























15


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**




**Acquisition
      of Oak Hills**





On
      January 23, 2006, we entered into a definitive share exchange agreement (the
      “Oak Hills Share Exchange Agreement”) with Oak Hills International, Inc., Oak
      Hills, and each of the shareholders of Oak Hills International, Inc. (the “Oak
      Hills International Shareholders”), pursuant to which the Oak Hills
      International Shareholders agreed to sell to us the total issued and outstanding
      shares of Oak Hills International, Inc. and its wholly owned subsidiary, Oak
      Hills, in consideration of the issuance by us to the Oak Hills International
      Shareholders of an aggregate of 6,000,000 shares of our restricted common stock
      at a price of approximately $0.64 per share.





Oak
      Hills
      is currently our designated oil and gas operator for our well interests in
      the
      Barnett Shale, Texas Project leases. Oak Hills was originally created to drill,
      complete, and operate wells according to our exploration and development program
      when we had difficulty obtaining access to drilling rig service providers during
      the latter half of fiscal year 2004. Effective January 1, 2005, Oak Hills became
      our designated operator for the drilling and completion of Company-operated
      well
      interests. On January 23, 2006, we acquired Oak Hills and Oak Hills Drilling
      and
      Operating International Inc. We believe that by having Oak Hills drill our
      prospects, we will decrease our drilling costs on a consolidated basis and
      increase our control over our oil and gas leasehold developments enabling us
      to
      evolve into a vertically integrated junior oil and gas company with the capacity
      to take oil and gas development initiatives from land acquisition through
      drilling and to completion and production.





**Drilling
      Rig Offer**





We
      have
      solicited offers from unaffiliated third parties for the purchase of certain
      assets of Oak Hills, including the Wilson Giant single draw works drilling
      rig
      and related equipment (the “Drilling Rig Offer”). We reserve the right to refuse
      any and all Drilling Rig Offers. In the event we should accept a Drilling Rig
      Offer, the company submitting the offer must place into an escrow account a
      non-refundable earnest money deposit in the amount of 2% of the offer price.
      We
      have requested an independent evaluation report regarding valuation of the
      Wilson Giant drilling rig in order to substantiate the consideration offered
      in
      the Drilling Rig Offers.





**Joint
      Exploration Agreement - Arkoma Basin, Oklahoma**





On
      March
      3, 2006, effective January 31, 2006, we entered into an exploration agreement
      with Dylan Peyton LLC (“Dylan”) to jointly develop Lexington’s Arkoma Basin
      leases located in Hughes and MacIntosh Counties in the State of Oklahoma (the
      “Arkoma Basin Exploration Agreement”). The properties will be developed on a
      50/50 equal working interest basis. An affiliate to Dylan, Avatar Energy, LLC
      (“Avatar Energy”), will become the operator for the project supplying at least
      one drilling rig to the project. We have assigned 50% of our undeveloped
      leasehold interests in Oklahoma in exchange for cash proceeds of $575,000 which
      equates to approximately 50% of our originally incurred leasing costs.
      Assignments to 50% of our undeveloped leasehold interests in Coal Creek, South
      Lamar, Middle Creek, and H-9 Prospects have been effected to Dylan. Well bores
      and acreage relating to previously drilled and completed wells by us do not
      form
      part of any assignments under the Arkoma Basin Exploration Agreement.


16


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**




Under
      the
      exploration joint venture between us and Dylan, our operating subsidiary, Oak
      Hills, will be utilized for well completion and service, as well as geological
      and engineering work associated with the joint exploration. The joint
      exploration provides the ability for us to drill simultaneously on our leases
      in
      both the Arkoma Basin, Oklahoma through Avatar Energy, LLC, and the Barnett
      Shale in Texas through Oak Hills. As of the date of this Quarterly Report,
      we
      have ceased active drilling operations on our lease holdings pending acquisition
      of further capital.





**Joint
      Exploration Agreement - Comanche County, Texas**





On
      March
      3, 2006, effective January 31, 2006, we entered into an exploration agreement
      with Dylan to jointly acquire and develop approximately 5,000 acres of Barnett
      Shale and shallow gas targets in Comanche County, Texas (the “Comanche County
      Exploration Agreement”). The property will be developed on a 50/50 equal working
      interest basis. Our subsidiary, Oak Hills, will become the operator of the
      project. We will pay approximately $1,250,000 for our 50% working interest
      in
      the new acreage through a combination of $575,000 in cash (already paid this
      year) and approximately $675,000 of carried drilling costs in the first Comanche
      Barnett Shale test well.




The
      test
      well commenced drilling on September 1, 2006 and the Company is currently
      evaluating the final costs associated with drilling in order to determine the
      total amounts owing. It is estimated that the total amount owing for the 50%
      interest in approximately 5,600 acres will be $1,400,000, resulting in an amount
      remaining to be paid of $350,000 after deducting the original payment of
      $575,000 and the carried drilling costs estimated to be $475,000. The $350,000
      (final amount subject to confirmation) may be paid by the Company in cash or
      restricted stock with piggy back registration rights at a 15% discount to the
      30
      day weighted average preceding the completion of the drilling of the test
      well.








**Convertible
      Debt Set-Off Agreement**





On
      October 2, 2006, we entered into a convertible debt set-off agreement with
      Dylan
      (the “Convertible Debt Agreement”), relating to amounts due and owing to Dylan
      from fractures and completion of certain coal bed methane gas wells. Pursuant
      to
      the terms and provisions of the Convertible Debt Agreement: (i) Oak Hills sold
      to Ada Energy Services LLC (“AES”) certain of its assets, including two Wilson
      600 duplex pumps for an aggregate consideration of $120,000 as a set-off for
      the
      debt due and owing to Dylan; (ii) Oak Hills will have 120 days to pay the amount
      of $120,000 due and owing to Dylan to re-purchase the two Wilson pumps from
      AES
      for $120,000 plus the cost of any work done on them other than repairs made
      for
      damages caused by AES’ usage of the pumps; (iii) Oak Hills made a payment of
      $20,000 to Avatar Energy relating to the completion and fracture job on the
      Gray
      Well #1H-22 and the fracture job on the Dylan Well #1-23; and (iv) in the event
      Oak Hills does not re-purchase the Wilson pumps for $120,000 within the 120
      days, the sale of the pumps will constitute full and complete settlement of
      the
      $120,000 due and owing Dylan.

















17


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**




**WELL
      DRILLING AND PROSPECT DEVELOPMENT**





**Reserve
      Report**





As
      reported in a Report on Form 8-K dated February 1, 2006, as filed by us on
      January 6, 2006, we obtained an independent reserves and economic evaluation
      report regarding our holdings as of December 31, 2005 (the "January 2006
      Reserves and Economic Evaluation Report"). The January 2006 Reserves and
      Economic Evaluation Report was prepared by Pinnacle Energy Services, LLC of
      Oklahoma City, Oklahoma.





After
      the
      January 2006 Reserves and Economic Evaluation Report was prepared, we entered
      into two the Joint Exploration Agreements with Dylan, as discussed above,
      whereby we obtained certain additional interests and assigned certain interests.
      We requested Pinnacle Energy Services, LLC (“Pinnacle”) to prepare a new
      independent report as of July 1, 2006 to include these and other changes.
      Pinnacle prepared a "Mid-Year 2006 Reserves and Economic Evaluation Report"
      on
      August 7, 2006, and finalized this report on September 23, 2006. The Mid-Year
      2006 Reserves and Economic Evaluation Report provides a summary of the proven
      results regarding our interests in eleven proven developed producing ("PDP")
      wells, seven proven non-producing ("PNP") wells and ten proven undeveloped
      ("PUD") wells as of July 1, 2006. The Mid-Year 2006 Reserves and Economic
      Evaluation Report supersedes the January 2006 Reserves and Economic Evaluation
      Report. The Mid-Year 2006 Reserves and Economic Evaluation Report does not
      include well completions, leases expired or acquired, or additional related
      property or lease developments after July 1, 2006.





We
      filed
      the Mid-Year 2006 Reserves and Economic Evaluation Report as an exhibit to
      the
      Report on Form 8-K. Information regarding probable (non-proven) reserves was
      redacted from the Mid-Year 2006 Reserves and Economic Evaluation
      Report.





**Mineral
      Property Liens**





We
      have
      incurred approximately $589,407 to Cude Oilfield Contractors Inc. and Cude
      Energy Services Inc. (collectively, the “Lienholders”), in connection with
      labor, materials and services provided by the Lienholders to certain drilling
      sites located in Texas, including the Olive Lease in Tarrant County, the Martin
      Cantrell Lease in Parker County and the Gilbert Lease in Palo Pinto County.
      Therefore, the Lienholders filed and recorded mineral property liens on the
      subject leases to secure payment of the aggregate indebtedness.





**Arkoma
      Basin, Oklahoma**





**South
      Lamar Prospect, Hughes County, OK - Peyton 1-25 vertical well, Dylan Peyton
      1-24H horizontal coal bed methane well, Nicole 1-23H horizontal coal bed methane
      wells.** As
      at the
      date of this Quarterly Report, we, through Dylan and Avatar Energy have
      undertaken drilling and development of three wells located on our South Lamar
      prospect. One vertical well (Peyton 1-25) and two horizontal wells (Nicole
      1-23H
      and Dylan Peyton 1-24H) targeting a Coal Bed Methane (“CBM”) gas target are in
      stages of completion, and production.





As
      of the
      date of this Quarterly Report, we have completed the drilling and completion
      of
      the Peyton 1-25 well. The Peyton 1-25 encountered multiple possible gas bearing
      sand zones and was fracture treated and completed. The well is currently in
      production from one of the gas bearing zones.


18


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**




As
      of the
      date of this Quarterly Report, two further wells, the Nicole 1-23H and Dylan
      Peyton 1-24H horizontal coal bed methane wells have been completed on our South
      Lamar Prospect. Since the wells are now in production, we have assigned 10.0%
      of
      our working interest in each completed well to Douglas Humphreys, one of our
      directors, or his designate pursuant to a management consulting agreement
      between us and Mr. Humphreys.





**H-9
      Prospect - Hughes County, OK - Gray 1-22H horizontal coal bed methane well.** Through
      Dylan and Avatar Energy, we began drilling and development of a further
      horizontal coal bed methane well located on our H-9 Prospect. We have completed
      the Gray 1-22H horizontal coal bed methane gas well. Since the well is now
      in
      production, we have assigned 10.0% of our working interest in each completed
      well to Douglas Humphreys, one of our directors, or his designate pursuant
      to a
      management consulting agreement between us and Mr. Humphreys. During the
      quarter, approximately 1,318 gross acres expired according to their terms.
      Our
      portion of these expired leases is approximately 659 acres.





**Non-Operated
      Interest Hughes County, OK - Gates 1-19 and Gates 2-19 horizontal coal bed
      methane wells.** We
      and
      our Arkoma Basin CMB exploration-drilling partner Dylan have elected to
      participate equally in an 11.25% working interest and 8.91% net revenue interest
      Gates 1-19 and Gates 2-19 horizontal CBM wells being drilled by Orion
      Exploration in McIntosh County, Oklahoma. Together with Dylan, we have 72 acres
      of the 640 acre section undergoing drilling by Orion Exploration, which if
      drilled and completed successfully, will hold two other possible horizontal
      CBM
      drilling sites with the same participation percentage. The acreage forms part
      of
      our 5,170 gross acre H-9 Prospect. The two Gates wells have been put into
      production. Since the wells are now in production, we have assigned 10.0% of
      our
      working interest in each completed well to Douglas Humphreys, one of our
      directors, or his designate pursuant to a management consulting agreement
      between us and Mr. Humphreys.





**Barnett
      Shale, Texas**





**Oliver
      Lease, Tarrant County, TX - Oliver Unit #1H well.** During
      the first quarter of 2006, Oak Hills completed the drilling portion of a
      horizontal Barnett Shale gas well named the Oliver Unit #1H. The well was
      subsequently fracture stimulated and completed and is producing. Oak Hills
      has
      effected well cleanout, mechanical work, and the well was prepared for final
      production including tank battery, metering, pipeline, gas processing, and
      marketing. Formation water has been determined as present and has limited the
      well’s production capability; further testing logs will be required to determine
      procedures that may enhance current production. Initial production has decreased
      and the well is currently shut in pending resolution of water intrusion. We
      have
      a 90% working interest and a 63% net revenue interest in this well. Since the
      well was put into production, we have assigned 10% of our working interest
      to
      Mr. Humphreys or his designate pursuant to a management consulting agreement
      between us and Mr. Humphreys.




**Martin
      Cantrell Lease, Parker County, TX.** Oak
      Hills
      has drilled a horizontal Barnett Shale gas well on our Martin Cantrell lease
      (the “Martin #1H”), in which we own a 100% working interest and 72.5% net
      revenue interest. We have obtained seismic data from a Devon Energy related
      company that was required to identify possible faulting in the area of the
      lease
      to minimize drilling risk and for engineering of the new horizontal well bore.
      We have completed drilling and fracture stimulation, and initiated production,
      including tank battery, metering, pipeline, gas processing and marketing. As
      of
      the date of this Quarterly Report, we have contracted with a compression company
      to install
      a
      compressor so that gas may flow more freely. The well is currently in
      production. We have a 90% working interest and a 63% net revenue interest in
      this well. Since the well was put into production, we have assigned 10% of
      our
      working interest to Mr. Humphreys or his designate pursuant to a management
      consulting agreement between us and Mr. Humphreys.


19


ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS
      OR PLAN OF OPERATION - continued




**Gilbert
      Lease Development, Palo Pinto County, TX.** We **** completed
      a 3D seismic program on the 1,211 contiguous acre Gilbert lease located in
      Palo
      Pinto County, Texas with TimeSlice Technology Inc. of Texas. After analysis,
      engineering, and planning, Oak Hills has drilled a horizontal Barnett Shale
      gas
      well on our Gilbert Lease and has conducted fracture stimulation (the “Gilbert
      #1H”). The Gilbert #1H well was prepared for production including tank battery,
      metering, pipeline, gas processing and marketing.





As
      of the
      date of this Quarterly Report, we have completed the Gilbert #1H well and tied
      it into a small diameter pipeline with significant back pressure. Initial flow
      rates have declined with increasing water infiltration. The Gilbert #1H well
      is
      shut in pending resolution of water infiltration and still requires compression
      equipment to stabilize production. The well is currently shut in.





We
      have a
      90% working interest and a 63% net revenue interest in this well. Since the
      well
      was put into production initially, we have assigned 10% of our working interest
      to Mr. Humphreys or his designate pursuant to a management consulting agreement
      between us and Mr. Humphreys.





In
      addition, while drilling the Gilbert #1H well, a new zone was encountered in
      what appears to be a Marbe Falls formation previously identified with seismic
      information that lies above the Barnett shale. Readings of 5,800 units of gas
      during drilling indicates that this interval will be analyzed, followed by
      a
      decision to either twin the well or attempt to commingle production with the
      Gilbert #1H well bore in order to produce from the Marble Falls zone as well.




**Non-Operated
      Interest, Parker County, TX: Paradise Park #1H well.** Oak
      Hills
      acted as drilling contractor to Ray Richey Management Company, Inc. for the
      drilling of the horizontal Barnett Shale gas well named Paradise Park #1H.
      As a
      result, we were able to obtain a 10% working interest in the well and drilling
      contract service income at the rate of $14,500 per day, in addition to
      mobilization and demobilization fees. The well has been drilled and completed.





We
      have a
      9% working interest and a 6.3% net revenue interest in this well. Since the
      well
      was put into production initially, we have assigned 10% of our working interest
      to Mr. Humphreys or his designate pursuant to a management consulting agreement
      between us and Mr. Humphreys.





**Working
      Interest Lease, Comanche County, TX: Petta #1 well.** As
      of the
      date of this Quarterly Report, together with our joint exploration partner,
      Dylan, Oak Hills has completed drilling the Petta #1H horizontal Barnett Shale
      well on approximately 2,835 net mineral acres under acquisition in Comanche
      County, Texas. The well will not be frac’ed or completed until pipeline access
      and gas marketing arrangements can be obtained. An offsetting operator in the
      area is in the process of attempting completion on offsetting Barnett Shale
      wells and the building of 8-10 miles of gas pipeline. We have a 45-50% net
      revenue interest in approximately 5,670 gross acres of near contiguous leases.
      Oak Hills has been designated as the operator for the joint exploration
      development of the new acreage.


20




ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS
      OR PLAN OF OPERATION - continued




The
      Petta
      #1H well tests the Barnett Shale zone and provides data on other zones thought
      to be in the area of development. The Comanche County joint exploration is
      in
      addition to and separate from our 90-100% working interest in the 2,637 mineral
      acres of Barnett Shale lease acreage in Tarrant, Parker, Hood, Palo Pinto and
      Jack counties in the State of Texas. We believe the Comanche County acreage
      is a
      step out from the evolving Barnett Shale fairway, but the 45-50% working
      interest diversifies risk while obtaining a larger near contiguous land package
      with both shallow and deep exploration rights. We plan future seismic work
      to
      more clearly identify the Barnett Shall gas target and geology relating to
      other
      potential prospects on the new acreage.





**Third
      Party Contract Drilling.** During
      the third quarter, Oak Hills has contracted its rig as a third party drilling
      contractor for the development of a salt water disposal well to obtain services
      related income pending further Company lease preparation and
      funding.





As
      of the
      date of this Quarterly Report, drilling of the disposal well has been completed
      and Oak Hills has received payment for associated fees with the exception of
      approximately $70,000. Oak Hills has filed a mineral property lien on the well
      bore against Majestic Consulting LC to secure payment of the
      indebtedness.





**RESULTS
      OF OPERATIONS**





**Nine-Month
      Period Ended September 30, 2006 Compared to Nine-Month Period Ended September
      30, 2005**




Our
      net
      loss for the nine-month period ended September 30, 2006 was approximately
      ($3,875,439) compared to a net loss of ($6,469,152) during the nine-month period
      ended September 30, 2005 (a decrease of $2,593,713).





During
      the nine-month period ended September 30, 2006, we generated $1,938,292 in
      gross
      revenue compared to $530,721 in gross revenue generated during the nine-month
      period ended September 30, 2005 (an increase of $1,407,571 or 265.2%), resulting
      primarily from drilling service revenue in the amount of $1,527,419 from Oak
      Hills providing third party drilling services and, to a smaller degree, the
      sale
      of gas in the amount of $410,873 produced from our well interests.





During
      the nine-month period ended September 30, 2006, we incurred operating expenses
      in the aggregate amount of $5,447,478 compared to $3,625,875 incurred during
      the
      nine-month period ended September 30, 2005 (an increase of $1,821,603 or 50.2%).
      The operating expenses incurred during the nine-month period ended September
      30,
      2006 consisted of: (i) operating costs and taxes of $294,901 (2005: $180,073);
      (ii) rig, well and pulling unit expense of $555,537 (2005: $-0-); (iii)
      salaries, wages and related costs of $715,493 (2005: $-0-); (iv) depreciation,
      depletion and amortization expenses of $623,693 (2005: $244,641); (v) general
      and administrative expenses of $1,103,279 (2005: $684,925); (vi) investor
      relations and promotion expenses of $2,154,575 (2005: $602,245); and (vii)
      consulting stock-based compensation relating to the fair value of stock options
      granted to consultants of $-0- (2005: $1,913,991). The increase in operating
      expenses incurred during the nine-month period ended September 30, 2006 compared
      to the nine-month period ended September 30, 2005 resulted primarily from the
      increase in investor relations and promotion relating to investor awareness
      programs. The increase in operating expenses also resulted from the acquisition
      of Oak Hills and related business operations and infrastructure including:
      (i)
      rig, well and pulling unit expense; and (ii) salaries, wages and related
      expenses and (iii)depreciation.


21


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**





Of
      the
      $5,447,478 incurred as operating expenses during the nine-month period ended
      September 30, 2006, an aggregate of $90,000 was incurred in fees payable to
      International Market Trend (“IMT”) for amounts due and owing for operational,
      administrative and consulting services rendered during the nine-month period
      ended September 30, 2006. On November 10, 2003, we entered into a consulting
      agreement with IMT (the “Consulting Agreement”), whereby IMT performs a wide
      range of management, administrative, financial, and business development
      services for us. On August 19, 2005, we granted to IMT an aggregate of 1,150,000
      stock options exercisable at $1.25 per share for a period of five years and
      on
      March 1, 2006, the stock options were re-assigned from IMT to two consultants
      of
      IMT under identical terms and conditions of the original grant in connection
      with business development services rendered to us.





Of
      the
      $5,447,478 incurred as operating expenses during the nine-month period ended
      September 30, 2006: (i) an aggregate of $135,000 was incurred to our officers
      for management fees; (ii) $15,000 was incurred to an officer/director for
      expense reimbursement; and (iii) $40,000 was incurred in fees to a director.
      Furthermore, $65,769 was incurred as additional compensation expense to one
      of
      our directors, Mr. Humphreys, who is also the sole officer and director of
      Oak
      Hills, during the nine-month period ended September 30, 2006. In addition,
      Oak
      Hills incurred $31,500 to Mr. Humphreys for rent on our field offices in
      Oklahoma. As at September 30, 2006, a total of $137,161 is owed to us from
      Mr.
      Humphreys and/or affiliates of Mr. Humphreys for costs incurred in connection
      with certain well interests. Subsequent to September 30, 2006, we have received
      $46,922 of this amount due and owing.





Our
      net
      loss from operations during the nine-month period ended September 30, 2006
      also
      includes $3,137,653 related to interest and finance fees and a gain of
      $2,771,400 related to the decrease in the fair value of derivative liability,
      resulting in a net loss of $3,875,439. Included in interest and finance fees
      are
      non-cash amounts totaling $2,880,638 relating to the amortization of a
      convertible debt discount, deferred finance costs, and the fair value resulting
      from the repricing of certain warrants. As discussed above, the decrease in
      net
      loss during the nine-month period ended September 30, 2006 compared to the
      nine-month period ended September 30, 2005 is attributable primarily to the
      increase in investor relations and promotion expenses, the depreciation,
      depletion and amortization expenses, rig, well and pulling unit expenses,
      salaries, wages and related expenses and the derivative liability gain. Our
      net
      loss during the nine-month period ended September 30, 2006 was ($3,875,439)
      or
      ($0.12) per share compared to a net loss of ($6,469,152) or ($0.37) during
      the
      nine-month period ended September 30, 2005. The weighted average number of
      shares outstanding was 32,285,314 for the nine-month period ended September
      30,
      2006 compared to 17,375,441 for the nine-month period ended September 30, 2005.





Volumes
      of gas sold this year were approximately 101,225 mcf up from approximately
      83,790 mcf last year. Prices for natural gas sales averaged $4.06 (net of
      marketing and transportation costs) per mcf, down from $6.33 per mcf last year.
      Increases in volume was due to new wells coming into production; however,
      increases in volume were moderated by the decline in production from older
      wells. Increased production was offset by the decline in gas prices resulting
      in
      a decrease of approximately 22% in overall revenue.





22


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**




**Three-Month
      Period Ended September 30, 2006 Compared to Three-Month Period Ended September
      30, 2005**




Our
      net
      loss for the three-month period ended September 30, 2006 was approximately
      ($27,854) compared to a net loss of ($4,645,900) during the three-month period
      ended September 30, 2005 (a decrease of $4,618,046).





During
      the three-month period ended September 30, 2006, we generated $991,672 in gross
      revenue compared to $137,458 in gross revenue generated during the three-month
      period ended September 30, 2005 (an increase of $854,214 or 621.4%), resulting
      primarily from drilling and well services revenue in the amount of $838,309
      from
      Oak Hills providing third party drilling and well services and, to a smaller
      degree, the sale of gas in the amount of $153,363 produced from Company well
      interests.





During
      the three-month period ended September 30, 2006, we incurred operating expenses
      in the aggregate amount of $1,333,909 compared to $1,418,110 incurred during
      the
      three-month period ended September 30, 2005 (a decrease of $84,201 or 5.9%).
      The
      operating expenses incurred during the three-month period ended September 30,
      2006 consisted of: (i) operating costs and taxes of $176,619 (2005: $58,612);
      (ii) rig, well and pulling unit expense of $92,647 (2005: $-0-); (iii) salaries,
      wages and related costs of $238,550 (2005: $-0-); (iv) depreciation, depletion
      and amortization expenses of $238,543 (2005: $104,761); (v) general and
      administrative expenses of $363,950 (2005: $115,974); (vi) investor relations
      and promotion expenses of $223,600 (2005: $525); and (vii) consulting - stock
      based $-0- (2005: $1,138,238). The decrease in operating expenses incurred
      during the three-month period ended September 30, 2006 compared to the
      three-month period ended September 30, 2005 resulted primarily from the decrease
      in consulting - stock based compensation relating to the valuation of stock
      options granted to our officers/directors and consultants during the three-month
      period ended September 30, 2005.





Our
      net
      loss from operations during the three-month period ended September 30, 2006
      also
      included $147,517 related to interest and finance fees and a gain of $461,900
      related to the decrease in the fair value of derivative liability, resulting
      in
      a net loss of $27,854. As discussed above, the decrease in net loss during
      the
      three-month period ended September 30, 2006 compared to the three-month period
      ended September 30, 2005 is attributable primarily to the decrease in consulting
      - stock based compensation relating to the valuation of stock options granted
      to
      our officers/directors and consultants, the decrease in amounts recorded for
      interest and finance fees and the increase in gain on derivative liabilities.
      Our net loss during the three-month period ended September 30, 2006 was
      ($27,854) or ($0.00) per share compared to a net loss of ($4,645,900) or ($0.26)
      during the three-month period ended September 30, 2005. The weighted average
      number of shares outstanding was 38,766,270 for the three-month period ended
      September 30, 2006 compared to 17,557,753 for the three-month period ended
      September 30, 2005.





Prices
      for natural gas average $4.95 per mcf (net of marketing and transportation
      costs) for the quarter versus $5.40 per mcf for last year. Volume of gas sold
      for the quarter was approximately 30,949 mcf up from approximately 25,431 mcf
      last year. Increased volume was due to new wells coming into production;
      however, increases were moderated by the decline in production from older
      wells.








23


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**




**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      financial statements have been prepared assuming that we will continue as a
      going concern and, accordingly, do not include adjustments relating to the
      recoverability and realization of assets and classification of liabilities
      that
      might be necessary should we be unable to continue in operation.





**Nine-Month
      Period Ended September 30, 2006**





As
      of
      September 30, 2006, our current assets were $1,842,695 and our current
      liabilities were $7,111,188, which resulted in a working capital deficit of
      $5,268,493. As of September 30, 2006, our total assets were $22,158,139
      consisting of: (i) $113,408 in cash and cash equivalents; (ii) $1,524,458 in
      accounts receivable; (iii) $145,177 due from related parties; (iv) $3,777 in
      prepaid expenses and other; (v) $55,875 in deferred charges; (vi) $6,413,428
      carrying value of proved oil and gas properties (net of accumulated depletion);
      (vii) $8,799,922 carrying value of unproved oil and gas properties; and (viii)
      $5,102,094 in other equipment (net of accumulated depreciation). The increase
      in
      total assets during the nine-month period ended September 30, 2006 from fiscal
      year ended December 31, 2005 was primarily due to the increase in carrying
      value
      of proved and unproved oil and gas properties and the increase in other
      equipment resulting primarily from the acquisition of Oak Hills.





As
      of
      September 30, 2006, our total liabilities were $9,797,032 consisting of: (i)
      $5,907,204 in accounts payable and accrued liabilities; (ii) $1,295,961 in
      long
      term debt; (iii) $625,151 in promissory note and other short term advances;
      and
      (iv) $578,833 in convertible notes and related accrued interest; and (v)
      $1,389,883 of derivative liabilities related to the Company’s private placement
      financing completed during the period (refer to the notes to the Company’s
      September 30, 2006 interim consolidated financial statements). The increase
      in
      total liabilities during the nine-month period ended September 30, 2006 from
      fiscal year ended December 31, 2005 was primarily due to the increase in
      accounts payable and accrued liabilities and in long term debt resulting
      primarily from the acquisition of Oak Hills, and the derivative liability
      resulting from the Company’s private placement financing completed during the
      period.





Stockholders'
      equity increased from $3,006,058 as of December 31, 2005 to $12,361,107 as
      of
      September 30, 2006.





For
      the
      nine-month period ended September 30, 2006, net cash flows used in operating
      activities was ($3,576,012) compared to net cash flows used in operating
      activities for the nine-month period ended September 30, 2005 of ($1,047,012).
      Net cash flows used in operating activities for the nine-month period ended
      September 30, 2006 consisted primarily of a net loss of ($3,875,439) adjusted
      by
      $2,880,638 relating to non-cash interest and finance fee expenses and $2,771,400
      relating to a non-cash gain on derivative liabilities.





Net
      cash
      flow used in investing activities was ($5,159,218) for the nine-month period
      ended September 30, 2006 compared to net cash flows used in investing activities
      for the nine-month period ended September 30, 2005 of ($2,245,408). Net cash
      flow used in investing activities during the nine-month period ended September
      30, 2006 was primarily a result of acquisition and exploration costs related
      to
      our oil and gas properties.


24


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**




Net
      cash
      flows from financing activities was $8,328,306 for the nine-month period ended
      September 30, 2006 compared to net cash flows from financing activities for
      the
      nine-month period ended September 30, 2005 of $3,977,665. Net cash flows from
      financing activities for the nine-month period ended September 30, 2006
      pertained primarily to $9,426,250 received as proceeds from the sale of our
      common stock.





We
      expect
      that working capital requirements will continue to be funded through a
      combination of securities. Our working capital requirements are expected to
      increase in line with the growth of our business.





**PLAN
      OF OPERATION AND FUNDING**





During
      the second quarter, we completed a private placement pursuant to which we issued
      an aggregate of 7,650,000 units ("Unit") of the Company’s securities at a
      subscription price of U.S. $1.00 per Unit for total gross proceeds of
      $7,650,000; with each Unit being comprised of one common share and one
      non-transferable common stock purchase warrant ("Warrant"). Each resulting
      Warrant entitles the subscriber to purchase an additional share of our common
      stock (“Warrant Share”) at a price of $1.25 per share for the period commencing
      upon the date of issuance of the Units and ending on the day which is the
      earlier of (i) 18 months from the date of issuance of the Units and (ii) 12
      months from the effective date of our proposed registration statement. Both
      the
      Warrant Shares and the common shares issued pursuant to the private placement
      offering are to be proposed for registration under the United States Securities
      Act of 1933, as amended. We paid finders fees of 5% of the gross cash proceeds
      received under the private placement offering and 10% restricted common shares
      on the gross units issued, with such restricted shares carrying piggy back
      registration rights.





Effective
      July 3, 2006, we filed a Form SB-2 Registration Statement under the United
      States Securities Act of 1933, as amended, to register the 8,415,000 common
      shares issued and 7,650,000 common shares underlying the Warrants. The
      Registration Statement was not declared effective before financial penalties
      were due pursuant to registration timing. Penalties accrued and unpaid to
      September 30, 2006 total $85,217. As of the date of this Quarterly Report,
      we
      continue to incur 1.5% of $7,450,000 raised per month of delay until the
      Registration Statement is declared effective by the Securities and Exchange
      Commission.





Existing
      working capital, further advances and possible debt instruments, anticipated
      warrant exercises, further private placements, and anticipated cash flow are
      expected to be adequate to fund our operations over the next six months. We
      have
      no lines of credit or other bank financing arrangements. Generally,
      we have financed operations to date through the proceeds of the private
      placement of equity and debt securities. In connection with our business plan,
      management anticipates additional increases in operating expenses and capital
      expenditures relating to: (i) oil and gas operating properties; (ii) drilling
      initiatives; and (iii) property acquisitions. We intend to finance these
      expenses with further issuances of securities, debt and or advances, and
      revenues from operations. Thereafter, we expect we will need to raise additional
      capital and increase revenues to meet long-term operating
      requirements.





Additional
      issuances of equity or convertible debt securities will result in dilution
      to
      our current shareholders. Further, such securities might have rights,
      preferences or privileges senior to our common stock. Additional financing
      may
      not be available upon acceptable terms, or at all. If adequate funds
      are
      not available or are not available on acceptable terms, we may not be able
      to
      take advantage of prospective new business endeavors or opportunities, which
      could significantly and materially restrict our business
      operations.


25


ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS
      OR PLAN OF OPERATION - continued





The
      report of the independent registered public accounting firm that accompanies
      our
      December 31, 2005 and December 31, 2004 consolidated financial statements
      contains an explanatory paragraph expressing substantial doubt about our ability
      to continue as a going concern. The consolidated financial statements have
      been
      prepared "assuming that we will continue as a going concern," which contemplates
      that we will realize our assets and satisfy our liabilities and commitments
      in
      the ordinary course of business.





**MATERIAL
      COMMITMENTS**





**Secured
      Convertible Notes**





During
      2006, a material commitment for us relates to the repayment of secured
      convertible debenture holders of the outstanding amounts of principal and
      interest accruing at 8% per annum. The secured convertible debt principal
      outstanding was $4,845,314 plus accrued interest of $109,333 as at December
      31,
      2005. During the nine-month period ended September 30, 2006, we paid a total
      of
      $187,130 in interest, repaid an aggregate of $745,516 of principal, converted
      a
      total of $3,390,122 of principal and $33,625 of interest into shares of our
      common stock at a price of $1.00 per share under the terms of the convertible
      note agreements. As at September 30, 2006, we had convertible debt principal
      outstanding of $718,675 and $10,371 of accrued interest. See “Part II. Item 2.
      Recent Sales of Unregistered Securities.





As
      at
      September 30, 2006, the remaining amounts of principal and interest due and
      owing under the convertible note agreements totaling $729,046 is payable in
      eleven monthly principal and interest payments in either cash or shares of
      our
      common stock at the rate of $1.00 per share (the “Fixed Conversion Price”)
      beginning on or about December 17, 2005 if our share price is trading above
      $1.00 per share at the date of payment. Commencing on the fourth month
      anniversary of the closing date of the issue of the Convertible Notes (September
      16, 2005 and October 11, 2005), and on the first day or each month thereafter,
      the Convertible Notes must be repaid in cash in amount equal to 5% of the
      principal amount of the Notes together with all accrued interest due and payable
      up to the repayment date. If our shares are trading at less than $1.00 per
      share
      at the date of repayment, then we may repay outstanding monthly principal and
      interest in either cash or shares in our capital at a different rate than the
      Fixed Conversion Price. If the volume weighted average share price (the "VWAP")
      of the five trading days prior to a monthly payment date is less than the Fixed
      Conversion Price, then we may pay the monthly amount in cash or registered
      shares of our common stock at 75% of the VWAP for the five trading days prior
      to
      the monthly payment date. As of the date of this Quarterly Report, required
      monthly payments of principle and interest are approximately $78,131 monthly.
      The holders of the Convertible Notes have a secured first interest in the assets
      of Lexington Oil and Gas Ltd. Co.





**Promissory
      Note**





During
      2006, a material commitment for us relates to an unsecured promissory note
      from
      one of our shareholders aggregating $600,000 (the “Promissory Note”). The
      provisions of the Promissory Note are:(i) two-year term with interest at the
      rate of 10% per annum; and (ii) interest to be paid on a quarterly basis with
      the principal to be repaid on or before the due date of the Promissory Note.
      As
      at September 30, 2006, there is $25,151 of accrued and unpaid interest on this
      loan. We intend to repay this loan during the next twelve
      months.


26


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued**





**Oak
      Hills Debt**





During
      2006, a material commitment for us on behalf of Oak Hills relates to outstanding
      promissory notes totaling $1,295,261, which accrues interest at 9% per annum,
      and require no payments of interest or principal until the end of a two-year
      term ending January 22, 2008. The promissory notes are owed to certain former
      shareholders of Oak Hills and are secured against the assets of Oak Hills.
      During the nine-month period ended September 30, 2006, we accrued $77,330 of
      interest on these loans resulting in $196,737 in accumulated accrued interest
      due and owing.





**Capital
      Expenditure Related Accounts Payable**





To
      the
      date of this Quarterly Report, Oak Hills has incurred capital expenditures
      relating to the drilling and completion of various wells and for the development
      of our various lease interests in Okalahoma and Texas. As a consequence of
      well
      performance, gas price volatility, and the lack of availability of debt and
      equity sources on commercially acceptable terms to us, our trade payables have
      increased to $5,907,204 as at September 30, 2006. We will continue to review
      available sources of debt and equity to satisfy these debts, and will also
      review the monetization of various of our assets as an alternative source of
      capital.





**Lease
      Acquisition Expenditures - Comanche County, Texas**





On
      March
      3, 2006, effective January 31, 2006, we entered into an exploration agreement
      with Dylan to jointly acquire and develop approximately 5,000 acres of Barnett
      Shale and shallow gas targets in Comanche County, Texas (the “Comanche County
      Exploration Agreement”). We will pay approximately $1,250,000 for our 50%
      working interest in the new acreage through a combination of $575,000 in cash
      (already paid this year) and approximately $675,000 of carried drilling costs
      in
      the first Comanche Barnett Shale test well.





The
      test
      well commenced drilling on September 1, 2006 and the Company is currently
      evaluating the final costs associated with drilling in order to determine the
      total amounts owing. It is estimated that the total amount owing for the 50%
      interest in approximately 5,600 acres will be $1,400,000, resulting in an amount
      remaining to be paid of $350,000 after deducting the original payment of
      $575,000 and the carried drilling costs estimated to be $475,000. The $350,000
      (final amount subject to confirmation) may be paid by the Company in cash or
      restricted stock with piggy back registration rights at a 15% discount to the
      30
      day weighted average preceding the completion of the drilling of the test
      well.





**Registration
      Statement Penalties**





Effective
      July 3, 2006, we filed a Form SB-2 registration statement under the Securities
      Act to register 8,415,000 shares of common stock issued and the 7,650,000 shares
      of common stock underlying the Warrants. The Registration Statement was not
      declared effective before financial penalties were due pursuant to registration
      timing. Penalties accrued and unpaid to September 30, 2006 total $85,217. As
      of
      the date of this Quarterly Report, we continue to incur 1.5% of $7,450,000
      raised per month of delay until the Registration Statement is declared effective
      by the Securities and Exchange Commission.


27







**ITEM
      III. CONTROLS AND PROCEDURES**





Our
      management is responsible for establishing and maintaining a system of
      disclosure controls
      and procedures
      (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is
      designed to ensure that information required to be disclosed by us in the
      reports that we file or submit under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the Commission’s
      rules and forms. Disclosure controls
      and procedures
      include, without limitation, controls
      and procedures
      designed to ensure that information required to be disclosed by an issuer in
      the
      reports that it files or submits under the Exchange Act is accumulated and
      communicated to the issuer’s management, including its principal executive
      officer or officers and principal financial officer or officers, or persons
      performing similar functions, as appropriate to allow timely decisions regarding
      required disclosure.





In
      accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was
      completed under the supervision and with the participation of our management,
      including Mr. Grant Atkins, our Chief Executive Officer, and Mr. Vaughn Barbon,
      our Principal Financial Officer, of the effectiveness of the design and
      operation, our Chief Financial Officer of our disclosure controls
      and procedures
      as of the end of the period covered by this Quarterly Report. Based on that
      evaluation, our management including the Chief Executive Officer and Principal
      Financial Officer, concluded that our disclosure controls
      and procedures
      are effective, to provide reasonable assurance that information required to
      be
      disclosed in our reports filed or submitted under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in the
      Commission’s rules and forms. There have been no changes to our internal controls
      over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under
      the
      Securities Exchange Act of 1934) that occurred during our nine-month quarterly
      period ended September 30, 2006, that materially affected, or were reasonably
      likely to materially affect, our internal controls
      over financial reporting.








**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





Management
      is not aware of any legal proceedings contemplated by any governmental authority
      or any other party involving us or our properties other than that described
      as
      unsecured creditor debt (see “Mineral Property Liens” - ITEM 2. MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION). As of
      the
      date of this Quarterly Report, no director, officer or affiliate is (i) a party
      adverse to us in any legal proceeding, or (ii) has an adverse interest to us
      in
      any legal proceedings. Management is not aware of any other legal proceedings
      pending or that have been threatened against us or our properties.

















28


**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





**PRIVATE
      PLACEMENT OFFERING**





During
      the period, we completed a private placement pursuant to which we issued an
      aggregate of 7,650,000 Units at a subscription price of U.S. $1.00 per Unit
      for
      total gross proceeds of $7,650,000. Each Unit is comprised of one common share
      and one non-transferable common stock purchase warrant ("Warrant"). Each
      resulting Warrant entitles the subscriber to purchase an additional share of
      our
      common stock (“Warrant Share”) at a price of $1.25 per share for the period
      commencing upon the date of issuance of the Units and ending on the day which
      is
      the earlier of (i) 18 months from the date of issuance of the Units and (ii)
      12
      months from the effective date of our proposed registration statement. Both
      the
      Warrant Shares and the common shares issued pursuant to the private placement
      offering are to be proposed for registration under the United States Securities
      Act of 1933, as amended. We paid a finders fees of 5% of the gross cash proceeds
      received under the private placement offering and 10% restricted common shares
      on the gross units issued, with such restricted shares carrying piggy back
      registration rights.




The
      per
      share price of the offering was arbitrarily determined by our Board of Directors
      based upon analysis of certain factors including, but not limited to, stage
      of
      development, industry status, investment climate, perceived investment risks,
      our assets, and net estimated worth. We issued Units to investors who were
      either a U.S. resident- or a non-U.S. resident. The investors executed
      subscription agreements and acknowledged that the securities to be issued have
      not been registered under the Securities Act, that they understood the economic
      risk of an investment in the securities, and that they had the opportunity
      to
      ask questions of and receive answers from our management concerning any and
      all
      matters related to acquisition of the securities.





Effective
      July 3, 2006, we filed a Form SB-2 registration statement under the Securities
      Act to register 8,415,000 shares of common stock issued and the 7,650,000 shares
      of common stock underlying the Warrants. The Registration Statement was not
      declared effective before financial penalties were due pursuant to registration
      timing. Penalties accrued and unpaid to September 30, 2006 total $85,217. As
      of
      the date of this Quarterly Report, we continue to incur 1.5% of $7,450,000
      raised per month of delay until the Registration Statement is declared effective
      by the Securities and Exchange Commission.




**CONVERSION
      OF NOTES**





During
      the nine-month period ended September 30, 2006, we issued an aggregate of
      3,423,747 shares of our common stock in connection with the conversion of the
      Convertible Notes. An aggregate of $3,390,122 in principal and $33,625 in
      interest in the Convertible Notes was converted into 3,423,747 shares of our
      common stock at a conversion price of $1.00 per share. We issued the shares
      of
      common stock in reliance upon Section 4(2) of the Securities Act.





**EXERCISE
      OF SERIES B WARRANTS**





During
      the nine-month period ended September 30, 2006, we have issued an aggregate
      of
      250,000 shares of our common stock in connection with the exercise of Series
      B
      Warrants at $1.00 per Series B Warrant for aggregate proceeds of $250,000.
      The
      Series B Warrants were originally issued as part of a secured convertible note
      unit offering and the shares of common stock underlying the warrants were
      registered under the Securities Act pursuant to a registration statement on
      Form
      SB-2.


29





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS -
      continued**




**STOCK
      OPTIONS**





During
      the nine-month period ended September 30, 2006, we issued an aggregate of
      1,650,000 shares of our common stock pursuant to the exercise of a total of
      1,650,000 Stock Options, of which 500,000 were exercised at $1.00 per share
      and
      1,150,000 at $1.25 per share, for aggregate proceeds of $1,937,500. The shares
      of common stock were subject to S-8 registration statements.





**OAK
      HILLS SHARE EXCHANGE AGREEMENT**





On
      January 23, 2006, we issued an aggregate of 6,000,000 shares of our restricted
      common stock to the shareholders of Oak Hills International, Inc. at a price
      of
      approximately $0.637645 per share in accordance with the terms and provisions
      of
      the Oak Hills Share Exchange Agreement. The per share consideration was
      calculated by reference to the of the assets of Oak Hills obtained from the
      independent third party valuation, and management’s further calculation of net
      tangible value inclusive of all other balance sheet assets, current, and
      long-term liabilities of the acquired companies resulting in the shares issued
      as consideration, with such shares issued at a 6.3% discount to the trading
      value of our stock as at December 22-23, 2005, the transaction valuation date.
      The shares were issued pursuant to an exemption from registration under Section
      4(2) of the 1933 Securities Act. In addition, we also negotiated favorable
      terms
      on long term debt that formed part of the acquisition deferring payment of
      interest and principle for a period of two years. Oak Hills has outstanding
      promissory notes totaling $1,295,261, which accrue interest at 9% per annum
      and
      require no payments of interest or principal until the end of a two year term
      ending January 22, 2008.




**EURXCHANGE
      CONSULTING LTD.**





On
      February 15, 2006, we issued an aggregate of 400,000 shares of our restricted
      common stock in accordance with the terms and provisions of a consulting
      agreement (the “Consulting Agreement”), with EurXchange Consulting Ltd., a
      Canadian corporation (“EurXchange”). Pursuant to the terms and provisions of the
      EurXchange Consulting Agreement: (i) EurXchange agreed to render to us
      consulting services including, but not limited to, translations of webpage,
      business plan and new releases into German, establishment of communication
      during European business hours, chat line coordination, web portal presence
      through Wallstreet Online, production and distribution of a MIDAS research
      report and a penny stock report, presentation of roadshows, production of
      certain mailers, and establishment of a Stock Hotline telephone line; (ii)
      we
      agreed to pay to EurXchange a cash retainer in the aggregate amount of 293,000
      EUR, with the first installment of 153,000 EUR due on date of execution of
      the
      EurXchange Consulting Agreement and the second and third installment of 70,000
      EUR payable on April 15, 2006 and May 15, 2006, respectively; and (iii) we
      agreed to issue to EurXchange an aggregate of 400,000 shares of our restricted
      common stock. The shares were issued pursuant to an exemption from registration
      under Section 4(2) of the 1933 Securities Act.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





No
      report
      required.





30


**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




No
      report
      required.




**ITEM
      5. OTHER INFORMATION**





**Change
      in Auditors**




On
      April
      13, 2006, our Board of Directors approved and authorized the termination of
      the
      services of Dale Matheson Carr-Hilton LaBonte Chartered Accountants (“DMCL”) as
      our principal independent accountant. The termination of the services of DMCL
      was a result of communication between us and DMCL and the subsequent decision
      by
      our Board of Directors that it would be in our best interests to effect a change
      in auditors in order to address the needs of a small business development
      company with growing operations located in Oklahoma and Texas. During our two
      most recent fiscal years and any subsequent interim period preceding the
      resignation of DMCL, there were no disagreements with DMCL which were not
      resolved on any matter concerning accounting principles or practices, financial
      statement disclosure, or auditing scope or procedure, which disagreements,
      if
      not resolved to the satisfaction of DMCL, would have caused DMCL to make
      reference to the subject matter of the disagreements in connection with its
      reports. The report of DMCL for fiscal years ended December 31, 2005 and 2004
      indicated the following:





“The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, to date the Company has reported significant losses since inception
      from operations and requires additional funds to meet its obligations and fund
      the costs of its operations. These factors raise substantial doubt about the
      Company's ability to continue as a going concern. Management's plans in this
      regard are described in Note 1. The financial statements do not include any
      adjustments that might result from the outcome of this
      uncertainty.”





Except
      as
      described in the immediately preceding paragraph, the report of DMCL did not
      contain an adverse opinion or a disclaimer of opinion, and was not qualified
      or
      modified as to uncertainty, audit scope, or accounting principles.





On
      April
      13, 2006, our Board of Directors approved and authorized the engagement of
      the
      services of Whitley Penn LLP (“WP”), as our principal independent accountant.
      The address and telephone/facsimile numbers for WP are as follows: 5420 LBJ
      Freeway, Suite 1440, Dallas, Texas 75240, telephone no. 972.392.6600 and
      facsimile no. 972.392.6601.





We
      did
      not previously contact WP prior to its engagement regarding application of
      accounting principles to a specific completed or contemplated transaction,
      or
      the type of audit opinion that might be rendered on our financial statements,
      and nether written nor oral advice was sought by us from WP prior to its
      engagement regarding an important factor considered by us in reaching a decision
      as to the accounting, auditing or financial reporting issue.





**Appointment
      of Director**





On
      June
      6, 2006, our Board of Directors, pursuant to written consent, unanimously
      approved the appointment of Mr. Gino Cicci as a member of the Company’s Board of
      Directors, effective as of June 12, 2006, to serve until his successor is duly
      elected and shall qualify.


31


ITEM
      5. OTHER INFORMATION -
      continued




During
      the past five years, Mr. Cicci has been active within the oil and gas industry
      and has been engaged in providing consulting services to us pursuant to
      contractual arrangements between us and IMT. In past years, he has been
      associated with junior companies that have drilled for oil and gas in the
      Province of Alberta and the State of Texas. He has also been engaged with
      companies that have explored various regions in Canada and the United States
      for
      precious metals, primarily in the Provinces of Ontario, Quebec and British
      Columbia, and in the States of Nevada, Arizona and Idaho. We believe that Mr.
      Cicci’s broad experience and knowledge of junior markets will be an asset to us
      during our various phases of growth.




**ITEM
      6. EXHIBITS**





31.1
      Certification of Chief Executive Officer pursuant to Securities Exchange
      Act of 1934 Rule 13a-14(a) or 15d-14(a).





31.2
      Certification of Chief Financial Officer pursuant to Securities Exchange
      Act of 1934 Rule 13a-14(a) or 15d-14(a).





32.1
      Certifications pursuant to Securities Exchange Act of 1934 Rule 13a- 14(b)
      or
      15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to


Section
      906 of the Sarbanes-Oxley Act of 2002.




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly authorized.












**LEXINGTON
              RESOURCES, INC.**Date: November
              10, 2006
            By:
            /s/ Grant
              AtkinsGrant
              AtkinsTitle President
              and Chief
              Executive Officer


Date: November
              10, 2006
            By:
            /s/ Vaughn
              BarbonVaughn
              BarbonTitle Chief
              Financial  Officer




32