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, 2005

[ ]  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                               (I.R.S. Employer
incorporation of organization)                               Identification No.)

                            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 [ ]


Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


                                Yes [ ] No [X]


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

                                       N/A

                                       1
<PAGE>

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 [ ] No [ ]


                      Applicable only to corporate issuers

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 14, 2005
--------------------------------------------------------------------------------
Common Stock, $.00025 par value                       17,603,405



Transitional Small Business Disclosure Format (check one)

                                Yes [ ] No [X]

                                       2
<PAGE>


Table of Contents for   LEXINGTON RESOURCES, INC.                          Page

PART I.  FINANCIAL INFORMATION

ITEM 1.  INTERIM CONSOLIDATED FINANCIAL STATEMENTS

          CONSOLIDATED BALANCE SHEETS ....................................... 4

          INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS ..................... 5

          INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS...................... 6

          NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS ........... 7 - 25

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION OR PLAN OF OPERATION ................................. 26

ITEM 3. CONTROLS AND PROCEDURES ............................................ 38

PART II. OTHER INFORMATION ................................................. 39

ITEM 1.  LEGAL PROCEEDINGS ................................................. 39

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS ......................... 39

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES ................................... 40

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 40

ITEM 5.  OTHER INFORMATION ................................................. 40

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K .................................. 40

SIGNATURES ................................................................. 41



                                       3
<PAGE>

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
-----------------------------

                            LEXINGTON RESOURCES, INC.
                    INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005
                                  (Unaudited)

                           LEXINGTON RESOURCES, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                September 30,    December 31,
                                                                    2005            2004
------------------------------------------------------------   ------------    ------------
                                                                (unaudited)
<S>                                                                 <C>              <C>
                                     ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                   $  1,011,538    $    326,293
   Accounts receivable                                              162,984         136,573
     Prepaid expenses                                                12,000            --
    Current portion of deferred finance fees and
    discount on notes ( Note 7)                                     438,025            --
------------------------------------------------------------   ------------    ------------
                                                                  1,624,547         462,866
------------------------------------------------------------   ------------    ------------

DEFERRED FINANCE FEE AND DISCOUNT ON NOTES (Note 7)                 420,862            --
------------------------------------------------------------   ------------    ------------

PROPERTY AND EQUIPMENT (Note 4)
   Oil and gas properties full cost method of accounting
           Proved, net of accumulated depletion $405,969
           (2004 - $161,328)                                      2,710,046       1,209,938
           Unproved                                               2,348,949       1,419,447
------------------------------------------------------------   ------------    ------------
                                                                  5,058,995       2,629,385
   Other equipment, net of accumulated depreciation                   2,499           2,997
------------------------------------------------------------   ------------    ------------
                                                                  5,061,494       2,632,382
------------------------------------------------------------   ------------    ------------

                                                               $  7,106,903    $  3,095,248
============================================================   ============    ============

                      LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES

   Accounts payable and accrued liabilities                    $    616,146    $    228,819
   Current portion of drilling obligations (Note 5)                    --           617,000
     Current portion of convertible notes (Note 7)                1,839,305            --
------------------------------------------------------------   ------------    ------------
                                                                  2,455,451         845,819
CONVERTIBLE NOTES (Note 7)                                        1,215,443            --
DRILLING OBLIGATIONS (Note 5)                                          --           563,915
------------------------------------------------------------   ------------    ------------
                                                                  3,670,894       1,409,734
------------------------------------------------------------   ------------    ------------


CONTINGENCIES AND COMMITMENTS (Notes 1, 4, 5, 7 & 10)

STOCKHOLDERS' EQUITY (Note 8)
   Common stock $.00025 par value: 200,000,000 shares
   authorized Preferred stock, $.001 par value:
   75,000,000 shares authorized Issued and outstanding:
   17,603,405 common shares (December 31, 2004 - 16,999,038)          4,550           4,250
     Additional paid-in capital                                  14,887,912       8,947,604
   Common stock purchase warrants                                 2,580,854         301,815
    Accumulated deficit                                         (14,037,307)     (7,568,155)
------------------------------------------------------------   ------------    ------------
                                                                  3,436,009       1,685,514
------------------------------------------------------------   ------------    ------------
                                                               $  7,106,903    $  3,095,248
============================================================   ============    ============
</TABLE>
          The accompanying notes are an integral part of these interim
                       consolidated financial statements.

                                       4
<PAGE>

                            LEXINGTON RESOURCES, INC.

                  INTERIM CONSOLIDATED STATEMENT OF OPERATIONS

                                   (unaudited)
<TABLE>
<CAPTION>


                                        Three months   Three months      Nine months    Nine months
                                            Ended          Ended            Ended           Ended
                                        September 30,   September 30,   September 30,   September 30,
                                             2005            2004            2005            2004
                                        ------------    ------------    ------------    ------------
<S>                                           <C>             <C>             <C>             <C>
OIL AND GAS REVENUE                     $    137,458    $    211,549    $    530,721    $    305,756
                                        ------------    ------------    ------------    ------------

OPERATING EXPENSES
     Depletion                               104,761         105,628         244,641         112,186
     Operating costs and taxes                58,612          14,458         180,073          21,641
                                        ------------    ------------    ------------    ------------
                                             163,373        1120,086         424,714         133,827
                                        ------------    ------------    ------------    ------------

OPERATING PROFIT (LOSS)                      (25,915)         91,463         106,007         171,929
                                        ------------    ------------    ------------    ------------

OTHER EXPENSES
   Consulting - stock based (Note 9)       1,138,238            --         1,913,991       2,989,221
   General and administrative                116,499         949,459       1,287,170       2,307,567
   Interest and finance fees (Note 7)      3,365,248          23,924       3,373,998          50,309
                                        ------------    ------------    ------------    ------------

                                           4,619,985         973,383      6,575,159        5,347,097
                                        ------------    ------------    ------------    ------------

NET LOSS FOR THE PERIOD                   (4,645,900)   $   (881,920)   $ (6,469,152)   $ (5,175,168)
                                        ============    ============    ============    ============

BASIC NET LOSS PER SHARE                $      (0.26)   $      (0.06)   $      (0.37)   $    (0.35)
                                        ============    ============    ============    ============
WEIGHTED AVERAGE COMMON
      OF SHARES OUTSTANDING               17,557,753      15,319,693      17,375,441      14,632,326
                                        ============    ============    ============    ============
</TABLE>

          The accompanying notes are an integral part of these interim
                       consolidated financial statements.

                                       5
<PAGE>

                            LEXINGTON RESOURCES, INC.

                  INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (unaudited)


                                                   For the Nine     For the nine
                                                   month period     month period
                                                       ended           ended
                                                    September 30,  September 30,
                                                        2005           2004
---------------------------------------------------- -----------    -----------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss for the period                            $(6,469,152)   $(5,175,168)
  Adjustments to reconcile net loss to net cash
    from operating activities:
       Stock-based consulting fees                     1,913,991      2,989,221
           Non-cash compensation                         153,708         19,167
       Oil and gas depletion                             244,641        112,186
           Depreciation                                      498            332
       Non-cash interest and finance costs             3,326,799           --
  Changes in working capital assets and liabilities
       Prepaid expenses                                  (12,000)        (6,550)
       Accounts receivable                               (26,411)      (185,500)
       Accounts payable                                 (195,226)       777,745
       Accrued interest payable                           16,140         24,453
       Accrued and unpaid fees payable                      --           30,000
---------------------------------------------------- -----------    -----------

NET CASH FLOWS USED IN OPERATING ACTIVITIES           (1,047,012)    (1,414,114)
---------------------------------------------------- -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of equipment                                     --           (3,495)
  Oil and gas properties                              (2,245,408)    (2,247,539)
---------------------------------------------------- -----------    -----------

NET CASH FLOWS USED IN INVESTING ACTIVITIES           (2,245,408)    (2,251,034)
---------------------------------------------------- -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
    Drilling obligation (repayments) advances         (1,180,915)       737,984
  Advances payable                                          --          279,306
    Convertible notes, net  (Note 7)                   4,645,950        500,000
  Net proceeds on sale of common stock                   512,630      3,281,075
---------------------------------------------------- -----------    -----------

NET CASH FLOWS FROM FINANCING ACTIVITIES               3,977,665      4,798,365
---------------------------------------------------- -----------    -----------

INCREASE (DECREASE) IN CASH                              685,245      1,133,217

CASH, BEGINNING OF PERIOD                                326,293        351,420
---------------------------------------------------- -----------    -----------

CASH, END OF PERIOD                                  $ 1,011,538    $ 1,484,637
==================================================== ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION (Refer to Note 12)

          The accompanying notes are an integral part of these interim
                       consolidated financial statements.

                                       6
<PAGE>


LEXINGTON RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(unaudited)
--------------------------------------------------------------------------------

NOTE 1: NATURE OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION
--------------------------------------------------------------------------------

By Share Exchange Agreement dated November 19, 2003, Lexington  Resources,  Inc.
("LRI" or "the Company"), a Nevada corporation,  acquired 100% of the issued and
outstanding  shares  of  Lexington  Oil & Gas Ltd.  Co.  (an  exploration  stage
company)  ("Lexington"),  in exchange for 9,000,000  (3,000,000  pre January 26,
2004 3:1  forward  split)  restricted  shares  of  common  stock of the  Company
representing  85% of the total issued and  outstanding  shares of the Company at
the time. In connection with this  transaction,  the Company changed its name to
Lexington Resources, Inc. (Refer to Note 3.)

This acquisition has been accounted for as a reverse  acquisition with Lexington
being treated as the accounting parent and LRI, the legal parent,  being treated
as  the  accounting  subsidiary.   Accordingly,   the  consolidated  results  of
operations  of the Company  include  those of Lexington  for the period from its
inception on  September  29, 2003 and those of LRI since the date of the reverse
acquisition.

Lexington is an Oklahoma Limited Liability Corporation incorporated on September
29, 2003 formed 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.  As planned  principal  operations  commenced  in 2004,  the
Company is no longer considered to be an exploration stage company.

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 $830,904  at  September  30,  2005,  has  incurred  losses  since
inception of $14,037,307  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
research  and  development  and  ultimately  on  generating   future  profitable
operations.  The Company currently has unfunded property acquisition obligations
as  disclosed  in Note 4. The  Company  will  continue to fund  operations  with
advances and debt instruments, as well as further equity placements.

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, 2004 included in the Company's  Annual Report on Forms 10-KSB
and 10-KSB/A  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 and  10-KSB/A.  In the


                                       7
<PAGE>

NOTE 1: NATURE OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION - continued
--------------------------------------------------------------------------------

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,  2005  are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 2005.


NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

(a) Principles of Consolidation
The consolidated  financial  statements  include the accounts of the Company and
its  wholly-owned  subsidiary,  Lexington.  Lexington  was  acquired  by reverse
acquisition on November 19, 2003. All significant inter-company transactions and
account balances have been eliminated upon consolidation.

(b) Oil and Gas Properties
The  Company  follows  the full cost  method of  accounting  for its oil and gas
operations  whereby all costs related to the acquisition of methane,  petroleum,
and natural gas interests are capitalized. Under this method, all productive and
nonproductive  costs  incurred  in  connection  with  the  exploration  for  and
development of oil and gas reserves are capitalized. Such costs include land and
lease acquisition  costs,  annual carrying charges of non-producing  properties,
geological and geophysical costs, costs of drilling and equipping productive and
non-productive  wells,  and direct  exploration  salaries and related  benefits.
Proceeds from the disposal of oil and gas properties are recorded as a reduction
of the related  capitalized  costs without  recognition of a gain or loss unless
the  disposal  would  result in a change of 20 percent or more in the  depletion
rate. The Company currently operates solely in the U.S.A.

Depletion   of   proved   oil   and   gas   properties   is   computed   on  the
units-of-production   method  based  upon  estimates  of  proved  reserves,   as
determined by  independent  consultants,  with oil and gas being  converted to a
common unit of measure based on their relative energy content.

The costs of acquisition  and  exploration  of unproved oil and gas  properties,
including  any  related  capitalized   interest  expense,  are  not  subject  to
depletion,  but  are  assessed  for  impairment  either  individually  or  on an
aggregated  basis. The costs of certain  unevaluated  leasehold acreage are also
not  subject to  depletion.  Costs not  subject to  depletion  are  periodically
assessed for possible impairment or reductions in value. If a reduction in value
has  occurred,  costs  subject to  depletion  are  increased or a charge is made
against  earnings  for  those  operations  where  a  reserve  base  is  not  yet
established.

Estimated future removal and site  restoration  costs are provided over the life
of  proven  reserves  on  a  units-of-production  basis.  Costs,  which  include
production equipment removal and environmental  remediation,  are estimated each
period by management based on current regulations, actual expenses incurred, and
technology and industry  standards.  The charge is included in the provision for
depletion and depreciation and the actual  restoration  expenditures are charged
to the accumulated provision amounts as incurred.

The Company applies a ceiling test to capitalized  costs which limits such costs
to the aggregate of the estimated  present value,  using a ten percent  discount
rate of the estimated  future net revenues from production of proven reserves at
year end at market  prices less future  production,  administrative,  financing,


                                       8
<PAGE>

NOTE 1: NATURE OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION - continued
--------------------------------------------------------------------------------

site  restoration,  and  income  tax costs  plus the lower of cost or  estimated
market value of unproved  properties.  If  capitalized  costs are  determined to
exceed estimated future net revenues,  a write-down of carrying value is charged
to depletion in the period.

(c) Asset Retirement Obligations
The Company has adopted the  provisions of SFAS No. 143,  "Accounting  for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset  retirement  obligation  to be  recognized in the period in which it is
incurred  if a  reasonable  estimate of fair value can be made.  The  associated
asset  retirement  costs are  capitalized as part of the carrying  amount of the
related  oil and  gas  properties.  As of  September  30,  2005  management  has
determined that there are no material asset retirement obligations.

(d) Earnings (loss) Per Share
Basic earnings (loss) per share is computed by dividing  earnings (loss) for the
period by the  weighted  average  number of common  shares  outstanding  for the
period.  Diluted  earnings  (loss) per share reflects the potential  dilution of
securities by including  other  potential  common stock,  including  convertible
preferred  shares,  in the weighted average number of common shares  outstanding
for a period  and is not  presented  where  the  effect  is  anti-dilutive.  The
presentation  is only of  basic  earnings  (loss)  per  share as the  effect  of
potential  dilution of securities  has no impact on the current  period's  basic
earnings (loss) per share.  Loss per share,  as presented,  has been restated to
reflect the forward stock split described in Note 7. The weighted average number
of  shares  outstanding  prior to the  reverse  acquisition  is deemed to be the
number of  shares  issued  in  connection  with the  reverse  acquisition  being
9,000,000 shares (3,000,000 pre January 26, 2004 3:1 forward split).

(e) Revenue Recognition
Oil and natural gas revenues are recorded  using the sales  method,  whereby the
Company  recognizes  oil and natural gas revenue  based on the amount of oil and
gas sold to  purchasers,  when  title  passes,  the amount is  determinable  and
collection is reasonably assured.

(f) Financial Instruments
The  fair  values  of  cash,  accounts  receivable,  accounts  payable,  accrued
liabilities,  drilling  obligations  and  advances  due to related  parties were
estimated  to  approximate  their  carrying  values  due  to  the  immediate  or
short-term  maturity of these financial  instruments.  The Company's current and
planned  operations  are  located in the States of  Oklahoma  and Texas,  in the
United  States,  and as a result  the  Company  is not  subject  to  significant
exposure to market risks from changes in foreign currency rates.

The Company's financial instruments that are exposed to concentrations of credit
risk consist  primarily of cash and accounts  receivable.  The Company's cash is
held at a major U.S.  based  financial  institution.  The  Company  manages  and
controls  market and credit risk through  established  formal  internal  control
procedures, which are reviewed on an ongoing basis.

The  Company  sells  its  gas to  only  two  customers  as  there  is  currently
insufficient  production  for  multiple  purchasers.  The  Company  manages  and
controls this situation by ensuring it only deals with gas  purchasers  that are
reputable and are well established.

                                       9
<PAGE>

NOTE 1: NATURE OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION - continued
--------------------------------------------------------------------------------

(g) Concentration of Credit Risk
Substantially  all of the Company's sales are to two parties.  Consequently  the
Company is exposed to a concentration of credit risk.

(h) Use of Estimates
The preparation of these consolidated  financial  statements requires the use of
certain   estimates  by  management  in   determining   the  Company's   assets,
liabilities,  revenues  and  expenses.  Actual  results  could  differ from such
estimates.  Depreciation,  depletion and  amortization of oil and gas properties
and the impairment of oil and gas properties are determined  using  estimates of
oil and gas  reserves.  There  are  numerous  uncertainties  in  estimating  the
quantity of reserves and in projecting the future rates of production and timing
of development expenditures, including future costs to dismantle, dispose, plug,
and restore the Company's  properties.  Oil and gas reserve  engineering must be
recognized as a subjective  process of estimating  underground  accumulations of
oil and gas that cannot be measured in an exact way.  Proved reserves of oil and
natural gas are  estimated  quantities  that  geological  and  engineering  data
demonstrate with reasonable certainty to be recoverable in the future from known
reservoirs under existing conditions.

(i) Stock-Based Compensation
In December  2002, the Financial  Accounting  Standards  Board  ("FASB")  issued
Financial Accounting Standard No. 148, "Accounting for Stock-Based  Compensation
-  Transition  and  Disclosure"  ("SFAS No.  148"),  an  amendment  of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123").  The  purpose of SFAS No. 148 is to: (1) provide  alternative  methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based  employee  compensation,  (2) amend the disclosure
provisions  to require  prominent  disclosure  about the effects on reported net
income of an entity's  accounting  policy  decisions with respect to stock-based
employee compensation, and (3) to require disclosure of those effects in interim
financial information.  The disclosure provisions of SFAS No. 148 were effective
for the Company for the period ended December 31, 2003.

The  Company  has  elected to  continue  to  account  for  stock-based  employee
compensation  arrangements  in  accordance  with the  provisions  of  Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees",
("APB No.  25") and comply  with the  disclosure  provisions  of SFAS No. 123 as
amended by SFAS No. 148 as described above. In addition, in accordance with SFAS
No. 123 the  Company  applies  the fair  value  method  using the  Black-Scholes
option-pricing model in accounting for options granted to consultants. Under APB
No. 25, compensation  expense is recognized based on the difference,  if any, on
the date of grant  between the estimated  fair value of the Company's  stock and
the amount an employee  must pay to acquire the stock.  Compensation  expense is
recognized  immediately  for past services and pro-rata for future services over
the option-vesting period.

(i) Stock-Based Compensation - continued
The  following  table  illustrates  the pro forma  effect on net  income and net
earnings per share as if the Company had accounted for its stock-based  employee
compensation  using  the  fair  value  provisions  of SFAS  No.  123  using  the
assumptions as described in Note 4:

                                       10
<PAGE>

NOTE 1: NATURE OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION - continued
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                    Nine months ended   Nine months ended
                                                    September 30, 2005  September 30, 2004
                                                    ------------------  ------------------
<S>                                                     <C>                 <C>
Net loss for the period             As reported         $   (6,469,152)     $   (5,175,168)
SFAS 123 compensation expense       Pro-forma                 (841,307)           (692,051)
                                                    ------------------  ------------------
Net loss for the period             Pro-forma           $   (7,310,459)      $  (5,867,219)
                                                    ==================  ==================

Pro-forma basic net loss per share  Pro-forma           $        (0.42)      $       (0.40)
                                                    ==================  ==================
</TABLE>

The Company accounts for equity  instruments  issued in exchange for the receipt
of goods or services from other than  employees in accordance  with SFAS No. 123
and the  conclusions  reached  by the  Emerging  Issues  Task Force in Issue No.
96-18.   Costs  are  measured  at  the  estimated   fair  market  value  of  the
consideration  received or the  estimated  fair value of the equity  instruments
issued,  whichever is more reliably measurable.  The value of equity instruments
issued for  consideration  other than  employee  services is  determined  on the
earliest  of a  performance  commitment  or  completion  of  performance  by the
provider of goods or services as defined by EITF 96-18.

The Company has also adopted the  provisions of the FASB  Interpretation  No.44,
Accounting  for  Certain   Transactions   Involving  Stock   Compensation  -  An
Interpretation  of APB Opinion No. 25 ("FIN 44"), which provides  guidance as to
certain applications of APB 25.

(j) Income taxes
The Company follows the liability  method of accounting for income taxes.  Under
this method,  deferred tax assets and  liabilities are recognized for the future
tax  consequences  attributable to differences  between the financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
balances.  Deferred tax assets and  liabilities  are measured  using  enacted or
substantially  enacted tax rates  expected to apply to the taxable income in the
years in which those  differences  are expected to be recovered or settled.  The
effect  on  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized  in income in the  period  that  includes  the date of  enactment  or
substantial enactment. A valuation allowance is provided for deferred tax assets
if it is more  likely  than not that the  Company  will not  realize  the future
benefit, or if future deductibility is uncertain.

(k) Cash and cash equivalents
The Company considers all highly liquid instruments with an original maturity of
three months or less at the time of issuance to be cash equivalents.


                                       11
<PAGE>

NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC ("Lexington")
--------------------------------------------------------------------------------

By Share Exchange  Agreement dated November 19, 2003, the Company  acquired 100%
of the  issued  and  outstanding  shares  of  Lexington  (an  exploration  stage
company),  in exchange for 9,000,000 (3,000,000 pre January 26, 2004 3:1 forward
split)  restricted  shares of common stock of the  Company.  As a result of this
transaction the former  stockholders of Lexington acquired  approximately 85% of
the total issued and outstanding  shares of the Company as at November 19, 2003,
resulting in a change in control of the Company.

During  January,  2004,  the  parties to the Share  Exchange  Agreement,  Orient
Exploration  Ltd.  ("Orient"),  Douglas  Humphreys  ("Humphreys"),  the Company,
Lexington,  and Paluca Petroleum Inc.  ("Paluca")  re-evaluated the terms of the
original  Share  Exchange  Agreement  and upon further  negotiations  desired to
modify the terms of the original  agreement in the best  interest of all parties
such that: (i) 2,250,000 post forward split shares of restricted Common Stock of
the  Company  held  of  record  by  Humphreys  were  transferred  to  Orient  in
consideration  therefore;  (ii) the Company  assigned to  Humphreys a 5% carried
working  interest in every well  drilled by the Company on the Wagnon  Property;
(iii) the Company  agreed to allow  Humphreys to participate up to an additional
5% working interest in every well drilled by the Company on the Wagnon Property;
(iv) the Company agreed to transfer to Paluca certain assets previously acquired
by the Company (which included  working  interests and net revenue  interests in
certain oil and gas leases  located on the Doc Cole  Property,  the Atwood Booch
Sand Property, the Jeneva Property and the Sasakwa Gilcrease Sand Property).

Management  of the  Company  decided  not to  proceed  with the  acquisition  or
development  of  the  described  properties  as  set  out in  item  (iv)  due to
management's  analysis that the properties did not contain the  appropriate  oil
and gas development  elements that form part of the Company's  current focus and
criteria for corporate oil and gas development initiatives.

This acquisition has been accounted for as a  recapitalization  using accounting
principles  applicable to reverse  acquisitions  with Lexington being treated as
the accounting parent (acquirer) and Lexington Resources,  Inc. being treated as
the accounting subsidiary (acquiree). The value assigned to the capital stock of
consolidated  Lexington Resources,  Inc. on acquisition of Lexington is equal to
the book value of the capital stock of Lexington  plus the book value of the net
assets  (liabilities)  of  Lexington  Resources,  Inc.  as at  the  date  of the
acquisition.

The  book  value  of  Lexington's   capital  stock  subsequent  to  the  reverse
acquisition is calculated and allocated as follows:

      Lexington capital stock                                $       300
      Lexington Resources, Inc. net assets (liabilities)      (1,430,969)
                                                             -----------
                                                              (1,430,669)
      Charge to deficit on reverse acquisition                 1,433,317
                                                             -----------
      Consolidated stock accounts post reverse acquisition   $     2,648
                                                             ===========

These  consolidated  financial  statements  include the results of operations of
subsidiary  Lexington  since  September 29, 2003  (inception) and the results of
operations of parent  Lexington  Resources,  Inc.  since the date of the reverse
acquisition  effective November 19, 2003. The Company's  consolidated results of
operations  for the period from January 1, 2003 to September  30, 2003 have been
reported in the Company's September 30, 2003 filing on Form 10-QSB.

                                       12
<PAGE>

NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC ("Lexington") - cont'd
--------------------------------------------------------------------------------

In  order  to  reflect  the  revised   operating   arrangement   resulting  from
modifications  to the  original  terms  of the  Share  Exchange  Agreement,  the
Humphreys  Purchase and Sale Agreement and the Paluca Agreement both outlined in
the following sections were simultaneously executed.

Humphreys Purchase and Sale Agreement
On January 21, 2004,  Orient and Humphreys,  a director of the Company,  entered
into  a  purchase  and  sale  agreement  (the   "Humphreys   Purchase  and  Sale
Agreement").  Pursuant to the terms and provisions of the Humphreys Purchase and
Sale  Agreement:  Humphreys  agreed to transfer  2,250,000  shares of restricted
Common Stock of the Company held of record by Humphreys to Orient.

Paluca Agreement
On January 21, 2004, the Company, Lexington,  Paluca, and Humphreys entered into
an agreement whereby: (i) the Company assigned to Humphreys a 5% carried working
interest in every well drilled by the Company on the Wagnon  Property;  (ii) the
Company agreed to allow  Humphreys to participate up to an additional 5% working
interest  in every well  drilled by the  Company on the Wagnon  Property;  (iii)
Humphreys agreed to waive any and all other claims, debts or obligations owed to
Humphreys  by the  Company  or by  Lexington,  and (iv) the  Company  agreed  to
transfer to Paluca  certain  assets  previously  acquired by the Company  (which
included  working  interests  and net revenue  interests  in certain oil and gas
leases  located on the Doc Cole Property,  the Atwood Booch Sand  Property,  the
Jeneva Property and the Sasakwa Gilcrease Sand Property).

Management Compensation Agreement
The Company and Lexington have  negotiated a new  compensation  agreement  ("New
Agreement")  with  Humphreys  for his  assistance  in  overseeing  the  drilling
operations and the completion,  management of wells, and for his increasing role
in  development  of the  Company on a  performance  basis.  Under the  covenants
provided under the New Agreement and within its effective  term,  Humphreys,  or
his  designate:  (1) will receive  compensation  of $7,500 per month,  effective
April 1, 2004;  (2) will be  assigned up to a 10%  carried  working  interest of
Lexington's  total  interest  in  every  well  drilled  by  the  Company  on all
properties  held by the  Company,  (3) will have the right to  purchase up to an
additional  5% working  interest  of  Lexington'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; and
(4) will receive a further 200,000 options in the Company to be granted at $3.00
per share  exercisable for a five year term.  These options were granted in July
2004. (Refer to Note 8.)

During the nine month  period  ended  September  30, 2005 the  Company  recorded
additional  compensation  expense to  Humphreys of $153,708  (September,  2004 -
$NIL) being the  estimated  value of his 10% carried  interest in the  Company's
well interests that were  successfully  developed in the period ended  September
30, 2005. (Refer to Note 4.)

Humphreys is a director of the Company and is the Drilling Operations Manager of
Lexington,  and also a director,  General  Manager,  and 25%  shareholder in Oak
Hills  Drilling and Operating,  LLC ("Oak  Hills"),  an oil and gas drilling and
well operating  company based in  Holdenville,  Oklahoma that acts as designated
"operator" to Lexington since January 1, 2005. Humphreys is in charge of oil and
gas  operations  for  Lexington  in the United  States.  (Refer to Note 10.) The
previous operator in charge of drilling and operating of wells for Lexington was
Oakhills Energy, Inc.

                                       13
<PAGE>

NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC ("Lexington") - cont'd
--------------------------------------------------------------------------------

Paluca  Petroleum Inc. is a private  Oklahoma based oil and gas services company
owned by Humphreys and his immediate  family.  Some of the services  provided by
Humphreys  to the  Company  are  provided  through  this  business  entity.  Mr.
Humphreys is also the President of Paluca.

NOTE 4 - PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------

Property and equipment include the following:

                                            September 30, December 31,
                                                2005          2004
                                             ----------    ----------
Oil and gas properties:                          $             $
Proved, subject to depletion                  3,116,015     1,371,266
Unproved, not subject to depletion            2,348,949     1,419,447
Accumulated depletion                          (405,969)     (161,328)
                                             ----------    ----------
Net oil and gas properties                    5,058,995     2,629,385
                                             ----------    ----------

Other equipment                                   3,495         3,495
Accumulated depreciation                           (996)         (498)
                                             ----------    ----------
Net other property and equipment                  2,499         2,997
                                             ----------    ----------
Property and equipment, net of accumulated
  depreciation  and depletion                 5,061,494     2,632,382
                                             ==========    ==========


The  Company's  oil and gas  activities  are  currently  conducted in the United
States.  During the current  period the Company  incurred  development  costs of
$1,832,096  on its  properties  inclusive  of  carrying  costs to  Humphreys  of
$153,708.

Wagnon Lease
By agreement dated October 9, 2003,  Lexington acquired an interest in a section
of farm-out acreage with the intention to develop coal bed methane gas producing
wells in Pittsburg County, Oklahoma. Lexington holds an 80% working interest and
a 60.56% net revenue interest in approximately  590 gross acreage of a potential
gas  producing  property  located in  Pittsburg  County,  Oklahoma  (the "Wagnon
Property"). The Company's interest relating to the Wagnon Property is subject to
farm-out  agreements  equating to a total 20% working  interest  between Paluca,
Oakhills Energy,  Inc. and the lessee of the Wagnon  Property.  Drilling targets
are Hartshorne Coal bed methane gas zones.

A director  and an officer  of the  Company  were  minority  owners in  Oakhills
Energy,  Inc. in 2003. Their interest in Oakhills Energy,  Inc. was purchased by
the majority shareholder on January 26, 2004.

During  the year  ended  December  31,  2004,  three  horizontal  gas wells (the
Kellster 1-5, Kyndal 2-2 and Bryce 3-2) have been put into production.

On March 15, 2005 the Company began drilling a fourth horizontal gas well on the
Wagnon  Property  (Calleigh  4-2).  The well began  producing  on April 2, 2005.
During the period ended September 30, 2005 the Company has incurred  $552,898 on


                                       14
<PAGE>

NOTE 4 - PROPERTY AND EQUIPMENT - continued
--------------------------------------------------------------------------------

drilling  expenditures  relating to a total of four  producing  gas wells on the
Wagnon lease. (Refer to Note 5.)

Coal Creek Prospect
In March 2004 the  Lexington  obtained an option to purchase  an  undivided  95%
interest in  approximately  2,500 net leasehold  acres in 5 sections of the Coal
Creek  Prospect  located  in  Hughes  and  Pittsburg  Counties,  in the State of
Oklahoma. During the year ended December 31, 2004 the Company acquired 1,932 net
leasehold  acres  under the  option.  Lexington  does not expect to acquire  any
additional  acreage under this option.  Under the terms of the purchase of these
leases, Lexington has an undivided 95% working interest in the subject lands and
a minimum 78% net revenue  interest.  The terms of the leases are for two years.
Drilling targets are Hartshorne Coal bed methane gas zones.

On March 31, 2005 Lexington began drilling its first horizontal coal bed methane
gas well on the Coal Creek  Prospect  (Lex 1-34).  The well began  production in
April 2005.  Lexington has  approximately a 50% working interest in the well and
has accrued $496,526 in costs associated with the well for the period.

On April 14,  2005  Lexington  began  drilling  its second  horizontal  coal bed
methane gas well on its Coal Creek  Prospect  (Braumbaugh  1-10).  Lexington has
approximately  a 22% working  interest  in the well and has accrued  $142,471 in
costs associated with the well for the period.  The well began production in May
2005.

On May 31, 2005 Lexington  began drilling its third  horizontal coal bed methane
gas well on its Coal Creek Prospect (Ellis 1-15). Lexington has approximately an
88% working  interest in the well and has incurred  $593,588 in costs associated
with the well for the period.  The well is currently in drilling and development
stages.

In June through  August 2005, the Company  received  loans  totaling  $1,165,000
which have been  secured  against  the Coal Creek  property.  (Refer to Note 6.)
Those loans were paid in full on September 19, 2005.

Panther Creek Prospect
In March 2004  Lexington  purchased  a 3 year lease of  approximately  300 acres
located in five separate sections to develop the Panther Creek Project in Hughes
County,  Oklahoma.  Lexington has an undivided 100% working  interest in subject
lands and an approximate 81% net revenue  interest.  Part of the acreage in this
lease has been subject to three division pooling orders by Newfield  Exploration
Mid-Continent,  Inc. ("Newfield"), for three wells to be drilled and operated by
Newfield in which  Lexington  has elected to  participate.  Lexington's  working
interests  in the three wells to be drilled  are  proportionate  to  Lexington's
Panther  Creek lease  ownership in areas pooled by Newfield.  Lexington  working
interests in the three wells are estimated to be as follows;  25.78% (contingent
liability  of $419,801  for a completed  well based on  Newfield  Authority  For
Expenditure "AFE), 10.94% (contingent liability of $159,655 for a completed well
based on Newfield AFE if drilled),  and 4.06%  (contingent  liability of $58,521
for a  completed  well based on Newfield  AFE if  drilled).  Newfield  has up to
approximately  the end of 2005 to drill the  remaining  two wells and may or may
not proceed  with any  individual  well  project at their  election.  Contingent
liability  exists to Lexington for any well drilled by Newfield  that  Lexington
has elected to participate.

Newfield has proceeded  with the drilling and  completion of one of the wells in
which  Lexington  has  leased  acreage.  The first of the three  vertical  wells


                                       15
<PAGE>

NOTE 4 - PROPERTY AND EQUIPMENT - continued
--------------------------------------------------------------------------------

targeting  a  Woodford  Shale gas  zone,  the POE 1-29,  commenced  drilling  on
February 9, 2005 and began  producing on March 21, 2005.  Lexington has incurred
$485,071  for  drilling  and  completion  costs  relating  to the POE 1-29 as of
September 30, 2005.

South Lamar Prospect
By agreement dated April 21, 2004,  Lexington  acquired a 100% working interest,
78.5% net revenue interest, in three sections (960 acres) of farm-out acreage in
Hughes  County,  Oklahoma  (the "South Lamar  Prospect")  with the  intention to
develop coal bed methane gas producing wells and Caney Shale wells.  The term of
the lease is two years.  On July 26, 2004,  Lexington  acquired a further 183.98
acres in the South Lamar  prospect  and a 100%  working  interest  and a 79% net
revenue interest in the additional acreage.  The term of the lease is two years.
Lexington  has begun site  preparation  on the first well  (Goodson  1-23) to be
drilled on the property; but has since abandoned plans to drill this well.

H-9 Prospect
By agreement  dated June 29, 2004,  Lexington has obtained an option to purchase
an  undivided  100%  leasehold  interest,   79.25%  net  revenue  interest,   in
approximately  4,600 net leasehold acres in approximately 38 sections of the H-9
Prospect  located in Hughes and  McIntosh  Counties,  in the State of  Oklahoma.
Lexington  concluded the purchase of the property on July 29, 2004. The terms of
leases acquired within the prospect are between three and four years.

On July 19,  2004  Lexington  acquired  an  additional  325 acres of gas  target
drillable  acreage in the northeast  portion of Hughes  County,  Oklahoma in the
vicinity of the  approximate  4,600 acres of farm out leases  under  acquisition
(H-9)  Prospect.  Drilling  targets  that  are  included  in the  lease  include
Hartshorne and Booch Coal gas zones with a 100% Working Interest and a 78.3% Net
Revenue  Interest.  The acquired  lease is held by  production.  The term of the
lease is three years.

Middle Creek Prospect
By agreement  dated October 28, 2004,  Lexington has purchased an undivided 100%
leasehold interest,  70% net revenue interest, in 320 net leasehold acres in two
sections of the Middle Creek Prospect located in Hughes County,  in the State of
Oklahoma.  Drilling  targets are the Caney Shale and Hartshorne coal bed methane
zones. The leasehold interest acquired is held by production.

Barnett Pathway  Prospect On June 2, 2005 (amended on July 14, 2005) the Company
entered  into an  agreement  whereby it has the option to purchase up to a 100 %
working interest in net revenue  interests  ranging between 70% and 75% in up to
3,687 acres of Barnett  Shale gas targeted  properties  located in Jack and Palo
Pinto Counties in the State of Texas for between $450 and $500 per acre together
with a 30 month best efforts  drilling  commitment.  On June 8, 2004 the Company
provided the seller a $100,000 non-refundable deposit. The first acquisition was
concluded on August 19, 2005 with the Company acquiring 2,325 acres.

                                       16
<PAGE>

NOTE 5:  DRILLING OBLIGATIONS
--------------------------------------------------------------------------------

During the period ended December 31, 2003 Lexington,  the Company,  and Oakhills
Energy,  Inc.  entered into  drilling  agreements  with private  investors  (the
"Funding  Investors")  for the funding for the first three  wells,  the Kellster
1-5, the Kyndal 2-2 and the Bryce 3-2,  located on the Wagnon Lease. The Funding
Investors   subsequently  each  provided  one-third  of  the  Authorization  For
Expenditure   ("AFE")  capital  estimated  at  $360,000  for  the  drilling  and
completion of each of the first three wells. As of June 30, 2005 a total of four
such drilling  agreements  with private  investors had been entered into between
Funding  Investors,  the Company,  and  Lexington.  The Company had received the
total  required  funding of  $1,485,000 ( 2004 - $720,000)  for the drilling and
completion of the four  horizontal  coal bed methane  Wagnon Lease wells and has
successfully  drilled and  completed the Kellster 1-5, the Kyndal 2-2, the Bryce
3-2 and the Calleigh  4-2 wells.  The terms of the  drilling  agreements  of all
wells on the  Wagnon  Lease  are the same for  each  well on the  property.  The
Calleigh 4-2 began production in April, 2005.

Wells to be  drilled  on the  Wagnon  Lease  property  carry  royalty  interests
totaling 25% to land owners and property  interest  holders and carried  working
interests of 5% to a land owner,  and 10% to a company  related to a director of
the  Company,  Paluca  Petroleum,  Inc.  (see Note 3 -  Management  Compensation
Agreement).  Paluca Petroleum,  Inc. also owns a non-carried working interest of
5% as part of capital participation funding provided by Paluca.

 NOTE 5: DRILLING OBLIGATIONS
--------------------------------------------------------------------------------

The Funding Investors are provided an 80% working  interest,  60.56% net revenue
interest,  in the wells  until their  invested  capital for each well is repaid,
after which time the Funding  Investors  revert to an  aggregate  20.1%  working
interest,  15.075%  net  revenue  interest,  in the wells  located on the Wagnon
Lease. Oakhills Energy, Inc., the previous operator responsible for drilling the
wells,  will  "back-in" to a reversionary  6.7% working  interest after invested
capital is repaid to the Funding  Investors  in the wells  located on the Wagnon
Lease and Lexington will back-in to a reversionary 53.2% working interest.

As of September  30, 2005,  the Funding  Investors  have been fully repaid their
cumulative  capital  investment of  $1,485,000  for the drilling of the Kellster
1-5, Kyndal 2-2, Bryce 3-2 and Calleigh 4-2 wells from February,  2004 to April,
2005. As a result, the Company's back-in working interest of 53.2% has vested in
the four wells.

NOTE 6:  PROMISSORY NOTES
--------------------------------------------------------------------------------

In June 2005 the  Company  obtained  loans by way of  promissory  notes from two
shareholders of the Company totaling $1,100,000 ($600,000 and $500,000).  During
the period an additional  $65,000 had been advanced to the Company by one of the
shareholders.  The terms of the loans  were 5 years from the dates of issue with
an interest rate of 10%. Payments of blended principal and interest were payable
monthly over a 60 month  amortization.  In conjunction  with the promissory note
advances,  233,000  warrants,  valued at $271,028 (refer to Note 8), were issued
exercisable  at $3.00 per share with exercise terms until May 31, 2010. The fair
value of the  warrants  has been  credited to equity.  A discount on the debt of
$271,028  was also  recorded,  to be  accreted  over the term of the  debt.  The
promissory  notes were repayable at anytime  without  penalty,  and were secured
against the Company's  Coal Creek oil and gas property  leases.  As of September
30, 2005 the original  loan  principal of  $1,165,000  was repaid as well as all
accrued  interest of $31,058.  The  unamortized  debt discount on settlement has
been included in interest and finance fees.

                                       17
<PAGE>

NOTE 7:  CONVERTIBLE NOTES
--------------------------------------------------------------------------------

On  September  16, 2005 the Company  issued  secured and  Convertible  Notes and
certain  warrants  pursuant  to a  private  placement  with  certain  accredited
investors,  in  reliance  on Rule  506  promulgated  under  Section  4(2) of the
Securities  Act, for gross proceeds of $5,260,000.  Introduction  and legal fees
associated with this financing were $614,050. Accordingly, the Company issued:

(i)  An aggregate of  $5,260,000  in secured,  convertible  two-year  promissory
     notes bearing 8% interest. The promissory notes are immediately convertible
     into  5,260,000  shares of common stock on the basis of one share of common
     stock for every $1 in value of notes;
(ii) For every two shares of its common stock purchasable in accordance with the
     conversion provisions of the Convertible Notes, one Class A Warrant, for an
     aggregate of 2,630,000 Class A Warrants,  to purchase a share of its common
     stock at an exercise  price of $1.50 per share for a three-year  term after
     this registration statement has been declared effective by the SEC;
(iii)For every two shares of its common stock  purchasable  in  accordance  with
     the conversion  provisions of the Convertible  Notes,  one Class B Warrant,
     for an aggregate of 2,630,000  Class B Warrants,  to purchase an additional
     share of our  common  stock at an  exercise  price of $1.25 per share for a
     one-year term after this registration statement has been declared effective
     by the SEC; and
(iv) 526,000 Finder's  Warrants to purchase shares of the Company's common stock
     at an  exercise  price of $1.00 per share for a term of three  years  after
     this registration statement has been declared effective by the SEC.

The security granted is by a general  security  interest in all of the Company's
property.

Subsequent  to the period ended  September  30, 2005,  on October 11, 2005,  the
Company  received  an  additional  $600,000  in  Convertible  Note  and  warrant
financing under identical terms and conditions as mentioned above,  bringing the
Company's total Convertible Note debt financing to $5,860,000. (See Note 13.)

In  accordance  with  EITF  00-27  "Application  of Issue  No.  98-5 to  Certain
Convertible  Instruments" and EITF 98-5  "Accounting for Convertible  Securities
with  Beneficial  Conversion  Features  or  Contingently  Adjustable  Conversion
Ratios" the proceeds of the issuance have been allocated  among the  convertible
debt and the warrants  issued based upon their  relative  fair values.  The fair
value of the 5,786,000  warrants  issued as of September 30, 2005 was determined
to be $5,727,450 by using the  Black-Scholes  option  pricing model  assuming an
expected life of 1 - 3 years,  a risk-free  interest  rate of 3.85% - 3.96%,  an
expected volatility of 140.8%, and a dividend yield of 0%. The fair value of the
convertible  debt has been  determined to be  $7,574,400,  based upon  5,260,000
shares of common  stock at a market value of $1.44 per share.  As a result:  (a)
the intrinsic value of the beneficial  conversion feature has been determined to
be  $2,995,174  and has  been  charged  to  interest  expense  and  recorded  as
additional paid in capital; (b) the pro-rata fair value of the warrants has been
determined  to be $2,264,826  and has been recorded as equity.  The Company will
record  further  interest  expense  over  the term of the  Convertible  Notes of
$2,264,826  resulting from the difference  between the stated value and carrying
value at the date of issuance.  The carrying value of the Convertible Notes will
be accreted to the face value of $5,260,000 to maturity.  To September 30, 2005,
accrued interest of $16,140 has been included in convertible notes, and interest
expense of $43,435 has been accreted,  thereby  increasing the carrying value of
the Convertible Notes to $3,054,748.

                                       18
<PAGE>

NOTE 7:  CONVERTIBLE NOTES - continued
--------------------------------------------------------------------------------

Repayment of Promissory Notes and Accrued Interest
The Company is  committed to repay  convertible  debenture  holders  outstanding
amounts of principal and interest  accrued at 8% per annum on an aggregate  face
value of  $5,860,000 in  Convertible  Notes.  20 monthly  principal and interest
payments are payable in either cash or shares of the  Company's  common stock at
the rate of $1.00 per share (the "Fixed Conversion  Price") beginning on January
16, 2005 if the  Company's  share price is trading  above $1.00 per share at the
date of payment.  Commencing on the 4th month anniversary of the closing date of
the issue of the Convertible  Notes (January 16, 2005),  and on the first day of
each month thereafter, the Convertible Notes must be repaid in cash or shares in
the 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 the  Company's
shares are trading at less than $1.00 per share at the date of  repayment,  then
the Company  may repay  monthly  principal  and  interest  due in either cash or
shares  in the  capital  of the  Company  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  the  Company  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.  The holders of the  Convertible  Notes
have a secured first interest in the assets of the Company.

Debt Repayment
The aggregate amount of principal and interest  payments required in each of the
next two years to meet debt retirement  provisions is as follows  (includes debt
financing subsequent to the period ending September 30, 2005):

                    Year   Principal   Interest     Total
                    ----   ---------   ---------   ---------
                               $             $         $
                    2006   3,516,000     456,598   3,972,598
                    2007   2,344,000      70,127   2,414,127
                           ---------   ---------   ---------
                           5,860,000     526,725   6,386,725
                           =========   =========   =========

================================================================================
Deferred Finance Fees and Discount on Notes
Deferred finance fees associated with this financing are comprised of:
     (a) introduction and legal fees of $614,050; and
     (b)  $262,000  being the value of 200,000  shares  issued to settle  with a
former financier (Refer to Note 8). During the nine month period ended September
30,  2005,  $17,163 of the  deferred  finance fees have been charged to interest
expense and the balance of $858,887 will be expensed over the remaining  term of
the convertible debt.

NOTE 8:  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.

Forward Stock Split
On January 26, 2004 the Company  forward split its common shares on the basis of
three new shares for each common share outstanding. The par value and the number
of authorized but unissued shares of the Company's  common stock was not changed
as a result of the forward stock split.

                                       19
<PAGE>

NOTE 8:  STOCKHOLDERS' EQUITY - continued
--------------------------------------------------------------------------------

Unless  otherwise   noted,  all  references  to  common  stock,   common  shares
outstanding,  average numbers of common shares outstanding and per share amounts
in these  Financial  Statements and Notes to Financial  Statements  prior to the
effective  dates of the reverse and forward  stock splits have been  restated to
reflect the one-for-three  hundred reverse split and the  one-for-three  forward
split on a retroactive basis.

Stock Issuances - 2005
On July 21, 2005 the Company  issued  200,000  restricted  common shares to C.K.
Cooper & Co., relating to a termination and settlement  agreement  regarding the
recent debt financing by the Company. The fair value of these shares at the date
of  issuance  was $1.31 per share  bringing  the total  value to  $262,000.  The
calculated  fair value  respecting  the issue of 200,000  common shares has been
recorded as an increase  in equity and a charge to deferred  finders  fees which
will be expensed over the term of the promissory  notes.  The shares are subject
to subsequent registration rights. (Refer to Note 7.)

Stock Issuances - 2004
On January 22, 2004 the Company  issued  1,200,000  post forward split shares of
its common stock,  upon the exercise of 1,200,000 post forward share split stock
options at $0.167 per post  forward  share split share for proceeds of $200,000,
which was paid by way of offset of $200,000  originally  advanced to the Company
by ICI which was assigned by Investor Communications International, Inc. ("ICI")
to  International  Market  Trend,  Inc.  ("IMT")  designated  option  holders as
described in Note 8.

On May 18, 2004 the Company issued 495,000 shares of its common stock,  upon the
exercise of 495,000  stock  options at $1.00 per share for proceeds of $495,000,
which was paid by way of offset of $495,000  originally  advanced to the Company
by ICI, which was assigned to an IMT designated  option holder,  as described in
Note 8.

On June 25, 2004 the Company issued 320,000 shares of its common stock, upon the
exercise  of  320,000  stock  options  at $3.00 per share for cash  proceeds  of
$960,000.

Private Placements - 2004
On September 9, 2004 the Company  approved a financing of up to 4,150,000  units
of  restricted  common  shares at a price of $1.47 per share  plus a full  share
purchase  warrant  exercisable  at a price of $1.68  per  share  for each  share
purchased (the "September  Unit(s)").  The unexercised  warrants expired on July
23, 2005,  such date being six months from the effective date of registration of
the stock and warrants  issued under the offering.  Brokers' fees payable on the
September Units were: cash of 8% of gross proceeds,  brokers'  warrants equal to
4% of the gross  proceeds  (to be issued  under the same  terms as the  warrants
issued under the offering),  and a warrant  exercise fee equal to 5% of proceeds
received as a result of the future exercise of the warrants by the investors. On
November 1, 2004 the Company  completed  the sale of an  aggregate  of 1,700,686
Units.  The  Company  filed  a  registration  statement  (form  SB-2)  with  the
Securities and Exchange  Commission  ("SEC") on December 15, 2004,  covering the
resale of shares of common stock sold in the private  placement or issuable upon
exercise of the warrants.  Under the terms of the  financing,  the  registration
statement  is to become  effective  within 120 days after the filing  date;  the
registration  statement  went effective on January 24, 2005 in less than 42 days
from the filing date.

                                       20
<PAGE>

NOTE 8:  STOCKHOLDERS' EQUITY - continued
--------------------------------------------------------------------------------

As of December 31, 2004, 1,700,686 September Units had been sold for proceeds of
$2,319,264, net of an $180,746 agent fee which was charged to additional paid in
capital.  Of the 1,700,686  units sold 376,318 were  non-brokered  and 1,324,368
were  brokered.  The fair value of the warrants was  estimated to be $0.147 each
and $250,001 has been recorded as a separate component of stockholders'  equity.
The fair value of the 46,353 broker  warrants  issued to date has been estimated
to be $0.147 per warrant and as a result, $6,814 has been recorded as a separate
component  of  stockholders'  equity.  The  non-brokered  units in the amount of
376,318 were issued upon:  (1) settlement of a $500,000  convertible  promissory
note and accrued  interest of  approximately  $12,637 for 348,733 units; and (2)
pursuant to a  non-brokered  placee  that paid  $40,550  for 27,585  units.

Share Purchase Warrants
Share purchase warrants outstanding at September 30, 2005 are:

                                                           Weighted average
 Range of exercise    Weighted    Number of warrants to  remaining contractual
      prices       average price   purchase shares        life (in years)
--------------------------------------------------------------------------------
   $1.00 - $5.00       $1.52.         6,219,000                  2.33
================================================================================

A summary of the Company's stock purchase warrants as of September 30, 2005, and
changes during the period ended is presented below:

<TABLE>
<CAPTION>
                                 ------------------ ------------------ -----------------------
                                                      Weighted average     Weighted average
                                 Number of Warrants   exercise price     remaining contractual
                                                          per share         life (in years)
                                  ------------------ ----------------- -----------------------
<S>                                      <C>                <C>                 <C>
                                                             $
Outstanding at December 31, 2003                   -
Granted May 3, 2004                          200,000
Granted October 31, 2004                   1,747,039
                                  ------------------ ----------------- -----------------------
Balance at December 31, 2004               1,947,039        2.02                 0.60
Exercised                                   (304,367)
Granted                                    6,019,000
Expired                                   (1,442,672)
                                  ------------------ ----------------- -----------------------

Balance at September 30, 2005              6,219,000        2.22                 2.09
                                  ================== ================= =======================
</TABLE>

From May to August,  2005 the Company issued 233,000  warrants at $3.00 per unit
in conjunction  with the issue of promissory  notes  totaling  $1,165,000 to two
shareholders  ($600,000  and  $565,000) by the Company (see Note 6). The term of
these  warrants is five years.  The fair value of these  warrants at the date of
grant was $271,028 as estimated  using the  Black-Scholes  warrant pricing model
with an expected  term of 5 years,  a risk free  interest rate of 3%, a dividend
yield of 0%, and an expected volatility of 159.69%. (Refer to Note 6).

                                       21
<PAGE>

NOTE 8:  STOCKHOLDERS' EQUITY - continued
--------------------------------------------------------------------------------

In the  period  ended  June 30,  2005,  304,367  share  purchase  warrants  were
exercised at $1.68 per purchase  warrant  providing  $495,964 in proceeds to the
Company, net of brokers' fees of $15,373.

During the nine month period ended September 30, 2005 1,442,672 warrents expired
unexercised.

As a result of the warrants  that expired and the warrants  that were  exercised
during the nine month  period ended  September  30,  2005,  the Company  charged
$256,815 to Additional Paid in Capital.

In  September  2005,  the  Company  issued:   (a)  2,630,000  Class  A  Warrants
exercisable at $1.50 for 3 years; (b) 2,630,000 Class B Warrants  exercisable at
$1.25  for 1 year;  and (c)  586,000  Finder's  warrants  exercisable  at  $1.00
exercisable  for 3 years in  conjunction  with the  issue  of  promissory  notes
totaling $5,260,000 (see Note 6).


NOTE 9:  STOCK OPTION PLAN ("SOP")
--------------------------------------------------------------------------------

As of September 30, 2005, 6,700,000 options under the Company's current SOP have
been granted and 3,765,000 have been exercised.

A summary of the Company's  stock options as of September 30, 2005,  and changes
during the period ended is presented below:
<TABLE>
<CAPTION>
                                  ------------------ ----------------- -----------------------
                                                     Weighted average        Weighted average
                                         Number of    exercise price      remaining contractual
                                          options         per share            life (in years)
                                  ------------------ ----------------- -----------------------
<S>                                         <C>               <C>                <C>
                                                              $
Outstanding at December 31, 2003           1,350,000         0.50                3.392
Exercised                                 (2,015,000)
Granted                                    1,200,000

                                  ------------------ ----------------- -----------------------
Outstanding at December 31, 2004             535,000         1.64                4.26
Cancelled,                                  (100,000)
Granted                                    2,600,000
Exercised                                   (100,000)
                                  ------------------ ----------------- -----------------------

Outstanding at September 30, 2005          2,935,000         2.48                 6.91
                                  ================== ================= =======================
</TABLE>

In January 2004, 1,200,000 stock options (400,000 pre-forward split shares) were
exercised at $0.167 per share ($0.50 per  pre-forward  split share) for proceeds
of $200,000 which was paid by way of offset of $200,000  originally  advanced to
the Company by ICI which was assigned by ICI to IMT designated option holders.

On February 2, 2004,  an  additional  1,000,000  share  options  were granted to
consultants  and three  directors,  500,000  exercisable  at $1.00  and  500,000
exercisable at $3.00. The term of these options is five years. The fair value of
these  options  at the date of grant  of  $2,989,221  was  estimated  using  the
Black-Scholes option pricing model with an expected life of 5 years, a risk free
interest rate of 3%, a dividend yield of 0%, and an expected  volatility of 251%
and has been recorded as a consulting  expense in the period.  Of these options,
100,000 of the $3.00 options were granted to an  officer/director of the Company
and 10,000 of the $1.00 options were granted to two directors.

In April 2004 the Company registered 500,000 common stock options exercisable at
$1.00 per share under an S-8 Registration Statement. On May 18, 2004, 495,000 of
these stock  options were  exercised at $1.00 per share for proceeds of $495,000
which was paid by way of offset of $495,000  originally  advanced to the Company
by ICI which was assigned to a designated option holder.

                                       22
<PAGE>

NOTE 9:  STOCK OPTION PLAN ("SOP") - continued
--------------------------------------------------------------------------------

In June 2004 the Company registered 400,000 common stock options  exercisable at
$3.00 per share under an S-8 Registration Statement.  And, in June 2004, 320,000
of these stock  options were  exercised at $3.00 per share for cash  proceeds of
$960,000.

By  Directors'  Resolution  dated  July  2,  2004,  the  Company  increased  the
authorized number of options under its SOP from 4,000,000 to 5,000,000.

On July 12,  2004,  200,000  stock  options  were  granted at $3.00 per share to
Humphreys.  The term of these  options  is five  years.  The fair value of these
options at the date of grant of $692,051 was estimated  using the  Black-Scholes
option pricing model with an expected life of 5 years, a risk free interest rate
of 3%,  a  dividend  yield  of 0%,  and an  expected  volatility  of 222% and in
accordance  with the  provisions of SFAS 148, has been  disclosed on a pro-forma
basis in Note 2.

On February 1, 2005, 500,000 options were granted at $1.00 per share to IMT. The
term of these options is five years. The fair value of these options at the date
of grant of $646,054 was estimated using the Black-Scholes  option pricing model
with an expected  life of 5 years,  a risk free  interest rate of 3%, a dividend
yield of 0%, and an expected volatility of 239.25%.

On February 1, 2005,  100,000  existing S-8 options were granted at $0.16667 per
share to IMT. The term of these  options is five years.  The fair value of these
options at the date of grant of $129,699 was estimated  using the  Black-Scholes
option pricing model with an expected life of 5 years, a risk free interest rate
of 3%, a dividend yield of 0% and an expected volatility of 239.25%.

On May 23, 2005, 100,000 S-8 registered share options were exercised at $0.16667
per share for cash proceeds of $16,667.

On August 19,  2005,  1,150,000  options were granted at $1.25 per share to IMT.
The term of these options is five years.  The fair value of these options at the
date of grant of $1,138,238 was estimated using the Black-Scholes option pricing
model  with an  expected  life of 5 years,  a risk free  interest  rate of 3%, a
dividend yield of 0%, and an expected volatility of 139.60%.

On August 19,  2005,  850,000  stock  options were granted at $1.25 per share to
various officers and directors of the Company. The term of these options is five
years.  The fair  value of these  options at the date of grant of  $841,307  was
estimated using the Black-Scholes  option pricing model with an expected life of
5 years,  a risk  free  interest  rate of 3%,  a  dividend  yield of 0%,  and an
expected  volatility of 139.60%,  and in accordance  with the provisions of SFAS
148, has been disclosed on a pro-forma basis in Note 2.

NOTE 10: RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------

For the nine month period ended September 30, 2005
The Company  previously entered into a contract with IMT, a private company that
performs a wide range of  management,  administrative,  financial,  and business
development services to the Company. The Company incurred $90,000 in fees to IMT
for the period ended September 30, 2005 (2005 - $60,000).

On February 1, 2005 IMT was granted 600,000 stock options (refer to Note 9).

On August 19, 2005 IMT was granted 1,150,000 stock options (refer to Note 9).

                                       23
<PAGE>

NOTE 10: RELATED PARTY TRANSACTIONS - continued
--------------------------------------------------------------------------------

On November 9, 2004,  the Company  reached an agreement  with Oak Hills Drilling
and Operating  LLC  ("Oakhills"),  to drill a ten well  program.  Humphreys is a
director of the Company and is the Drilling Operations Manager of Lexington, and
also the General Manager,  director, and 25% shareholder of Oakhills, an oil and
gas drilling and well operating company based in Holdenville, Oklahoma that acts
as "operator" to Lexington. Mr. Humphreys is in charge of oil and gas operations
for Lexington in the United States.

On  September  23,  2005,  the Company  announced  that it had  entered  into an
agreement in principle to acquire 100% of the issued and  outstanding  shares in
the capital of Oak Hills  Drilling and Operating  LLC, the Company's  designated
oil and gas operator for  3,000,000  restricted  common shares in the capital of
the Lexington.  The transaction is subject to, among other things, (i) the prior
receipt by the Company of a valuation,  acceptable to the independent members of
the Board of Directors of the Company,  that determines the underlying  value of
Oakhills,  such that the resulting Purchase Price and the final number of Shares
issuable at closing may be adjusted  upward or downward,  accordingly,  (ii) the
prior audit of Oakhills,  (iii) mutual due  diligence,  (iv) the  execution of a
formal  agreement  incorporating  the terms and  conditions  of the agreement in
principle  by November  15, 2005 and (v) the  closing of the  transaction  on or
before December 31, 2005.

Humphreys  has  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.  In addition,  under the
terms of Mr.  Humphreys  management  contract,  he has a 10% carried interest of
Lexington's interest in all wells drilled by the Company. The estimated value of
the 10% carried  Working  Interest of $153,707 (total to date $270,738) has been
recorded as additional  compensation  expense during the period ended  September
30,  2005.  Humphreys  also has the right to purchase an  additional  5% working
interest  in each well  drilled by the  Company and has elected to do so for the
first four wells drilled on the Company's  Wagnon lease. The original 5% cost to
participate in the wells by Humphreys was $60,000.  As of September 30, 2005 the
Company was still owed  $15,000  (December  31, 2004 - $22,500) and has recorded
the amount as a receivable  from  Humphreys as full payment for an additional 5%
working interest in each of the Kellster 1-5, the Kyndal 2-2, and the Bryce 3-2.
Refer to Notes 3, 5, and 9.

During the period ended September 30, 2005 the Company incurred  $149,150 to its
officers for management fees (September 30, 2004 - $165,300).

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
Lexington.  Oak Hills Drilling and Operating, LLC replaces Oakhills Energy, Inc.
as its designated operator.

Refer to Note 3.

                                       24
<PAGE>

NOTE 11: INCOME TAXES
--------------------------------------------------------------------------------

The Company has adopted FASB No. 109 for reporting purposes. As of September 30,
2005,  the  Company  had net  operating  loss carry  forwards  of  approximately
$4,300,000 that may be available to reduce future years' taxable income and will
expire between the years 2006 - 2025.  Availability  of loss usage is subject to
change of ownership  limitations  under  Internal  Revenue Code 382.  Future tax
benefits which may arise as a result of these losses have not been recognized in
these  financial  statements,  as their  realization is determined not likely to
occur and  accordingly,  the Company has recorded a valuation  allowance for the
deferred tax asset relating to these tax loss carry forwards.

The Company  evaluates its valuation  allowance  requirements on an annual basis
based on projected future operations.  When circumstances change and this causes
a change in management's judgment about the recoverability of future tax assets,
the impact of the change on the  valuation  allowance is generally  reflected in
current income.

NOTE 12: SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
--------------------------------------------------------------------------------

                                 Nine month period ended Nine month period ended
                                 September 30, 2005      September 30, 2004
-------------------------------- ----------------------- -----------------------
Cash paid during the period for:
   Interest                           $        47,199         $           -
   Income taxes                       $             -         $           -
-------------------------------- ----------------------- -----------------------

NOTE 13: SUBSEQUENT EVENTS
--------------------------------------------------------------------------------

On October 16, 2005 the Company  received an additional  600,000 in  convertible
promissory note debt financing per the same terms and conditions as the previous
debt.  The Company  issued  300,000  Class A Warrants to purchase a share of its
common stock at an exercise price of $1.50 per share for a three-year term after
this registration  statement has been declared  effective by the SEC and 300,000
Class B Warrants  to  purchase  an  additional  share of our common  stock at an
exercise  price of $1.25 per  share  for a  one-year  term and  60,000  Finders'
Warrants at an exercise  price of $1.00 for three years after this  registration
statement  has  been  declared  effective  by the  SEC in  connection  with  the
additional notes issued (refer to Note 7).


















                                       25
<PAGE>

     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.

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

GENERAL

     Lexington Resources,  Inc. is a corporation organized under the laws of the
State of Nevada (herein known as "we" or the  "Company").  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: A0BKLP.

CURRENT BUSINESS OPERATIONS

     We are a natural  resource  exploration  and production  company  currently
engaged in the  acquisition  and  development  of oil and gas  properties in the
United States. We expect to weight our future  development  initiatives  towards
gas production. We are committed to developing into a profitable independent oil
and gas  producer  through the  systematical  expansion  of  operations  and the
acquisition  of new drilling  targets and  organizing  drilling  and  production
initiatives on leased properties.

     Our wholly  owned  subsidiary,  Lexington  Oil & Gas Ltd.  Co., an Oklahoma
limited liability company  ("Lexington"),  previously  acquired a 590 gross acre
section of farm-out  acreage in Pittsburg  County,  Oklahoma for the development
and production of coal bed methane gas (the "Wagnon Property"). We have drilled,
completed,  and are producing gas from four wells drilled on the Wagnon Property
each with a back-in 53.2% working interest to Lexington.

     We have also successfully  drilled,  completed,  and are producing from two
further coal bed methane gas well  interests  located on our Coal Creek  Project
with working  interests of 50% and 22%  respectively to Lexington that form part
of approximately  1,932 gross acres in the Coal Creek Project.  In addition,  we
have a 25%  working  interest  in a third gas well,  which has been  drilled and
completed  by  Newfield  Exploration   Mid-Continent,   Inc.  and  is  currently
producing,  on our Panther Creek Prospect,  which consists of approximately  292
gross acres.  In total,  we have interests in six coal bed methane gas wells and
one Woodford Shale gas well, and estimated  acreage suitable for the drilling of
further potential gas wells primarily targeting coal bed methane gas production.
We have conducted  partial  drilling of a fourth well on our Coal Creek Prospect
that has not reached the completion  stage. We have an approximate 88.5% working
interest in this well bore.

                                       26
<PAGE>

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

     We have consummated the aggregate  acquisition of approximately 9,450 gross
acres of primarily  coal bed methane gas targeted  prospects in the Arkoma Basin
in the State of  Oklahoma,  including  590 acres in our Wagnon  Prospect,  1,932
gross leasehold acres in the Coal Creek Prospect, 292 gross acres in the Panther
Creek Prospect,  320 gross acres in the Middlecreek Prospect,  1,144 gross acres
in the South  Lamar  Prospect,  and 4,925 gross  acres in the H-9  Prospect.  In
addition,  we have committed to purchase up to a 100% working  interest in up to
3,687 gross acres of Barnett Shale targeted gas leases in the Dallas/Fort  Worth
Basin in the State of Texas of which we  currently  own 2,325  gross  acres.  We
currently have an aggregate of  approximately  1,211 gross  developed and 10,562
gross  undeveloped  acres  pursuant to leases and/or  concessions  as more fully
described below. It is anticipated that our ongoing efforts, subject to adequate
funding being available,  will continue to be focused on successfully concluding
negotiations for additional tracts of prime gas and oil producing  domains,  and
to implement additional drilling and production development  initiatives through
the drilling of new wells to develop reserves and to provide  revenues.  We plan
to continue  building  and  increasing a strategic  base of proven  reserves and
production  opportunities  within  Oklahoma's  Arkoma Basin, and the Dallas Fort
Worth Basin in the State of Texas.

     Oak Hills Drilling and Operating LLC

     On November 9, 2004, we entered into an agreement  with Oak Hills  Drilling
and  Operating  LLC ("Oak  Hills") to drill a ten well  program  (the  "Drilling
Agreement").  Oak Hills is a  wholly-owned  subsidiary of Oak Hills Drilling and
Operating International, Inc., a Nevada corporation ("Oak Hills International").
Mr. Douglas Humphreys,  one of our directors, is currently the sole director and
officer  of both Oak Hills  and Oak Hills  International.  We  entered  into the
Drilling  Agreement to eliminate wait times for proceeding with planned drilling
initiatives due to high drilling demand and thus limited rig availability and to
ensure continuous availability of a dedicated drilling rig and crew.

     On September 23, 2005, we entered into an agreement in principle to acquire
100% of the total issued and  outstanding  shares of Oak Hills for not less than
the  issuance of  3,000,000  shares of our  restricted  common stock at a deemed
issuance  price of $1.50 per share,  and not less than  $4,500,000  in aggregate
consideration (the "Agreement").  The Agreement is subject to certain conditions
precedent  including but not limited to the following:  (i) the prior receipt by
us of a  valuation  acceptable  to  the  independent  members  of our  Board  of
Directors  that  determines  the  underlying  value of Oak Hills,  such that the
resulting  purchase price and final number of shares of restricted  common stock
issuable at closing may be  accordingly  adjusted  upward or downward;  (ii) the
prior audit of Oak Hills; and (iii) mutual due diligence. As of the date of this
Quarterly Report,  we believe that a final definitive  agreement will be entered
into by the end of the year and the closing of the  transaction  will take place
on or  before  December  31,  2005.  The  date  for the  originally  anticipated
definitive  agreement of November 15, 2005 will not be met as scheduling for the
completion  of the  audit  of Oak  Hills  has not  been  finalized.  The date of
finalization  of the audit of Oak Hills may  affect  the  timing of the  closing
date.

     Oil and Gas Properties

     As of the date of this Quarterly Report, we have not reported nor filed any
reserve estimates with any Federal agencies,  but have commenced production from
certain  properties as more fully described  below.  During 2004, we obtained an
independent reserve and economic evaluation report regarding the Wagnon Property


                                       27
<PAGE>

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

that was conducted by Fletcher Lewis Engineering,  Inc. of Oklahoma but have not
updated the reserve and economic evaluation report for 2005 for the inclusion of
Coal Creek and Panther Creek well interests.

     In accordance  with the terms and  provisions of the  consulting  agreement
with  Douglas  Humphreys,  our director  and  Drilling  Operations  Manager (the
"Consulting Agreement"),  we will assign to Paluca Petroleum Inc. ("Paluca"), an
affiliate of our director,  Douglas Humphreys,  10% of our working interest as a
carried working interest in each well drilled on our lease prospects.

The following is a description of our oil and gas properties.

     Wagnon Property

     We hold an 80%  working  interest  and a 60.56%  net  revenue  interest  in
approximately  590.2 gross  acres of a gas lease  located in  Pittsburg  County,
Oklahoma  (the "Wagnon  Property").  The gas lease was  acquired  from Oak Hills
Energy,  Inc.  ("Oak Hills  Energy"),  which  acquired  the lease  pursuant to a
farm-out  agreement  with Quinton  Rental & Repair  Services,  Inc. (the "Wagnon
Farm-Out Agreement"). Our interest relating to the Wagnon Property is subject to
farm-out  agreements  equating to a total 20% working  interest  between  Paluca
Petroleum  Inc.  ("Paluca"),  an  affiliate  of one of  our  directors,  Douglas
Humphreys, Oak Hills Energy, and the lessee of the Wagnon Property.

     During 2004 and 2005, we have drilled,  completed,  and put four wells into
production on this prospect, the Kellster #1-5, the Kyndal #2-2, the Bryce #3-2,
and the  Calleigh  #4-2.  The last  well  drilled  on the  Wagnon  Prospect  was
completed  on April 2, 2005 when the  Calleigh  #4-2 coal bed  methane  gas well
commenced  production.  It is estimated  that up to a total of five wells may be
drilled on the Wagnon Property.

     We previously entered into funding agreements for the Kellster #1-5, Kyndal
#2-2,  Bryce  #3-2,  and  Calleigh  #4-2  wells   (collectively,   the  "Funding
Agreements").  Pursuant to the Funding  Agreements,  the private  investors were
provided with an 80% working  interest and a 60.56% net revenue  interest in the
wells  until their  respective  invested  capital in each well is repaid,  after
which time the private  investors  will  revert to an  aggregate  20.1%  working
interest  and a 15.075% net revenue  interest.  Oak Hills  Energy,  the original
driller and operator of the wells, will "back-in" to a reversionary 6.7% working
interest after invested  capital is repaid to the private  investors and we will
"back-in" to a  reversionary  53.2%  working  interest.  Pursuant to the further
terms and provisions of the Funding  Agreements,  all wells to be drilled on the
Wagnon Property carry royalty interests  totaling 25% to landowners and property
interest holders and carried working interests of 5% to a landowner,  as well as
a 10% carried working interest to Paluca. Paluca also owns a non-carried working
interest of 5% as part of capital  participation  funding provided by Paluca. As
of September 30, 2005, we have received the total required funding of $1,485,000
under the Funding  Agreements for drilling and completion of the four horizontal
coal bed methane gas wells on the Wagnon Property. As of September 30, 2005, the
private  investors  have  been  repaid  an  aggregate  of  $1,485,000  of  their
$1,485,000  investment  under the  Funding  Agreements.  Therefore,  our back-in
working  interest of 53.2% in each of the four wells on the Wagnon  Property has
vested and the private  investors  have  reverted in an aggregate  20.1% working
interest and a 15.075% net revenue interest.

                                       28
<PAGE>

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

     Coal Creek Prospect

     During 2004, we obtained an option to purchase an undivided 95% interest in
approximately  2,500 net leasehold acres in five sections  located in Hughes and
Pittsburg Counties, State of Oklahoma (the "Coal Creek Prospect").  On March 12,
2004, we entered into a two-year  lease for  approximately  1,536 gross acres in
the Coal Creek  Prospect  pursuant  to which we have an  undivided  95%  working
interest and a minimum 79% net revenue  interest.  On May 20,  2004,  we entered
into a two-year  lease  pursuant to which we acquired an additional 372 acres of
the Coal  Creek  Prospect  with a minimum  95%  working  interest  and a 78% net
revenue interest.  On August 20, 2004, we entered into a two-year lease pursuant
to which we acquired an  additional  23 acres of the Coal Creek  Prospect with a
minimum 95% working interest and a 79% net revenue  interest.  As of the date of
this Quarterly Report, the total acreage acquired in the Coal Creek Gas Prospect
is approximately 1,932 gross leasehold acres.

     On March 31,  2005,  we began  drilling  the first  well on our Coal  Creek
Prospect,  the Lex #1-34, of which we have a 50% working interest. The Lex #1-34
well has been  completed and is currently in  production.  On April 15, 2005, we
began  drilling a second well on the Coal Creek  Project,  the  Brumbaugh  #1-10
well, of which we have a 22% working interest. The Brumbaugh #1-10 well has been
completed and began  production in May 2005. It is estimated  that  interests in
twelve to sixteen  wells may be drilled on lease  acreage owned by us that forms
part of the Coal Creek Prospect.

     On May 31,  2005,  we began  drilling a third coal bed methane  well on the
Coal  Creek  Prospect,  the  Ellis  #1-15,  of which  we have an  88.5%  working
interest. Drilling of this well has encountered a shallow "Bartlesville Sand" as
zone that  produced a significant  gas flair upon testing of the zone.  The zone
was  logged,  underwent  economic  and  geological  study to  assess  commercial
potential  of the new,  non-CBM gas zone,  and we  attempted  completion  in the
Bartlesville  Sand zone  without  success due to  intrusion of water from a salt
water  disposal  well.  As a result,  procedures  are under  evaluation  for the
completion of the well in the originally targeted,  Hartshorne CBM gas zone that
management believes is unaffected by the intrusion of water.

     In accordance  with the terms and  provisions of the  consulting  agreement
with Douglas Humphreys (the "Consulting Agreement"),  we have assigned to Paluca
as an earned carried  interest 10% of our working  interest as a carried working
interest in each well completed on the Coal Creek Gas Prospect.

     During June to August 2005, we obtained  loans in the  aggregate  amount of
$1,165,000,  which loans were  secured  against our  interests in the Coal Creek
Prospect (the "Coal Creek  Loans").  As of September 30, 2005, we had repaid the
Coal Creek Loans in the aggregate  principal  amount of  $1,165,000  and accrued
interest of $41,058,  thus  discharging the security  interest  against our Coal
Creek Prospect.  See "Part II. Other Information.  Item 2. Changes in Securities
and Use of Proceeds."

     Panther Creek Prospect

     On March 12, 2004, we entered into a three-year lease of approximately  292
acres  located in five  separate  sections in the Panther Creek coal bed methane
gas prospect  located in Hughes  County,  State of Oklahoma (the "Panther  Creek
Prospect").  We have a 100% working  interest and an approximate 81% net revenue
interest in the acreage acquired in the Panther Creek Prospect.

                                       29
<PAGE>

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

     A portion of the acreage in the Panther Creek  Prospect is subject to three
division pooling orders by Newfield Exploration Mid-Continent Inc., a subsidiary
of Newfield Exploration Company ("Newfield"),  for three wells to be drilled and
operated  by Newfield in which we have  elected to  participate.  On January 25,
2005, we entered into the joint operating agreement with Newfield to participate
in the proposed wells to be drilled (the "Joint Operating Agreement").  Pursuant
to the terms and provisions: (i) Newfield shall drill and operate the first well
and explore other zones up to 8,500 feet in depth;  (ii) we have an  approximate
25% working  interest in the first completed well;  (iii) we have an approximate
10.94% working interest in the second proposed well; (iv) we have an approximate
4.06% working  interest in the third  proposed  well; and (v) Newfield has up to
approximately the end of fiscal year 2005 to drill such wells.

     On February 9, 2005, Newfield commenced drilling on the first well, the POE
#1-29 and, as of March 21,  2005,  the POE #1-29 gas well  commenced  production
from a  Woodford  Shale  gas  zone.  As of the  date of this  Quarterly  Report,
Newfield had proposed the drilling of a second  horizontal test well in which we
would have a 10.94% working interest. The Company has elected not to participate
in the well based on  management's  analysis of the  proposal  by  Newfield  and
amendments thereto.

     South Lamar Prospect

On April 21, 2004, we entered into a two-year lease  agreement to acquire a 100%
working interest and a 78.5% net revenue interest in 960 gross undeveloped acres
to develop coal bed methane gas wells in Hughes  County,  State of Oklahoma (the
"South Lamar  Prospect").  On July 26, 2004, we acquired a further  183.98 gross
acres in the  South  Lamar  Prospect  pursuant  to which we hold a 100%  working
interest and a 79% net revenue interest.  We have previously  prepared the drill
site for the first proposed well on this prospect, the Goodson #1-24 well. As of
the date of this Quarterly  Report,  the Company decided not to proceed with the
drilling  of the  planned  "Goodson  #1-23"  coal bed  methane  Hartshorne  Coal
targeted gas well pending reassessment of costs and techniques utilized to drill
and complete wells. Cost escalations  relating to the drilling and completion of
horizontal  CBM wells by the  Company  have  increased  at least 40% since  2004
affecting potential investment returns to the Company. Various well drilling and
completion related cost reduction techniques are under evaluation by management.

     Middlecreek Prospect

     On May 24, 2004, we entered into an agreement to acquire an undivided  100%
working  interest and a 70% net revenue  interest in 320 gross  leasehold  acres
located in two sections in the  Middlecreek  Prospect  located in Hughes County,
State of Oklahoma (the "Middlecreek  Prospect").  Rights to drill all geological
zones  are  included  and  primary  gas  targets  include  the  Caney  shale and
Hartshorne  coal zones with  further  possibilities  in the Booch,  Stuart,  and
Savannah zones. The Middlecreek  Prospect includes a 2,000 foot gas pipeline and
pipeline right of way.

     H-9 Prospect

     On June 29,  2004,  we  entered  into an option  agreement  to  purchase  a
leasehold  interest  and a net  revenue  interest  in  approximately  4,600  net
leasehold  acres  located in  approximately  38 sections of the H-9  Prospect in
Hughes and McIntosh  counties,  State of Oklahoma (the "H-9 Prospect").  On July
29,  2004,  we entered  into three to four year lease  agreements  to acquire an
undivided 100% leasehold interest and a 79.25% net revenue interest in the 4,600


                                       30
<PAGE>

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

gross  leasehold  acres on the H-9  Prospect.  On July 19, 2004, we entered into
another  three-year lease to acquire a 100% leasehold  interest and a 78.25% net
revenue  interest  in an  additional  325 gross  acres of gas  target  drillable
acreage on the H-9 Prospect.

     Barnett Shale Project

     On June 2, 2005,  as amended  July 14,  2005,  we entered into a definitive
agreement  with a Texas-based  limited  partnership  (the "Barnett  Agreement"),
regarding a gas well  horizontal  drilling  venture in the Jack,  Wise, and Palo
Pinto Counties in the State of Texas (the "Barnett Shale Project").  Pursuant to
the  terms  and  provisions  of the  Barnett  Agreement:  (i) we will be able to
acquire a working  interest of between 75% to 100% in the wells to be drilled on
the Barnett Shale Project with net revenues  interests  ranging from 70% to 75%,
and to increase  the initial  acreage up to  approximately  3,700 net  leasehold
acres; (ii) we paid a non-refundable deposit of $100,000 with the balance of the
funds due by August 19, 2005,  which $100,000  deposit shall be credited against
the total  purchase  price to be paid by us for the  working  interest  in up to
3,687 net leasehold acres; (iii) we will pay our pro-rata share of net leasehold
acres we  acquire;  (iv) in the  event we  purchase  the  maximum  100%  working
interest,  we will  receive a minimum  70% net  revenue  interest  on the leases
without  any  carried  interest  to the  Texas  limited  partnership,  with  the
remaining net revenue interest to be reserved as an overriding  royalty interest
for the Texas  limited  partnership;  (v) in the event we purchase a 75% working
interest,  we will  receive a 56.25% net  revenue  interest on the leases and we
will carry for the Texas  limited  partnership  a 10%  working  interest  in the
drilling,  completion  and equipping of the pipeline on all wells drilled on the
acreage  purchased by us; (vi) we will be responsible  for our pro-rata share of
acreage costs; and (vii) our contract operator,  Oak Hills, will be the operator
for the project.

     On  September  25, 2005,  we acquired our first lease in the Barnett  Shale
Project. We acquired approximately 2,325 net leasehold acres for $1,107,000.  We
anticipate  that  this  acquisition  will  provide  us with up to 16  additional
horizontal  Barnett  Shale gas drilling  sites with access to existing  pipeline
networks. We anticipate,  that subject to financing, that the first well will be
spudded in November-December  2005 and that all drilling on the acquired acreage
will be completed in less than two years.

                                       31
<PAGE>

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

     Wells Developed on Oil and Gas Properties

     As of the date of this Quarterly  Report,  the following  table  summarizes
wells and working interests in wells under current development initiatives:

---------------- ----------------- -------------------- ------------------------
Company          Well Name         Interest             Status
Lease/Prospect
---------------- ----------------- -------------------- ------------------------
Wagnon           Kellster #1-5     53.2% Back WI APO    Producing
---------------- ----------------- -------------------- ------------------------
Wagnon           Kyndal #2-2       53.2% Back WI APO    Producing
---------------- ----------------- -------------------- ------------------------
Wagnon           Bryce #3-2        53.2% Back WI APO    Producing
---------------- ----------------- -------------------- ------------------------
Wagnon           Calleigh #4-2     53.2% Back WI APO    Producing
---------------- ----------------- -------------------- ------------------------
Panther Creek    POE #1-29         25.7% WI             Producing
---------------- ----------------- -------------------- ------------------------
Coal Creek       LEX #1            50.1% WI             Producing
---------------- ----------------- -------------------- ------------------------
Coal Creek       Brumbaugh #1-10   22.2% WI             Producing
---------------- ----------------- -------------------- ------------------------
Coal Creek       Ellis #1-15       88.5% WI             Under analysis for
                                                        drilling and completion
                                                        techniques
---------------- ----------------- -------------------- ------------------------
South Lamar      Goodson #1-23     87.5% WI             Site abandoned, division
                                                        pooling order lapsed
---------------- ----------------- -------------------- ------------------------

     To date, we have committed to interests in eight gas wells,  seven of which
are producing.  We estimate that we have additional  available  acreage suitable
for the drilling of a further seventy to one hundred, primarily coal bed methane
gas wells in the state of  Oklahoma  and 16 Barnett  Shale wells in the state of
Texas.

RESULTS OF OPERATION

Nine-Month  Period Ended September 30, 2005 Compared to Nine-Month  Period Ended
September 30, 2004

     Our net  loss  for the  nine-month  period  ended  September  30,  2005 was
approximately  ($6,469,152)  compared to a net loss of  ($5,175,168)  during the
nine-month period ended September 30, 2004 (an increase of $1,293,984).

     During the  nine-month  period  ended  September  30,  2005,  we  generated
$530,721  in oil and gas  revenue  compared  to  $305,756 in oil and gas revenue
generated  during the same period in 2004 (an increase of  $224,965),  resulting
primarily  from the sale of gas produced from an  increasing  number of coal bed
methene gas well  interests  brought into  production.  Depletion  and operating
costs and taxes of $244,641 and  $180,073,  respectively,  increased  during the
nine-month  period ended  September 30, 2005 compared to depletion and operating
costs and taxes of  $112,186  and  $21,641,  respectively,  incurred in the same
period in 2004.  The  increase in  depletion  and  operating  expenses and taxes
during the nine-month period ended September 30, 2005 from the nine-month period
ended  September  30, 2004 was primarily the result of the increase in operating
costs and estimated depletion resulting from the increased number of operating


                                       32
<PAGE>

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

wells.  Gross profit of $106,007  generated  during the nine-month  period ended
September 30, 2005 was further  reduced by an aggregate of $6,575,159 from other
expenses incurred, resulting in a net loss of ($6,469,152).  The gross profit of
$171,929  generated  during the nine-month  period ended  September 30, 2004 was
reduced by an aggregate of $5,347,097 from other expenses incurred, resulting in
a net loss of ($5,175,168).

     During the  nine-month  period ended  September 30, 2005, we incurred other
expenses in the aggregate amount of $6,575,179  compared to $5,347,097  incurred
during the same period in 2004 (an increase of $1,228,082),  which consisted of:
(i) general and administrative expenses of $1,287,170 (2004:  $2,307,567);  (ii)
consulting fees - stock based  compensation  relating to the fair value of stock
options  granted to  consultants  of $1,913,991  (2004:  $2,989,221);  and (iii)
interest and finance fees expense of $3,373,998 (2004: $50,309). The increase in
other expenses  incurred  during the nine-month  period ended September 30, 2005
compared to the same period during 2004 resulted  primarily from the increase in
interest and finance fees expense associated with the promissory notes issued in
September 2005. General and administrative  expenses generally include corporate
overhead,  financial and  administrative  contracted  services,  marketing,  and
consulting costs.

     Of the $6,575,159  incurred as other expenses during the nine-month  period
ended  September  30, 2005,  an  aggregate  of $90,000 was  incurred  payable to
International  Market Trend  ("IMT") for amounts due and owing for  operational,
administrative  and financial  services  rendered  during the nine-month  period
ended  September  30, 2005.  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 February 1, 2005,  we granted to IMT an aggregate of 500,000
stock  options  exercisable  at $1.00 per share for a period of five  years.  On
February  1, 2005,  we  granted to IMT an  aggregate  of 100,000  stock  options
registered under an S-8 Registration Statement exercisable at $0.16667 per share
for a period of five  years.  On August  19,  2005,  we also  granted  to IMT an
aggregate of 1,150,000 stock options exercisable at $1.25 per share for a period
of five years.

     Of the $6,575,159  incurred as other expenses during the nine-month  period
ended  September 30, 2005, an aggregate of $149,150 was incurred to our officers
for  management   fees.   Furthermore,   $153,708  was  recorded  as  additional
compensation  expense to one of our directors,  Mr.  Humphreys,  relating to the
estimated  valuation of his 10% carried working  interest in our wells developed
during the  nine-month  period ended  September  30, 2005.  On July 12, 2004, we
entered into a consultation agreement (the "Humphreys  Consultation  Agreement")
with  Lexington  Oil  &  Gas  and  Mr.  Humphreys.  Pursuant  to  the  Humphreys
Consultation  Agreement,  Mr.  Humphreys  assists  in  overseeing  the  drilling
operations  and the  completion  and  management  of our  wells.  Mr.  Humphreys
compensation pursuant to the terms and provisions of the Humphreys  Consultation
Agreement  is: (i) $7,500 per month;  (ii) the  assignment  of up to 10% carried
working interest of the Company's  working interest in every well drilled on all
properties  held by us;  (iii)  the right to  purchase  up to an  additional  5%
working  interest in all wells  drilled by us on our  properties  provided  that
funds for this  participation  are paid prior to the commencement of drilling of
said wells;  and (iv) grant of 200,000 Stock  Options to purchase  shares of our
common  stock at an exercise  price of $3.00 per share  (which were granted July
2004). The Humphreys  Consultation  Agreement can be terminated at any time with
ninety days written notice by either party.

                                       33
<PAGE>

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

     As discussed above,  the increase in net loss during the nine-month  period
ended  September 30, 2005 compared to the nine-month  period ended September 30,
2004 is  attributable  primarily  to the  increase in interest  and finance fees
expense.  Our net loss during the nine-month period ended September 30, 2005 was
approximately  ($6,469,152)  or  ($0.37)  per  share  compared  to a net loss of
($5,175,168)  or ($0.35) during the nine-month  period ended September 30, 2004.
The  weighted  average  number  of shares  outstanding  was  17,375,441  for the
nine-month  period  ended  September  30, 2005  compared to  14,632,326  for the
nine-month  period  ended  September  30,  2004  (which  had  been  restated  in
accordance with the forward stock split of three-for-one  shares of common stock
effected January 26, 2004).

Three-Month Period Ended September 30, 2005 Compared to Three-Month Period Ended
September 30, 2004

     Our net  loss for the  three-month  period  ended  September  30,  2005 was
approximately  ($4,645,900)  compared  to a net loss of  ($881,920)  during  the
three-month period ended September 30, 2004 (an increase of $3,763,980).

     During the  three-month  period  ended  September  30,  2005,  we generated
$137,458  in oil and gas  revenue  compared  to  $211,549 in oil and gas revenue
generated  during the same  period in 2004 (a decrease  of  $74,091),  resulting
primarily  from the sale of gas produced  from coal bed methane gas wells on the
Wagnon Property.  Oil and gas revenue  decreased  during the three-month  period
ended  September 30, 2005 compared to the same period during 2004 primarily as a
result of well production  decreases relating to the installation and management
of well dewatering  systems,  and lower than anticipated  operating  performance
from the Company's  interest in Newfield's  POE #1-29  previously  estimated and
accrued.  Depletion  and  operating  costs and taxes of  $104,761  and  $58,612,
respectively,  increased in the aggregate  during the  three-month  period ended
September  30,  2005  compared to  depletion  and  operating  costs and taxes of
$105,628 and $14,458, respectively, incurred during the same period in 2004. The
increase in depletion  and operating  expenses and taxes during the  three-month
period ended September 30, 2005 from the three-month  period ended September 30,
2004 was  primarily  the  result of the  increase  in well  operating  costs and
estimated  depletion resulting from the increased number of operating wells. The
operating  loss of  ($25,915)  generated  during the  three-month  period  ended
September 30, 2005 was further  reduced by an aggregate of $4,619,985 from other
expenses incurred,  which resulted in a net loss of ($4,645,900).  The operating
profit of $91,463  generated  during the three-month  period ended September 30,
2004 was reduced by an aggregate of $973,383 from other expenses incurred, which
resulted in a net loss of ($881,920).

     During the  three-month  period ended September 30, 2005, we incurred other
expenses in the  aggregate  amount of $4,619,985  compared to $973,383  incurred
during the same period in 2004 (an increase of $3,646,602),  which consisted of:
(i) general and  administrative  expenses of  $116,499  (2004:  $949,459);  (ii)
consulting fees - stock based  compensation  relating to the fair value of stock
options granted to consultants of $1,138,238  (2004:  $-0-);  and (iii) interest
and finance fees expense of $3,365,248  (2004:  $23,924).  The increase in other
expenses  incurred  during the  three-month  period  ended  September  30,  2005
compared to the same period during 2004 resulted  primarily from the increase in
interest and finance fees expense.

     As discussed above, the increase in net loss during the three-month  period
ended September 30, 2005 compared to the three-month  period ended September 30,
2004 is  attributable  primarily  to the  increase in interest  and finance fees


                                       34
<PAGE>

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

expense. Our net loss during the three-month period ended September 30, 2005 was
approximately  ($4,645,900)  or  ($0.26)  per  share  compared  to a net loss of
($881,920) or ($0.06) during the  three-month  period ended  September 30, 2004.
The  weighted  average  number  of shares  outstanding  was  17,557,753  for the
three-month  period ended  September  30, 2005  compared to  15,319,693  for the
three-month  period  ended  September  30,  2004  (which  had been  restated  in
accordance with the forward stock split of three-for-one  shares of common stock
effected January 26, 2004).

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, 2005

     As of the  nine-month  period ended  September 30, 2005, our current assets
were $1,624,547 and our current liabilities were $2,455,451, which resulted in a
working capital deficit of $830,904. As of the nine-month period ended September
30, 2005, our total assets were $7,106,903 consisting of: (i) $1,011,538 in cash
and cash  equivalents;  (ii) $162,984 in accounts  receivable;  (iii) $12,000 in
prepaid  expenses;  (iv) $858,887 in deferred charges;  (v) $2,710,046  carrying
value of proved oil and gas  properties  (net of  accumulated  depletion);  (vi)
$2,348,949  carrying value of unproved oil and gas properties;  and (vii) $2,499
in other  property and equipment (net of  accumulated  depreciation).  As of the
nine-month   period  ended  September  30,  2005,  our  total  liabilities  were
$3,670,894   consisting  of:  (i)  $616,146  in  accounts  payable  and  accrued
liabilities;   and  (ii)  $3,054,748  in  current  and  non-current  portion  of
promissory notes.

     Stockholders'  equity  increased  from  $1,685,514  for  fiscal  year ended
December 31, 2004 to $3,436,009  for the nine-month  period ended  September 30,
2005.

     We have not generated  positive cash flows from operating  activities.  For
the nine-month period ended September 30, 2005, net cash flows used in operating
activities  was  ($1,047,012)  compared  to net  cash  flows  used in  operating
activities for the nine-month  period ended September 30, 2004 of  ($1,141,114).
Net cash flows used in  operating  activities  for the  nine-month  period ended
September 30, 2005 consisted  primarily of a net loss of ($6,469,152).  Net cash
flows used in operating  activities  was adjusted by $1,913,991 to reconcile the
non-cash  expense of the grant of stock options and by $244,641 to reconcile the
non-cash expense of oil and gas depletion.

     Net cash  flows  used in  investing  activities  was  ($2,245,408)  for the
nine-month  period ended  September  30, 2005 compared to net cash flows used in
investing  activities  for the  nine-month  period ended  September  30, 2004 of
($2,251,034),  which  primarily  pertained to the acquisition of the oil and gas
properties.

     Net cash flows from financing  activities was $3,977,665 for the nine-month
period  ended  September  30,  2005  compared  to net cash flows from  financing
activities for the nine-month period ended September 30, 2004 of $4,798,365. Net
cash flows from financing  activities for the nine-month  period ended September
30, 2005 consisted of $4,645,950  (2004:  $500,000) in convertible notes (net of


                                       35
<PAGE>

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

introduction  and legal  fees),  $512,630  net  proceeds on sale of common stock
(2004:  $3,281,075),  and $-0- in  drilling  advances  (2004:  $279,306),  which
amounts were adjusted,  respectively,  by  ($1,180,915) in repayment of drilling
advances.

PLAN OF OPERATION

     During the  nine-month  period ended  September  30, 2005, we completed the
sale  of  a  secured  and  convertible  note  private  placement  (the  "Private
Placement") with certain accredited  investors (each an "Investing Note Holder")
for  aggregate  proceeds of $5,260,000  pursuant to the terms and  conditions of
certain  subscription  agreement  as  entered  into  between  us and  each  such
Investing Note Holder. Subsequently,  we also received an additional $600,000 in
convertible  note and warrant  financing  under  identical terms and conditions,
bring our aggregate  convertible  debt  financing to  $5,860,000.  See "Material
Commitments" and "Part II. Other Information.  Item 2. Changes in Securities and
Use of Proceeds."

     Furthermore,  during  fiscal year 2004,  we  completed a private  placement
offering of an  aggregate of  1,700,686  Units at a purchase  price of $1.47 per
Unit for net proceeds of approximately $2,319,264.  Included in the net proceeds
was the exchange of two of our  outstanding  promissory  notes in the  aggregate
principal  amount of  $500,000  plus  accrued  interest  of  $12,637  for Units,
resulting in the issuance of 376,318  Units.  Each Unit consists of one share of
our common  stock and one warrant to purchase a share of our common  stock at an
exercise price of $1.68 (the "September Warrants").  The September Warrants from
the  offering  were  exercisable  for a term of 180 days after the  Registration
Statement was declared  effective on January 21, 2005 creating an expiry term of
July 23,  2005.  During the first and second  quarters of 2005,  an aggregate of
304,367  September  Warrants were exercised for aggregate  proceeds of $495,964,
net of $15,373 in brokers' fees. The remaining 1,396,319 September Warrants have
expired.

     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;  (iii) property acquisitions' and (iv) working capital and
administration.  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  its 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,
or existing  agreements which could  significantly  and materially  restrict our
business operations.

                                       36
<PAGE>

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

     The independent  auditors'  report  accompanying  our December 31, 2004 and
December 31, 2003  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

     In accordance  with the terms and provisions of the Private  Placement with
certain Investing Note Holders for aggregate  proceeds of $5,860,000,  we issued
an aggregate of $5,860,000 in secured,  convertible  two-year  promissory  notes
bearing  8%  interest  to  the  Investing   Note  Holders   (collectively,   the
"Convertible Promissory Notes"). See "Part II. Other Information. Item 2 Changes
in Securities and Use of Proceeds".

     We are committed to repay the Investing Note Holders outstanding amounts of
principal  and interest  accrued at 8% per annum on an  aggregate  face value of
$5,860,000 in Convertible Notes.  Twenty monthly principal and interest payments
are  payable  either in cash or shares of our common  stock at the rate of $1.00
per share (the "Fixed  Conversion  Price")  beginning on January 16, 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 on the first date of each month
thereafter, the Convertible Notes must be repaid in cash or shares in the amount
equal to 5% of the principal  amount of the Convertible  Notes together with all
accrued  interest  due and payable up to the  repayment  date.  If our shares of
common stock are trading at less than $1.00 per share at the date of  repayment,
then we may repay monthly principal and interest due in either cash of shares of
common stock 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
month 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 month payment  date.  The holders of
the Convertible Notes have a secured first interest in our assets.

OFF-BALANCE SHEET ARRANGEMENTS

     As of the date of this  Quarterly  Report,  we do not have any  off-balance
sheet  arrangements  that have or are  reasonably  likely  to have a current  or
future  effect on our  financial  condition,  changes  in  financial  condition,
revenues or expenses, results of operations,  liquidity, capital expenditures or
capital resources that are material to investors.  The term  "off-balance  sheet
arrangement"  generally means any  transaction,  agreement or other  contractual
arrangement to which an entity unconsolidated with us is a party, under which we
have:  (i) any  obligation  arising  under  a  guaranteed  contract,  derivative
instrument or variable  interest;  or (ii) a retained or contingent  interest in
assets transferred to such entity or similar  arrangement that serves as credit,
liquidity or market risk support for such assets.

                                       37
<PAGE>

ITEM III. CONTROLS AND PROCEDURES

     An  evaluation   was  conducted   under  the   supervision   and  with  the
participation of our management, including Grant Atkins, our President and Chief
Executive Officer, and Vaughn Barbon, our Treasurer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure  controls and
procedures as at September 30, 2005.  Based on that evaluation,  Messrs.  Atkins
and Barbon concluded that our disclosure  controls and procedures were effective
as of such date to ensure  that  information  required  to be  disclosed  in the
reports that we file or submit  under the  Securities  Exchange Act of 1934,  as
amended (the "Exchange  Act"), is recorded,  processed,  summarized and reported
within the time periods  specified in Commission rules and forms.  Such officers
also  confirm that there was no change in our  internal  control over  financial
reporting  during  the  nine-month  period  ended  September  30,  2005 that has
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.

Audit Committee Report

     The Board of Directors has established an audit  committee.  The members of
the audit committee are Mr. Steven Jewett,  Mr. Doug  Humphreys,  and Mr. Norman
MacKinnon.  Two of the three members of the audit  committee  are  "independent"
within the meaning of Rule 10A-3 under the Exchange Act. The audit committee was
organized  in April 2004 and  operates  under a written  charter  adopted by our
Board of Directors.

     The  audit  committee  has  reviewed  and  discussed  with  management  our
unaudited  financial  statements  as of and  for  the  nine-month  period  ended
September 30, 2005.  The audit  committee has also  discussed with Dale Matheson
Carr-Hilton  LaBonte  the matters  required  to be  discussed  by  Statement  on
Auditing Standards No. 61,  Communication with Audit Committees,  as amended, by
the  Auditing  Standards  Board of the American  Institute  of Certified  Public
Accountants.   The  audit  committee  has  received  and  reviewed  the  written
disclosures and the letter from Dale Matheson  Carr-Hilton  LaBonte  required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, as amended, and has discussed with Dale Matheson Carr-Hilton LaBonte
their independence.

     Based on the reviews and discussions referred to above, the audit committee
has  recommended  to  the  Board  of  Directors  that  the  unaudited  financial
statements  referred to above be included in our Quarterly Report on Form 10-QSB
for the nine-month period ended September 30, 2005 filed with the Securities and
Exchange Commission.

                                       38
<PAGE>

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.  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.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

CONVERITBLE NOTES

     In accordance  with the terms and provisions of the Private  Placement with
certain Investing Note Holders for aggregate proceeds of $5,860,000,  we issued:
(i) an aggregate of $5,860,000 in secured, convertible two-year promissory notes
bearing  8%  interest  to  the  Investing   Note  Holders   (collectively,   the
"Convertible  Promissory Notes");  (ii) for every two shares of our common stock
purchasable  in accordance  with the  conversion  provisions of the  Convertible
Promissory  Notes,  one Class A Warrant,  for an aggregate of 2,930,000  Class A
Warrants,  to purchase a share of our common stock at an exercise price of $1.50
per share for a three-year term after a registration statement has been declared
effective by the Securities and Exchange Commission;  (iii) for every two shares
of our common stock purchasable in accordance with the conversion  provisions of
the Convertible Notes, one Class B Warrant,  for an aggregate of 2,930,000 Class
B Warrants,  to purchase an additional  share of our common stock at an exercise
price of $1.25 per share for a one-year term after a registration  statement has
been declared  effective by the  Securities  and Exchange  Commission;  and (iv)
586,000 finder's  Warrants to purchase shares of our common stock at an exercise
price of $1.00  per  share  for a term of  three-years  after  the  registration
statement has been declared effective by the Securities and Exchange Commission.

COAL CREEK LOANS

     From June through August 2005, we obtained loans in the aggregate amount of
$1,165,000,  which loans were  secured  against our  interests in the Coal Creek
Prospect (the "Coal Creek Loans").  As of September 30, 2005, we have repaid the
Coal Creek Loans in the aggregate  principal  amount of  $1,165,000  and accrued
interest of $41,058,  thus  discharging the security  interest  against our Coal
Creek Prospect.  We also issued 233,000 warrants  exercisable at $3.00 per share
with exercise terms until May 31, 2010.

EXERCISE OF SHARE PURCHASE WARRANTS

     As of the date of this  Quarterly  Report,  we have issued an  aggregate of
304,367 shares of common stock to  shareholders  pursuant to the exercise of the
September  Warrants.  During  fiscal  year  2004,  we  completed  the sale of an
aggregate  of  1,700,686  Units at a  purchase  price of $1.47  per Unit for net
proceeds  of  approximately  $2,319,264.  Included in the net  proceeds  was the
exchange of two of our outstanding  promissory notes in the aggregate  principal
amount of $500,000 plus accrued interest of $12,637 for Units,  resulting in the
issuance of 376,318 Units.  Each Unit consisted of one share of our common stock
and one warrant to purchase a share of our common stock at an exercise  price of
$1.68.

     As of the date of this Quarterly  Report, an aggregate of 304,367 September
Warrants were  exercised for aggregate  proceeds of $495,964,  net of $15,373 in
brokers'   fees.  The  304,367  shares  of  common  stock  were  issued  to  the


                                       39
<PAGE>

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - continued

shareholders in reliance on the registration provisions of the Securities Act of
1933, as amended,  in accordance with the terms of the  Registration  Statement.
The September  Warrants  were  exercisable  until July 23, 2005 and  unexercised
warrants have expired.

EXERCISE OF STOCK OPTIONS

     During the  nine-month  period ended  September  30, 2005,  an aggregate of
100,000 Stock Options were  exercised at $0.16667 per share for cash proceeds of
$16,667. The shares of common stock were issued to the shareholder in accordance
with the S-8 Registration Statement.

Amendment to Stock Option Plan

     We current have one equity compensation plan, our amended Stock Option Plan
(the "Amended  SOP") dated August 19, 2005,  which  provides for the issuance of
stock options for services rendered to us. Our Board of Directors is vested with
the power to  determine  the  terms and  conditions  of the stock  Options.  The
Amended Stock Option Plan includes  7,500,000  shares.  As of December 31, 2004,
4,200,000  stock options  under our previous  stock option plan had been granted
and 3,665,000 stock options had been exercised which, by adoption of the amended
SOP,  now form part of our  Amended  SOP.  During  the nine month  period  ended
September 30, 2005, we have granted an aggregate of 2,600,000  additional  stock
options  under our  Amended  Stock  Option Plan as  follows:  (i) 500,000  stock
options at an exercise  price of $1.00 per share,  100,000  stock  options at an
exercise  price of $0.1667  both granted on February 1, 2005  exercisable  for a
period of five years,  and (ii) 2,000,000  stock options at an exercise price of
$1.25 granted on August 19, 2005 exercisable for a period of five years.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         No report required.

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

         No report required.

ITEM 5. OTHER INFORMATION

         No report required.

ITEM 5. OTHER INFORMATION

         No report required.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         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.

                                       40
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - continued

     Reports on Form 8-K:

     Report on Form 8-K Item 5.01 filed on February 18, 2005. Report on Form 8-K
     Item 1.01  filed on June 8,  2005.  Report  on Form 8-K Item 3.02  filed on
     September  20, 2005.  Report on Form 8-K Item 1.01 filed on  September  23,
     2005. Report on Form 8-K Item 1.01 filed on September 29. 2005.


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.

Dated: November 14, 2005                   By: /s/ Grant Atkins
                                             ---------------------------
                                             Grant Atkins, President and
                                             Chief Executive Officer


Dated: November 14, 2005                  By: /s/ Vaughn Barbon
                                            ---------------------------
                                             Vaughn Barbon, Chief Financial
                                             Officer

                                       41
<PAGE>